beyond market - nov 2011
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DB Corner – Page 5
Labour Pains The st rike at Maruti is a clear indicati on of how arm-twisti ng by employeby the unions, could hurt companies – Page 6
Triumph And Tragedy In Tumultuous Markets The Q2 earnings resu lts of India Inc are a healthy mix of positi ve and negperformances – Page 10
Pink Slips Loom Large The risk of cut in wages or job los ses cannot be ruled out as vol at ili ty in tIndian economy is forcing companies to put their expansion plans and hhold – Page 14
Now, Companies Answerable To Stockholders, TooAlthough a new concept, shareholder activism is gaining popularity, forccompanies to get their act right – Page 17
In Urgent Need Of RepairsAnomalies in governance and accounting policies of asset reconstruction
has forced the RBI to assess the problems – Page 20
When Idleness Is Good The recent decisi on of the RBI to deregu late savings ac count interest rat egood news for customers whose surplus money was fetching negative rereturns amid higher inflation – Page 22
Fragile: Handle With CareEven as the logistics industry is besieged with a host of issues, the playerinnovating by doing more with less to beat competition – Page 25
Taking Pharma To The MassesIf the government’s proposed initiative becomes a reality, consumers wilto choose the cheapest medicine from a list of alternatives, through an SPage 28
Aviation’s White Elephant Tout ed to be the next big th ing in the avi at ion se ctor, low-c ost carr iers alonger affordable for most players – Page 30
Bajaj Electricals Limited: Light Years AheadWith a well-diversified product portfolio and presence in all price points,able to maintain an edge over its competitors – Page 33
Fortnightly Outlook For Commodities – Page 39
Fortnightly Outlook For Currencies – Page 40
Looking Ahead: Long-Term Debt FundsInvestors can consider long-term debt funds in a falling interest rate scen– Page 42
Important Statistics for the Fortnight Gone By – Page 44
Portfolio RebalancingPortfolio rebalancing is an important tool for effective risk management helps maintain the desired allocation mix – Page 48
olume 1 Issue: 58, 21st Nov ’11
Editor-in-Chief & Publisher: Rakesh Bhandari
Editor: Tushita Nigam
Senior Sub-Editor: Kiran V Uchil
Art Director: Sachin Kamble
Junior Designer: Sagar Padwal
Marketing & Operations:
Savio Pashana, Afsana Tamboli
We, at Beyond Market welcome your views,
comments and feedback. Do help us to grow
better as per your liking. This is our attempt to
reach you better while crossing horizons...
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HEAD OFFICE
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Sonawala Building, 25 Bank Street,
Fort, Mumbai - 400001
Tel. 022-3926 7500/7501
CORPORATE OFFICE
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Tel: 022 - 3926 8000/8001
Research Team:
Sunil Jain, Kunal Shah, Vikash Bairoliya,
Ruchita Maheshwari, Dipesh Mehta,
Sunit Mehta, Subhash Lalwani, Somya Dixit
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The str ik e a t M aru ti
is a clear indication
of how arm-twisting
by employees, led by
the unions, could
hurt companies
ndia’s largest carmaker
Maruti Suzuki on 1st
November this year posted a
53% drop in monthly sales,
its worst in ten years, after a strike at
its Manesar plant in Haryana hit the
production of its cars.
Maruti sold 55,595 vehicles in
October as compared to 1,18,908
vehicles in the same period last year.
The company reported a year-on-year
(y-o-y) decline in car sales for five
straight months since the start of the
labour dispute in June over
recognition of a new union and claims
of worker sabotage. The recent work
stoppage at the company’s Manesar
plant has cost the firm $400 million in
lost production, since June.
Sadly, it is not just Maruti, which is
the victim of labour unrest in India.
IOther automakers such as Hyundai
Motor India Ltd and General Motors
have also faced labour problems in
the past.
A year ago, around 150 Hyundai
workers held a sit-in agitation at the
company’s Sriperumbudur plant,
outside Chennai. The strike was to
demand the reinstatement of 67
workers who were involved in violent
protests in July ’09.
According to a Hyundai statement,
150 workers occupied the factory,
which forced the management of
Hyundai to suspend production for
three days, resulting in a loss of 4,000
cars and $27.7 million. This was the
fourth strike since 2008 at Hyundai’stwo plants in Sriperumbudur.
In fact, labour issues have forced
It’s simplified...Beyond Market 21st Nov ’116
Hyundai to consider the option of
moving production of some of its i20
superminis from India to an existing
factory in Turkey.
Manesar-based auto ancillary makers,
Sunbeam Auto and Rico, have also
lost money in strikes in the past. In
2010, Hero Group
promoted-Sunbeam lost `65 crore
because of a 52-day strike and a
45-day strike at RICO Automotive
Industries, which forced shutdowns at
Ford Motor Co and General Motors
Co in North America.
In fact, the largest roadblock to
India’s ambition of becoming a global
small car production base is very
likely to be labour disputes, saidmarket research firm JD Power, in its
report titled, ‘India Automotive
2020: The Next Giant from Asia’.
“The risk of union-related labour
problems is omnipresent in India
since many labour unions are
affiliated with political parties. As a
result, local politics frequently
interferes with business operations,”
the report said.
According to the report, unions use
their influence to promote manual
labour rather than automation in
Indian plants to create more
employment, resulting in longer
production cycles, greater variability
in quality and more cost outgo.
Not surprisingly, because of all these
reasons, India is way behind other
nations in terms of labour market
efficiency, ranking 92nd among 139nations in the World Economic
Forum’s Global Competitiveness
Index 2010-11.
Industry experts warn
disputes could spread
manufacturing sectors su
goods and chemicals, wh
large number of people.
Experts say such sectors
probability of labour trou
the industries require a la
of trained workforces, fo
hire contract workers at l
Experts say labour disp
manufacturing sector ar
companies tend to emp
number of contract worke
In some cases, the share
workers is 60% to 90%
workforce. Indian labovery rigid. In India,
workers cannot be hired
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easily and are protected by the
Industrial Disputes Act, 1947, which
mandates that firms with over 100
workers (permanent) have to obtain
government permission for any
layoffs, retrenchments or closures.
Manufacturing companies, therefore, prefer to hire contract workers, who
can be fired more easily than
permanent workers, if there is an
economic slowdown.
The problem though is that once
hired, contract workers want the same
benefits and job security enjoyed by
permanent workers.
Considering that manufacturing
companies tend to have a largenumber of contract workers, any
dispute between contract workers and
the management can bring production
to a complete halt.
In the case of Maruti also one of the
primary reasons for the labour dispute
was that the company had a large
number of contract workers. The
contract workers were paid lower
wages compared to permanent
workers although they were doing thesame amount of work.
Experts say that such labour disputes
are more likely in industries, which
employ high skilled labour and are
growing at a fast pace. For instance,
Nokia has faced at least three labour
disputes so far.
The most recent was in July ’10,
when more than 1,000 workers went
on strike demanding a revision inwage settlement and reinstatement of
60 workers who were suspended in
January ’10 on charges of
misconduct. Production at Nokia’s
Sriperumbudur factory, outside
Chennai, was severely disrupted for
three days.
The strike ended after the Nokia
management revoked the suspension
of 60 workers and the union agreed to
a long-term wage settlement.
However, the demand for higher
wages is not always the reason for
employees going on strike. Strikes
also happen when there are multipleunions and each one wants to be
recognized by the management.
For instance, in the case of Foxconn, a
mobile phone accessories
manufacturing company, employees
of the company went on strike in
September ’10 at its Sriperumbudur
plant demanding recognition of a
second union.
Strikes have also become common inthe aviation sector. It first started in
2009 when pilots and other
employees of Jet Airways and Air
India went on a strike demanding
higher wages.
More recently, more than 100 Air
India pilots have threatened to resign
over alleged discrimination by the
airline’s management.
In a letter to Air India’s chairman andmanaging director Rohit Nandan, 101
pilots represented by the Indian
Pilots’ Guild, which represents
pre-merger pilots of Air India, said
they were considering “seeking
employment elsewhere”.
The pilots claimed in the letter that
their peers at Indian Airlines have
received favoured treatment, “leading
to a complete stall of our career
progression”. Air India managementis now holding talks with the pilots to
prevent their resignations.
India is not new to labour problems
and the country has seen several
labour unrests in the 1970s and in the
1980s as well. While there is no one
solution to labour disputes, the
management could make things easier
by keeping communication channels
open. Several experts have also called
for a relook at India’s labour laws.
One of the changes that is required is
linking pay with performance, which
will put an end to wage-related
disputes. The other problem thatneeds to be looked at are laws that
pertain to governing of trade unions.
The Trade Unions Act allows for
multiple unions, which gives more
bargaining power to the unions. This
is, however, terrible for companies
because more often than not, what
happens is that an agreement reached
by the management with any one
union is not agreed upon by the other,
as seen in the case of Foxconn.
The other nasty reason for strikes is
alleged political conspiracy by some
political parties to incite industrial
unrest. In many cases, labour unions
are affiliated to political parties.
For instance, Nokia India Employees
Progressive Union, which went on
strike at Nokia’s plant, is under the
control of the Labour Progressive
Front, a union that is affiliated to theruling Dravida Munnetra Kazhagam
party in Tamil Nadu.
Again, in the case of the Maruti strike,
the government of Haryana has
consistently claimed the strike was
instigated by the Left parties to
disrupt industrial growth in the state.
Labour dispute could be caused by
any reason be it the demand for higher
wages, recognition of the union or reinstatement of workers, the bottom
line is that labour unrest results in
heavy losses for companies.
In many cases, companies are forced
to give in to labour demands and in
some rare instances the company
could be forced to shut down its plant
and move to a new locatioN.
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While seasonality played a role (due
to monsoons), the impact of monetary
tightening by the Reserve Bank Of
India (RBI) led to an additional
increase of 50 bps - 75 bps in key
interest rates, directly or indirectly
impacting various sectors.
With most of the quarterly results
being disclosed, it is time to check
how certain individual sectors
performed in the quarter and what the
future looks like for them.
Private banks and the Information
Technology (IT) sectors have done
well in the second quarter, while the
metals, capital goods as well as the
power sectors have been nothing but
disappointments for the markets.
AUTOMOBILE
Despite road blocks in the form of
higher input costs, high interest rates
and fuel price hikes, auto companies
registered a steady sales momentum
in the quarter, as disclosed by the
Society of Indian Automobile
Manufacturers (SIAM) for the second
quarter of FY12.
However, the volumes were skewed
towards the two-wheeler,
three-wheeler, and light commercial
vehicles (LCV) segment and the
tractor segment. Therefore,
companies that cater to these
segments did well at the top line
levels in the quarter.
The demand for passenger car and
medium and heavy commercial
vehicle (MHCV) segments remainedsubdued. It was a quarter best
forgotten for a company like Maruti
Suzuki India Ltd as labour unrest at
its Manesar plant in Haryana severely
impacted operations, leading to a
decline in volumes.
Moderating demand scenario has led
to a weakening pricing power and
discounts offered by major
automobile companies in order to
boost their sales, weighs on the
margins for many companies in the
passenger cars segment.
Going forward, a correction in base
metals in recent times will help thecompanies in this sector to lighten the
input cost pressure.
BANKS
Given the pessimism surrounding the
banking sector since the beginning of
the second quarter of this financial
year, Indian banks were able to put a
better show in the quarter.
Most banks have posted better profitnumbers despite fears over the asset
quality, especially on any stress in the
infrastructure sector (read power
sector: owing to defaults by state
power utilities) and weak advances
due to the high interest rate scenario.
As expected, Public Sector
Undertaking (PSU) banks, led by the
State Bank of India (SBI) reported
higher slippages, while some of the
public sector banks reported higher NPAs due to the migration of banks to
system-based calculations.
On an average, both net interest
income (NII) and net interest margins
(NIM) for public sector banks
improved during the quarter mainly
on account of an increase in the base
rate. Private banks on the other hand,
were able to put a better show. Loan
growth was in line with expectations
across sectors.
Commentary on capital infusion of
`3,000 – `4,000 crore by March ’12
for the SBI lifted some tension over
adequacy norm adherence by the
public sector bank.
Going forward, savings rate
deregulation that was recently
announced by the RBI, increasing
cost of funds and lower advances
would put some pressure on NIMs.
Deteriorating asset quality will also
be a big cause of concern.
AVIATION
Companies in the aviation sector
posted disappointing numbers for the
second quarter. The traditionally
weak July-September quarter for the
aviation companies was made more
challenging by the depreciating
Indian rupee, rising fuel prices,
intense competition and mounting
wage bills.
The sector has not found favour with
investors for quite some time now.However, the performance of few
airlines in the past few quarters
offered promises of a turnaround in
the aviation sector.
But, the challenging macro
environment and inability of airline
companies to control costs added to
the gloom surrounding the sector.
INFORMATION TECHNOLOGY
Industry analysts had expected a
mixed quarter for the IT companies
based on their hedging levels and the
timing of wage bills. As has been the
case since the past few quarters, Tier I
companies like Infosys, TCS and
HCL Technologies did not see any
major outperformance in their
revenue growths.
A hanging sword in the form of the
gloomy western world, which is amajor geography of sales for
companies, did not throw any
negative surprises as companies did
not witness any cancellation or delays
in orders.
The depreciating Indian rupee helped
expand margins for some companies.
The slightly lower-than-expected
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volume growth of IT bellwether
Infosys was offset by the
higher-than-expected FY12 guidance.
HCL expects CY12 IT budgets to
remain constant, with some budget
cuts from their clients.
Wipro’s positive commentary ongrowth was also a key takeaway from
the sector. Revenues were mainly
driven by the banking, financial
services and insurance (BFSI) as well
as manufacturing verticals, while the
retail and telecommunication sectors
remained subdued. Healthcare also
picked up traction in the second
quarterly earnings this year.
Coming to Tier II companies in the IT
sector, their earnings were boosted bythe depreciating rupee. Going
forward, the progress in the western
world and IT budgets of companies
there will determine the future course
for this sector.
MEDIA
Media companies are reeling under
softness in advertising revenue for
quite some time and the second
quarter of the current fiscal year wasno different.
Media companies (split into print and
broadcasting) were impacted by slow
growth in ad-spend while their profit
growth took a hit due to foreign
exchange losses on their foreign
currency loan.
A 25% rise year-on-year (y-o-y) in
news print cost, a majority of which is
imported from countries like the USand Europe, among others,
pressurized margins for companies in
the print segment.
Going forward, the media industry in
the country expects improved
performance in 2HFY12 and is
expecting a higher uptick in
advertising revenue in the third
quarter on the back of spending
during the festive season.
METALS
It was a difficult quarter for
companies in the metal space.
Pressures on margins were quiteevident on account of higher raw
material prices during the quarter for
companies in this sector.
Availability in terms of quality and
quantity of coal and iron ore remained
a major challenge for steel companies
in the second quarter, especially after
the mining ban was imposed by the
Supreme Court of India, in Bellary
region of Karnataka.
The poor demand for long products
due to a weak macro-economic
environment globally affected the top
lines of most companies in this sector,
while some demand for flat products
in the automobile industry saved the
day for certain companies.
For companies in the non-ferrous
segment, realization remained muted
and proportional to the prices of base
metals on the London MetalExchange, which has been on a
downward spiral for a while now.
Going forward, a fall in the prices of
coal (as per media reports) would
help margins of companies as they
would not pass it to the customer
since they are still at elevated levels.
At the same time the companies will
compensate for the lower demand of
their products due to the overallweakness in the macro environment.
The following sectors had more
company-specific activities in the
second quarter this financial year
POWER
Key takeaways from the second
quarter results of power companies in
the current financial year were
shortage of fuel, increasing fuel
prices, falling merchant tariff and
poor financial positions of state
electricity boards (SEBs).
Generation of power was also quitelow mainly due to seasonal factors
and outages at the plants.
In terms of numbers, most of the
companies posted numbers which
were below expectations.
According to the managements of
power companies, they are all looking
at ascertaining fuel supply from
domestic or overseas companies, but
they expect uncertainty in the near term and await broader policy from
the government.
REAL ESTATE
In a cyclical quarter for the sector due
to the monsoons, sales were expected
to be low on account of weak demand
due to high interest rates and elevated
property prices.
Though the activity remainedcompany-specific, residential
volumes remained lower while
commercial rentals in some pockets
picked up.
Revenues for some real estate
companies were largely driven by the
sale of plotted land and execution of
existing projects.
Going forward, weak demand, delays
in execution of projects undertakenand the impact of the land acquisition
bill remains a cause of concern for the
real estate sector.
CAPITAL GOODS
Lower-than-expected industrial
capital expenditure as is evident from
the orders placed to the companies in
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this sector, partly due to unfavourable
domestic and overseas conditions and
partly due to a higher interest rate
scenario, took a toll on the capital
goods companies.
Comments regarding the execution of
projects and a positive guidance were being keenly watched by experts from
this sector.
However, L&T, India’s largest capital
goods company, slashed order book
guidance on slowing investments and
rising competition, giving a vague
picture about the sector.
INFRASTRUCTURE
In an otherwise weak seasonal quarter due to monsoons, high interest rates
and rinsing cost of commodities
threw their own challenges at the
infrastructure sector.
Like it has been the case for the past
few quarters slowdown in order
inflow, (except road segment, there
has been no award activity from other
segments in the quarter) has directly
impacted the top line.
Operating margins were under
pressure for the quarter. The
management’s remarks on the impact
of the land acquisition bill were also
watched, which is likely to impact the
earnings of companies in this sector,
going forward.
CEMENT
Analysts had expected slower growth
in dispatch for cement companies inthe July-September period mainly
because of monsoons and slowdown
in the housing, infrastructure and
industrial segments.
High interest rates had its own impact
on the housing and industrial projects,
in turn, impacting the overall demand
for cement.
Cement companies in the second
quarter this year saw a meagre growth
of 5% in dispatches as against the 3%
growth in the same period last year.
This could have been higher, analysts
believe, as extended monsoons and a
week-long truckers strike in south
also impacted movements.
Despite lower growth in dispatches,
the cement companies were able to
put a better show for the quarter
mainly due to higher realization and
price discipline.
During the quarter, cement companies
had raised prices by `10 to `20 in the
northern, eastern and western regions,
while prices in south remained stable
in the quarter. For the quarter, cement prices on an average, were around
`260 per bag versus the price of `230
per bag last year.
Cement major Ultratech’s dispatches
grew by 2.6% mainly because of
revival in northern India and posted a
huge growth of 140% in net profits as
against the same quarter last year.
Dispatches of ACC and Ambuja grew
by 19% and 6% and their net profits
rose by 67% and 13%, respectively.
The price hike helped companies
from this sector to absorb higher input
costs, especially coal, in the quarter
and sustain margins.
Though the numbers are robust on a
yearly basis (as corresponding quarter
of last year was weak and forms a
weak base for comparison), figures
were lower on a sequential basis.
Going forward, sector analysts are
skeptical about a further hike in
cement prices as demand is yet to pick
up proportionally, while input costs
are showing no signs of cooling off.
Going forward, the availability of
coal will be an issue as majority of
coal has been diverted to meet the
huge shortage at power plants, while
the overall slowdown in construction
activity and higher freight costs will
offer their own challenges.
FMCG
The July-September quarter iscyclically a better quarter for FMCG
companies. The FMCG companies
posted higher volumes and bottom
line numbers.
While gross margins declined for
most companies due to higher raw
material costs and fuel charges, net
margins were higher due to cut down
in ad-spends and a broad-based price
hike in the quarter.
However, unlike last year, the quarter
witnessed fewer product launches.
Being a safer and non-volatile sector,
FMCG companies have also
performed well on the bourses in the
recent past.
Overall, the performance of
companies across sectors has been
rather lukewarm. And market experts
are hoping for a revival in earnings in
the coming quarter S.
Note:
Quarterly numbers are only a way of
appraising a company’s performance.
But long-term performance over few
quarters is a true yardstick to measure
the capability of a company. No two
companies are the same even if they
fall under the same sector.
Distinguishing factors like brandimage, quality of human resource and
operating efficiencies do play a major
role in forming a perception about a
company among investors and the
valuation it commands in the market.
Only a few top companies from a
sector are taken into consideration to
get a trend regarding sectors
performance over the quarter.
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Pink Slips Loom LargeOver IndiaPink Slips Loom LargeOver India
The risk of cut in wages or job
losses cannot be ruled out as
volatil ity in the Indian economy is
forcing companies to put their
expansion plans and hiring on hold
ighten your seat belts as
the job market could face
tough times owing to thelikely slowdown in the
Indian economy. In fact, talks are rife
that the situation in the job market
could go bad and hiring may also take
a beating.
Consumption and investment cycles,
the two propellers of the Indian
economy, are already showing signs
Tof a slowdown and may slacken
further as general sentiments turn
bitter due to interest rate hikes by theReserve Bank of India (RBI) and
persistently high inflation, which is
forcing consumers and companies to
defer or reduce spending.
For any economy consumption and
investment are two important factors
that drive growth and create more
employment. In fact, this is what
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results in higher demand and creation
of new capacities, leading to more
demand for labour.
During the past economic downturns,
including the ones witnessed in
2001-2003 and 2008-09, jobs were
lost and employees were asked to takea cut in their salaries. Although the
situation is not as bad as it was then,
the initial signs are not very
encouraging, now.
THE CAUSE AND EFFECT
In a bid to control inflation, the RBI
raised interest rates in October for the
13th time since 2010. The RBI raised
its policy lending rate or the repo rate
by 25 basis points to 8.5%.
This also led the banks to raise
borrowing rates, which are currently
hovering in the region of 12% to 14%.
These levels were only seen before
the financial crisis of 2008-09.
With the rising interest rates and
persistent inflation or cost pressures,
it is becoming increasingly difficult
for consumers to borrow.
Consumer and corporate credit,
including loans for home and
automobiles have already become
costlier, leading to moderation in
credit growth for both retail and
corporate sectors.
Not just retail loans, even loans taken
by corporates is seeing a dip at these
rates, especially in the light of
demand-side issues. It is evident from
the fact that industrial capex or corporate spending on new or existing
projects have reduced. It is difficult to
borrow at higher rates and generate
enough returns to reward
shareholders or generate good
internal rate of returns.
The projects in the infrastructure
sector like power, construction and
housing have already been stalled and
many companies have postponed
their plans.
News reports suggest that several
infrastructure projects have been
delayed and there are very few takers
for new projects, considering thathigh interest rates have impacted the
economics of the projects.
In fact, several existing projects have
turned unviable at current interest
rates, which can be gauged from the
recent quarterly results wherein
several companies reported a decline
in profits.
If consumers are not spending,
corporates are not investing andgovernment is not showing any
willingness to invest in the economy
as a result of fiscal imbalance and
inflation, then the growth could be
hit, which will be visible in the
coming months.
In this scenario, it is obvious that
economists and the RBI are expecting
some moderation in economic growth
in the months to come. The RBI has
cut down its economic growthforecast for the fiscal year ending
March to 7.6% from 8% earlier with a
downside bias.
Many sections or sectors of the
economy have already begun seeing
moderation in growth. The
manufacturing growth was nearly
stalled in September, which is the
weakest since March ’09, led by
slowing output and growth in the
number of new orders.
CURRENT STATE OF HIRING
Early signs of weakness in the job
market are already visible. Reports
suggest that there were fewer jobs on
offer in the month of October this
year. According to job search sites
and other agencies, there was a
decline of roughly 16% in recruitment
in the month of October as compared
to September.
The decline was witnessed across the
board except telecom and to some
extent, the services sector. Interest
rate-sensitive sectors likeconstruction and auto too reported a
significant decline of about 20% to
25% in recruitments.
In the case of IT, banking, oil and gas
and pharma sectors, the fall in
recruitment is considered to be in the
region of 13% to 19%, which is not a
good sign at all.
Industry watchers attribute this to
slow demand and uncertainty in theglobal and domestic economies.
Further, on the back of the prevailing
economic scenario, corporates are
adopting a cautious approach to
hiring as well as hiking salaries of
their employees.
General sentiments are pointing
towards further weakness in the job
market as many experts believe that
the impact of the last hike in petrol
prices and key interest rates is yet to be seen.
The cascading impact of these two
factors will hit the financial
performance of most corporates in the
days to come and that will restrict
them from expanding or recruiting
with the risk of cut in wages and
salaries if the situation worsens from
the current levels.
According to estimates, theunemployment rate in India in the
year 2008 was around 7.2%, which
shot up to nearly 11% in the year 2009
and 2010 as a result of the global
financial crisis and contraction in
economic activities across the globe.
This estimate does not include
unemployment in rural areas and the
agricultural sector.
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SERVICES: BIG DANGER
There is one more aspect to this.
Typically, the slowdown in the
manufacturing sector percolates to the
services sector with a time gap which
could be in the range of six months to
nine months.
Considering these reasons, it was
only in the month of September that
the initial signs of moderation in the
services sector was witnessed.
This is apparent considering that if
corporates and consumers do not
spend as desired there will be fewer
need for services, especially in the
luxury segment, which will be hit the
most in the downturn.
For instance, companies in the hotel
or hospitality industry and those in
the aviation sector generate a large
part of their revenues from domestic
as well as foreign arrivals. A cut in
consumer and corporate spending
could lead to lower growth for some
of these sectors.
For instance, in financial year 2009,
the foreign passenger traffic grew by
a mere 10.3% as against 20.5% in
fiscal 2008 as a result of the
slowdown and lower tourist arrivals
in the country.
Around this time, the hotel industry
and the aviation industry too suffered
in terms of occupancies and
utilization of capacities dropped too.
EXTERNAL SECTOR: NO
SAVING GRACE
There is not much support from the
external sector as well, because
export markets have and are further expecting moderation due to lower
demand in the western world.
The Information Technology sector is
already in focus, which is quite
logical given that most large Indian IT
companies generate almost 80% to
90% of their revenues from
international markets, especially the
developed markets like the US and
Europe, among others.
Economic instability and uncertainty
in the Euro zone and expected
slowdown in the US economy are
likely to impact the demand for the products and services of Indian
companies. Also, since these
international companies employ a
large workforce, the impact of the
slowdown on the Indian job market is
expected to be immense.
VULNERABILITY INDEX
The odds are definitely not in favour
of new job creation. In fact, there is a
high probability that one might notsee an increment in salaries this year.
What is even worse is that high
interest rates, inflation or consumer
prices and unemployment could have
more serious implications on the
general public, whose impact will be
seen in the months to comE.
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Although a new concept, shareholder
activism is gaining popularity, forcing
companies to get their act right
Now, CompaniesAnswerable
To Stockholders, Too
hareholder activism in
India is few and far
between. The good thing
is that from baby steps it
is now taking youthful strides. To put
things into context you need to
answer a few questions. What would
you do as an investor if a portfoliocompany passes a resolution that
surprises you on the negative side?
What would you do if you are not
comfortable with the salary hikes
taken by CEOs, especially if he is a
promoter or if the company gets
involved in inter-group transactions?
What would you do if the company
Smakes moves which are deemed
shareholder-unfriendly?
There is no easy answer to this,
especially if you have invested in an
Indian scrip. There are few options in
front of you. Sell the stock and move
on. Be loyal and hold on to the stock and let the company win its way even
if it is against the shareholders. Or
take the road less travelled and reach
out to the management and raise the
pertinent issues.
Shareholder activism which was
dormant for decades in India is
evolving. Although the last option
was not aggressively pursued by
Indian investors earlier, things are
changing for the good as many
shareholders are standing up to their
role of active investors.
Take the case of the recent labour
strike at Maruti’s Manesar plant inHaryana. Not only was the company
negotiating with the workers to call
off the strike, even LIC, its big
investor, was trying to call for a truce
between the management and the
errant labour force.
Recently, minority investors forced
Crompton Greaves to give a
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commitment to investors that it would
process the sale of a `270 crore jet to
an unlisted group company, which
was bought during the year when
Crompton reported disappointing
profit numbers.
Also LIC, the country’s largestinstitutional investor, found itself at
the receiving end of Voices of
Tobacco Victims, an NGO working
for cancer patients, which raised
questions over the ethics and irony of
the state-owned life insurance
company for investing up to `3,500
crore in various tobacco companies.
Another example of such activism in
recent times is the stiff opposition to
erstwhile Satyam’s plans to mergeMaytas, a group company.
Post the Satyam crisis, investors in
Maytas - IL&FS and IFCI - also urged
the government to supersede the
company’s board. Further, there was a
huge investor uproar at Siemens when
the company board planned to hive
off its IT services arm.
These issues raise a pertinent question
as to what shareholder activism is andwhy such activism in the country is
yet to see the best days like its
western counterpart.
CORPORATE GOVERNANCE
AND SHAREHOLDER ACTIVISM
Ever since the liberalization of the
economy in the early 1990s, several
Indian companies have attracted
foreign players.
Foreign institutional investors (FIIs)
in the form of pension funds that
demanded greater professionalism in
corporate activities, professionalism
in the form of better disclosures of a
company’s financial position and so
on. All these and many other related
developments have brought the issue
of corporate governance to the fore.
Corporate governance is all about
commitment to values and ethical
business conduct. It is about how an
organization is managed, its culture,
policies and the manner in which it
deals with various stakeholders,
including shareholders, employees,
government and other agencies.
Corporate governance means timely
and accurate disclosure of
information regarding the financial
situation, performance, board
constitution, ownership of the
company, maintaining high levels of
transparency, accountability and
equality in all areas of its operations
as well as in all interactions with its
various stakeholders.
In the Indian context, companies are
mainly run by promoters unlike
professionals in the west. They have a
higher presence in the board and a
better say in a company’s resolution.
Companies do err or make moves for
their own advantage, putting minority
shareholders at the receiving end.
Hence, there is a need for better
corporate governance and active
participation by shareholders.
Active participation in a company’s
operation ensures better management,
less frauds and better governance. If
the management knows that it will be
questioned for its actions, it will
always be on its feet.
The active involvement of
stockholders in an organization is
shareholder activism. Even as things
change, shareholder activism in Indiahas remained dormant because of the
following reasons.
- In India, most investors are focused
on short-term gains.
- There is limited institutional
ownership with promoters including
government, holding majority stakes
followed by retail investors and then
institutions.
- India suffers from the problem of
too many regulations. High costs
involved in litigation and
manipulative ways adopted by the
promoters of companies aresometimes deterrents for any sort of
shareholder activism.
- Lack of awareness regarding
shareholder’s rights and duties is also
a deterrent.
Shareholders can ensure that the
company follows good corporate
governance practices and implements
beneficial policies. They can resolve
issues laid down in the annual generalmeetings and other such general
meetings. They can also raise
concerns over financial matters or
even social causes such as protection
of the environment, etc.
For this, the shareholders of the
company can participate actively in
the meetings of the company and
establish a dialogue with the
management on issues of concern.
Shareholder activism can be
exercised through proxy battles,
publicity campaigns, shareholder
resolutions, litigations and
negotiations with company
managements in courts. They can also
use the Internet and mass media as
they are effective tools in building
pressure on the management.
Shareholder activists include public
pension funds, mutual funds, unions,religious institutions, universities,
foundations, environmental activists
and human rights groups.
The law in each country gives rights
to shareholders. For example, in
India, shareholders have been granted
certain rights under the Companies
Act, 1956.
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NEW BREED OF ADVISORY
COMPANIES IN INDIA
There is a new breed of companies
called proxy advisory firms, that
advice shareholders and help them
take informed decisions, and, in turn,
improve corporate governance byhighlighting critical issues.
Proxy advisory firms are independent
investment advisory firms that
provide stiff appraisal of corporate
conduct and give unbiased vote
recommendations to their clients,
which are typically institutional
investors who want to take informed
investment decisions over a
company’s resolution. They foster
institutional shareholder activism
through corporate governance and, at
times, also vote for their clients ingeneral meetings.
The recently launched Institutional
Investors Advisory Services (IIAS)
and InGovern Research Services are
firms that fall into the category of
proxy advisory firms. Their western
peers are firms like Institutional
Shareholder Services, the biggest
proxy advisory firm in the US.
SIGNIFICANCE OF
SHAREHOLDER ACTIVISM
Shareholder activism can do wonders
in implementing corporate
governance. It can influence
corporate culture and increase general
awareness on social and human rights
issues concerning organizations toO.
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Chana `2,500/quintal
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CORPORATE OFFICE: B-2, 301/302, Marathon Innova, O Ganpatrao Kadam Marg, Lower Parel (W), Mumbai - 400 013. Tel: 022 - 39268000 / 8001; Fax: 022 - 39268010R E G D . O FFIC E : S on aw ala Bui ldi n g, 2 5 Ban k S treet , Fort , Mum bai - 4 0 0 0 0 1 . Tel : 0 2 2 - 3 9 2 6 7 5 0 0 / 7 5 0 1 ; Fax : 0 2 2 - 3 9 2 6 7 5 1 0
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Anomalies in governance and
accounting policies of asset
reconstruction rms has forced
the RBI to assess the problems
he asset reconstruction
industry, thoughless-than-a-decade old in
India, is under the
scanner of the banking regulator
because it has been found that the
country’s largest and oldest asset
reconstruction firm, Asset
Reconstruction Co (India) Ltd (better
known by its acronym ARCIL) has
some anomalies in governance as
well as accounting policies.
It is has been found that this assetreconstruction firm is not driven by
its board, but its major shareholders
who are three major banks – State
Bank of India, ICICI Bank and IDBI
Bank. Now, this is a conflicting
scenario as these banks are supposed
to be in the business of selling off
their bad loans to asset reconstruction
companies themselves.
TOne would imagine that in a country
like India when the banking regulator and the top bankers are waxing
eloquent about the worrisome
situation of rising NPAs (non
performing assets or bad loans) the
country would have a robust asset
reconstruction industry. Globally,
there are asset management
companies who perform this function.
They flush bad loans out of the
system by tackling bad assets as a
one-time phenomenon.
To prevent the commercial banking
system from being negatively
impacted, the AMCs bear the burden
of bad loans, for which they get fiscal
and administrative support from the
government. Typically, an AMC buys
bad assets from a bank at a discounted
price and issues bonds against them.
The government, in turn, guarantees
IN URGENTNEED OF REPAIRS
these bonds and protects any erosion
of value from the books of the banksthat are making the sale of the
stressed assets.
But unfortunately, in India, it is not
like this. The banking system is
sitting on a pile of bad loans
amounting to approximately $20
billion, a quarter of which is held by
the largest bank of India, the State
Bank of India alone.
At a time when interest rates have been rising and the economy is
slowing down, corporates are
expected to default on bank loans.
Yet, about a dozen asset
reconstruction companies recount
their horror stories about how
difficult it is get a bank to make a sale
of its stressed assets and how in most
cases a deal falls through because of
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unrealistic expectations of a bank
even after an elaborate auction
process is carried out.
As a result the industry that showed
much promise in the years 2003-2004
can best be classified as an
opportunity lost. A lot of foreigninvestors coming in to the country to
take a slice of the distressed debt pie
have all but disappeared. Let us
analyze what has brought about this
situation upon the banking industry.
THE PROBLEM AT HAND
In India this is how the system works.
The ARCs are empowered to buy bad
assets from banks either by paying
cash or offering security receipts or SRs that can be redeemed later. But
mostly banks are unwilling to sell
their stressed assets or even if they do
agree they ask for higher valuations
while accepting SRs or very steep
discounts for all cash deals, which
ARCs find unrealistic. As a result, the
deals fall through in most cases. But
banks can’t be blamed entirely
because of the regulatory diktats that
they have to follow.
First and foremost while making the
sale of a stressed asset to an ARC, a
bank is required to make a full
provision on its books for the book
value of the loan and the value at
which it is being sold to the ARC.
This takes a toll on the bank’s
profitability which it obviously tries
to avoid. On the other hand, if they
carry the bad assets on their books for
three to four years, they can postpone
this negative impact as they can makefull provisions over this time period
and no fresh provisioning will be
required. After this is done the bank
can always sell it to an ARC as the
last option.
Secondly, operationally banks enjoy
much of the same powers as an ARC
as far as recovery of bad assets is
concerned. So, they would first
attempt to recover a bad asset on their
own. In fact, a head of an ARC that is
sponsored by a leading private bank
recalls how frustrating it gets
especially when public sector banks
ask their specialist team ‘what is it
that you can do, that we can’t doourselves?’ What they often lack is
the recovery skills or the know-how
about the industry, which ARCs
spend years studying, he says.
Thirdly and most importantly,
perhaps, is the process of the sale and
price expectations. The driving factor
is the cost of funds. To quote an
example: if they want to recover `70
from an asset valued at `100 over
three years, ARCs tell them that it isonly possible to recover `40. Besides,
the banks flatly refuse to pay the
management fee that a bank has to
pay to an ARC that varies between
1% and 2% of the size of the asset in
case of the sale of an SR.
The other glitch is the process of
auction itself. Banks auction bad
assets to ARCs but do not provide any
floor price. Thus, price discovery
mechanism in nipped in the bud. Infact, most banks after receiving bids
from the ARCs, withdraw from the
auction themselves and start
negotiating one on one with the
borrower using the highest bid as a
floor. These practices are rampant,
leaving Indian ARCs high and dry.
WHAT NEEDS TO BE DONE
It was in 2002 that the government
passed the Securities andReconstruction of Financial Assets
and Enforcement of Security Interest
(SARFESI) Act. But the banking
regulator, RBI took seven long years
to empower ARCs and that too was
done in a truncated manner. ARCs can
take over the management but cannot
lease its business, which they find
restrictive. Besides, there are cases in
which defaulting borrowers delay the
process by taking the ARC to court.
This is a palpable issue that needs
immediate attention.
Moreover, there are other loopholes
in the system. For instance, banks
complain that the assets that they sellto ARCs cannot be mixed in a pool.
This means that ARCs have to set up
separate trusts that hold these bad
assets under them. ARCIL alone is
known to have over 300 trusts that are
only seller specific. Apart from this,
there is the issue of a clear conflict of
interest mentioned earlier in the case
of ARCIL.
Banks, as shareholders of ARCs,
makes them sellers as well asinvestors in SRs. Their representation
has to be curbed immediately as has
been done in the case of credit
information bureaux. Banks should
not be involved in the process of
recovery and should be incentivised
to sell their bad loans to the ARCs.
Finally in the case of SRs, there has to
be a wider participation. Currently,
only banks and insurance firms can
subscribe to SRs and foreigninvestment is capped at 49%. Besides,
no FII can hold more than 10% in an
SR. Foreign investors should be
encouraged to participate in the
recovery process as they have
significant experience in distressed
debt, which can really benefit the
asset reconstruction industry.
In India, banks are reluctant to let go
of their stressed assets and ARCs are
restricted in the operations, whichmakes it a difficult situation overall
and has almost hammered the last nail
in its coffin, with ARCIL coming
under the scanner. However, if the
regulator takes heed at this point in
time and paves a clear path of
recovery for ARCs and specifies that
banks comply with their functions,
resurrection is possible even noW.
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When
Idleness
Is Good
The recent decision of the RBI to
deregulate savings account interest rates
spells good news for customers whose
surplus money was fetching negative real
returns amid higher ination
ringing in reforms is a
c h a l l e n g i n g
proposition. Until they
are implemented,
arguments about their importance and
relevance are made repeatedly. After
they come into practice, questions
about the timing of the implications
and implementation arise.
B
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The bankers were taken by surprise
when the Reserve Bank of India
(RBI) in its last quarterly review of
the monetary policy announced the
deregulation of saving account
interest rates. This was RBI’s second
and final step towards deregulating
the saving account interest.
Earlier, the RBI had raised the cap on
the saving account interest rate from
3.5% to 4% along with calculating the
interest on a daily basis. While the
banks are coping with the effect of the
previous move, the new act came as a
surprise. If nothing else, its timing
surely did.
Most bankers wonder if it is a good
time to bring in the regulation in anenvironment when interest rates are
actually on the higher side.
But RBI Governor D Subbarao has a
clear take on this. At a post policy
briefing, he reasoned, “On timing
question the answer is a standard one
because whenever we do it, people
will say why now?”
Subsequent to indicating in its
quarterly monetary review in November ’10, the RBI prepared a
discussion paper on “deregulation of
savings bank deposit interest rate”
and posted the same for public
comments and suggestions in April
’11, which spelt out both the pros and
cons of deregulating.
Subbarao said the Reserve Bank has
examined the suggestions received
and weighed the pros and cons of
deregulation of the savings bank deposit interest rate.
“On balance, it is felt that the time is
appropriate to move forward and
complete the process of deregulation
of rupee interest rates,” elaborated the
chief of the central bank.
Accordingly, the RBI has decided to
deregulate the savings bank deposit
interest rate with immediate effect
whereby banks are free to determine
their savings bank deposit interest
rate, subject to two conditions.
Firstly, each bank will have to offer a
uniform interest rate on savings bank deposits up to `1 lakh, irrespective of
the amount in the account of the
holder within this limit.
And second, for savings bank
deposits over `1 lakh, the bank may
provide differential rates of interest if
it chooses to.
However, the RBI has mandated that
there should not be any
discrimination from customer tocustomer on interest rates for similar
amount of deposit.
So, how bad is the move? Not at all
bad for depositors whose surplus
money was fetching negative real
returns amid higher inflation.
At a time when inflation is hovering
over 9%, the 4% interest that the
balance in savings account fetch
means a notional loss of 5% for thesavings account holders.
But for banks this move will mean an
increase in their costs, especially the
ones with high percentage of
Current-Account-Savings-Account
(CASA) deposits.
“The market-allocated premium to
banks with high CASA ratios might
witness some re-rating,” said an
analyst. Traditionally, while currentaccounts do not add to interest costs
of banks, the cost of interest on
savings accounts has been barely 40%
of the average lending rates of banks.
Currently, savings accounts constitute
over 22% of the banking systems’
total deposits and experts believe that
banks’ opting for differential rate of
interests would lead to an increase in
the industry’s cost of funds and thus
impact their net interest margins as
well as profitability.
However, experts also believe that the
reform would not be too disastrous on
the banking sector too.
According to a theoretical exercise by
HSBC, while everything else remains
the same, a 100 basis points (one
percent) increase in savings account
interest rate could see between 1 to 24
basis points compression in margins
and a 0.8% to 13% impact on profit
before tax (PBT) for private banks.
While in case of PSU banks, the
margin compression could be in therange of 17 to 27 basis points and the
impact on PBT would be between
14% to 30%.
According to HSBC, at this juncture,
the situation is still evolving, with
most bankers either expecting savings
rates to remain largely the same or to
increase to 45 - 60-day deposit rates,
which are in the range of 5% to 6%.
Also, most private banks are talkingabout increasing the transaction fees
for all savings account transactions
and are looking to pass increases to
the borrowers.
“Accordingly, when all is said and
done, they might end up experiencing
only a marginal impact or no impact
on profit,” HSBC said in its report.
“However, PSU banks may be slow to
pass through cost increases in terms
of fees and higher lending rates, andtherefore, they appear likely to see
some impact on their profits.”
The larger picture which could unfold
going forward is the likely migration
of retail depositors to banks offering
higher rates.
But HSBC does not see that
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happening in the near term due to the
inertia of retail depositors who would
barely shift to another bank that is
offering 50-100 basis points higher
than the banks they have been
previously serviced by.
“Empirical evidence of the past 10years suggests that banks that have
better service levels and that offer
products that tie in CASA have far
better prospects to attract incremental
CASA deposits,” says the HSBC
report pointing at the success of
HDFC Bank and Axis Bank in
developing a sound CASA base in the
past decade versus the declining
CASA ratios of PSU banks.
“Therefore, over the longer term, we believe that private banks will largely
be able to protect their CASA, while
PSU banks may see some erosion,
especially if some private banks offer
higher savings deposit rates,” the
report adds.
And the move has already begun with
Yes Bank increasing its saving
deposit interest rates by 2% to 6% for
all its customers on the day when the
RBI announced the plan.
“This (saving interest hike) also gives
a significant opportunity to Yes Bank
to leverage its 300-plus branch
network to accelerate mobilization of
retail deposits - one of the key
objectives of its Version 2.0 Strategy
for building its retail banking
franchise with an unprecedented
service and innovative experience,”said Rana Kapoor, Founder,
Managing Director & CEO of Yes
Bank, in a release.
The move is unlikely to affect Yes
Bank’s bottom-line in a big way given
that savings accounts currently
account for just 2% of its total
deposits. And with just 0.7% market
share, the move is unlikely to shake
the industry up in a very big way.
Competition among banks cannot be
ruled out because empirical evidence
shows that unlike in metropolitan
areas, savings deposits in rural,
semi-urban and urban areas are
responsive to interest rate changes in
savings deposits and could attract
competition from banks.
Will the competition get unhealthy?
The RBI does not think so. Citing the
case of deregulation of term depositinterest rate, the RBI in its discussion
paper had highlighted: “The
experience with deregulation of term
deposits interest rate suggests that
deregulation resulted only in a
marginal shift of deposits from public
sector banks and foreign banks to
private sector banks.
Thus, if deregulation of term depositsinterest rate is any guide, deregulation
of savings deposit interest rate may
not result in an unhealthy competition
and a large shift of deposits from one
bank to another.”
The impact of the move will reflect in
the ensuing quarters because the
deregulation has happened at the peak
of the interest rate cycle – the gap
between the fixed deposit rates and
saving account interest rate (4%) iscurrently the widest.
However, while competition among
banks to retain their saving deposits
will stem up, leading to improvement
in their product quality and service.
And given that the rate is now
deregulated, its behaviour will map
the larger interest rate environment
similar to the fixed deposit rates. Your
idle money will make more moneylying idle when the liquidity scenario
is tight and the other way round toO.
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FRAGILEhandle with careEven as the logistics industry is
besieged with a host of issues, the
players are innovating by doing
more with less to beat competition
hile transportation
in India has
i m p r o v e d
considerably, as a
business, the industry is yet to be
organized and generate enough
business to attract large number of
corporations. Logistics, an integral part of the transportation industry (it
constitutes around 40% of the road
transportation business), continues to
be in a bad state.
The industry’s growth has been
marred by inconsistent taxes and poor
infrastructural facilities. These factors
continue to be chief obstacles for
Wdismal financial performance of most
companies in the sector.
The logistics industry has been facing
a wide range of challenges over the
years and certain recommendations
by experts can bring about growth in
the industry.
The logistics industry is quite
unorganized. Broadly, the industry
can be classified into seven
categories: rail freight, Container
Freight Stations/ Inland Container
Depot, Multi-modal Transport
Operator, coastal shipping, trucking,
warehousing and express logistics.
These categories include services
such as plain vanilla transportation of
goods by roadways, transportation by
air, outsourcing of goods, and stations
for unloading and packaging of
goods. It is estimated that outsourced
logistics form a substantial part of the
industry. In this, organized playershave just 5% access to this.
There is competition in the road
transportation segment of the
industry, where small players have
mushroomed. According to certain
estimates, the overall costs of the
logistics industry is estimated to be
14% of India’s gross domestic
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product (GDP), which is translated as
US $141 billion if one considers
India’s GDP to be $1 trillion.
CHALLENGES
Despite such a huge stake and
investment, the industry is far fromconsolidated and companies are
struggling to secure handsome returns
on their investments. Obstacles such
as poor infrastructure, inconsistent
tax system, rail haulage rates,
wastages in truck transport due to
congestion, octroi duty on truck
transportation and no tax incentives
plague the industry.
All these factors have stunted the
growth of companies in the sector.Take for instance, moving of goods
by roadways. It is estimated that close
to 45% of road freight traffic is
through roads.
Huge traffic jams and labyrinthine
documentations have resulted in
delays and spoilage of certain goods.
In contrast to this, vehicles in western
parts of the world move much faster
and have swifter and easier
documentation. These factors have propelled the emergence of strong
brands such as Safexpress.
A report suggests that vehicles in the
western parts of the world run at three
times the speed of vehicles in India.
Besides this, immense irregularities
in the tax system have added to the
woes of companies in the sector. A
company has to pay multiple taxes in
a state. To evade this, companiesresort to strategies like the hub and
spoke model.
A hub and spoke network is a
centralized, integrated logistics
system designed to keep costs down.
Hub and spoke distribution centers
receive products from many different
origins, consolidate the products and
send them directly to destinations.
A centralized warehouse helps them
to take into account multiple taxes
levied by the government. Most
companies do not have huge
warehouses in every state. Instead, to
ensure their presence in certain states,the companies erect small warehouses
with bare minimum facilities.
Experts believe business-friendly
policies by the government, including
tax incentives and a single Goods and
Services Tax (GST) need to be
promoted, which would attract
investments and ensure smooth
facilities for transportation in the
logistics industry.
MEASURES
Industry experts are of the opinion
that if India has to emerge as a strong
and deep-rooted manufacturing hub,
the development of its roads is of
utmost importance. They are
expecting the inconsistent tax system
to be abolished soon.
Even as these developments
materialize, players in the industry arecoping with the present system. Take
for instance, the hub and spoke model
of distribution pioneered in express
logistics segment of the industry -
cargo business.
Few airline companies have begun a
facility in a state, which serves as a
hub for its operations. This, in turn, is
connected to other metros and tier-II
and tier-III cities.
Such a model ensures there is enough
reach through franchisee network for
airline companies. Outsourcing
aircraft from bigger airlines, works
better for those companies with a
small fleet of aircraft.
Road transportation is the only
segment where most experts are of
the opinion that development must
take place rather swiftly. Though the
National Highway Authority of India
has been awarding projects
consistently, the present state of roads
is quite dismal. Hence, basic
improvement of roads is the key for
the future growth of the industry.
Of the seven categories of the
industry, experts feel that Multi-nodal
Transport Operators will do well in
the coming years, considering the
inherent better returns due to the light
asset model of the business. These
operators derive returns on equity in
the range of 15% to 20%.
It is believed that growth in the future
lies in two major segments of theindustry: 3PL Logistics and Express
Logistics. 3PL Logistics involves
bundling of various logistics services
such as warehousing, inventory
management, transportation, freight
-forwarding and packaging.
Due to such amalgamated services,
experts believe this segment would
generate high margins in the coming
quarters. Some analysts believe that
companies in the 3PL Logisticssegment would have Earnings Before
Interest Depreciation Tax and
Amortisation (EBIDTA) in the range
of 10% to 12% in comparison with
5% in pure truck services.
Express Logistics, on the other hand,
involves handling of two types of
consignments: documents and
non-documents. It is estimated that
documents account for 60% of the
organized sector’s revenues, whilenon-documents account for 40% of
the organized sector’s revenues.
Considering extensive network and
premium quality services, this
segment has presence of organized
players. In this segment, organized
players have been able to capture
65% of the market shar E.
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SMS ‘BANG NRI’ to 54646 | nr i@nirmalbang.com | www.nirmalbang
Registered Oce: 38-B, Khatau Building, 2nd Floor, Alkesh Dinesh Mody Marg, Fort, Mumbai - 400001. Tel: 3926 8600 / 01; Fax: 3926 8610,Corporate Oce: B-2, 301/302, 3rd Floor, Marathon Innova, O Ganpatrao Kadam Marg, Lower Parel (W), Mumbai - 400 013. Tel.: 39268000 / 8001 Fax: 392680
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Taking Pharma
To The MassesIf the government’s proposed
initiative becomes a realit y,
consumers will be able to choose
the cheapest medicine from a l ist of
alternatives, through an SMS
o make the prices of
medicines cheaper and
affordable to commoners,
the government, through
the National Pharmaceutical Pricing
Authority (NPPA), some time back proposed to launch a new initiative,
which is a technology-advanced
programme enabling them to choose
the cheapest brand of drug prescribed
by doctors.
Under the plan, a person or a patient
can get an SMS reply with a list of
brands of the same medicine along
Twith their prices providing him or her
the option to choose the cheapest
brand. This is an extension of the
government’s initiative to have
‘ janaushadhi stores’ across India to
make generic drugs available to thecommon man.
At present, more than 122 such stores
are operative across the country. The
drugs for these janaushadhi stores
will be supplied by the Bureau of
Pharma PSUs of India (BPPIs), which
will manufacture them at modest
profit margins.
PROS AND CONS
While all seems good at this point,
experts are divided on the efficacy of
the plan. Some say the consumers will
have the right to opt for a cheaper alternative as against the one
prescribed by the doctor, which is
quite often unaffordable. Many a time
doctors receive incentives or gifts
from pharma companies to prescribe
their brand of drugs. And since most
consumers are unaware of the fact
that they can seek an alternative, they
take the doctor’s word as final.
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measly 1% of the GDP, and expand
health insurance.
Besides, transaction costs are so high
that they result in increase in prices of
drugs. The transaction costs in Indiaare the highest, about 40%, compared
to other developing countries.
This includes dealer’s and retailer’s
margins, taxes such as VAT, excise
duty, octroi in certain states and other
inter-state levies. Hopefully, GST
(Goods and Service Tax), if and when
implemented, will harmonize all
these taxes.
Moreover, the government also needsto ensure that it obtains the updated
MRP of drugs being sold over the
counter (OTC) by using a real-time
platform so that they can avoid
discrepancies in information that is
passed on to the consumer.
But, the government’s job does not
end with the implementation of the
project. It also needs to learn the scale
and efficiency of the programme. But
when this programme comes into
force, manufacturers will be
incetivised to support their customers
with competitive pricing and developnew strategies to survive in the
evolving market place.
This, in turn, will compel stockists
and pharmacists to keep a variety of
drugs and not give preference to
certain pharma companies. Doctors
will get the added responsibility to
justify or give options of drugs in
their prescription.
Finally, consumers will be able tosave money by purchasing generics.
Many pharmaceutical companies are
ready to support this unique campaign
on an on-going basis to help improve
the system and work past any hurdles
that may be encountered along the
way. Till this programme takes shape,
all we can do is adopt a
wait-and-watch approacH.
Further, a devious practice goes on
unhindered. Sometimes drugs are
priced so high that when they are
sold, margins or bonus are offered to
the retailer.
There have been instances where
margins as high as 400% to 500% or more are given to the retailer, fleecing
the patient and only benefiting the
middle man. Obviously in such cases,
the retailer is likely to push a brand
which gives higher margins.
Others are of the opinion that while
the drugs might be cheaper, the
quality is likely to be compromised.
They say substitutes or cheaper
alternatives could have a disastrous
impact on the patient seeking potentdrugs such as antibiotics, hormones,
steroids, etc, since aspects such as
quality, efficacy and bioavailability
are likely to be jeopardized.
Some might counter argue that if a
drug is manufactured by a company
having drug manufacturing license
from the US FDA or UK MHRA or
any other respective authorized
regulatory authority, the quality issue
would not be significant.
However, given the varying enforcing
standards of state FDAs across India,
this debate does not hold ground.
ROLE OF THE GOVERNMENT
The government’s plan looks good
but will not make any sense unless the
benefits trickle down to the end
consumer. The government needs to
focus on improving access andreducing transaction costs.
With only about 35% of the
population of the country having
access to modern medicines, such
peripheral actions will only have a
marginal impact. The government
should improve health infrastructure,
increase healthcare budget, which is a
WHAT IS NPPA?
NPPA is an organization of the government of India which was established, inte
to fix/ revise the prices of controlled bulk drugs and formulations and to enforce
and availability of the medicines in the country, under the Drugs (Prices Control)
1995. The organization is also entrusted with the task of recovering am
overcharged by manufacturers for the controlled drugs from the consumers. I
monitors the prices of decontrolled drugs in order to keep them at reasonable lev
Functions Of NPPA
accordance with the powers delegated to it
steps
individual companies, profitability of companies etc, for bulk drugs and formu
pharmaceuticals
and procedures laid down by the government
to the drug pricing
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AVIATION’S
WHITE ELEPHANT
Touted to be the next
big thing in the aviation
sector, low-cost carriers
are no longer aordable
for most players
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he customer is king and
this is what gave birth to
low-cost carriers (LCCs)
like Air Deccan (now
Kingfisher Red), SpiceJet, Indigo
Airlines and GoAir in India.
But with new airports coming up andcrude oil prices also spiralling
upwards, the cost of operation in
terms of aviation turbine fuel (ATF),
parking and landing charges are
rising, thus putting pressure on
margins of these airlines in this
quarter as well as the fourth quarter.
Additionally, full-service carriers are
also lowering their fares to increase
load factors.
Experts say capacity addition will benefit low-cost airlines, which
control around 40% of the domestic
airline market. But at the same time it
will find itself in a tight spot owing to
higher ATF prices and intense
competition among peers.
Further, during the festive season
most airlines sell a bulk of their seats
in advance to big agents and
consolidators and a miniscule 20%
are sold at a premium. So, the thirdquarter margins are expected to take a
hit with this type of strategy, said an
expert who did not wish to be named.
While in the first quarter Jet Airways,
Kingfisher Airlines and SpiceJet
reported losses due to varying tax on
ATF, in the second quarter the
margins are expected to be lower on a
year-on-year (y-o-y) basis.
However, airlines managed to pass onthe increase in ATF prices by
increasing fuel surcharge in the
second quarter, analysts said.
The ATF, which constitutes around
40% of the operating cost, has gone
up by around 7% in the first half of
this fiscal which has severely
impacted the margins of low-cost
Tcarriers and full-service carriers. “The
prices are expected to go up further
due to volatile market conditions in
Europe,” analysts informed.
According to a study, a full-service
product generates higher yields and
load factors than the extremely price-sensitive low fare segment.
That is the reason why Kingfisher
Airlines has decided to close down
the low fare Kingfisher Red
(erstwhile Air Deccan) soon.
Kingfisher had acquired the
loss-making Air Deccan at a
whopping price of `550 crore from
Captain GR Gopinath in 2007, which
continued to burden its balance sheet
due to high operating costs and lower revenues as compared to its economy
class service.
On the contrary, Indigo Airlines
reported a net profit of `650 crore in
2010-11 due to operational
efficiencies and steady earnings from
sale and lease-back of aircrafts.
Even full-service carriers like Jet
Airways, Kingfisher Airlines and Air
India have not been spared from themenace of high operating costs. But
since these airlines charge higher
fares as compared to low fare carriers,
the high operating cost is taken care
of to some extent.
The Federation of Indian Airlines
(FIA), the lobby group of domestic
airlines, has asked the central
government to intervene and resolve
the problem of high fuel tax, parking
and landing charges, levied by oilmarketing companies as well as
airport operators.
Experts say that as more and more
airport infrastructures are getting
developed, the cost of operating low
fare airlines will go up, thereby
putting pressure on margins of LCCs.
Further, capacity addition by LCCs is
also expected to lead to over capacity
and a price war between full-service
carriers and LCCs.
Unlike in 2004-05, when full-service
carriers placed huge orders for
wide-bodied aircraft, the Indian LCCs
in recent months have placed ordersfor over 250 aircraft.
A major portion of the order is spread
between all the LCCs - Indigo
Airlines, GoAir and SpiceJet. In fact,
Indigo Airlines has placed the largest
order of 180 aeroplanes, which
includes the 150 A320neo and 30
A320 aircraft.
Interestingly, the LCCs of these
airlines have now started flying oninternational routes, which to a
certain extent helps them to offset
high ATF prices. GoAir has, however,
thought the other way and decided to
concentrate on domestic routes.
With continuing economic growth,
business related travel is increasing
significantly after a slowdown in
2009-10. Businessmen and
executives prefer to fly with
full-service carriers because thetickets are refundable and they can
avail of the frequent flyer benefits and
other conveniences offered to them.
“They are willing to pay extra and this
segment is not as price-sensitive as
the low cost or low-fare segment
where there is a lot of discretionary
travel involved,” an analyst said.
A recent survey on Low Cost Airlines
World Asia Pacific 2012 found thatLCCs will grow at the expense of
full-service and legacy carriers.
Meanwhile, Kalanithi Maran
-promoted airline SpiceJet is focusing
on short-haul domestic routes.
SpiceJet has started its operations in
the southern part of the country with
Bombardier Q400 NextGen
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turboprop aircraft. “In the long run, it
is these low-cost carriers that will
sustain in the short-haul domestic
routes,” an analyst said. SpiceJet has
placed an order for 30 such aircraft.
Not only that, Maran has pledged his
shares to pump more equity into theairline. The company also issued 35.9
million preferential shares to Maran
through which SpiceJet received over
`95 crore.
Similarly, GoAir has decided to focus
on the hub and spoke model for
growth in India rather than going
international. With India’s GDP
growing at a brisk rate of around 8%
per annum, GoAir is expecting a great
future ahead for the aviation sector.
As part of its strategy, GoAir is
planning to fly those who currently
don’t fly. GoAir has placed an order
for additional 72 aircraft worth
`32,400 crore or US$ 7.2 billion.
The Kingfisher Airlines, which is
promoted by Vijay Mallya, had said
that operating costs of so called low-
cost carriers and full-service carriers
in terms of fuel, airport charges,
engineering and maintenance as well
as crew costs are similar.
The airline further said that full-service carriers incur additional costs
on global distribution, in-flight
catering, ground amenities and the
frequent flyer programme. These
additional costs are more than
recovered through higher yields.
For full service carriers also, the
quarter is going to be very bad as
compared to last year because of
supply addition by low-cost airlines,
competition, high fuel prices andrupee depreciation, an aviation
industry expert said.
Sales tax ranging from 4% to 20%
across the country is further affecting
margins of LCCs. Civil Aviation
Minister Vayalar Ravi has urged the
state government to bring down the
tax on ATFs in order to help airlines
connect major destinations, which at
present, are refraining from flying to
such locations.
Air India, which lost a significant
market share due to its operational
inefficiencies in the last two years,has cut ticket prices significantly to
increase its market share in the
domestic aviation space.
However, other full-service carriers
like Jet Airways and Kingfisher
Airlines have approached the central
government to intervene as this
strategy of Air India will start a price
war and lead to further losses for
airlines which are already making
huge losses.
Meanwhile, the central government is
contemplating on increasing foreign
direct investment in the aviation
sector and also raising the investment
limit to 49%, which will help carriers
to raise funds and bring down their
debt burdeN.
EQUITIES | DERIVATIVES | COMMODITIES* | CU R R EN CY | MUTUAL FUNDS # | IPOs # | INSURANCE # | DPDisclaimer: Insurance is a subject matter of solicitation. Mutual Fund investments are subject to market risk. Please read the scheme related document carefully before investing. Please read the Do’s and Don’ts prescribed by Commodity Exchange before trading. The PMS Service is not oering for commodity segment. *Through Nirmal Bang Commodities Pvt. Ltd. #Distributors
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BSESEBIREGNNo. INB011072759,INF0110727 59 &INE011072759, NSESEBIREGNNo. INB230939139,INF23093913 9 &INE230939139 DPSEBIREGN. NoNSDL:IN-DP-NSDL-136-2000, CDS(I)l:IN-DP-CDSL-37-99,AMFI REGN.No.arn-49454 NCDEXREGN.NO. 00362,FMCCode-0 075,MCXREGN. No. 16590, FMCCode-MCX/TCM/CORP/0490, MCXSX-INE260939139, PMS-INP000002981
Registered Oce: 38-B, Khatau Building, 2nd Floor, Alkesh Dinesh Mody Marg, Fort, Mumbai - 400 001. Tel: 264 1234 / 3027 2000 / 2005; Fax: 30272006
CorporateOce: B-2, 301/302, 3rd Floor, Marathon Innova, O Ganpatrao Kadam Marg, Lower Parel (W), Mumbai - 400 013. Tel.: 39268000 / 8001 Fax: 39268010
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With a well-diversied product portfolio and
presence in all price points, BEL is able to
maintain an edge over its competitors
ajaj Electricals Ltd (BEL) is a 72-year-old
company with diversified business interests inconsumer durables, lighting and engineering
& projects. It’s appliance business unit (BU)
offers a range of domestic appliances like water heaters,
mixers, food processors, microwave ovens, air coolers,
steam and dry irons, electric kettles,water filters, etc.
During the fiscal year ended 31st Mar ’11, the company
sold approximately 6.13 million pieces of appliances. The
fans BU has a range of ceiling, portable, fresh air and
industrial air circulators. The luminaires BU markets a
range of luminaires ranging from commercial to industrial
lighting and flood lighting to street lighting.
BEL has been growing strongly at a CAGR of 26% in the
last four years on the back of robust growth in the
consumer segment and steady growth in other divisions.
The company is a dominant player in small appliances,
second largest player in luminaires and third largest in
fans. Owing to its renowned brand name, collaboration
with strong foreign players, wide distribution network and
a strong vendor base, it has an edge over its competitors.
INVESTMENT RATIONALE
A Well-Diversified Product Portfolio With A Presence In
All Price Points
With its comprehensive product portfolio, the company is
present across segments and various price points. Over the
past seven decades, BEL has established a strong presence
in the value-for-money segment of consumer durable
products. To strengthen its product portfolio, it entered the
premium segment through tie-ups with global brands.
B
LIGHT
YEARSAHEAD
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BEL also launched its own premium sub-brand called
Bajaj Platini to further explore the fast-growing premium
segment, apart from being present in the premium segment
under the brand Morphy Richards.
BEL enjoys 15% to 30% market share in various product
categories like oven toaster and griller (30%), irons (26%)
and water heaters (23%). Apart from appliances, BEL is
one of the top three players in fans (16% of the organized
market), lighting (8%) and luminaires (17%).
and 4,000 authorized dealers.
Its products, ranging from bulbs and lamps to fans and a
wide range of domestic appliances, are sold through over
4,00,000 retail outlets. BEL has created a strong presencein pan India with a network of 19 branch offices and over
282 customer care centers.
With the economy growing and the demography changing,
the market is expected to get more organized in the coming
years. Further, with its diversified product portfolio and
presence in all price points, BEL will benefit the most from
the same.
Introduction Of New Products At Various Price Points
Backed by its R&D efforts and global collaborations, thecompany has been able to launch newer products across
various price points/segments. The company is re-entering
the pressure cooker sector after a gap of 25 years. The
company has completed successful test marketing in
Orissa and West Bengal and is planning to launch it pan
India in 2011.
The company is also planning to foray into the water
purifier segment for rural as well as urban markets.
Besides, BEL is also planning to launch DG sets after
test-marketing in Tamil Nadu and Kerala.
The company is also trying to consolidate its position in
the water lifting pumps after being in the market for two
years. BEL is planning to introduce microwave ovens
under Morphy Richards brand in the near future.
With aggressive marketing, robust distribution network,
strong brand equity and various launches of new categories
in the last 1–2 years, its products will start contributing
substantially to the top-line and bottom-line of BEL.
Source: Company, Nirmal Bang Research
Source: Company, Nirmal Bang Research
Global Tie–ups
Strategy
Fans
Fans
Appliances
AppliancesLuminaires/ Lighting
Luminaires/ Lighting
Luminaires/ Lighting
Luminaires/ Lighting
Luminaires/ Lighting
Luminaires/ Lighting
TPW fans (table, pedestal and walls)
For children
For premium appliances
For gas appliances and cooking rangeFor premium technical lighting
For LED lighting
For street lighting
For alarm system
For access controls and building management
For sports lighting
Segment Global Tie-up
Midea
(World’s largest fan company)
Walt Disney
Morphy Richards, UK
Nardi, ItalyTrilux, Germany
RUUD, US
Disano, Italy
Securiton, Switzerland
Delta Controls, Canada
Abacus, UK
ce: Company, Nirmal Bang Research
Market Share Of BEL
Competitors
ans
ghting
uminaries
ppliances
igh Masts/
ower Projects
ghting,
umination,
ural Electrification
Crompton Greaves (24%),
Usha (17%), Orient, Khaitan,
Polar, Havells
Philips (26%), Surya (12%),
Crompton, Wipro,
Osram, Havells
Philips (23%), Crompton (13%)
Philips, Usha, Kenstar, Preeti,
Prestige, Maharaja, Inalsa, Pigeon,
Black & Decker, Tefals, Delonghi,
Braun, Kenwood, National
Philips, Crompton, BP Projects,
Utkal Galvanziers, KEC,
Kalpatru, L&T, Jyoti
Philps, GE, Crompton,
IVRCL, KBL, Kalpatru
Segment Market
Share
Market
Position
16%
8%
17%
15-30%
organized
NA
NA
3rd
3rd
2nd
NA
NA
NA
Nationwide Distribution Network With Wide Urban And
Retail Penetration
We believe the consumer durables market is highly
fragmented, with stiff competition from regional and
national players. BEL sells its products - spread over five
business verticals - through a network of 1,000 distributors
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Vendor-Driven Outsourcing Model
BEL derives huge benefit from its vendor-driven
outsourcing model. Most of the product manufacturing is
outsourced to third party vendors, who manufacture
products according to the specifications provided by the
company. This approach provides flexibility in operation
and competitive pricing.
The company has built a strong base of 200 vendors to
outsource its manufacturing jobs. More than 70% of the
vendors are dedicated and have been associated with the
company for several years. BEL has prompted several of
its dedicated vendors to move production base to backward
areas in Himachal Pradesh and other similar locations for
cost-effective production.
BEL is outsourcing 20% of appliances and fans and 5% of
luminaires from China. Apart from enjoying competitive
pricing, the company has also been able to effectively facecompetition from Chinese companies. With such a set-up,
BEL is an asset-light entity. BEL has more time and
resources in its core competency of R&D, marketing as
well as distribution.
illumination design and development of accessories. The
division’s portfolio also includes signage, flag mast and
night raider mobile light towers.
Special Projects: The division’s competency areas are
power plant lighting, stadium and monument lighting, as
well as rural electrification work. Under the rural
electrification work, the company has selected only centralutilities and works with NTPC and NHPC. The company
does not have any projects from State Electricity Boards
(SEBs) in this segment.
Transmission Line Towers: The company has a
galvanizing plant with a capacity of 30000MT. BEL gets
projects from the Power Grid Corporation, private players
like Sterlite and SCB for laying of transmission lines.
The company’s revenues from its E&P business unit
increased to `831.2 crore in FY11 from `305 crore in
FY07 with a CAGR of 28%. BEL’s EBIT rose to`73.57
crore in FY11 with a CAGR of around 19.5% over a span
of four years.
The Engineering & Projects division of the company has
also started exporting high masts, towers and poles to
Kenya, Uruguay, the Caribbean, Sri Lanka, Mauritius and
the Maldives. BEL has also undertaken few street lighting
projects in the Middle East and Ethiopia. All these
export–related activities are carried through its group
company – Bajaj International.
BEL registered 2.5% revenue growth in the E&P businessduring Q1FY12 due to slower executions. During the
quarter, the company had taken special initiative to close
down the lingering projects pending on account of some
last mile activities. Consequently, the company had to
incur additional costs, which will free up the working
capital stuck in these projects.
This had resulted in a negative margin of 6.7% in Q1FY12.
BEL has started the cleaning process by bringing down the
number of projects from the current 82 level to ~50
projects by the end of the year. The cleaning process was
broadly completed in Q2FY12 and margins are expected toimprove, thereafter.
Compared to the first quarter of FY12, BEL posted better
numbers in the E&P division in Q2FY12, mainly due to the
closure of 8 out of 30 sites where more than 95% work has
been completed, to avoid fixed overheads. This has
resulted in improvement in EBIT margin in Q2FY12 of
3.8% as compared to negative 6.7% margin in Q1FY12
and 3.1% in Q2FY11.
Source: Company, Nirmal Bang Research
Product Information
Manufactured In-house/ Outsourced
Appliances
Fans
Lamps and Tube lights
CFL Lamps
Luminaires
High Masts, Poles
and Towers
- Outsourced to dedicated vendors in Noida,
Delhi and Himachal Pradesh
- Imports from China (~20%)
- Own plant at Chakan near Pune- Outsourced to dedicated vendors
Hyderabad and Himachal Pradesh
- Imports from China (~5%)
- Manufactured by its UP-based sister
concern Hind Lamps
- Manufactured by its Nasik-based sister
concern Starlite Lighting
- Outsourced to dedicated vendors in
Daman and Himachal Pradesh
- Imports from China
- Own plant at Ranjangoan and Chakan
near Pune
Product
Engineering & Products Business Is Strained, But Is
Expected To Improve
The Engineering & Projects (E&P) segment has three main
divisions:
High-mast & Street Lighting Division: BEL entered into
the high-mast and street lighting business in 1983.
Currently, it also undertakes civil, structural and
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The management has also guided to control capital
employed in the E&P business through a calibrated growth
(selective order book) with 8% to 9% margin.
We believe that going ahead, BEL will be able to post a
better result in H2FY12E owing to the cyclical nature of
the business where the last two quarters are the best
quarters in terms of revenue collection and fixed costspread out. This gives us confidence that the E&P business
will post better results in FY12E.
The major concern posed in the E&P business is the
shrinking order book, though the management is aiming at
a sustained order book position of `1,000 crore in the
coming months. Currently, the order book stands at `742
crore, down 14% q-o-q due to a) government delay in order
finalization, which continued amid decision making
paralysis, and b) execution of existing orders.
BEL has achieved a revenue of `300 crore in the last two
quarters and the management has targeted to achieve `950
crore by FY12E. The management is confident of
achieving the said target due to the strong pipeline of
projects and is awaiting issuance of new contracts. We
have projected `934 crore in FY12E and have taken a
muted growth in FY13E due to nonclarity in the order
book position for FY13E.
FY12E Remains Positive For The Company
BEL reported poor performance in Q1FY12 as the
consumer business faced poor market conditions (reporteda moderate growth of 15.5%) and the E&P business
showcased a meagre growth of 2.5% against last year. The
consumer business was affected badly as the markets for
fans and room coolers were extremely depressed in the
quarter because of shorter summer season this time.
However in the E&P business, BEL reported a negative
EBIT margin of 6.7% as the company had to incur
additional costs to close down its several old/stuck projects
to free up more working capital and to bring efficiency in
employee costs.
To improve the E&P business, the company is in the
cleaning process and it plans to reduce the number of
projects from 82 to ~ 50 levels. The cleaning process has
been broadly completed in Q2FY12 and margins are
expected to improve, thereafter.
The various initiatives undertaken by the management
have resulted in better performance in the E&P business,
where the E&P division posted a positive EBIT margin of
3.8% in Q2FY12 as compared to the negative EBIT margin
in Q1FY12.
We expect the H2FY12E result to be excellent on account
of better performance by the E&P business and the
consumer durables business. BEL expects to register a
growth of 24% in the business in FY12E.
Being a strong leader in most segments it operates, the
company enjoys a pricing power. The company has
resorted to several price increases to counter the negative
effect of high raw-material prices. These raw-materials
(copper, aluminium, zinc, plastic and steel) have softened
in the current quarter. We expect BEL to benefit from the
hike in prices and softening of raw-material prices.
MANAGEMENT GUIDANCE
BEL intends to bring down the number of projects from
82 to ~ 50 projects in the E&P division. This will aid in bringing down the cost, check inventory management,
improve working capital position and its balance sheet,
going forward.
The management expects the EBIT margin to improve
in the E&P division from negative 6.7% in Q1FY12 to
10%+ by Q4FY12, indicating a full-year margin at 8% to
9% approximately.
BEL expects to clock a growth of 22-24% in the
consumer durable business in FY12E and also expects to
maintain the margin of FY11.
The management is confident that it will be able to
recover margins in the consumer durables business to
normalized levels through the combination of a) price
hikes in the coming quarters, b) reduction in discounts, and
c) softening of copper and aluminium prices (account for
10% of total cost). The management maintains that price
hikes are undertaken judiciously and consistently to protect
its margins on an annual basis.
KEY RISKS AND CONCERNS
A sharp increase in the price of raw materials like copper,
zinc, aluminium, plastic and steel will impact the
company’s margins.
The company’s inability to hike prices further to mitigate
the rise in raw material prices will impact its margins.
Any sharp decline in the market share due to the rise in
competition or increase in advertisement expenses could
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Source: Company, Nirmal Bang Research
Financials
EBITDA EBIDTAM
(%)
PAT PATM
(%)
EPS
(`)
PE
(x)
P/BV
FY10
FY11
FY12E
FY13E
242.7
258.0
287.3
332.3
10.90%
9.40%
8.90%
9.40%
117.1
143.8
160.6
184.4
5.30%
5.20%
5.00%
5.20%
12.0
14.5
16.1
18.5
15.6
12.9
11.6
10.1
3.8
3.1
2.5
2.1
Growth
(%)
26.30%
23.00%
18.00%
9.90%
Net SalesYear
2228.6
2740.8
3234.5
3553.2
IN A NUTSHELL
We believe the steps taken by the management to reduce fixed overheads will help BEL to post better margins by end
FY12E. We expect its E&P segment to improve margins in the H2FY12E compared to H1FY12, and we also expect the
consumer durables segment to post 24% growth and maintain its EBIT margin in FY12E. Given these factors, the stock is
available at an attractive value at current levels and offers a potential upside from these levelS.
adversely affect the earnings of the company.
Any slowdown in the economy may cause de-growth in
the real estate sector. That may impact business growth of
the company.
Rising interest rates, environmental clearances for
various projects and land acquisition issues lead to delay ininvestments in the T&D space. We believe severe delays in
the execution of these projects and further delays in the
closure of projects could negatively impact the company’s
E&P division.
FINANCIAL ANALYSIS
We expect net sales to clock a CAGR of 13.9% and PAT of
13.2% from FY11 to FY13E on account of slowdown in
the E&P segment and steady growth in the consumer
durables and lighting and luminaries segment.
Further, we have assumed a contraction in margin during
FY12E as it will not be easy to pass on the increase in raw
material cost and margin contraction in E&P.
Historically, BEL has been able to pass on the hike in raw
material prices with a lag. We have assumed a 50 bps
contraction in EBIDTA margin in FY12E as compared to
FY11 on account of high volatility in global commodity
prices, company’s inability to pass on the abnormalincrease in raw-material prices to customers immediately
and low margins of the E&P business segment.
However, we expect some respite in the E&P segment
where the company has given guidance in E&P to be
selective about orders to protect margins, going forward.
BEL has started reducing the project level from 82 to 50,
which we feel, will improve the working capital
management and upgrade margins, going forward. We
expect the margins to again bounce back in FY13E to 9.4%
on the back of stability in the E&P business and consistentmargins in the consumer durables business.
regular investments keep worries away
an apple a day keeps the doctor away
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the nation’s insular political class
about the stakes involved. He called
on the lawmakers to form a broad
coalition in support of the former
European Commissioner MarioMonti, which would be able to push
through urgent economic measures.
Going forward, we expect gold prices
to remain buoyant as we have not
seen any major liquidation in the ETF
holdings. Strong ETF holdings
suggest that the investment interest is
still strong in the yellow metal. We
recommend going long in gold at
$1,750-$1,760/ounce on the COMEX
at which we see actual value buyingfor the metal for a target of above
$1,825/ounce on the COMEX until
the next fortnight.
INDUSTRIAL METALS
Industrial metal prices edged higher
to reach their multi-week highs on all
major exchanges of the world.
Positive industrial production, retail
sales and expansion in PMI from
China led to some fresh buying inindustrial metals. Also, the CPI was
reported positive at 5.5%, easing the
chances of further monetary tighten-
ing in China.
China, being the highest consumer of
base metals, any positive economic
activity is expected to support metal
prices. Also, supply concerns in major
copper mines kept prices upbeat.
Copper prices once again managed to
test $8,000/tonne on the LME and onMCX, it tested `400/kg.
The world’s number one copper
producer, Codelco, cut the physical
copper premium to its Chinese buyers
by 4.3% to $110/tonne for 2012,
traders said.
Kazakhstan’s refined copper output
rose by 1% year-on-year (y-o-y) in
January-October ’11, while zinc
production grew by 0.3%, the data
released by the State Statistics
Agency showed.
Zinc producers and traders continue
to push for 2012 contract premiums
of 7.5 cents/lb, even as consumers
resist paying almost double the levels
of 2011 and hold out for lower offers,
industry sources said
Term premiums on aluminium
shipments to Japan for January-
March is likely to ease as domestic
demand is slowing after the devastat-ing floods in Thailand caused many
Japanese firms to curb output of
consumer goods using parts made in
Thailand, traders said.
Going forward, we expect the same
trend to continue in industrial metals.
China’s demand for metals is still
strong as import numbers suggest.
Copper imports in China climbed by
more than 13% in October. We expect
copper and zinc prices to remainstrong until the next fortnight.
CRUDE OIL
Crude oil rallied to a 15-week high of
$99/barrel in the previous fortnight.
The upside was majorly supported by
good recovery in the US job market
and easing Chinese inflation data.
Also positive signs of progress in
Italy and Greece boosted the demand
for riskier assets. A drawdown in oilinventories and threats about the
nuclear weapon in Iran also pushed
oil prices up.
The outlook for crude is still bearish.
We expect prices to fall in the coming
fortnight as slow economic growth
and uncertainty in the markets will
weigh on the demand of crude oiL.
FORTNIGHTLY OUTLOOK FOR COMMODITIES
All international
commodities reversed
their losses due to
easing debt concerns in
the Euro zone. Highly volatileinternational currencies made it
difficult for investors to take a call on
the US dollar. Because of recent
positive US ISM manufacturing data,
good Chinese industrial production
and retail sales data, we saw fresh
buying in almost all metals, and crude
oil in the previous fortnight.
Gold prices too reversed all its losses.
A weaker rupee against the dollar also
supported the price of metals on theIndian exchanges. Base metal prices
were steady on account of positive
data points from China. Even crude
oil prices were well supported with
the overall risk appetite in the
financial market.
PRECIOUS METALS
After being under pressure, precious
metal prices rallied sharply in the
previous fortnight. Gold prices onceagain managed to test $1,800/ounce
on the COMEX after touching
$1,600/ounce in the previous month.
On the Indian exchanges, it is close to
its all-time high as a weaker rupee
against the US dollar provided
additional support.
Silver prices too climbed, but rather
steadily. Silver prices once again
crossed $35/ounce on the COMEX.
The change in the political leadershipin Italy and Greece rekindled hopes
about the Euro zone’s resolution to
the debt crisis, fuelling risk appetite in
the markets.
Italian President Giorgio Napolitano
gave a tough speech aimed at reassur-
ing investors about the country’s
commitment to the euro and warning
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Looking ahead, this enthusiastic
mood is unlikely to last long. Deficit-
reduction plans are certainly a right
step, but they may take a long time to
be on track.
The effective implementation of these
plans is truly a matter of concern for
investors. Over the near term, the tone
will be set by Italy’s austerity vote
over the weekend. We are bearish on
the euro. It may test the levels of
$1.3300 against the US dollar.
The British pound is still at its level of
$1.60 and is sitting tight at $1.59 on
the lower level, despite weak funda-mentals of the UK economy.
The Bank of England’s quarterly
inflation report highlights the biggest
event risk for the pound, and we are
likely to see the central bank striking
a dovish tone on the monetary policy
as the region faces the increased risk
of a double-dip recession.
Retail spending is projected to
weaken 0.3% in the coming fortnightand the batch of negative develop-
ments is likely to weigh on the
exchange rate as market participants
see more quantitative easing since
growth is likely to deteriorate in the
coming quarter.
We remain bearish on GBP for the
coming quarter, with expected levels
of $1.5550 against the US dollar.
In the last fortnight, we were bullishon USD/JPY due to the intervention
of Japan. The country is trying to
devalue its currency to help exporters
of the economy.
Meanwhile, the Japanese economy
showed immense improvement for
Q3 GDP numbers and industrial
production (IIP) data.
Consensus estimated quarterly GDP
to be at the levels of 1.5%, a dramatic
contrast from the previous read of
-0.5%. IIP numbers also showed an
improvement, which made theJapanese currency more attractive
over the US dollar.
Investors will be closely eyeing the
Bank of Japan interest rate decision
and although there are no expecta-
tions from the central bank to move
on rates, officials may see scope in
increasing the size of their asset
purchases as deflationary concerns
continue to dictate policy.
We might see another round of
intervention in the coming fortnight
as the appreciated currency of Japan
is vulnerable for Japanese exporters.
We are bullish on USD/JPY and are
expecting it to test the levels of
78.75-79.10.
The Indian rupee traded with a depre-
ciation bias for the last fortnight
because of risk aversion in the global
financial markets.
A bounce in the euro did not help the
rupee to reap the benefits against the
US dollar. The RBI was also dovish
with its tone for another rate hike; it
commented that this might be the last
rate hike. The INR was also under
pressure because of the widening gap
on the trade front.
Going forward, we see the Indian
currency depreciating further againstthe backdrop of the broad weakness
in Asian currencies.
Rising crude oil prices will also
weigh on the rupee as inflated dollar
bills will trigger demand from import-
ers. We expect the rupee to be range-
bound within 50.00 to 51.00 with a
positive bias in the coming fortnighT.
FORTNIGHTLY OUTLOOK FOR CURRENCIES
Currencies witnessed
another round of extreme
volatility in the fortnight
gone by. The data and
event risk from the US did not guidethe greenback as much as the health
of the global financial markets did.
The development in Europe was the
major driver for the market and
consistent news flows from Europe
ruled the markets, causing extreme
volatility in the financial markets.
Italian bonds were in the limelight for
the latter half of the fortnight as yields
rose to the levels of 7.22 basis pointafter a strong sell-off in Italian bonds.
If we take a broad view of the world
markets, the general trend will be a
greater sensitivity to risk aversion.
The IMF warned global economies
that they could witness another
recession, yields soared for the risky
bonds and the banking sector across
the globe is in severe pain of credit
crunch with default swaps makingnew highs.
The response to any negative devel-
opment will dampen the reaction to
any positives. Hence, we remain
bullish on the US dollar against
several major currencies.
The euro ended the fortnight on a
bright note, posting the largest daily
rally in the last two weeks. Optimism
emerged after Greece finally settledon Lucas Papademos as its new Prime
Minister. Italy is headed by former
EU Commissioner Mario Monti.
This offered a ray of hope to Europe
as many expect the new ministers to
quicken the process of austerity
measures, budget planning and calm
the financial markets.
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Investors can consider long-term debt funds
in a falling interest rate scenario
xtreme volatility in the
domestic as well as
global equity markets
has left retail investors
puzzled and confused, forcing many
of them to stay on the sidelines andwait for the right opportunity to invest
in equities. But with interest rates in
India on the verge of decline in the
months to come, retail investors can
make decent gains from the same.
Fall in interest rates can come with
immense prospects for smart
investors who can invest in long-term
E bond funds, such as medium- and
long-term funds. This is the right time
for retail investors to look at some of
the long duration bond funds since
when interest rates decline, the prices
of existing fixed income investmentinstruments rise. Conversely, when
interest rates rise, the value or prices
of existing fixed income investment
instruments decline.
Recently in the mid-year policy
review of the Reserve Bank of India,
its Governor D Subbarao indicated
that the possibilities of a rate action in
the next policy would be low.
Market players also believe that once
inflation eases down in the weeks to
come, the RBI will not hike interest
rates as it did in the past. Since thestart of last year, the RBI has hiked
key policy rates over a dozen times,
but now experts believe that the worst
is behind them and from the start of
the next calendar year, interest rates
will start cooling off.
Despite this, no one is sure enough
when interest rates will actually begin
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to fall. So, it makes sense for retail
investors to take a partial exposure to
long-term bond funds at this juncture
to earn better returns. Many fund
managers have already started
advising investors to put their money
in few long-term debt funds.
Not only are they advising, they also
believe that interest rates have more
or less peaked-out, so they have also
started taking exposure to debt scrips
with longer tenures for their
long-term bond funds. Several fund
houses have started increasing their
average maturity periods to three to
seven years, up from just about 12-16
months of maturity, few months ago.
If investors want to take a little risk for the chance of getting better
returns, long-term bond funds are
right for them.
As these funds are marked-to-market
and open-ended, any fall in interest
rates will benefit the schemes. While
a rise in interest rate poses the risk of
loss in the price of bonds in the
secondary market and in the NAVs
(net asset values) of bond funds, a fall
in interest rates on the other handleads to appreciation in the prices of
bonds and NAVs of bond funds.
For many investors, a bond fund is
also a more efficient way of investing
in the Indian debt market. Bond
mutual funds are just like stock
mutual funds, where you put money
into a pool with other investors and
fund managers invest that money
where the best opportunity is present.
Some bond funds aim to give similar
returns as the broad market, investing
in short- and long-term bonds from a
variety of issuers, such as the Indian
government and government agencies
or corporations.
Long-term bond funds invest in many
different securities, often buying and
selling according to market
conditions, and rarely holding bonds
until maturity so it is an easier mode
to attain diversification even with a
small investment. In bond funds,
dividend payments are made
half-yearly or yearly, differing from
fund house to fund house.
The aim of such funds is to provide
regular and steady income to
investors. Such schemes usually
invest in fixed income securities like
bonds, corporate debentures,
government securities and money
market instruments. They are less
risky compared to equity schemes.
However, long-term investors need
not bother about these fluctuations
due to interest rate movements.
Long-term bond funds are specially
meant for investors with relatively
less appetite for risk and seek to earn
returns higher than what they would
earn from other avenues like Fixed
Deposits (FDs) that are considered
safe. So, safety and return both are of
equal concern for those investing in
bond funds.
However, long-term debt mutualfunds are more sensitive to interest
rate movements than short-term debt
funds; but with interest rates falling,
they stand to gain more. Investors
with 2-3 year investment horizon can
invest in long duration bond funds,
which might give them better returns
than other debt products.
The performance of a bond fund is
determined by the performance of its
underlying investments (bonds in thecurrent scenario), but there are a few
specific factors such as volatility in
interest rates and other domestic
factors that might affect its
performance and your investment.
Debt mutual funds are in a way
considered suitable for retail
investors, who with a small
investment amount want to diversify
their portfolio and benefit from
various highly rated and
high-yielding debt instruments.
In the last one year, when benchmark
indices have given a negative return
of 15%, long-term bond funds havegiven an average of 4%, with many
funds even giving returns in the range
of 6% to 8%.
A bond fund’s total return measures
its overall gain or loss over a specific
period of time. The total return
includes income generated by the
underlying bonds and (both realized
and unrealized) price gains or losses.
Investors should focus on the total
return when evaluating the performance of bond funds.
On the taxation side, it is better to put
money in long-term funds as dividend
income in the hands of investors is
tax-free and long-term capital gains
tax (investments over 1 year) is 10%,
and 20% with indexation.
Investors are charged as per their
income tax slabs if they redeem their
investments before one year.However, the investor will pay a
dividend distribution tax of about
16.84% if he opts for the dividend
option instead.
Though inflation is expected to come
down, there is no single answer as to
how soon it will drop. The non-food
manufacturing inflation is above the
comfort zone of the RBI and, hence,
the central bank may wait for this
number to fall before pausing.
However, one has to keep in mind that
early exit from the scheme in case of
emergency can bring in exit loads in
long-term bond funds. Typically, in
long-term bond funds, the fund
houses charge exit loads anywhere
between 1% if there are withdrawals
before one-year of the investmenT.
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(`)
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(`)
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Interest
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in Price
(`)
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in Price
(% )
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in Open
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1192.35
155.80
1135.60
1728.45
321.75
633.90
397.85
300.40
291.10
332.30
236.05
1624.05426.70
2509.00
432.10
485.50
2156.35
136.50
385.45
688.55
210.10
901.25
2859.85
132.25
76.40
560.35508.65
1395.40
841.00
1131.40
178.85
279.90
104.60
1012.70
508.90
78.00
868.25
450.30
95.20
208.80851.80
1906.50
111.55
124.35
509.40
1113.80
193.95
101.55
466.85
375.45
28903650
1845475
1328250
10194000
7706750
1443250
12196000
1312500
11965000
13805000
4572000
9112000
21601000
9002502815000
567750
2743000
17710625
1112000
26902000
13821000
9615500
32518000
13892000
3632750
21210000
36116000
47615004371000
6522000
4767500
3243750
16738000
11158000
9020000
4053750
2925000
26040000
15679750
4729500
17604000
11957000716000
6463375
9124000
25568000
3546000
5608750
49519000
12204000
21735000
3578500
5078.20
9080.65
1211.75
161.35
1012.95
1719.90
310.50
539.75
403.55
309.25
307.25
318.05
207.35
1620.65409.30
2467.00
424.50
471.45
2169.15
125.65
392.10
660.40
211.50
792.50
2803.90
114.70
70.10
537.10491.20
1292.65
762.15
1006.40
170.65
259.35
103.75
898.65
467.95
77.50
863.95
415.80
94.20
199.65788.30
1733.45
99.20
113.80
506.05
1125.60
181.25
98.85
400.80
383.95
30108850
2220325
1262500
10768000
8117500
1282500
11460000
1749500
16788000
12923000
4289000
10021000
24984000
8972502757000
598625
3006000
18187500
1027500
26636000
14409000
9349000
38076000
15715500
3587750
27380000
36532000
48715004731500
7220750
5220000
3179250
23048000
12708000
9352000
5240750
3130500
27374000
15015250
4950500
24278000
12962000743750
8539125
12040000
26780000
3589000
6251250
51181750
11951500
23843500
3886500
-213.20
-788.40
19.40
5.55
-122.65
-8.55
-11.25
-94.15
5.70
8.85
16.15
-14.25
-28.70
-3.40-17.40
-42.00
-7.60
-14.05
12.80
-10.85
6.65
-28.15
1.40
-108.75
-55.95
-17.55
-6.30
-23.25-17.45
-102.75
-78.85
-125.00
-8.20
-20.55
-0.85
-114.05
-40.95
-0.50
-4.30
-34.50
-1.00
-9.15-63.50
-173.05
-12.35
-10.55
-3.35
11.80
-12.70
-2.70
-66.05
8.50
1205200
374850
-65750
574000
410750
-160750
-736000
437000
4823000
-882000
-283000
909000
3383000
-3000-58000
30875
263000
476875
-84500
-266000
588000
-266500
5558000
1823500
-45000
6170000
416000
110000360500
698750
452500
-64500
6310000
1550000
332000
1187000
205500
1334000
-664500
221000
6674000
100500027750
2075750
2916000
1212000
43000
642500
1662750
-252500
2108500
308000
-4.03
-7.99
1.63
3.56
-10.80
-0.49
-3.50
-14.85
1.43
2.95
5.55
-4.29
-12.16
-0.21-4.08
-1.67
-1.76
-2.89
0.59
-7.95
1.73
-4.09
0.67
-12.07
-1.96
-13.27
-8.25
-4.15-3.43
-7.36
-9.38
-11.05
-4.58
-7.34
-0.81
-11.26
-8.05
-0.64
-0.50
-7.66
-1.05
-4.38-7.45
-9.08
-11.07
-8.48
-0.66
1.06
-6.55
-2.66
-14.15
2.26
4.1
20.3
-4.9
5.6
5.3
-11.1
-6.0
33.3
40.3
-6.3
-6.1
9.9
15.6
-0.3-2.0
5.4
9.5
2.6
-7.6
-0.9
4.2
-2.7
17.0
13.1
-1.2
29.0
1.1
2.38.2
10.7
9.4
-1.9
37.7
13.8
3.6
29.2
7.0
5.1
-4.2
4.6
37.9
8.43.8
32.1
31.9
4.7
1.2
11.4
3.3
-2.0
9.7
8.6
01 Nov'11 15 Nov'11
CHANGE IN PRICE AND OPEN INTEREST OF THE NIFTY 50 COMPANIES
Source: NB Research
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fter starting the November expiry on a
bullish note, the Nifty Futures lost around
3% on the back of negative global cues. The
Nifty moved in line with other equitymarkets around the world due to a weak global economic
outlook as the European Union struggles to cope with the
sovereign debt crisis in the weaker European nations.
Back home, the IIP numbers for September are less than
expected at 1.9% compared to 6.2% in the corresponding
period last year. The growth in industrial output touched its
low in September this year as compared to the monthly
growth in the last two years. This decrease in growth is the
cumulative effect of interest rate hikes by the RBI - which
has not been a very effective tool to tame inflation - and the
weak global demand. The weak IIP numbers, sluggishsecond quarter corporate earnings and high inflation rates
paint a gloomy picture of the Indian equity markets.
On the Put Call Ratio (PCR) open interest (OI) front for the
Nifty, the continuous decrease in its value from 1.37 to the
current level of 1.21, suggests an increase in call activity,
which is expected to be dominated by sellers.
The increase in open interest by around 4% and a fall of
more than 2% in the Nifty Futures in the last two sessions
(14th and 15th November) suggest a negative outlook for
the Nifty. This is also supported by a decrease in the NiftyFutures premium, coming down from the level of 30 last
week to the level of 7, currently.
On the Options front, additions in the Call open interest at
the 5,100 level and above suggest that Options traders are
expecting further weakness. But market participants
expect this downward movement to be limited to the 5,000
level as the highest build-up for Put is seen on that strike to
the tune of 11.77 million.
The current trend is cautious and negative as the Nifty is
trading below its long-term moving averages. RSI andMACD, the two key technical oscillators have given a
negative divergence, indicating weakness in the near term.
Currently, the Nifty has corrected almost 7% from its
recent top of 5,399 in a very short time span but a major
sell-off was seen in broader mid-cap stocks, which are
down 20% to 40%. A strong support is seen in the range of
4,925-4,880 on the Nifty and fresh sell-offs can be seen
only below these levels. On the higher side, the level 5,060
A
has to sustain with a positive market breadth for a rally to
emerge. If we hold this level, then the Nifty could rally up
to the 5,200 level for the November expiry.
As far as institutional activity (in cash) is concerned, we
usually notice that at every fall the FIIs are net sellers and
DIIs actively buy in the markets. Now the question that
arises is whether to buy with the FIIs or sell with the DIIs.
Let us analyze this with data from 2010 and 2011 to date.
TECHNICAL OUTLOOK FOR THE FORTNIGHT
FII DII High/Low (Nifty)Year
2011
2010
-17017
60493
21175
-19806
6157/4728
6301/4757
The table shows that FII investments were over `60,000
crore in the year 2010, pulling the markets comfortably
above the level of 6,300. On the contrary, DIIs turned out
to be net sellers of `21,000 crore near the peaks.
But this year (year-to-date), the markets have plunged from
their peaks above the level of 6,000 to the bottom of the
4,700 level. FIIs sold nearly 30% (over `17,000 crore) of
their 2010 investments, whereas DIIs bought over `20,000
crore, which is more than what they had sold last year.
As per month-to-date (November expiry), FIIs have beennet buyers in the cash segment to the tune of `3,415 crore
(as on 15th Nov), whereas DIIs have sold worth `2,653
crore. Now the question is: is this a sign of a bear market?
India VIX, which measures traders’ perception of
immediate risk in the market, has cooled off recently since
last month’s high of 39.02 (as on 4th Oct) to the recent low
of 20.7 (as on 8th Nov). One can expect the VIX to not
breach the recent lows of 20, which is expected to be the
bottom of the new trading range.
STRATEGY
One can initiate a short strangle on the Nifty by selling the
5,100 December Call and the 4,900 December Put,
fetching a premium inflow of over 250 points. The
break-even for this strategy will be the 5,350 level on the
upside and the 4,650 level on the downside. The maximum
the initiator can earn is `12,500 (250*50) if the December
expiry expires between the 4,900 and 5,100 levels. The
loss remains unlimited beyond the break-even rangE.
(` in Crs) (` in Crs)
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MUTUAL FUND, FII ACTIVITY AND NIFTY
Source: NB Research
Date MF Net*
01 Nov'11
02 Nov'11
03 Nov'1104 Nov'11
08 Nov'11
09 Nov'11
11 Nov'11
14 Nov'11
15 Nov'11
FII Net *
-393.20
-48.80
150.60199.50
-46.60
-176.60
-240.00
-40.20
--
481.40
33.50
194.1077.90
215.90
503.40
421.70
212.60
215.90
5257.95
5258.45
5265.755284.20
5289.35
5221.05
5168.85
5148.35
5068.50
Nifty
*Net activity in Equ
This graph and data represent the Mutual Fund and FII activity that took place
the last fortnight, whether the Fund Houses were buyers or sellers.
MF Net , FII Net & Nifty
MF FII NIFTY (RHS)
BULK DEALS
Ex Company Client
Price
Date Quantity % of EqTrade
BSE
BSE
BSE
BSE
BSE
BSE
BSE
BSE
BSE
BSE
BSE
BSEBSE
BSE
BSE
BSE
BSE
BSE
BSE
BSE
BSE
BSE
BSE
1 Nov'11
1 Nov'11
1 Nov'11
1 Nov'11
2 Nov'11
3 Nov'11
3 Nov'11
3 Nov'11
3 Nov'11
3 Nov'11
4 Nov'11
4 Nov'118 Nov'11
8 Nov'11
8 Nov'11
8 Nov'11
8 Nov'11
14 Nov'11
14 Nov'11
14 Nov'11
14 Nov'11
14 Nov'11
14 Nov'11
Kirloskar Pneumatic Co Ltd
AIA Engineering Ltd
AIA Engineering Ltd
Pasupati Fincap Ltd
Nu Tek India Ltd
Unimers India Ltd
R Systems International Ltd
VMS Industries Ltd
Krishnadeep Trade & Investments Ltd
Birla Pacific Medspa Ltd
Spectacle Infotek Ltd
Kailash Ficom LtdLGS Global Ltd
LGS Global Ltd
Prakash Woollen Mills Ltd
LGS Global Ltd
Raj Oil Mills Ltd
Rain Commodities Ltd
Rain Commodities Ltd
Infotech Enterprises Ltd
Infotech Enterprises Ltd
BGIL Films & Technologies Ltd
Pasupati Fincap Ltd
PCA Securities Investment Trust Co Ltd
Nalanda India Equity Fund Ltd
Reliance Capital Trustee Co
Pasupati Olefin Ltd
Butterfly Commotrade Pvt Ltd
Choice International Ltd
GE Capital Mauritius Equity Investment
Madhuvan Vincom Pvt Ltd
Hotel Polo Towers Pvt Ltd
Rupak Trading Pvt Ltd
IFCI Financial Services Ltd
Dash Pharmaceuticals Pvt LtdProbus Capital Ltd
Batt.Mar Fin Mgmt
Atoz Steels Pvt Ltd
Batt.Mar Fin Mgmt
Associated Capsules Pvt Ltd
HSBC Bank (Mauritius) Ltd
Oxbow Carbon & Minerals Llc
General Atlantic Service Company
Morgan Stanley Mauritius Company Ltd
Rapid Credit & Holdings Pvt Ltd
Pasupati Olefin Ltd
Buy
Buy
Sell
Sell
Buy
Sell
Sell
Sell
Buy
Sell
Sell
SellSell
Buy
Buy
Buy
Sell
Buy
Sell
Sell
Buy
Sell
Sell
256335
1200000
1200000
50000
3945433
445400
230000
255286
36000
1167818
600000
1125001154821
615909
85100
461928
598973
9250000
9250000
2600000
2600000
148800
50000
2.00
1.27
1.27
1.06
2.55
2.80
1.87
1.55
1.13
1.04
1.17
1.064.54
2.42
2.04
1.82
1.66
2.61
2.61
2.33
2.33
2.32
1.06
Traded
475.00
310.00
310.00
16.65
1.36
10.93
110.00
24.50
167.46
17.90
12.53
31.0990.00
90.00
5.10
90.00
14.09
29.25
29.25
121.00
121.00
5.66
18.95
MAJOR BULK DEALS WHERE OVER 1% OF EQUIT Y WAS TRADED FROM 1st Nov’1 1 TO 15th Nov’11
Bulk deals take place from normal trading windows that brokers provide and can be
any time during trading hours. In a bulk deal, the total traded quantity exceeds 0.5%
of the number of equity shares of a company.
Source: NSE and BSE
4950
5000
5050
5100
5150
5200
5250
5300
5350
-500
-400
-300
-200
-100
0
100
200
300
400
500
600
01 Nov'11
04 Nov'11
11 Nov'11
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Scheme Name
Absolute %
(Point to Point)
2 Weeks
NAV
(15th Nov'11)
MoversDSPBR World Gold-Reg(G)
Birla SL CEF-Global Prec Metal-Ret(G)
JPMorgan JF ASEAN Equity Off-shore Fund (G)
Fidelity Global Real Assets Fund (G)
AIG World Gold(G)
Laggards
HSBC Small Cap(G)
Escorts Leading Sectors(G)
Escorts Tax(G)
HSBC Midcap Equity(G)
HDFC Infrastructure(G)
20.8373
14.9743
10.381
12.733
16.772
8.6052
8.8431
36.934
16.207
9.224
5.6562
5.5309
4.8374
4.5402
4.5375
-9.5769
-8.5729
-8.4950
-8.0449
-7.9441
Equity Schemes
MOVERS AND LAGGARDS IN MUTUAL FUND SCHEMES
Debt SchemesMovers
Canara Robeco InDiGo(G)
DWS Gilt Fund-Reg(G)
Religare STP-A(G)
JM G-Sec-Reg(G)
ICICI Pru LT FRF-C(G)
Laggards
Escorts Income Bond(G)
FT India Life Stage FOFs-40(G)
Fidelity Wealth Builder-B(G)
FT India Life Stage FOFs-50(G)
ING OptiMix Income Gth Multi FoF-30%-A(G)
12.0639
11.412
13.9224
31.8538
10.2868
30.0281
23.2982
13.0327
18.9226
12.9926
2.0410
1.4211
0.6659
0.6032
0.5985
-1.5821
-1.0007
-0.9952
-0.7745
-0.7676
Balance SchemesMovers
Peerless MF Child Plan(G)
Reliance Arbitrage Advantage(G)
Axis Triple Advt-Reg(G)
Taurus MIP Advt-Reg(G)
SBI Arbitrage Opportunities(G)
Laggards
Tata Young Citizen [>3Y-7Y]
Tata Young Citizen [After 7Y]
Escorts Balanced(G)
HDFC Prudence(G)
UTI Balanced(G)
10.9869
10.943
11.0225
10.8644
14.195
12.4659
12.4659
53.8855
198.603
73.54
1.0661
0.7300
0.6823
0.5972
0.5418
-17.8589
-17.8589
-5.8418
-4.0741
-3.8441
Source: NB Research
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PORTFOLIO REBALANCING
Portfolio rebalancing is an
important tool for eective
risk management and helps
maintain the desired asset
allocation mix
n financial terms, a portfolio
is nothing but a collection of
financial assets like stocks,mutual funds, bonds, fixed
deposits, precious metals like gold,
real estate and even cash, among
other things.
A portfolio is created on the basis of
the risk-taking capacity of an
individual and his financial goals and
objectives and the time frame by
Iwhich he wants to achieve these
financial goals.
Although there is no set rule for a
model for an ideal portfolio, a general
financial planning rule states that the
number arrived at after subtracting
your age from 100 should be your
equity portfolio and the rest should be
invested in debt.
So, if your age is 30 years, then your
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equity exposure should be (100-30) =
70% and the remaining 30% should
be invested in debt instruments that
are relatively risk-free.
The premise of this is that when you
are young and in your earning years,
your exposure to riskier assets can bemuch more as even though the
promise of high returns comes with
an equally high risk of capital erosion,
the loss-bearing capacity at a young
age is quite high.
But as you grow older and closer to
the age of retirement, your main focus
at that point in life should be
preservation of capital and a steady
stream of income with much lesser
exposure to riskier assets.
Debt instruments can be further
sub-divided into bank fixed deposits,
company fixed deposits, post office
saving schemes, public provident
funds (PPFs) and even liquid and debt
mutual funds.
Equity instruments can be further
sub-divided into small-cap, mid-cap
and large-cap stocks as well as
diversified mutual funds, sectoralmutual funds and index funds, among
other instruments.
PORTFOLIO REBALANCING
Portfolio rebalancing means
fine-tuning or adjusting your
investment portfolio from time to
time to restore your original asset
allocation and maintain the
risk-return profile.
A portfolio may also be rebalanced if
your financial goals and time
horizons have changed due to the
change in your risk-return profile
because of factors such as age, job
loss, inflation, etc.
To better understand rebalancing let
us consider a simple illustration. Say
you have a portfolio of `1 lakh out of
which 60% of the amount, that is,
`60,000 is in fixed deposits (FDs)
while the remaining 40%, that is,
`40,000 is in equities.
Now at the end of one year, assume
that your equities have had a great runand have increased in value, moving
up to `55,000.
Then, now even though you are in
profit and the initial amount of your
portfolio of `1 lakh has is worth
`1,15,000, the original debt-to-equity
ratio of 60:40 has actually become
52:48 (Debt : Equity).
This means that a much greater
portion of your portfolio is nowinvested in riskier equity assets. This
is a signal for you to rebalance your
portfolio to achieve the original
allocation of 60:40 ratio.
You can rebalance your portfolio in
a number of ways:
a. Liquidate or sell a part of the equity
and invest that money in debt
instruments.
b. Invest fresh amounts into the debt
side of the portfolio.
c. Start a systematic investment plan
(SIP) that focuses more on debt
instruments.
THE ADVANTAGES OF
REBALANCING A PORTFOLIO
1. The main advantage of rebalancing
is instilling disciple and ensuring thatyou don’t allow your risk profile to
deviate significantly from your
original plan.
In other words, it takes the emotional
factor out of investment.
2. By selling a part of the equities
from the investment portfolio that has
increased and investing it into debt,
you ensure that you are booking your
profits, which would otherwise
remain invested in the same asset
class and be under the constant threat
of turning into losses if the stocks
were to reverse.
3. Conversely, if the value of equities
has fallen considerably, rebalancing
the portfolio forces the investor to
buy more equities which will bring
down the original cost of acquisition
of the stock mainly due to averaging
and give much better profit potential
to the investor.
4. Bringing in additional funds to
rebalance your portfolio also helps to
increase the total value of your investment portfolio.
5. Starting an SIP ensures that you
buy more when the value of the asset
is down and buy less when the asset
price is high, thus ensuring that the
overall buying cost comes down
drastically while at the same time
allowing you to accumulate a sizeable
chunk of the asset.
THE APPROACHES TOREBALANCING A PORTFOLIO
1. Rebalancing By Time
Rebalancing of the portfolio by time
involves reviewing your investment
portfolio at predetermined time
frames such as on a monthly,
quarterly or yearly basis. Most people
follow an annual rebalancing regimen
to mitigate taxation issues.
While time rebalancing takes away
the hassle of constant monitoring of
the portfolio, if the time interval is too
long, then there could be a significant
deviation in one or the other asset
class away from your original asset
allocation which will require a
large-scale rejig of the investment
portfolio by you.
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2. Rebalancing By Performance
To understand rebalancing of a
portfolio on the basis of the
performance of the portfolio, let us
assume that you were expecting a
maximum return of around 20% on
your equities in a span of one year,and true to your perception your
stocks achieved that target.
Therefore, now you need to rebalance
your investment portfolio by selling
shares that are equal to the additional
returns and invest that amount in
other underperforming assets or other
fixed instruments.
3. Rebalancing By Percentage
Bands
Rebalancing the investment portfolio
by setting percentage bands means
assigning a percentage to each and
every instrument in the portfolio and
rebalancing it once an asset class
deviates or moves out of this preset
percentage band.
Say you have kept a band of +/- 10%
for your equities. If your equity
allocation at present is 40% and over a period of time it becomes 51% or
more on the upside or 29% or less on
the downside, it is an automatic signal
for rebalancing.
You should either sell some stocks or
buy some stocks from the portfolio as
the case may be, to achieve the
original allocation percentile.
We shall now study an important and
complex strategy of portfoliorebalancing commonly known as
Constant Proportion Portfolio
Insurance (CPPI).
CONSTANT PROPORTION
PORTFOLIO INSURANCE
Suppose you are looking at investing
a total amount of `1,00,000 for a
period of say 3 years and the
maximum loss that you can bear
without losing your nerves is
`30,000.
Then, we now have a floor for your
investment which is `1,00,000 -
`30,000 =
`70,000 (floor).
Therefore, you cannot let your
portfolio to fall below `70,000.
Now, let us assume that the maximum
expected decline in equities over 3
years is 40%. Thus, we get an
investment multiplier or “m” of 2.5
(the inverse of expected decline
1/0.40 = 2.5).
The formula for CPPI isEquity investment
= m * (Asset – Floor),
where “m” is the investment
multiplier
= 2.5 x (1,00,000-70,000)
= 2.5 x 30,000
= `75,000
Hence, you should invest `75,000 in
equities and the remaining `25,000
can be invested in debt.
Now, after a period of 1 year, if the
equity portfolio falls by around 10%,
that is, 10% of `75,000 = `7,500.
Hence, now your equity portfolio will
stand at `75,000 - `7,500 = `67,500.
At this point, your debt still stands at
`25,000.
Your total investment will now
become `67,500 + `25,000 =
`92,500.
Applying the previous formula,
Equity Investment
= m * (Asset – Floor),
where “m” is the investment
multiplier
= 2.5 x (92,500-70,000)
= 2.5 x 22,500
= `56,250
So now only `56,250 should be
invested in equities and you should
sell shares worth `11,250 (that is,
`67,500 - `56,250) to rebalance your
investment portfolio.
This is how the CPPI method enables
you to calculate how much equityexposure your investment portfolio
should have according to your
loss-taking capacity.
THINGS TO AVOID
1. Avoid rebalancing your portfolio
on a frequent basis because the
transaction cost and taxes could be
quite high and they could eat into
your returns.
2. Do not over diversify your
portfolio because it will be much
harder to keep track of all your assets
and rebalance them effectively.
3. Do not be greedy and postpone the
decision to rebalance your portfolio
simply because a certain asset class is
fetching good returns. Stick to your
original plan.
4. Do not try to time the markets.That is, do not rebalance a portfolio
just because a few stocks or the
markets are down. Focus on your
allocation percentages.
5. Do not hesitate to seek help from
professionals such as certified
financial planners or portfolio
managers if you are unable to monitor
or rebalance your portfolio actively
either due to lack of knowledge or
lack of time.
It is very important to remember that
without proper rebalancing and
practicing inactivity, your investment
portfolio can either start becoming
extremely risky or extremely
conservative, both of which can be
quite injurious to your long–term
financial healtH.
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DATE: 15th Oct, 2011. VENUE: ITC Gardenia, Bengaluru.
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Beyond Market Visits Bengaluru
Nirmal Bang Securities Pvt Ltd had organized an investor education camp in association with ET Now at ITC Gardenia
in Bengaluru on 15th Oct ’11.
Veterans from the industry such as Rahul Arora, CEO – Institutional Equities at Nirmal Bang Equities Pvt Ltd; Deven
Sangoi, Head – Equity at Birla Sun Life Insurance and Mitesh Thacker, Technical Analyst addressed the audience with
the aim to impart necessary knowledge to enable them to take informed decisions about the equity markets.
ET Now anchor Niraj Shah introduced the speakers to the gathering and told them how important it is to seek profes-
sional guidance in volatile market conditions such as the one we are facing currently.
Shah said the current scenario is one of uncertainty. The interest rates are high and there is no clear understanding as to
what steps the RBI is going to take in the future. There is uncertainty regarding global macroeconomic cues, which will
impact FII inflows. There is uncertainty regarding earnings too.
However, talking about the positives, he said interest rates may peak-out post-December, which will give the RBI the
much needed leeway to decrease interest rates. He added that there could be a co-ordinated global action, which will be
a huge positive for India.
Niraj Shah said investors must not expect a stock to perform every single month. They should also avoid keeping
extremely short-term horizons. They should be aware of stocks that are available at cheap valuations as this would be an
opportunity for investors to buy stocks at a lower price. Further, he said
they must stick to quality stocks from various companies even if they are
in the same sector. “The key rule is to buy businesses and not just
stocks,” he said.
Reminiscing an incident involving Infosys chairman emeritus N R
Narayana Murthy, Rahul Arora, the first speaker of the day, said whenhe had asked Murthy why he did not go ahead with the deal with Axon,
the founder of the Indian software company had replied that as important
as it is to know what you are going after, it is equally important to know
when to walk away. The corollary of this idea applies to the market
participants too. Arora said, “A similar attitude is needed while investing
in the stock markets.”
Quoting market mavens he said traders and investors should be careful
about who they are taking the advice from. “Many people buy stocks on
expectations, rather than facts. Some buy stocks because their relatives
or friends have bought the same stocks,” elaborated Arora.
He said there are two kinds of forecasters: one who do not know and
others who do not know that they do not know. He quoted Mark Twain
and said, “October, is one of the peculiarly dangerous months to specu-
late in stocks. The others are July, January, September, April, November,
May, March, June, December, August, and February.” According to
Arora, although the share of the cash market is low, there are quality
stocks to buy from.
“People must remember that the stock market, like any other market, is
Rahul Arora
CEO – Institutional Equities, Nirmal
Bang Equities Pvt Ltd
Rahul Arora is CEO – Institutional Equities at Nirmal
Bang Equities Pvt Ltd. Prior to this, he was stocks
editor at Bloomberg UTV for two years. He has over 7
years of experience and expertise in research. At
Nirmal Bang, Rahul is responsible for setting up a
team for institutional sales and research which caters
to domestic as well as foreign institutional clients. His
previous stints include CNBC-TV 18, UBS
Investment Banking and PricewaterhouseCoopers
Industry experts assist market
participants in taking informed
decisions about the equity markets
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determined by demand and supply and, hence, they will lose money. One cannot expect the markets to give them
positive returns only. There have been a few hedge fund managers who have been wiped out completely and have
returned to the markets to make a decent amount of money. Equity has given the highest capital appreciation over the
long-term vis-à-vis other asset classes, he said.
According to him, one of the biggest risks that people take is that they invest in news instead of fundamentals. One must
do a little homework over the weekend and read up on companies. They must also look at the management of a
company. In fact, they must look for a company with good management and a good track record.
Arora feels that there are two things that can go wrong in the stock market. Either the business can go wrong or the
promoter can go wrong. If the business goes wrong, it will be a cycle that will turn. But if the promoter goes wrong, one
must exit the stock.
Speaking about global issues, Arora said the US may still not be out of the woods. Europe is a big problem and one
cannot figure the entire extent of the problem. Referring to the bailout package that France and Germany have agreed
upon, he said that bailout is not a solution. As far as India is concerned, it is in tandem with the rest of the world.
Despite this, a host of problems, which he refers to as India’s PIIGS, plague our country, said Arora. Some of them are
political problems, interest rate and inflation, GDP growth and social inequality. As far as the political issues are
concerned, all eyes are on the UP elections in 2012. “I do not expect the government to undertake any major economic
reforms,” he reiterated.
Further, the inflationary phase had started as a supply driven inflation. And constant interest rate hikes is not the
solution. “Now, inflation is cost pushed inflation. The cost of manufacturing a good is still higher than the cost of selling
it,” he reasoned. Moving on to the issue of GDP, Arora said that the country’s GDP has been on a steady decline since
the second quarter of FY ’11. Finally, social inequality is rising at a great pace as the rich are getting richer and the poor
are getting poorer.
Arora expects the Sensex to touch 14,700 points and the Nifty 4,400 points by December this year. He said the downside
risks to earnings persist. However, FY13 may be better for the markets.
He advised traders and investors to consider certain stocks that seem
attractive buys.
The next speaker Deven Sangoi said the only place where the demand
elasticity does not apply is the stock market. “Market participants must
realize that value is what you get and price is what you pay,” he said,
adding that if the prices are low, there is never good news. Finding value
is what differentiates a good investor from a bad one. He cited the
example of Warren Buffet who always bought when people sold.
He said the Indian stock market is a part of the global market and global
turmoil will have a negative impact on prices. This negative impact will
create an opportunity for investors. “The Indian economy has not lost
steam and that the growth story is for real,” said Sangoi.
He further expects wealth to shift from the developed nations to the
emerging markets. “Today, India is not a large export-oriented nation.
We have less than 20% of our GDP coming from exports. The rest is
domestic investment and consumption. The GDP growth is driven by
investment and consumption,” explained Sangoi.
He said central bankers have many tools like cutting interest rates and
increasing money supply, to revive growth. And this is an excellent
opportunity for foreign investors to turn towards India.
Deven Sangoi
Head – Equity, Birla Sun Life Insur-ance
Deven Sangoi is Head – Equity at Birla Sun Life
Insurance and has been with the company since
August ’09. Prior to this, he was associated with
ICICI Prudential AMC as Head of Equity. He has
over 14 years’ experience in the equity markets,
including 9 years in fund management. His
earlier stints include Birla Sunlife AMC and
Alchemy Shares & Stock Brokers Pvt Ltd.
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While everyone is talking about negatives like inflation, rupee depreciation, issues of corporate governance and no policy
actions, they must also see the positives, he insisted. The positives include the global fall in commodity prices, which will
bring inflation down. He said the situation in Europe will improve. The government has taken some positive action.
Sangoi expects the markets to deliver in excess of 15% in the long term. “The markets have become cheap and there will be
huge volatility. But in the long term, there will be a boost in prices. Also, the commodity prices will cool off and that food
inflation will also ease due to the recent robust rainfall,” maintained Sangoi. “The Sensex and gold have given similar
returns,” he said.
The last speaker for the day, Mitesh Thacker opined that market participants
must choose and know what they want if they have to make money in the
stock markets. “A person must not be an investor and then pretend to be a
trader by booking early profits, or vice versa,” said Thacker.
He dwelt upon trading with support and resistance levels. He defined support
as the price point or the level where the force of demand is expected to be
stronger than the force of supply. And resistance according to him is the price
point or the level where the force of supply is expected to be stronger than the
force of demand.
A support level guides one in initiating long positions. It helps one in keepinga stop loss in the long exposure. Similarly, resistance guides one to initiate
short positions. He used charts to explain this. He said support and resistance
levels are determined by market participants, which means they should
carefully study the levels and initiate trades.
One way to fix levels is through price consolidation. This is done if price
fluctuates within a range. The other way is through the study of historical
price points of companies. This is done by noting the price of the stock at the
fag-end of a bull or a bearish market. Then there are moving averages and
trend lines, he said.
After the panelists shared their views, the event was thrown open for a round
of questions and answers where the audience got the chance to clear theirdoubts and interact with the expertS.
Mitesh Thacker
Technical Analyst
Mitesh Thacker is a postgraduate in management
with specialization in finance. He has been
tracking the equity markets since 1999. It was his
love of numbers that drew him to the stock
market and made him develop a technical
approach to trading and investing. He is regularly
invited by TV channels and business magazines
to share his views on stocks and indices and
provide market t ips. He has also been a visi ting
faculty with the Bombay Stock Exchange & National Stock Exchange on the subject.
The next Beyond Market camp will be held at Kolkata on 10th Dec ’11.
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