GLASSNOST : FOR SMART INVESTORS

Successful trading is based on three Ms

2006-09-03T22:46:00.000-07:00

Mind is your trading psychology; method is how you analyse markets; money is risk control. Would successful people who trade for a living talk about their method of making profits? The answer is `yes,' if they are talking to Dr Alexander Elder. And he comes back from his `visits to sixteen trading rooms' with enough matter to fill Entries & Exits from Wiley (www.wiley.com). "Winners know full well that success in trading does not depend on knowing the `secret'," explains Elder. "There is no secret ? only hard work, focus, attention to detail, being careful and long-term oriented with money, and having a bit of flair." Don't search, therefore, for a magic formula, which you can `buy and plug into your computer to automatically make money,' as states the intro. "Successful trading is based on three Ms ? mind, method and money," says Elder. "Mind is your trading psychology; method is how you analyse markets and make trading decisions; money is risk control." The formula is also explained as 3 Bs, viz. `balls, brain and bankroll'. These are `the legs of a three-legged stool,' because if any one is missing, you end up on the floor! Methods that work well on paper may fail when one starts trading read money, cautions the author. "When the level of emotion goes up, the level of intelligence goes down." The best way to remain calm and preserve discipline is to keep good records, he advises wannabes. "Write down your plan for the day ahead; put it next to the keyboard, and follow it. Do not change your plan during trading hours." Two pillars Elder speaks of two pillars of risk control, `the 2 per cent and the 6 per cent rules.' He elaborates: "The 2 per cent rule states that you may never risk more than 2 per cent of your account equity on any single trade." For example, if you are buying a Rs 12 share with a Rs 10 stop, you risk Rs 2 per share; and if your maximum permitted risk is Rs 2,000, you may buy up to 1,000 shares. The second pillar, that is, the 6 per cent rule states that you should never expose `over 6 per cent of your account equity to the risk of loss.' For instance, if you trade a Rs 1,00,000-account and risk Rs 1,000 on every trade, "you may not have more than six open trades at any given time." In case you lost out on two trades, you can now have not more than four open trades. "This rule allows you to have more trades when you're on a roll, but slows you down when you are starting to lose money." The first trader you'd meet in the book is Sherri Haskell. "I troll at night, looking for consolidating stocks with unusual volume," she describes her method. "Something that hasn't moved very much but has big volume ? that tells me momentum is building and it may bust out." The difficult part for her is `the discipline of not being influenced by others'. How has Sherri handled it? "I learned over time not to listen to financial programmes on TV, to reduce the number of publications I receive, and to be very careful conversing with others about the market." Elder takes us next to Fred Schutzman's trading room. "Our percentage of winning trades is about 40 per cent, and so we shoot for at least a 2:1 return, but ideally we'd like 3:1," explains Schutzman. "We are trying to get the best risk adjusted returns ? it is more game theory than technical analysis. We want to beat our competitors on a risk-adjusted basis." To succeed in the long run, take many trades, he advises. "We operate like a casino, and the law of large numbers works for us... I do the R&D, the computer pulls the trigger." Andrea Perolo, the third trader, has a simple method: "Check the weekly, discover a trend, analyse the daily to discover a good risk/reward ratio, manage it with solid money management." And his trading room is uncluttered: "Just one computer and one monitor, with no real-time quotes." Perolo tells Elder, "Trading for me is about more than money. There is no other task that is so difficult ? it is a challenge I have within myself." One useful insight he shares with the author is about fighting the feeling of arrogance. "Whenever you get a strong opinion about the market, shut down the computer and take a long walk. Your opinion is not helpful; it can influence your judgment when you look at the chart. Trade your chart, never your opinion." Three main rules Our next stop is at Sohail Rabbani's office. His three main rules of trading are: `use stops, use stops, and use stops'. Because, "you have to protect yourself if you want to survive in the markets," says Rabbani. Three Cs for success, according to him, are `concentration, clarity, and confidence.' That no one can know the future is one of his two maxims. The other is that most people are wrong most of the time. "To learn from the multitudes," therefore, "you have to see through their follies and position yourself on the other side of the trade." A book worth investing in, if your goal in trading is to become `the best professional you can be'.

The greed factor

2006-09-03T22:42:00.000-07:00

Consider this. You decide to buy a car. You find that the price of the car that you wanted to buy has increased by Rs 25,000. What do you do? Chances are you will wait till the price comes down. Or if you need a car urgently, you might decide to buy another model that is cheaper. But what if you want to buy a stock? Suppose the stock price has gone up Rs 15 before you could buy it. If you are like many other traders/investors, you may want to buy the stock anyway. Why the difference in buying behaviour? When we see a stock perform well and also hear our friends talk about it, we become enthusiastic about owning it. That is why most uniformed investors/traders tend to buy stocks even after they move up. Of course, watching a stock move up gives us the confidence that it will move up further. And if the stock indeed does, chances are that we will attribute the success to our skills. But what if the stock instead comes down after you buy it? Chances are you will continue holding it till it moves up again. Contrast this with buying a car. You buy a car to use it. You simply postpone your consumption if you do not buy it now because the price has increased. On the other hand, if you do not buy a stock because it has just moved up and then it moves up further, you lose an opportunity to make profits. That stock price movements are readily available makes it easy for us to monitor the missed opportunity. The greed factor primarily accounts for the difference in our behaviour.

Why is technical analysis so popular?

2006-08-07T08:06:00.000-07:00

How to distinguish `desirable, timely investments' from the rest. Let's face it: Technical analysts are gaining in popularity. Why so? Because technical analysis has `shown its usefulness through the bull and bear markets.' Secondly, it explains how the two opposing forces, viz. supply and demand, `interact to provide clues to the direction of stock prices.' A more important reason you may need to accept this is that the `technical' followers `learn how to buy near price bottoms and sell near tops.' Dejected fundamentalists may ask, "Oh, where do the rest of us go then?" Where else but to Clifford Pistolese? Because his new book Technical Analysis for the Rest of Us, from Tata McGraw-Hill (www.tatamcgrawhill.com) is about `what every investor needs to know to increase income, minimise risk, and achieve capital gains.' And the preface assures, "With a studious attitude, you can develop an enlightened approach to the market and enjoy the rewards of investing successfully." Basic concepts Begin, therefore, with `basic concepts of technical analysis' using which you can distinguish `desirable, timely investments' from the rest. "It's not possible for you to know everything that affects the financial fortunes of a company. However, all that is known about a company's prospects is reflected in a stock price chart that summarises the results of all the transactions in its stock." With simple sketches and crisp explanations, Pistolese takes you on a tour of: double and rounding tops and bottoms, up and down trends, head-and-shoulders and its inverse, ascending and descending triangles, parabolic curve and trading range, flat line formation and erratic volatility. `A note of caution' that the author hastens to add is that technical analysis can't eliminate the inherent risks in the stock market. "Consequently, when buying the stock of any individual company, no matter how well respected, it's best to limit the amount of money you invest to a small percentage of your total assets." If you are an investor who checks the prices of your stocks every day, but not the trading volumes, count yourself as `uninformed'. You're then ignoring a major factor affecting the prospects of the stocks, admonishes the author. "Watching the volume of trading and making comparisons to average trading volume enables an investor to distinguish between price moves that can develop momentum and those that are just meaningless random movements." Scores of charts pop up from the pages to arm you with line-reading skills. "A trading range is a series of price fluctuations within a delineated vertical distance," explains Pistolese in easy style. "Each trading range has its own limits, which can be narrow, wide, or anywhere in between. The top of a trading range is a resistance level, the price at which holders of the stock are eager to sell. The bottom of a trading range is a support level, the price at which investors are eager to buy." Move on to the chapter on `moving averages' where you'd learn how to smoothen out the fluctuations in the stock price. "For example, a 10-day moving average is the average of prices from the 10 most recent business days." While the `simple moving average' gives equal weight to each day's price, EMA or `exponential moving average' is more up to date because it "gives extra weight to the more recent days in the sequence." Before you start trading, Pistolese handholds you in looking for `an uptrend that is just starting, with two or three ascending bottoms', and using a ruler `to see if bottoms can be aligned to identify an uptrend.' Knowing how to trade an uptrend is an important aspect of trading, emphasises the author. "The best time to buy is after the stock price has risen a little way from the trendline. When to sell is a matter of judgment because there is no reliable way to predict where the short-term rises will end." The book has instructive chapters on portfolio management, and technical analysis and the Internet, apart from inputs on the how of analysing closed-end funds. A chapter on real estate investment trusts (REITs) speaks of the avenue as "an opportunity to make investments that pay high dividends and have the potential to produce capital gains." When real estate values are on the ascent, REITs have appeal to those looking for a balance of income flow and capital gains, explains Pistolese. "REITs write leases that last for 10 years, which makes the rental income flow more reliable." What do REITs own? Varied properties. Such as: "Health care facilities, regional malls, neighbourhood shopping centres, office buildings, apartment complexes, industrial parks, restaurant chains, self-storage facilities, amusement parks, assisted living facilities, or hotels and other types of income-producing properties... " Must read. Because if you can't beat the technical analysts, it may make eminent sense to join them!

Magical thinking

2006-07-31T21:42:00.000-07:00

My friend's neighbour always buys shares of Reliance Industries only on Mondays. When questioned about his trading behaviour, the neighbour said that he "discovered" over a period that he got a higher return if he bought the shares on Mondays. The answer may leave you speechless. Yet, if you were to reflect on your behaviour, you might have sometimes displayed such sentiments. Have you ever worn your "lucky" shirt to your most important business meeting or to your exams, despite your mother or your wife telling you that the shirt had lived its life? There is a term to describe such behaviour. It is called magical thinking. It refers to the behaviour that leads us to believe that there is a causal effect. Consider your "lucky" shirt. You may successfully write your exams or conduct your business meeting well every time you wear that shirt. And so may conclude that the shirt is, indeed, lucky. Yet, your shirt may have nothing to do with your success. The few people who have not experienced such "magical thinking" may conclude that such behaviour is superstitious. They may be right. But as psychotherapists would agree, such behaviour can be used favourably through the power of positive thinking. How? You believe that your meeting will be successful if you wear your lucky shirt. Such belief can lead to what psychotherapists call as the power of positive thinking. That is, your positive thinking can lead to a self-fulfilling prophecy. It was, perhaps, such positive thinking that helped my friend's neighbour profit from his Monday-buys of Reliance shares.

GMR Infrastructure: Avoid [NEW IPO]

2006-07-31T21:29:00.000-07:00

The projects in the power sector, which contribute a sizeable chunk of revenues, are dogged by low utilisations and new projects are clouded in uncertainty. Investors can avoid the initial public offer of GMR Infrastructure (GMR) for now. The offer is stiffly priced; lack of visibility in earnings growth from the current revenue model, which is dominated by power, and the risks involved in relatively new ventures such as airport and road projects, outweigh the positives of being a unique infrastructure developer. GMR develops, owns and operates infrastructure projects through a number of special purpose vehicles, some wholly-owned and others joint-ventures. The company's primary business segments are power, road and airport. The IPO proceeds of Rs 800-950 crore are to be used to fund road and airport projects and pay a promoter group company towards acquisition of GVL Investments, which holds a 9 per cent stake in Delhi International Airport Ltd (DIAL). The offer price band of Rs 210-250 is at a price earnings multiple (PEM) of 75-89 times the consolidated, fully-diluted, FY-06 earnings. While international players in the concession business such as Cintra of Spain command a PEM of close to 150, their business model cannot be directly equated to that of GMR, as the latter, even after considering the road projects on hand, would remain mainly a power generation company. Challenged by power The power and road construction businesses accounted for 83 per cent and 14 per cent respectively of sales for the year-ended March 2006. In the power segment, all the revenues are now generated by two projects ? the 220-MW Chennai power plant and the 200-MW Mangalore unit ? both of which are suffering from low utilisation because of the high tariff brought about by oil-based fuels. The current power purchase agreements (PPA) ensure that the fixed costs along with a fixed return on equity are recovered from the respective State electricity boards. However, the PPA for the Mangalore project expires in 2008 and the terms of its renewal are clouded in uncertainty.Further, the company's third power project at Vemagiri, Andhra Pradesh, based on natural gas, is unlikely to generate power in the near term for want of adequate gas supply. GAIL, the gas supplier, will supply only on "best efforts" basis as enough gas is not available in the region now to service the needs of all the customers.The picture may not improve until gas discovered in the Krishna-Godavari basin is brought to shore in the next three-four years. Given the uncertainty over the Vemagiri plant's commercial operation, the company is re-negotiating the terms of the present PPA. GMR has also planned some hydropower projects but they are long gestation ones and, hence, do not add any immediate revenue visibility. The growth prospects for the power business are, therefore, likely to remain stunted. Paving the way GMR has quickly strengthened its position in the road segment with two annuity projects and four more, which will commence operation by 2008-09. The road segment is likely to attain balance with 50 per cent of its revenues coming as they would from annuity projects. The rest would accrue from high-risk, high-return toll-based projects. GMR is, however, not a construction player and will be outsourcing much of the building work. It may, thus, lose the edge in terms of margins compared to the engineering procurement and construction (EPC) players in the field. GMR has agreed to transfer the right to receive 73 per cent and 68 per cent of the receivables from its current two annuity roads projects to a consortium of banks and financial institutions for 15 years from May 2005 against secured loans received. This means the present revenues from the road segment would not directly fill the company's coffers. The road segment is, nevertheless, likely to drive volumes on the back of the huge investment plans of the Centre and the States. Take-off yes, but... The success of the concession for the Hyderabad Airport, which is likely to be operational by August 2008, would depend on the actual traffic that the airport is able to attract. As of now, Mumbai and New Delhi remain the primary transit hubs in the country. The lease for this project, however, provides the right to develop hotels, resorts, and so on, in conjunction with the airport within the 5,500 acres of total land provided. This leaves considerable scope for commercial revenue generation, if the Hyderabad airport consortium is able to plan and develop such area. While the operation management and development agreement of the Delhi airport has commenced, the agreement is still under legal contention from one of the unsuccessful bidders. Further, about 46 per cent of the gross revenues from the Delhi airport (unlike a 4 per cent concession fee and annual lease rent on a deferred basis in the case of Hyderabad airport) would be shared with the Airport Authority of India for the entire duration of the concession. This takes the sheen away from the seemingly lucrative project. The key to ramping up revenues in airports may lie in increasing the proportion of non-aero revenues which, in turn, depend on passenger traffic. The current mix of aero-to-non-aero revenues of 70:30 in Indian airports may have to undergo a drastic change. Singapore's Changi Airport started with a 60:40 mix in 1981, but that ratio has now reversed in favour of commercial revenues. While we are positive about the potential from the airport infrastructure segment, the above issue appears to cloud the medium-term earnings visibility. The structuring of the group that involves complex cross-holdings among group companies and promoter outfits does not add to the comfort levels on the offer. Offer details: The offer will be open from July 31 to August 4. Enam and JM Morgan Stanley are among the book running lead managers. Retails investors will get a discount of 5 per cent on the issue price.

Real gains from real estate

2006-07-17T08:43:00.000-07:00

To an investor in real estate, property is a source of income and an avenue for wealth generation, as any other business pursuit Buying property is one thing; investing in property is another. Most people buy property to get a roof over the head. To an investor in real-estate, property is a source of income and an avenue for wealth generation, as in any business pursuit. If you would, therefore, like to `become a real estate entrepreneur,' here's help from Gary W. Eldred in Trump University Real Estate 101, from Wiley (www.wiley.com). Begin with your three budgets, urges the author. The first is the mental budget, that is, "how well you allocate your thoughts, attitudes and beliefs." Next comes the money budget, the most easily understood and widely followed one. Last is the time/activity budget, or the hours you are going to devote "to looking at properties, building business relationships, and reading related books and articles." Play straight One of the early lessons that Eldred offers is, `honour your appointments, promises, and agreements.' Important because "real estate attracts more than its share of fakes, pretenders, wannabes, sharks, shirkers, and weasels." What do these people do? "They over-promise and under-deliver. They continue to push for concessions long after the deal is struck. They refuse to close contracts for slight or illegitimate reasons." A chapter titled `Make great decisions' begins with questions that can make many feel queasy: "Do you endlessly mull over `what should I do' types of questions? Do you second-guess and rehash the decisions you've made? Do you regret past decisions?" If yes, take help from Eldred to analyse your decision-making process. Five pointers from the author are: "Rank priorities, explore possibilities; get your facts straight; use rules of thumb cautiously; question advice and recommendations; and organise your thinking." Quality facts provide the ingredients for quality decisions, reminds Eldred. Before you interpret, you need to think, analyse and verify. Avoid a rush to judgment. The world overflows with GIGO (garbage in, garbage out) decision-making. But with facts, you can outperform the conventional crowd." An apt quote of Napoleon that the author cites is: "A leader has the right to be beaten but never the right to be surprised." Create your MVP (or most valued property), by searching for competitive advantages, and offering customers what they want. "Many owners of investment properties still think of themselves as `landlords' and they think of their residents merely as `renters' who don't deserve customer care," rues the author. Put yourself in the shoes of the customer to find out what improvements are looked for. You can add value by giving your property a makeover, counsels Eldred. "As you first walk into the unit, are you met with a bland neutrality? Do you see faded paint, scuff marks, outdated colour schemes, cheap hollow-core doors, nail holes in the walls, worn carpeting, torn linoleum, old-fashioned light fixtures, cracked wall switch plates, or stained sinks? If you answer yes to any or all of these questions, you've found an easy way to create value." Appreciate property Create the curb appeal, urges the author. "When prospects pull up to your property, make sure they immediately feel, `This looks like a nice place to live.'" Your building is your best advertisement, declares Eldred. For the aspiring real estate entrepreneurs, a useful clue is to carry a camera in the glove box of the car. What for? "When you see a building or yard that displays eye-catching features, snap a picture." Also, read the specialised magazines devoted to architecture and interiors, to `extend your creative thinking and aesthetic sensibilities.' The final chapter is on valuing properties. Market value is a major data point, but it should not be your sole decision guide, instructs the author. What about appraisals? "Critically examine all input data and question all inferences and conclusions," because "value conclusions are worth no more than the accuracy of the data and the quality of the reasoning that support them." One of the approaches to valuation relies is that of income, based on GRM or the gross rent multiplier. GRM formula is `sales price divided by monthly rent.' This approach leads to a rough estimate of market value, though it does not adjust for "sales or financing concessions, features, location, condition, or operating expenses." Another method is income capitalisation. Sage wisdom from Eldred is that you should never assume the experts (be they the lawyer, accountant, broker, banker, or any professional) to know enough to advise you in all areas for which you seek advice. "Question, probe, and explore issues." For, "you can't wear a blindfold in business." Exciting read on for real gains from real estate

THE ART OF AVERAGING

2006-07-14T04:30:00.000-07:00

Of all the popular stock market concepts, there is none as credulous as the oft followed "averaging down". To put it simply, when the stock price goes down, more stock is bought at lower levels so that the average cost of the stock in the portfolio goes down. This is done with the hope that the total holding of the stock will move in to profit soon. Emotions have no role whatsoever in trading. The first thing to do when a trade goes against you is to admit that you were wrong. Secondly, stick to the stop loss and exit in time. The loss should not be allowed to grow so large that you feel tempted to average. Averaging can work sometimes. But if it does not, the pain gets exacerbated and so does the hole in your pocket. Professional traders never average down. They only average up. In other words, they add to their profitable positions, not to loss making positions. There is a method to do it, called "pyramiding". The maximum quantity is bought first. As the profit starts building up, half the original quantity is added and then half of the previous lot and so on. To elucidate, if a trader purchases 100 shares of Infosys initially, he will buy 50 more shares more as the price moves up and another 25 as the price moves up further and so on. The question arises about when exactly to add to you winning position. Those who follow charts can use moving averages, supports and resistances as levels at which to do pyramiding. Those who do not use charts can pyramid after a certain pre-determined percentage move in the right direction. It all boils down to the age-old trading maxim - cut your losses rapidly and let your profits run. So, the next time you feel tempted to average down, don't do it. Book your loss instead. Easier said than done. But then, who said trading was easy.

Market is a moving target, as in football

2006-07-03T20:47:00.000-07:00

All work and no play makes Jack a dull boy. Ditto with all trading and no fun. Which is why it is relevant to read A Playbook for Stock Market Success from Bloomberg (www.bloomberg.com): Tom Dorsey's Trading Tips by Thomas J. Dorsey and the DWA Analysts. The `play' begins right from the blurb, thus: "In football, whether you're planning a run or a pass, you must develop the right stance. Similarly, if your portfolio doesn't have the right footing, you're less likely to beat the market." Play #1, however, is musical: "Playing the piano with two hands is better than playing it with only one." Likewise, you should combine technical with fundamental analysis, advise the authors. "Let the fundamental analyst help determine what you buy. But let the technical analyst determine when you buy that particular stock." On a musical note Learn to use, therefore, point and figure charts, a methodology that has been around for more than a century. Demand and supply show on the charts as Xs and Os, in alternate columns. "Charting by hand will allow you to see reversals take place. It will let you see patterns develop and give you the opportunity to act quickly on those patterns." The chapter on `market psychology' begins on a football ground: "When the football team steps on the field Sunday afternoon, all the players must come with a positive mental attitude, believing they are going to win." Exude confidence, exhort the authors, because that's the key to success in sports, life and investing. "The only way to gain confidence is to be prepared to control your negative thoughts." For this, first, find a discipline - "a methodology that you believe in, one that meets your risk characteristics and financial goals". Approach investment like athletes. For example, how does a basketball coach develop plays? Based on the players' talent levels and skills. "He teaches those plays every day until the team can run them in their sleep. Just because they lose a game doesn't mean they start the next practice with a new set of plays. Consistently playing your game over time simply leads to more wins than attempting new plays every week." Common mistakes Eight common investor mistakes to avoid include: Falling in love with a position; buying right but forgetting to sell right; no game-plan for investing; taking small gains but not being willing to take small losses; acting on poor advice and hype; and getting emotional. On the last one, the authors' counsel is to remember that emotion can be your worst enemy. "Try to stay objective." When looking at the chart, cover up the name of the stock, they say. That way, you can make your decision on what the chart is telling you, taking emotion out of knowing the name of the stock! Being arrogant is the first of `ten ways to sabotage your portfolio'. The market teaches humility, teach the authors. "As soon as you believe you know why the market acts, you will be proven wrong... You must be able to admit defeat and preserve enough capital to fight again." How about holding on to losing stocks with the fond hope that they would come back? Just another sabotage technique, because "hope is eternal, but your portfolio is not." Shouldn't we pursue perfection? No, please don't. Stop believing that there is a better system out there, and that you need to find it. "Using a new system to invest each week will not get you to your goal. You will become good at nothing and moderate to bad at everything." Also, there is nothing like a perfect trade. "If you only buy stocks that have all positive attributes you will maintain a portfolio of cash." Instead, "Look for the big ones like relative strength, trend, and signal... You are better off being approximately right than precisely wrong." Market is a moving target, please note. It doesn't wait around for you to catch up, so better practise. As football coach Vince Lombardi says, what you need to do is to react instinctively. "Dictionary is the only place that success comes before work. Hard work is the price we must pay for success. I think you can accomplish anything if you're willing to pay the price," is a quote of his on www.brainyquote.com. To hone your instincts, the authors advise the practice of looking at different chart patterns, and analysing what happened afterwards. Among the many tips in a chapter on stock selection is this: "Good stocks stand out in market declines." Look for the silver lining. "If you see a stock moving sideways during a market decline, it suggests there is enough demand for that stock to offset all of the supply." Play #47 explains the mathematics of losses. Limit losses, and let your winning positions run, insist the authors. "Most people do the exact opposite - they let their losses run and are trigger-happy to take the gains." Edge-of-the-seat read for the football season.

The Pike syndrome

2006-06-27T01:10:00.000-07:00

Consider this: My friend's father bought some shares in mid-2005. His portfolio rose handsomely in just a few months. He could have made good profits had he sold his investment in early 2006. He, however, refused to sell, arguing with my friend (his son) that he would take profits after the market moved up further. Unfortunately, the market declined sharply. So, his investments instead made losses. Later, as the market moved up, he was advised to buy more shares. But because of the losses, my friend's father decided not to invest in stocks again. My friend terms his father's behaviour as the Pike Syndrome. What does that mean? Pike is a fish that has a strange habit; it eats smaller fishes. Suppose you drop smaller fishes in a glass jar and lowered the container into the water. The pike will lunge at the smaller fishes many times only to get hurt bumping against the glass jar. After sometime, if you were to drop the smaller fishes directly into the water, what do you think the pike will do? Devour its prey? Interestingly, the pike will not eat the smaller fishes. It will remember the previous incident when it bumped itself painfully against the jar. It suffers from the once-bitten-twice-shy attitude. It fails to understand that the situation is different now. From this behaviour comes the term Pike Syndrome. Karl Albrecht, a management consultant, coined this term to reflect conditioned thinking. My friend's father lost money due to his unjustified expectations. Rather than take advantage of a good buying opportunity later, he decided not to buy shares again. His behaviour is no different from the pike.

The secret behind great investments is `gutsy moves'

2006-06-27T00:59:00.000-07:00

The masters don't gamble. "They invest deliberately and purposefully, and they outperform the average investor as a result Markets have been going down and up. If that makes you feel queasy, here is help. "You can achieve success in the stock market if you follow a set of well-defined investment principles and refuse to abandon them when the market acts irrationally," assures Scott Kays in 5 Key Lessons from Top Money Managers, from Wiley (www.wiley.com). First check if you belong to the majority in the world of investment that comprises those who want hot stock tips. "Unwilling to learn the rudiments of investing, they invest in companies because `they've been going up.' The thrill of the action is as important to them as the profits they make." To them, investing is not about maximising the returns over time. The minority are the few who study the art of investing "in a constant effort to increase their knowledge and improve their skills." Kays points out that these people take time to learn what matters when buying the stocks. "They don't gamble; they invest deliberately and purposefully, and they outperform the average investor as a result." Chapter 1, titled `The return of common sense', reminds us that many complex investment strategies only veer investors away from the crux. "What kind of pattern is the stock's price chart forming? What was the stock's relative strength last week? The masters classify these questions as irrelevant distractions." More right than wrong Great investments are about `gutsy moves,' requiring the execution of the fundamentals, using `straightforward methodologies,' even as lesser mortals look for `something flashy, something unusual, to give them an edge.' The difference is simple: "The na?ve talk of what should do well over the next few weeks; the masters consider the long term." The author devotes a chapter each to five top money managers, beginning with Andy Stephens of Artisan Mid-Cap Fund. The art of portfolio management, the way Stephens does it, is to be right more than being wrong ? at least to be right in a bigger way. "It's a trade-off between capitalising on opportunities and protecting my downside if I make a mistake," he says. Structural competitive advantage that he seeks in enterprises has four components, viz. dominant market share, proprietary asset, lowest cost structure, and defensible brand. "Firms that possess two or more of these advantages will likely perform in the upper quartiles of their industries. Because their cash flow is safeguarded, investors can value these firms with a higher level of confidence." Lessons from mother Next expert is Bill Nygren of Oakmark Select Fund, who learnt all about investing from his mother. She kept the family on a strict budget, he remembers. "A true value shopper, she visited three supermarkets each week, checking out the specials they were each running... If an item was fully priced, she bought less of it or passed on it completely." Kays notes that buying quality, undervalued-companies gets you only halfway to a successful investment experience. "Knowing when to sell a security is just as important. Fortunes have been lost because investors have tried to squeeze every penny out of winning situations and held on to positions long after they should have gotten rid of them." Sell a company when its price reaches 90 per cent of its fair valuation, Nygren advises. "Liquidate a position when a company fails to perform fundamentally as you expected. If you realise you made a mistake, the sooner you admit it and deal with it, the more likely you will minimise its impact on your performance," are further insights of immense value. No lottery tickets The third expert that Kays introduces you to is Christopher C. Davis of Selected American Shares. The foundational principle he adopts to select securities is, "Stocks are not pieces of paper like lottery tickets, but they represent ownership interests in real businesses." Once you accept that, answer the following two questions: "What kind of businesses do you want to own? And, how much should you pay for them?" According to Davis, "Businesses that grow their values at above average rates for long periods of time make the best investments." His three criteria of superior businesses are: Financial strength (as evidenced by a strong balance sheet and high returns on invested capital), competitive advantages (such as brands, patents and economies of scale), and shareholder-oriented management (with a strategic vision and a realistic plan). To assess the last criterion, that is, shareholder orientation, Davis digs deep to understand `the thought process and logic' of the company managers' capital allocation decisions. "Before he invests in a company, he ensures that managers have a strong understanding of their cost of capital and the return they expect to achieve on investments." Compound mystery Bill Fries of Thornburg Value Fund, the fourth expert you encounter in the book, recounts how his eighth-grade teacher unlocked the mystery of compound interest, and sparked his interest in saving and earning money on money! What is his investment technique? He divides his portfolio into three types, viz. basic value, consistent earners, and emerging franchisees. Fundamental research that he uses filters out for promise and discount. "A cheap stock can remain cheap indefinitely," he cautions. Identifying cheap stocks is easy; what's tough is "finding companies that can achieve a healthier than generally expected future." Two core philosophies The fifth expert is John Calamos Sr, of Calamos Growth Fund. His core philosophies are two. One, "to create wealth, you have to give up some of the upside to preserve capital on the downside." Calamos quips, "I'm long-term bullish, short-term scared, all the time." While the economy can create significant prosperity over time, "the stock market can drop unexpectedly at almost any moment," he warns. "When that happens, he wants to maintain his principal intact, even if that means missing out on some of the market's growth during the good times," explains the book. His second philosophy reads, "No strategy works very well for very long, so you have to keep evolving your process." Calamos says there is no `magic quantitative equation' that works all the time. "If such a formula existed, everyone would use it and it would no longer work. What works at any point in time constantly shifts." Compulsory read.

No such thing as a self-made millionaire

2006-06-18T09:00:00.000-07:00

"Making money and living a life free of financial concern is doable ? for everyone." Want to act, think and make money the way wealthy people do? Take lessons from Loral Langemeier's The Millionaire Maker, published by Tata McGraw-Hill (www.tatamcgrawhill.com). "You possess every tool you need to make a lot of money," assures the author. "Wealth is about access, and now you can finally access the information and opportunities too long kept in too small a circle," she promises. "Making money and living a life free of financial concern is doable ? for everyone." The `how' is explained through a `wealth cycle' that Langemeier proposes; it is about putting money in motion. Move, therefore, from the lifestyle cycle, where wealth can never be built because money gets consumed fast, often even before it is earned. "A person earning $14,000 a year who understands the concept of a wealth cycle has a 100 per cent better chance of building and sustaining wealth than a person who makes $1 million a year and lives in a lifestyle cycle." A dozen building blocks According to the author, building blocks of the wealth cycle are a dozen. The first is gap analysis, through `eight questions in eight minutes.' Find out your monthly income and expenditure, list your assets and liabilities, discover your wants, and identify the skills that you use to make money. Second building block is sequencing. `You've got skills,' reminds Langemeier. "Entrepreneurship is the single biggest source of wealth." The greatest barrier to wealth is `bad debt', reads a pointed message. Another tip in the book is that there's no such thing as a self-made millionaire. "People who tell you they built wealth without a team to help them are not telling the whole truth." Have a team, therefore, comprising "professional advisers, colleagues, and field partners with opportunities." Communicate your ambition, says Langemeier. "You'll discover that just by talking and sharing your vision with others, you will start to generate forward motion." Third is `freedom day,' that is "the realisation of each goal, starting with 120-day objectives." Without a clear vision, you are like ship without rudder, sailing aimlessly, without a final destination! "Quantify your vision," counsels the author. Decide how much cash flow you need every month, what you want your net worth to be, and when that goal is to be achieved. Then follows debt management to erase consumer debt, a task you can accomplish through five steps. Sixth, pay attention to entities, because you should know the tax implications of different forms of entities. Langemeier rues that in the US there are 60,000 pages of tax code but the CPAs use only 50 to 100 of these to serve their clients. Crank up the cash machine `Cash machine' comes as the next building block. To make wealth happen, you must learn to earn, exhorts the author. "Your skill set is the obvious place to look when brainstorming ideas for a cash machine. And these are not restricted to just those skills you've most recently used." Make the best use of your time by delegating work, she advises. "There's not enough of you to around. If the task you're doing at the time is not the highest, best use of your time, then it's not the right task." Building block seven is WAPP or wealth account priority payment, "the concept of pay-yourself-first," whereby you commit a portion of your earnings for investing. Don't wait till you have accumulated a lot of cash or identified a particular investment, urges the author. "Monthly is the easiest. The amount you invest is not nearly as important as starting the process right away." Divorce when still in love! Design your business divorce when you're still in love, advises Langemeier. "Because life has a tendency to be unpredictable, both plans and people have tendency to change." The author narrates how in one of her business ventures, a woman she was working with died unexpectedly. "She'd left her piece of our pie to her young boyfriend, who didn't play well with others but had no desire to let go of his shares. He inherited the business and we inherited him ? and the entire team of first-rate strategic partners suffered for this one rotten apple." The only viable exit that eventually was agreed upon was `to reluctantly sell the business.' Moral: "Subsequent to that experience, I have never gone into another business relationship without a right to purchase the participation of a shareholder upon death or divorce." Three levels of listening Learn to listen, to make money. There are three levels of listening, points out Langemeier. "Level one listeners listen to themselves, as well as the conditioning voices in their head and the mass of stimuli and impressions blasting at them daily." Watch out: This is a loud, chaotic place, "constantly reacting, busy, but unproductive," though about 80 per cent of people live here. Level two listening happens "when you are captured contently in a conversation with others, engaged, involved, completely in the moment and connected." The next level, at which leaders need to live, is intuition. At level three, "you have your arms around the entire room, listening to everything that is going on everywhere." Such listening is calm, and goes beyond words; "you actually use all the resources that surround you to anticipate what will happen." At that level, despite speed, you'd experience steadiness, with an access to "the message of what is really happening." The penultimate chapter begins `a new conversation,' that is, conditioning. Work on your money muscles, invites Langemeier. "If you want to become a millionaire, it's time to get in shape, to build the money muscles... The first days are the most difficult." A ticket to millionaire-dom!

Returns off relationships

2006-06-18T08:45:00.000-07:00

Volatile markets are eye-openers for investors These are times of high volatility in the markets. And it may look like a tall demand to ask for good returns irrespective of the way the index turns. But that's just what Joseph G. Nicholas promises in Market-Neutral Investing, from Bloomberg Press (www.bloomberg.com). Market-neutral isn't synonymous with risk-neutral, cautions George Benson in his foreword. "It is immune neither to the influence of the market nor to the human fallibility to which all managers are subject." However, variability of market-neutral investments can be `less extreme than that of conventional investments,' he assures. Volatile markets are eye-openers for investors, states the intro. Investors now look for protecting at least some portion of their assets "by making allocation to strategies that provide a hedge to equity exposure but yield higher returns than bonds." Definitions Market-neutral investing can be a solution, but let's first understand the phrase. "Market-neutral investing refers to a group of investment strategies that seek to neutralise certain market risks by taking offsetting long and short positions in instruments with actual or theoretical relationships," defines Nicholas. "These approaches seek to limit exposure to systemic changes in price caused by shifts in macroeconomic variables or market sentiment." Thus, returns from market-neutral strategies are from "the relationship between a long and short component of the portfolio, whether that relationship takes place at the level of individual instruments or at the portfolio level."Who are the foremost practitioners of market-neutral strategies? "The proprietary desks of major financial institutions and hedge fund managers, who are not subject to the same regulations as mutual fund managers," says the author. Their advantage is the ability to sell securities short. "Hedge fund does not refer to a specific investment approach or asset class," reads a definition in the book. "Hedge fund generally describes a variety of alternative investment strategies that (a) utilise liquid and semi-liquid instruments, and (b) are usually accessed by investing in private commingled funds." "Any investment strategy that consistently confounds the accepted relationship between risk and reward is taking advantage of a pocket of inefficiency," points out Nicholas. "Investors who utilise these strategies have a competitive advantage that allows them to exploit that inefficiency." He cites academic research to note that actively managed equity portfolios will rarely outperform an index of stocks over time. Another observation of import reads thus: "As market-neutral strategies, to a greater or lesser extent, derive returns from relationships between securities rather than from the direction of an asset class, they can be said to have a different source of return than traditional investments." Relationship investing involves a non-directional approach, explains the author. "The return to the strategy comes from the net result of the long and short components (that is, the performance of the long position relative to the short position). However, the return does not always come solely from a non-directional exposure." Chapter 3 walks you through `making an investment in market-neutral strategies,' by first arming you with inputs on `linear analysis and mean variance optimisation', and also `a powerful new tool that prudent investors are using' to alleviate many risks ? `daily transparency.' Alpha and beta Warm up exercise is to perform linear regression analysis "between the returns generated by a strategy (the dependent variable) and the market return (the independent variable)." In the line of best fit, which is in the form y=a+bx, `y' is the strategy return less the risk free interest rate, educates the book. Time to dust off your college texts to remember that `a' is alpha (the y-intercept), b is beta (the slope of the line), and `x' is the market return less the risk free rate. Beta is generally accepted as a proxy for systemic stock market risk, notes the author. "For example, a beta of 2.0 indicates that for a 1 per cent increase in the stock market return we would expect the portion of the strategy return explained by market return (as indicated by the correlation statistic `r') to increase by 2 per cent." What about alpha? It indicates the residual portion of the strategy return that is unexplained by fluctuations in the stock market return, elaborates Nicholas. Alpha is "widely accepted as a measure of the value added through active portfolio management." Efficient frontier Encounter the `efficient frontier' in the discussion on mean variance optimisation. This frontier is "the set of possible portfolio allocations that maximises expected returns for a given level of variance (risk) or minimises variance (risk) for a given level of return." Through graphs that may look like boomerangs, the author depicts the most efficient allocation as "the point with the highest risk-adjusted return, as measured by the Sharpe Ratio." Among the strategies is `merger arbitrage', which usually involves "buying the shares of a company that is being acquired by or is merging with another company, and selling short the stock of the acquiring company." Do merger arbitrage specialists try to anticipate possible merger activity? No, says Nicholas, because such an approach would rely much on rumours. "Instead, they research announced mergers and acquisitions as a way of reducing their uncertainty about each of the possible outcomes." Therefore, the specialist "will liquidate an investment position when new negative information is uncovered and the return is no longer a sufficient reward for the perceived risks of holding the position." In conclusion, the author counsels against `over-reliance on past activities and performance, good or bad.' If you want to understand the reality of market-neutral investment strategies, you must look beneath the surface, he insists. In short, this is a book you can bet long on.

Not investing your money is also risky

2006-06-06T01:45:00.000-07:00

Today's investments form the basis for future purchasing power Why do we invest? There can be many reasons, but the most important one, according to Esmé Faerber, is "to fund our retirement because we are living longer." Today's investments form the basis for future purchasing power, and poor investments can lead to negative returns, she explains in All About Investing from Tata McGraw-Hill (www.tatamcgrawhill.com) . The author is a CPA, and a professor of business and accounting. Her book is `a step-by-step guide to putting your money to work for you... from stocks to bonds to options and futures trading.' Begin with five steps that outline the investment process. Five steps First, determine your financial objectives (e.g., buying a car before 2008, funding a college education in 2015). Second, allocate your assets; that is, assign funds to different categories of investments. Funds that you need on demand should be invested in money-market securities, advises Faerber. Third step, identify your investment strategy, whether active or passive. Fourth, select your investments. "Passive investors choose diversified assets in each class of investments," points out the author. Active investors, in contrast, assemble a portfolio after studying the fundamentals of companies to find undervalued securities; they sell the securities when they turn overpriced. Step five is to evaluate the portfolio periodically, "because a change in your circumstances might necessitate a change in your asset allocation plan." The chapter on risk and return defines risk as `the variability of returns from an investment.' Risk is what weans many investors from stocks and "prompts them to keep their money in so-called safe bank accounts, CDs, and bonds." Faerber reminds that returns from these passive savings vehicles often have lagged the rate of inflation. "Although investors will not lose their capital, they risk losses in earnings owing to inflation and taxes when they merely hold cash and cash equivalents." Risk management It may be sobering to realise that even the most conservative investment involves some element of risk. "However, not investing your money is also risky. For example, putting your money under the mattress invites the risk of theft." Understanding risk involved in different investments isn't enough; you need to be aware of `your feelings towards risk.' Means? `How much risk can you tolerate?' asks the author. And there are more questions: "How nervous do you think you'll be about your investments? Will you check the prices of your stocks and bonds daily? Will be able to sleep at night if your stocks decline in price from their acquisition prices? Will you call your broker every time a stock falls by a point or two?" If you have a small amount of money to invest, mutual funds can be a better alternative, counsels Faerber. "Also, the professional managers of these funds have quicker access to information." There can, however, be a strong argument for buying individual securities, especially when the rates of return are better than what the funds offer. One of the many tips in the book is on using the Net to find value and growth stocks. "Use a stock screener on www.finance.yahoo.com or www.moneycentral.msn.com to see a list of some current growth and value stocks," writes Faerber. "For growth stocks, enter higher P/E ratios and higher earnings per share growth estimates. For value stocks, enter low P/E ratios and lower earnings per share growth estimates." Ever heard of DRIP? The acronym stands for dividend reinvestment plan, which allows shareholders to reinvest their dividends in additional stock rather than receiving dividends in cash. The advantage, as the author explains, is to make shareholders forced savers. An idea that is worth implementing closer home, with apt changes to tax law. The chapter on bonds begins from the basics. "A bond is a negotiable debt security whereby an issuer borrows money and in return agrees to pay a fixed amount of interest over a specified period of time and pay back the principal amount when the bond matures," defines Faerber, without presuming any prior knowledge on the part of readers. She then explains how bond prices and interest rates are on two sides of the see-saw, what different risks are to be faced by bond investors, and takes you on a tour of YTM (yield-to-maturity) and yield curves. She cautions that pricing transparency is poor in bonds, and that investors are seldom aware of the spreads. Within less than 40 pages, spread over two chapters, the book covers options and futures. Graphs and examples make learning easy, in sections such as `profit and loss from buying the stock versus a call option.' In a discussion titled `What makes trading futures different from trading stocks?' you can read about margin, "the amount of equity that must be deposited when purchasing securities." While margin requirements for purchasing stock is 50 per cent of the purchase price, it varies between 2 per cent and 10 per cent for futures contracts, notes the author about the US position. Closer home, as you may remember, the BSE and the NSE recently announced reduction in exposure margins for cash and derivatives segments, to help brokers hassled by the big falls in the bourses. Must-read for the whole family is the final chapter on `real estate, precious metals, and collectibles.' The last category includes "art, antiques, vintage cars, rare books, Persian rugs, coins, stamps, baseball cards and other items that offer the potential for appreciation." A book that you can include in your list of collectibles, for the ready value it offers!

More is less

2006-05-28T22:10:00.000-07:00

My friend's daughter loves yoghurt. The other day, when she refused to have dinner and demanded only yoghurt, my friend and his wife decided to give her enough and more of her favourite food. The little one was delighted and, perhaps, surprised that her parents were allowing her to have just yoghurt. But she was unable to have more than three heaped spoons. That was, perhaps, her parents' idea ? to stuff her so much with yoghurt that she would finally give up having her favourite food. Without their realising it, my friend and his wife were employing an important principle in economics ? marginal utility. Suppose you like ice-cream. You decide to binge on a Saturday night. After four ice-creams, you feel you cannot have any more. Why? Apart from feeling full, the satisfaction that you derive from having ice-creams may have also come down. You would have derived immense satisfaction from your first ice-cream. The second would have been good too. The third less while you struggle to complete the fourth. This is because your satisfaction from consuming each additional ice-cream comes down. The satisfaction derived from each additional unit is called marginal utility in economics. The principle that captures the decreasing satisfaction from each additional unit consumed is called the law of diminishing marginal utility. The concept was first formulated in the 1850s by H. H. Gossen and was later independently developed by William Jevons, Carl Menger and Leon Walras. It was, however, Friedrich Von Wieser of the Austrian School of Economics who coined the term "marginal utility

Magic formula to make money

2006-05-28T21:54:00.000-07:00

"You can learn how it's possible to more than double the annual returns of the stock market averages." For the market-mangled, there seems to be hope: "You can achieve investment returns that beat the pants off even the best investment professionals," assures Joel Greenblatt in The Little Book that Beats the Market, from Wiley (www.wiley.com). "In fact, you can learn how it's possible to more than double the annual returns of the stock market averages," he'd add. How is it possible, you wonder? The author, who is a hedge fund manager and professor, and `whose investment firm has averaged 40 per cent annual returns for over 20 years,' teaches how. He begins with two lessons in the intro: "If you really want to `beat the market,' most professionals and academics can't help you, and that leaves only one real alternative: You must do it yourself." To help, Greenblatt offers `a magic formula' ? that lets you choose `good companies at bargain prices.' Figuring out what a business is worth isn't easy, concedes the author. "After lots of guessing and estimating, maybe you get it right and maybe you get it wrong. But what if you could? What if you could figure out what a business was really worth?" Greenblatt explores all these questions and more, through a story that takes you through the protagonist Jason's business plan. The teacher in the author peppers the pages with narratives about financial analysis classes in an Ivy League university. For instance, he asks students if General Motors could be worth $30 billion one day and then a few months later be worth $60 billion. "Are they selling twice as many cars, making twice as much money, or doing something drastically different in their business to justify such a large change in value? Does something happen each and every year to account for large changes in the value of most companies?" The answer is `No!' declares the author. "The prices of the shares in most companies swing around wildly each and every year. All you have to do is look in the newspaper to see that that's true." Why then do prices change so much if values don't likewise change? There are many `complicated explanations and theories' to reason why. But Greenblatt discards the same as `theories as to why something that clearly makes no sense, actually makes sense.' His answer is simple: "Who knows and who cares? Maybe people go nuts a lot." According to Greenblatt, you don't really have to know why people are willing to buy and sell shares of most companies at wildly different prices over very short periods of time. You just have to know that they do! "It is a good idea to buy shares of a company at a big discount to your estimated value of those shares." That gives you `a large margin of safety'. You can become `a stock market master' by using just two simple tools, urges the author. "If you just stick to buying good companies (ones that have a high return on capital) and to buying those companies only at bargain prices (at prices that give you a high earnings yield), you can end up systematically buying many of the good companies that crazy Mr Market has decided to literally give away." Companies that score the best on combined rankings are what should attract your attention. Using Compustat's `Point in Time' database that goes back 17 years, Greenblatt constructs a portfolio of about `30 stocks that had the best combination of a high return on capital and a high earnings yield' and finds the return to be 30.8 per cent per year. "Investing at that rate for 17 years, $11,000 would have turned into well over $1 million," he explains. In contrast, the overall market averaged a return of about 12.3 per cent, and $11,000 would have turned into $79,000, as per the author's study. This, despite his formula doing worse than the overall market `for three years in a row'! Worth doing a similar exercise for companies closer home. An insight of value is that most people don't have the patience to wait; their investment horizon is too short. "After a year or two of performing worse than the market averages (or earning lower returns than their friends), most people look for a new strategy - usually one that has done well over the past few years." Don't forget, `it's hard to stay with a strategy that doesn't follow along with everyone else's.' Ben Graham had his own `magic formula,' points out Greenblatt. "Buying a group of stocks that could meet the strict requirements of Graham's formula was a great way to make money." The catch, however, is that "in today's market, few, if any, companies qualify for purchase under Graham's original formula." The alternative, as suggested in the book, being a ranking formula, doesn't have such a problem, says Greenblatt. The formula systematically helps you find `above-average companies' that can be bought at `below-average prices.' But how do companies manage to achieve a high return on capital? By putting to use a `special advantage' that keeps competitors trailing far behind. "Businesses that don't have anything special going for them (such as new or better products, well-known brand names, or strong competitive positions) are likely to earn only average or below-average returns on capital." Keep a watch for companies that have "the opportunity to invest some or all of their profits at a high rate of return," because such an opportunity is `very valuable,' instructs Greenblatt. "It can contribute to a high rate of earnings growth." Chapter 11 has an important warning: "Choosing individual stocks without any idea of what you're looking for is like running through a dynamite factory with a burning match. You may live, but you're still an idiot." Greenblatt emphasises more than once: "Most people have no business investing in individual stocks on their own!" To him it is irrelevant to debate whether small-cap stocks outperform the large-cap ones and so forth. He also hopes that, "just as Mark Twain aptly referred to golf as `a good walk spoiled,' perhaps someday the random walk will finally be considered spoiled as well." Fabulous read.

Take charge of your life [BOOK REVIEW]

2006-05-08T18:48:00.000-07:00

"Success largely and perpetually is a matter of choices we make After a recent high-profile shooting incident in Mumbai, the former CBI Director, Joginder Singh, was asked for his views about the gun culture in the capital. "Delhi has a total of around 60,000 licensed revolvers, but the number of people keeping illegal revolvers would be at least 10 times more," he said, as www.ndtv.com reports in an April 23 story. "Weapon gives a sense of power to a person, much more than his physical power," added Singh. Real power, though, is not in taking others' lives but in taking charge of your life, explains Singh in one of his recent books: Yes You Can from Main Street. "You too can be successful by learning how to make the right choices," invites the front cover, forcefully. "No excuse will do, as success largely and perpetually is a matter of choices we make," declares the intro. Choose, therefore, to be a success by denying yourself of temporary pleasures and putting in the long hours that your aspiration and ambition demands, exhorts Singh. "Always remember, that your own resolution to succeed is more important than anything else." He cites Emerson thus: "Big jobs usually go to men (and women) who prove their ability to outgrow small ones." Chapter 1 begins with introspection, because failure is often due to "looking in the wrong places for the solution to our problems and challenges." One of the first exercises Singh pushes you to do is to identify your depressing and destructive thoughts. "Take action to transform them into positive energy before they dominate and depress you. Consciously replace negative attitude with a more realistic and positive outlook." Interestingly, `How to Reduce Negative Thoughts Relating to Trading?' is a question on http://stocks.loansinformation.info. "Successful traders display an extraordinary amount of self-control. Keeping emotions constantly in check, the disciplined trader is immune to the highs and lows that attend large market swings ? whether panic, in a downturn, or of euphoria," educates the site. Art of success Success begins in the mind, says Singh in a chapter on `The art of success.' Do not believe that success is the result of either an accident or fluke, he counsels. "Nothing is ever achieved without working for it with integrity, wisdom, commitment and a success-oriented attitude." How does commitment show? By being "so engrossed in your work that you have hardly any time to think of anything else." Secret, for those who can hear it, is simple: "Do whatever you are to do and do it wholeheartedly." To help, Singh offers more tips: "Monitor every minute of your professional and leisure time. Respect the time of others as well as your own." The book brims with practical advice almost in every line. "Be always organised and write down everything you want to accomplish," is one such. "Prioritise and approach your task in a descending order of importance," is another. "Update your skills constantly," reads yet another. Time is fluid, says Singh. Which means, you may have to shuffle your tasks to meet your obligations in time. "Result-oriented people are realists." They know when to call it quits, so that they can "move forward without any anxiety, tension or guilt." For the avid, `how to figure out when it's time to call it quits with an investment,' is the subject matter of a chapter titled `Tough Sell' in Investing 101 by Kathy Kristof, from Bloomberg Press. `Be the best edition of yourself,' insists the caption of a paragraph that begins with a thought of Shakespeare ? that nothing is good or bad but thinking makes it so. "All joys, pleasures and miseries have their origin in the mind. It is for each one of us to decide whether we wire ourselves for happiness or misery," says Singh. "The real joy of life lies in your work and performance. Never rob yourselves of happiness by postponing it." Main foes of happiness are worry and tension; they are threat signals, warns Singh. "Never give way to moodiness and depression." For, as John R. Nofsinger writes in `Investment Blunders of the Rich and Famous...and What You Can Learn From Them' you can boost your returns by avoiding mistakes such as "greed, hubris, moodiness, poor information, and peer pressure from the investment process". Depression is the expression of self-dislike and self-disrespect, alerts Singh. "In this condition it is not others who are bothering you. It is only your own self wallowing in misery." Another menace to watch out for is stress. "Feeling dissatisfied with one's work, getting unnecessarily nervous, anxious, angry, unhappy and annoyed at even the most trivial matters are indications of stress." Singh cautions that stress can graduate "from nail biting, grinding teeth and tapping feet to serious illnesses such as heart attack, ulcers, diabetes and so on." In a chapter on `Organising for success,' Singh speaks of `the buffet syndrome.' What's that? Life, like a buffet, offers a variety of choices, explains the author. Rather than have too much on your plate, focus on what are really important. "Find out what is sapping your strength... Identify the factors which are causing the over-commitment at the cost of things that matter to you the most." Plenty of takeaways that can help in trading too.

Patel Engineering: Invest at cut-off

2006-05-08T18:41:00.000-07:00

MR PRAVIN PATEL, Chairman, Patel Engineering Ltd, with Ms Sonal Patel, COO, and Mr Rupen Patel, Managing Director. ? Paul Noronha Riding on its experience in constructing tunnels and pumphouses for hydropower projects, Patel has also strengthened its position in the irrigation sector. A strong presence in high-margin hydropower construction projects showcases Patel Engineering (Patel) as an infrastructure player with a slightly different business profile. With a burgeoning order book and access to leading-edge technology, Patel appears well placed to capitalise on the current infrastructure spending in the country. Its presence in the US through subsidiaries has added impetus to its earnings growth. Investors can subscribe to the company's public offer with a medium-term perspective. The price band of Rs 400-440 is at a discount of 15-20 per cent to the current market price. At the offer price, the stock trades at 25-27 times its expected consolidated per-share earnings for FY07 and is at a discount to players such as Gammon India and Nagarjuna Construction, which operate on relatively lower margins. The proceeds of the offer are to be used for investing in capital equipment, new infrastructure projects, subsidiaries and joint ventures. The company also proposes to use a part of the funds to repay debt amounting to Rs 80 crore. Diversifying order book Patel's order book of Rs 4,339 crore is 5.6 times its consolidated revenues of 2005. This is likely to be converted to revenues over the next three years lending steady growth to the top line. Of the total orders on hand, hydropower and irrigation projects account for 40 per cent each. Patel's core competence is construction of dams and powerhouses. The company's strength in terms of technology and experience is likely to ensure that it has an edge over competitors in this space. Riding on its experience in constructing tunnels and pumphouses for hydropower projects, Patel has also strengthened its position in the irrigation sector. It has now bagged orders for lift irrigation projects in Andhra Pradesh as an EPC (Engineering, Procurement and Construction) contractor. Entry into EPC has enabled it to move up the value chain and is likely to fetch better operating margins. Patel has also capitalised on order flows from the government in the road segment. Road projects now form 23 per cent of the order book against 3 per cent in 2005. Spread over south, east and north-east, the order book reflects diversification across States and into various businesses. This is likely to ensure that revenues and margins are well-cushioned against sluggishness in any segment. Technology edge Through its subsidiaries in the US, Patel has access to technology that gives it an advantage to bid for new projects. Roller Compacted Concrete (RCC) technology for building dams reduces project execution time and cost by replacing cement with fly ash. RCC is internationally accepted and has already been used by the company in Maharashtra. The company has also pioneered the use of micro-tunnelling and horizontal directional drilling technologies that enable mechanised tunnelling for water and drainage pipelines and underground cabling without surface digging such as for roads or rail tracks. Although such expertise is yet to gain popularity in India, the emphasis of the Government on development of infrastructure is likely to drive business for the technology given its time and cost advantages and technical superiority. Patel has grown the inorganic route and acquired the above technologies. It plans to acquire more companies that will equip it with unique pre-qualification skills. If this strategy works well, Patel will not only get a foothold in new territories but also make a head-start in applying new skills to domestic projects. Stable margins Patel's main business of hydropower construction and irrigation projects has yielded superior operating profit margins (OPM) over the years. The current OPM at 13 per cent is superior to peers such as Gammon India , given that the latter have core competency in less lucrative businesses such as road projects. With the company's continuing focus on its core competency, OPMs are likely to remain stable. As of March 2005, only 30 per cent of the hydropower capacity as envisaged by the Tenth Plan has been completed. This leaves immense scope for players such as Patel Engineering and is likely to ensure steady earnings growth. Risks Patel's debt levels are slightly higher than peers, thus posing a risk. The profits, however, adequately cover the interest costs. The current fund raising and repayment are likely to ease the situation. The debt-equity ratio, excluding current liabilities, appears comfortable at less than 2. Patel's revenues are completely dependent on government projects. Any change in policies or a slowdown in spending is likely to affect earnings. While the company remains a frontline player in the hydropower space, competition in the irrigation segment from players such as IVRCL Infrastructures and Nagarjuna Construction is likely to remain a threat. Offer details: The offer closes on May 9. ICICI Securities and Enam Financial Consultants are lead managers to the issue

Halo effect

2006-05-03T18:45:00.000-07:00

One my friends recently joined a brokerage firm. He was good at picking momentum stocks. His boss, however, forced him to concentrate on bringing in new clients. He failed to do so because of lack of experience in marketing. Some time later, a vacancy arose for a higher position in his department. He was overlooked for the position despite having the requisite skill sets. He was told that the position required continual discussion with clients to understand their investment needs. Since he failed to bring in more clients, he was considered unsuitable for the position. You may wonder what the connection is. My friend was a victim of the "devil effect." My friend was obviously bad at marketing. His superiors, therefore, decided that he was equally bad in discussing clients' needs. Thus, just because he was bad at a certain kind of work, he was judged to be bad in other areas as well. That is the devil effect. As investors, we victimise companies by applying the devil effect. Suppose a sugar mill is performing badly because of poor management. There is a good chance that we may conclude that the newly promoted textile company in the group will do badly! The company will, hence, command a low priceearnings multiple. Of course, not all suffer from the "devil effect." Suppose the stock market likes a promoter. Even an unrelated venture floated by that promoter may get a good response from investors. This is because of the "halo effect," the opposite of the devil effect.

Taj GVK: Buy

2006-05-01T19:15:00.000-07:00

An investment can be considered in the stock of Taj GVK. FY06 has been yet another splendid year for the hotel industry and the company has surpassed expectations by more than doubling its profits. The stock now trades at 33 times the FY06 per-share earnings and at about 17 times its likely FY08 per-share earnings. We have maintained a bullish stance on the stock since July 2003, when it traded at an adjusted price of Rs 11. Our buy recommendation is underpinned by Taj GVK's strong presence in Hyderabad, where three of its four properties are located. Hyderabad is likely to remain a key destination for business travellers. More so, as the average room rates in the city remain competitive when compared with those of Bangalore. Venues for meetings and conventions may shift from Bangalore to Hyderabad. The latter is to play host to the 39th AGM of the Asian Development Bank in the first week of May. Such high-profile events may act as a referral point in drawing other such business events and tourists to the city. The international airport is also expected to be operational in 2008, which will boost foreign traffic further. As the city is unlikely to witness any fresh supply until 2008, occupancy rates will remain at high levels, while room rates are likely to head further upwards; the increase may not, however, be as steep as the year gone by. Importantly, hotels in the city may not witness much of a downside to room rates even once fresh supply comes in. With room rates relatively more reasonable, demand is likely to keep pace with the enhanced supply, if not outstrip it. Besides, Taj GVK is adding more than 400 rooms in the city and will be able to maintain its share of the market. Meanwhile, its property at Chandigarh is likely to contribute more significantly to revenues and earnings from FY07. Its property in Chennai will also be commissioned in the last quarter of FY07. An unanticipated slowdown in business traffic and delays in project execution are the risks to our recommendation. Buy with a two-year perspective.

Six types of wealth

2006-04-29T18:41:00.000-07:00

A spiritual master may be the last person you would turn to for tips on money making. Think again. It may seem inappropriate to talk about wealth, immediately after learning about meditation. But that's what His Holiness Sri Sri Ravi Shankar does in Wisdom for the New Millennium, from Jaico (www.jaico books.com). The penultimate chapter of his book is titled `What is meditation?' and the last, `Six types of wealth and four pillars of knowledge.' A spiritual master such as Shankar may be the last person you would turn to for tips on money making. Yet, it helps to pay heed to the Indian guru who is avidly listened to all over the world. For instance, as the founder of the Art of Living (www. artofliving.org), he was in Jaffna earlier this month "to heal the trauma of the victims of the ongoing ethnic conflict in the region." The ultimate knowledge of who you are is very simple. It is the simplest, he writes. "Potentially it is available, but dynamically, practically, it is not available." Reason? Hearing about truth merely creates a concept; to experience it, you need practices that act like signposts, advises the author. He gives a contemporary analogy: "Simply describing the destination of where one is going is not sufficient. You have to be given a road map and directions, where to turn and which exit to take. Otherwise you could be on the freeway all the time not knowing where you have to exit. This could make the journey continuous and never ending. Directions are essential." Four pillars The final chapter discusses `Direction', such as the four pillars. The first is viveka. Though `grossly translated as discrimination' this is more: it is "the understanding or observation that everything is changing." Changes, not only the prices of shares that keep ticking on the screen, but also in your thoughts and emotions. For instance, "You cannot maintain the same degree of sadness every day all the time... You can never be unhappy for the same reason continuously." How does it help to know that everything changes? "The moment you see that things are changing, simultaneously you start seeing that the one who is observing the change is not changing." The reference point of change is non-change, explains the Shankar. An insight that can reduce 99 per cent of misery, he says! The second pillar is vairagya, `dispassion.' Which is not the same as apathy, or being unenthusiastic, depressed, or not being interested in anything. "Dispassion is a lack of feverishness," be it in what you desire, hope or aspire for. Shama to samadhana Then comes the third pillar, which includes the six wealths, viz. shama, dama, uparati, titiksha, shraddha and samadhana. The first wealth, `shama,' means tranquillity of the mind. "When the mind wants to do too many things, it gets completely scattered." With shama, you can focus your mind and be more alert, counsels Shankar. Dama is about having a say over your senses; essential, because many times you don't want to do something, yet you do! With dama, your senses don't drag you; instead, "you will say `yes' or `no' to the senses." The third wealth, titiksha is `endurance or forbearance.' When difficult things come, forbearance allows you to go on without getting completely shaken and shattered, guidesShankar. Opposites such as health-sickness, losses-gains... come and go; armed with titiksha, however, you aren't deterred by whatever happens. "Often, whatever is unpleasant can become pleasant later on. These are the changes that go on in life... The ability to not get carried away by the events, the judgments, is titiksha." The fourth wealth, uparati, means rejoicing in your own nature. How? By not doing things because someone else says or does something, by not labouring hard to win approval, or keeping up with the Joneses. "Being in the present moment, being in the joy that you are, the ability to rejoice in anything that you do, that is uparati." Faith or shraddha is the fifth wealth. "Faith is needed when you have found the limit of your knowing... Your willingness to know the unknown is shraddha." It would be fanaticism to think there is nothing beyond. Absence of faith is doubt ? in yourself, others, or the whole. "Ninety nine per cent of people doubt the whole, because they do not believe that there is a whole that is functioning." The sixth wealth, samadhana, is being at ease, being content. "Being at ease with everything, the whole existence... a great wealth by itself." These six wealths together form the third pillar, he says, before moving on to the fourth pillar, mumukshatva ? "the desire for the highest, a desire for total freedom, for enlightenment." Revelatory read.

2006-04-28T18:15:00.000-07:00

The focus on housing for the middle-income group is likely to yield steady returns for Apr 21, 05 Apr 21, 06 D.S. Kulkarni over the next three year Earnings although likely to be cyclical on a year-to year basis may see growth over the long term on the back of increased real estate development activity in the country. Rs 555 crore of projects to be executedHousing projects for middle-income group to drive volumesEntry into Tier-II cities may accelerate revenue growth. Shareholders of D. S. Kulkarni Developers can apply to the company's rights offer. The offer price of Rs 110 is at a significant discount to the current market price. D. S. Kulkarni is a small player in the realty space. While the company is yet to cash in fully on the demand for office space in IT and IT-enabled services, we expect its focus on housing for the middle-income group to yield steady returns over the next three years. Earnings although likely to be cyclical on a year-to year basis, may see growth over the long term on the back of increased real estate development activity in the country. Investors willing to take exposures in a business that is at a nascent stage in the listed space, with high risk-reward attributes may apply at cut-off; complex structuring of transactions could also lead to a valuation discount though we expect this negative to largely disappear over the next few years. The stage has just opened for unlisted players of the likes of DLF to make an entry in to the capital market. Investors who are willing to take the risks that come with an early entry in this space may invest with a long-term perspective. D. S. Kulkarni is in the business of developing residential and commercial buildings. It derives a majority of revenues from the housing space. The company operates in Mumbai, Pune and has recently-entered Bangalore. It also plans to expand to other cities such as Kolkata and Hyderabad and Tier-II cities, such as Nagpur and Kolhapur. The proceeds of the offer will be utilised for existing and new projects. The composite offer of rights and public offer will double the equity base to Rs 22 crore. Increase in volumes D. S. Kulkarni has about Rs 555 crore of projects lined up over 2006-09 after witnessing lacklustre growth in revenues in the past. At the current market price, the stock trades at about 40 times its expected FY07 earnings. This valuation look steep compared to peers such as MSK Projects, but is not out of sync with valuations enjoyed by the likes of Unitech or Mahindra Gesco. The ability of the company to complete the projects on time and conversion into revenues will remain the key to earnings growth. D. S. Kulkarni's vast experience in the housing space is a positive and inspires confidence on its capability to translate the projects to revenues. Operating profit margins have grown over 2004 and 2005. The sharp increase can be attributed to firming up of realty prices in Mumbai and Pune. The opening up of additional supply of land as a result of verdict in the NTC Mills case is unlikely to affect prices of housing projects for D. S. Kulkarni, as it caters mainly to the middle-income group in Pune where valuation metrics are different from the up market projects likely to come up in the mill land. Going forward we expect this segment to enable volume growth as first-time buyers of homes are bound to surge with increase in the number of double income generating couple. Development of IT/ITES in Pune is also likely to add to the demand for housing units in the region. The entry into Bangalore, although a bit late, may still pay off, as housing demand continues to remain firm in Bangalore. D. S. Kulkarni has so far overcome the handicap of the Maharashtra Urban Land Ceiling Act by procuring land through associate companies and developing them. A repeal in the Act may see the company own a rich land bank directly, instead of routing transactions through associates. Risks Delay in conversion of completed tenements into revenues is a key risk to the earnings. The administrative issues related to procurement of land especially in Maharashtra continues to delay projects. D. S. Kulkarni's debt-equity ratio at close to 2 is slightly on the higher side. Any delay in cash flows may affect debt servicing. Offer details: A. K. Capital Services is the lead manger to this composite issue. The public offer is open from April 25 to May 3 and the rights offer closes on April 29.

Profitable acquaintance

2006-04-28T18:13:00.000-07:00

A friend recently quit as the head of the financial services practice of a US-based software company. He was obviously concerned because he did not have another job on hand. That was a month ago. He recently got a well-paying job with another US-based company. Interestingly, he landed this job through an acquaintance that he had met three years ago at the Disney Amusement Park. His friends, though well networked, were unable to find him a suitable job. If you are a student of economics, this would not surprise you. Research conducted by sociologists suggests that your chances of getting a job through an acquaintance are far greater than getting one through a friend! Why? Suppose you have a network of ten close friends. It is more likely that their world will be no different from yours. That is, they may know the same management consultants or may be aware of the same vacancies in the same companies as you do. Your acquaintances, on the other hand, are more likely to have a network that is vastly different from yours. And that is why acquaintances can be of more help to you than your close friends! Mark Granovetter, a sociologist who wrote the classic book titled Getting a Job, coined a nice phrase to capture this paradox. He called it "the strength of the weak ties." The basic argument is that to move ahead, it is better to know more people to whom you are not close to. An equity trader I know uses similar logic to improve his returns. He pays more attention to the market tips that he receives from acquaintances!

Trading Tips

2006-04-28T18:10:00.000-07:00

Never try to fight a trend by taking positions against the prevailing trend. Though it may be always tempting to buy a stock that is falling with an intention to lower the average cost of acquisition, such a practice should be avoided. This will be tantamount to throwing good money after bad. Always have a stop-loss and an exit price clearly defined before making a trading decision. There are several methods to arrive at stop-loss levels. If you are unable to identify a logical or reliable stop-loss level, use a fixed money-based stop method, which fits into your psychological comfort zone. Never hold on to a trading or investment position that has moved past your psychological zone of comfort. If you are not disciplined to cut positions on the breach of stop-loss, it could turn out to be a psychologically arduous task to cut those loss-making positions when prices keep moving against you. Always take care of your losses and profit would take care of themselves. Periodical profit-booking and re-entry on fresh "buy" triggers are crucial aspects of success in stock market investing. There is nothing wrong or inconsistent in buying a stock at slightly higher levels after having booked profit earlier. Keep track of stocks you find are in a long-term upward trend and take positions on fresh "buy" triggers. The key aspect is to ensure that the long-term trend is intact and there is a valid reason to take fresh exposures. Even after the stop-loss is hit, investors should not ignore the stock they have been tracking. It may well turn out that the stock could reverse trend and get back to the target zone envisaged earlier. The stop-loss might have been hit owing to either an incorrect stop loss or a change in the short-term trend. The stock price may reverse at lower levels and manage to move to the earlier determined target zone.

Beer, cheer and stocks

2006-04-21T18:54:00.000-07:00

Consider this: You visit an export garment shop. You find a branded shirt for Rs 500. The same shirt costs Rs 750 at the brand's retail store. Yet, you may not hesitate to buy the shirt at the branded store. My friend and I were witness to such an incident recently, where a prospective buyer said that he would rather pay a higher price and buy the shirt from the branded store. If you decide to buy a product, you should prefer the shop where the price is lower. So, why do we behave differently? The reason is that it also matters from where we buy a product. Richard Thaler, a well-known behavioural economist with the University of Chicago's Graduate School of Business, conducted a study called "Beer on the beach" to assess such behavioural patterns. He found that people were willing to pay a price that was higher for a beer bought from a fancy resort hotel on the beach compared to the same beer sourced from a small grocery shop. Such behaviour also applies to the way we buy stocks! Meir Statman, a pioneer in the field of behavioural finance, attributes this to sentiment or what he calls as the value-expressive characteristic. That is, we may be willing to pay a higher price for a stock for the pleasure of owning it. Perhaps, that is why Wipro and Infosys command a higher price-earnings multiple compared with their peers in the industry.

The Infy beacon for the market

2006-04-21T18:51:00.000-07:00

While Infosys has come out with an earnings guidance that betters market expectations, a host of industry-wide variables will shape stock market perception over this week. The management guidance offered by Infosys Technologies in April every year has been a beacon for the stock market. After the turbulent swaying of the market the past week, the guidance should be a sort of lighthouse for investor perception when the bourses open on Monday. Pitching revenue and earnings 29 per cent and 27 per cent higher respectively for 2006-07, Infosys has set a positive tone to the proceedings. Over the past five years, this is the best guidance offered by the company and is broadly higher than market expectations. Analysts and industry observers are likely to remain divided over the probable impact of this guidance. Those impressed by the guidance may to seek to quickly re-rate the entire sector. But many others may want to to `wait and watch' till other players, such as Tata Consultancy Services, Wipro and Satyam, make their earnings announcements this week. And in a liquidity driven market, this tug of war between market participants will play out over this week. While the Infosys management guidance is strong, it has to be viewed through the prism of four key variables: The demand environment: The Infosys management has indicated that the overall IT spending is likely to remain buoyant and, in particular, the offshoring part of the pie is set to grow further. It also anticipates the pace of discretionary spends on various service offerings to accelerate during the year. Though encouraging, it remains to be seen whether the margin of surprise on the upside will prove to be as strong as expected. In any case, it is clear that a possible upward revision in guidance will be a measured one through the year, unlike the sharp change of revision seen in 2004-05, when both the revenue and earnings guidance were pushed up by 16 percentage points by the first quarter of the year. The multinational brigade: The multinationals have been seized of the offshoring threat for over a year and are getting their act together. In particular, IBM and Accenture have made substantial progress on this front and if EDS manages to secure a majority stake in MphasiS, this could be the year when the full force of their offshore strategy plays out in a maturing application development and maintenance market. The serious intent is fairly obvious from the fact that IBM's CEO is holding the next investor conference in Bangalore in early June to showcase the Asian growth story. The value chain: As Infosys progresses up the software value-chain and builds on its substantially higher revenue base of $2 billion, it is likely to face a host of competitive pressures from its domestic frontline peers. HCL Technologies is slowly carving out a niche for itself in the remote infrastructure management space, with a flurry of multi-year deals. Satyam is proving to be a force in enterprise solutions, where it can take on Infosys in practically every deal that matters. And Wipro, through organic and inorganic moves, is enhancing its presence in the R&D and product engineering space. As increasing number of mega deals cornered by the Big Six come up for re-negotiation or are unbundled to the best of breed players, the competition will be far more intense than in the past. The upside in billing: This could be a closely-watched variable for the next couple of quarters. Despite robust volume growth, Infosys (and other frontline companies) has been able to increase prices only for new clients. For the past six-eight quarters, billing rates from existing clients have remained largely flat. Unless these rates begin to look up, the flexibility and comfort that Infosys derives from its multiple levers of growth, such as employee utilisation, offshore-onsite mix, lower selling, general and administrative costs, and changes in business mix, will be limited.

Titan Industries: Invest in RIGHTS ISSUE

2006-04-18T18:28:00.000-07:00

Enhancing profile with a series of high-end products, an expanding retail network Steep discount to market price for the equity component, attractive interest rate for the non-convertible security and promising business outlook make it a rights offer to watch. Expanding retail presenceGaining strength in jewelleryWidening range in higherend watchesMaking a mark in precision productsScaling up manufacturing facility Shareholders can participate in the rights issue of partly convertible debentures of Titan Industries priced at Rs 600 per share. They will be entitled to one share of Rs 350 each for every 20 shares held and a debenture carrying an interest rate of 6.75 per cent per annum, redeemable after five years. At a ratio of one to 20, subscribing to the rights issue may not give a great averaging benefit. However, an additional investment of Rs 600 does give a good return, considering the current market price of Rs 750 for the stock and a reasonably attractive interest rate for a convertible bond. Moreover, Titan's growth plans will not lead to any significant expansion in equity. Retail play At Rs 750, the Titan stock now enjoys a premium valuation of 65 times its annualised FY-06 per share earnings. Being perceived as a retail play, the stock commands valuations equivalent to a few of the listed retailers such as Shoppers' Stop and Pantaloon Retail. The timely implementation of the project will lead to a substantial expansion in Titan's retail presence and allow it to capitalise on the growth prospects for the jewellery and precision engineering segments. We believe the retail story is still at a nascent stage and holds substantial potential for growth. Titan plans to expand its retail stores big time in the upcoming malls in the next couple of years. Quite a few stores are coming up in the National Capital Region (NCR) region, where the capacity to spend is high. Titan is also opening up stores in tier-two cities such as Jaipur, Ahmedabad and Mysore. The expansion will predominantly be for watches, the bottomline driver. The company plans to open 86 company-managed stores, of which 82 will be for watches. Titan has been concentrating on the middle range segment for watches for the last couple of years and has been successful. New ranges such as Fastrack or the Steel collection of watches at higher price points have improved the realisation level per watch. Also, the introduction of Tommy Hilfiger range has given it a share of the high-end segment too. A presence across price points and a good brand recall could give it an advantage as the retail story unfolds. Bright prospects The jewellery division has been on a consistent growth path and the bottomline too has been growing at a healthy rate. Having established a brand name, Titan is in a much better position to take advantage of the shift in trend towards branded jewellery. A number of players are now entering the retail jewellery segment. However, Titan's first-mover advantage and a strong brand recall may help it get a better share of the growing market. The precision engineering segment caters to the automobile and aerospace segment, which holds immense potential, as export opportunities are promising. Titan's plans to upgrade from a pure component manufacturer to making sub assemblies could give it better margins. Offer details: Titan Industries plans to issue 21.13 lakh partly convertible debentures of Rs 600 each on a rights basis in the ratio of one PCD for every 20 equity shares held. The PCD will be convertible into one equity share of Rs 350 and one secured redeemable debenture of Rs 250 each, redeemable after five years. The redeemable debenture will carry an interest of 6.75 per cent per annum. Titan plans to use the proceeds of the offer to fund the expansion of its retail outlets, refurbish its watch-making facility and ramp up manufacturing capacities for its precision engineering components and jewellery. JM Morgan Stanley is the lead manager to the offer. The offer closes on April 24, 2006.

Gujarat Ambuja Cements: Reject

2006-04-18T18:24:00.000-07:00

There are significant advantages in remaining invested in Gujarat Ambuja Cements. Primary is the likely consolidation of Holcim's India operations under one umbrella. Shareholders of Gujarat Ambuja Cements may avoid the open offer made by the Holcim group of Switzerland. At Rs 90.64, the offer price is well below the market price. Even otherwise, there is a strong case for retaining exposure. The open offer is for 20 per cent of the equity. The Holcim group had acquired a 14.8 per stake from the promoters of the company; the promoter group now holds less than 9 per cent of the equity and it may possibly participate in the open offer. This is the only way by which Holcim's stake can rise beyond 20 per cent. In any case, its targeted stake of about 35 per cent is unlikely to be attained. There is the possibility of Holcim resorting to secondary market purchases to shore up its holding. FAST-TRACK MERGER We do, however, expect Holcim to fast-track the merger of its various affiliates in India. For instance, the merger of Gujarat Ambuja Cement and Ambuja Cement India ? its assets include a 35 per cent stake in ACC and in excess of 95 per cent in Ambuja Cement Eastern. Holcim and Gujarat Ambuja jointly own this company. As Holcim has a 67 per cent stake in Ambuja Cement India, a merger could step up its shareholding in Gujarat Ambuja by a few percentage points. A more keenly awaited merger will be the one with ACC. We expect this merger to take place within a year; the more likely course is an earlier completion of the process. Unlike the Gujarat Ambuja group, which steered clear of a merger with ACC to protect the quality and value of its vastly superior cement properties, Holcim has no specific interest in retaining the existing ownership structure. A merger may also raise Holcim's stake and fast-track the payback for its big-ticket investments in India. The synergy, the cost benefits and the financial clout that a merger will provide could be significant. This combine is well placed to grow its business through acquisitions as well as disciplined capacity creation. Given its capacity of close to 35 million tonnes, it is unlikely to face any threat to its leadership position either from Grasim or MNC aspirants. If the merger process is initiated, we also expect swap ratio to be done in a manner that will be fair to shareholders. Life sans merger Even if the merger process does not take place in the timeline anticipated by us, remaining invested in Gujarat Ambuja will be a paying proposition. Given the healthy trends in demand growth, superior pricing power in the hands of producers due to the tightening of the demand-supply balance across the country, likelihood of cement prices settling at higher average levels and top-of-the-charts operating efficiency, there will be gains linked to fundamentals. We expect the ACC-Gujarat Ambuja combine to be one of the more preferred plays in the cement space. The principal risk to our recommendation is a slump in the stock price to less than Rs 90 due to extraneous factors or a sudden deterioration in industry dynamics; the risks of such a trend is low. We will view any major weakness as a buying opportunity. The open offer, which opened on April 5, closes on April 24. DSP Merrill Lynch is the manager to the offer. The open offer document is available on the SEBI web site (www.sebi.gov.in).

Four investment pitfalls and jackpots to match :BOOK REVIEW

2006-04-16T03:21:00.000-07:00

"The overall market will offer poor returns," and, dangerously, "some segments will suffer devastating losses." Stephen Leeb's recent book The Coming Economic Collapse was featured in the E-Dimension column last week (`Oily skid is just dangerously around the corner,' Business Line, April 8). You may fret that exploration for newer oil sources, costly wars and fuel taxes aren't areas where lesser mortals have much say. Yet, you can pay attention to making money even if oil were to soar beyond $200 per barrel, with Leeb's help. For, as chapter 13 declares, `Your personal choice: Insane wealth or pitiful poverty.' As individuals we can take steps to safeguard our financial situation during hard times, assures the author. "Certain types of investments will benefit tremendously from inflation and produce phenomenal returns. The small percentage of investors who adjust their portfolio now to favour these investments ? while reducing exposure to the most vulnerable sectors ? are likely to become insanely wealthy." The next 10 years will be very much similar to the 1970s, predicts Leeb. Those were the days when making money was difficult, in the face of runaway prices and failing investments. The first pitfall is cash, because inflation will erode the value of money. Including what you hold in savings bank, where interest rate is lower than inflation rate. Next pitfall is bond, because as inflation rises, bond price falls. "The trick to remember about bonds is that price and yield are like two ends of teeter-totter." Thus, when you want to sell your bond, "the purchaser will want compensation for the increase in inflation." A tip from the author is TIPS (Treasury Inflation-Protected Securities), as the one bond worth holding. Is there something similar closer home? Biggest trap! Third pitfall is stocks, `the biggest and most dangerous trap.' How? "Because of the tremendous gain stocks made during the 1990s, most people have come to regard the stock market as the best, or possibly the only, investment vehicle. Most investors today put too much faith and money into a diversified portfolio of stocks." Resist such groupthink, exhorts the author. Pray, why? When inflation rages on, "Only certain segments of the stock market will do well." On the contrary, "the overall market will offer poor returns." And dangerously, "some segments will suffer devastating losses." The author's first recommendation for the near future, therefore, is to forget about diversifying among all sectors. "Stay away from index funds, large-cap funds, and any other vehicle that mirrors the broad market. They will only bring you closer to the poorhouse." Vulnerable US stocks today, according to the author are Avon (cosmetics), Kellogg (food), and Wal-Mart (retail). More vulnerable are airlines and chemical producers "whose revenues and profits are inversely related to energy prices." Pitfall # 4 is small-cap.. Leeb reasons that small companies can't grow their earnings rapidly unless they access the world's fastest-growing consumer markets of Chindia (that is, China and India). Looks like Indian companies may end up fighting only with the multinational giants, because the smaller-cap companies of the developed countries may continue to depend on their own mature and slower-growing economies. Gold, oil and real-estate There are four investment jackpots that the book mentions, to help you make money in the coming collapse. These are: Gold and gold shares; oil and oil shares; real-estate; and Chindia. "Gold is the quintessential inflation hedge," explains the author. `Golden opportunity' is the promise of acceleration in the yellow metal's bull phase. "Increasingly, financial advisers will recommend that their clients put 5 per cent to 10 per cent of their savings into inflation hedges, such as gold and other precious metals. That buying pressure will force the price of gold higher rapidly." Since at the peak of gold prices, in 1980, "all the gold in the world both above and below ground (approximately 200,000 tonnes) was worth about $5.5 trillion, equivalent to around five times the value of S&P 500 at that time," Leeb calculates that today's value of gold should be $2,800 "to be on par with its value to stocks in 1980." Far below the 25-year high of $604 an ounce that gold touched on Tuesday! The final chapter in the book is on `the next hot investment sector'. Hey, what's that? Catch up with Leeb!

Plethico Pharmaceuticals: Invest at cut-off

2006-04-16T03:16:00.000-07:00

Track record of healthy profitability and an established presence in export markets with a product profile that is unlikely to be hurt by legal challenges make this offer attractive. Invest with a one/two-year perspective. EXPORT PLAY... Mr Shashikant Patel, CMD, and Mr Chirag Patel, Director & CEO. Plethico Pharmaceuticals holds promise of emerging as a strong small-size company in the healthcare segment. Its track record has been fairly good over the past five years with steady growth in revenues and earnings. The company has also been on an investment mode, adding to its capacity and venturing into overseas markets with equity-stake acquisitions over the past two years. Business focus The company may not be present in the highly regulated and lucrative markets of the US and European Union; as a matter of strategy, it has pursued less-regulated markets in the CIS universe (a few of the countries carved out of the erstwhile Soviet Union), Africa and Asia. It intends to keep the business focus this way. Even an established and demonstrably profitable presence in such geographies with products less vulnerable to legal and cyclical risks may not fetch Plethico a fancy valuation of the kind enjoyed by the frontline players. What is, however, likely from such a presence is a steady growth in revenues and earnings. This could attract investors, as the scope for negative surprises is minimal. Plethico Pharma is offering its shares in a narrow price band of Rs 280-300. Based on the likely FY-06 profits (the company now follows an October-September financial year), the IPO is offered at a price-earnings multiple of about 10-12 times, depending on the final pricing. Even if it commands a valuation in the lower-to-mid-teens, there is likely to be scope for gains linked to fundamentals over a one/two-year period. Plethico Pharma derives about 65 per cent of revenues from exports. A large proportion of its domestic revenues is from contract manufacturing; a few OTC products (including herbals/nutrition supplements) have also chipped in to make a modest contribution, but growth from this category is likely to be robust, albeit on a low base for the next few years. Plethico exited the domestic formulations space about 18 months ago and focussed on exports. As a result of this move, the revenues from domestic markets now account for 35 per cent compared to about 85 per cent three years ago. Plethico has, however, not taken its eye off the domestic market . As it has a non-compete agreement for four years, it has indicated that it may venture into the domestic market in a bigger way, once this period is over. Plethico derives a substantial proportion of revenues from antibiotics, anti-virals and anti-malarial/TB products. It has a marginal presence in the high-growth lifestyle therapeutic segments such anti-diabetes, cardiovascular and oncology, to name a few. It has indicated its intent to pursue the acquisition route to gain a more significant presence across a range of therapeutic segments. Given the modest outlay earmarked for this purpose, we are sceptical of the earnings impact of any such acquisition. Revenues from the export market are likely to remain the key driver of profitability over the next three to five years. The extent to which its investments, especially in the CIS countries, make incremental payoffs will have a critical bearing on key profitability parameters. Planned foray A substantial scaling up of capacities across product categories and delivery forms is being planned from the proceeds of the offer. If the company adheres to the implementation plan indicated in the offer document, these facilities should start contributing to revenues from FY-08. The full impact of the planned investments may be reflected in revenues and earnings only from FY-09 onwards. In the intervening period, the earnings growth from existing facilities is likely to more than adequately compensate for the 12-15 per cent expansion in equity that is imminent.] Key risks The principal risks to our recommendation are: The sharp spurt in the level of receivables as well as the credit periods are likely to impose strain on cash flows and profitability. There will be concerns about the quality of revenue growth till such time it is clear that such liberal terms are necessary to grow the revenues Plethico has invested about Rs 125 crore over the past two-and-half years to pick equity stakes in a pharmaceutical company that has outfits in several CIS countries. The investment process is not complete in the sense the ownership is still to vest with Plethico Plethico is also embroiled in a legal spat with a domestic company to which it had sold its formulations business; it has been accused of acting in a manner that runs counter to the terms of the deal. If the verdict goes against Plethico, there may one-time charges that could have a significant bearing on earnings. We will track news flow on this closely. Offer details: Plethico Pharmaceuticals plans to raise Rs 110 crore through this book built offer. The equity will expand by 12-15 per cent based on the final pricing. Plethico now has an equity base of Rs 30.4 crore. Anand Rathi Securities is the book running lead manager. The offer, which opened on April 10, closes on April 17.

Reliance Petroleum: A high-octane offer

2006-04-15T06:25:00.000-07:00

Reliance Industries' Jamnagar refinery. Reliance Petroleum will seek to replicate the success of its parent. The project is designed to capitalise on the twin aspects of rising demand in the West for high quality fuels that meet stringent emission standards and the widening price gulf between heavy and light crude oils. This public offer of equity shares by Reliance Petroleum Ltd (RPL), the group's first visit to the primary market in the last 12 years, can be considered favourably for investment. The project is well-planned and backed by good reasoning, and the group's experience of commissioning and running the large capacity, state-of-the-art refinery at Jamnagar is a big positive. The biggest risk to our recommendation would be a delay in commissioning the refinery by the set deadline of December 2008 as time-to-market will be critical for this export-oriented project. Multinational competitors are already talking about the same opportunity that RPL has spotted and it is only a question of time before they embark on similar projects to supply high-quality fuel to the American and European markets. RPL is a 80-per cent subsidiary of Reliance Industries and given the track record of the group in merging subsidiaries with itself, a similar action in the case of RPL some time in the future cannot be ruled out, especially because the two companies are in similar businesses. Investors should also note that performance-linked appreciation in the stock is more than three years away and an investment now should necessarily be with a long-term perspective. Our recommendation is not linked to possible speculative gains on listing. WHY ANOTHER MEGA REFINERY? Mr Mukesh Ambani.Thinking big, again. The new 29-million-tonne (5,80,000 barrels-a-day) refinery will be housed in a special economic zone adjacent to the existing refinery of Reliance Industries and supply exclusively to the export market, specifically the United States and Europe. It will be a technologically advanced refinery, more advanced than the existing one, and will be capable of processing the heaviest and sourest of crude oils to produce high quality refined products. The associated feature of the project will be a polypropylene plant of 9 lakh tonnes. The entire project, designed to capitalise on the twin aspects of increasing demand in the West for high quality products that meet stringent emission standards and the widening gulf between the global prices of heavy and light crude oils, rests on two major pillars. First, the best quality crude oils have already been discovered and tapped. These crude oil grades trade at high premium in the world market and are low on sulphur and light in density. The newer crude oil finds and hence, future output, would be of lower grades that are high on sulphur (sour) and heavy in density. Most of the existing refineries worldwide that were set up in the latter part of the last century are designed to process high quality crude oil grades. To process the heavy, sour crude grades that are now increasingly floating in the market, these existing refineries have to invest in upgrading their secondary processing and conversion capabilities. There is a place for new refineries that are complex enough to process the so-called "dirty" crude oils and yet produce the highest quality petrol and diesel to meet the stringent emission norms that are constantly evolving. And that brings us to the second pillar. Quality norms for transportation fuels in the US are set to become more stringent with ultra-low sulphur diesel and petrol free of MTBE (methyl tertiary butyl ether, a carcinogen), which the old refineries are not capable of producing. This opens up an opportunity for those willing to invest in new facilities designed to make products capable of meeting the advanced norms. Europe and large markets in Asia such as Korea, Japan and China are following suit with similar norms. SEIZING OPPORTUNITY The combination of refineries that can process low-grade crude to produce high-grade products is the window of opportunity (read accompanying story) that RPL is seeking to exploit. Of course, it does help that the gap between product demand and refining capacity worldwide is narrowing and refinery utilisation rates are running at their highest levels in the last two decades. Demand could outstrip refining capacity in the next few years as tightening product norms lead to shutdown of old refineries that cannot match the new requirements. But how are the margins? PROFITABILITY EQUATION This is the interesting part of the entire business. Heavy and sour crude oil grades trade at a sharp discount to the superior light and sweet variety and this gulf has been widening the last couple of years. In 2005 the price differential between the Arab Light and Arab Heavy grades, for instance, was as high as $5 a barrel. Gross refining margin, that is the difference between the total value of finished products and the cost of the crude oil, can be lucrative where a refinery has the capacity to use the cheaper low-grade crude oil to produce the superior-grade products that sell at a premium. This is exactly what RPL is endeavouring to do. The product slate of RPL's refinery will be tilted more in favour of high-margin, in-demand products such as petrol, diesel, kerosene, alkylates (high-octane additive to gasoline that commands a premium in the market) and petroleum coke. CAPITAL INCENTIVES The only catch here is that the capital costs of setting up such a high-complexity refinery is higher than a normal one. Compared to a capital cost of $24/barrel/day for the existing refinery of Reliance Industries, the new one of RPL is expected to cost $28/barrel/day. This is where the benefits of being located in a special economic zone (SEZ) kick in. The project will be entitled to duty-free imports of capital equipment and crude oil; it will be exempt from duties on exports of products; from excise duty on products purchased from within the country; from service tax on taxable services rendered to it by others and, finally, from all stamp duties on land transactions and loan agreements. In addition to the above, 100 per cent of profits derived from exports will not be subject to income tax in the first five years and this will fall to 50 per cent in the next five. These benefits, put together, will go a long way in boosting the refining margins and reducing the capital cost for RPL's project. WHY A SEPARATE COMPANY? The main reason for implementing the project through a separate subsidiary company appears to be its location in a SEZ. The different business model of the company, catering as it does to a predominantly export market, and the opportunity for unlocking value through a separate vehicle and give an opportunity for investors to participate in it, are put out as other reasons for implementing the project through a new company. From the perspective of a Reliance Industries shareholder, it is good that the project is not on its books for the simple reason of its size and quantum of investment. Though Reliance Industries will still be investing Rs 8,280 crore to acquire 80 per cent of RPL's equity, the debt of Rs 15,750 crore will not be on its balance-sheet. Importantly, the risks associated with setting up and commissioning a Rs 27,000-crore project will not weigh down on the balance-sheet or the stock price of Reliance Industries. OFFER DETAILS In all, 135 crore shares will be on offer of which 45 crore shares are available for retail investors. The price band will be between Rs 57 and Rs 62 and retail investors have the option of paying Rs 16 per share on application. The offer is open from April 13-20.

What makes the Nobel economists tick?

2006-03-27T17:55:00.000-08:00

"The lesson that some of the most illustrious figures of modern economics are human after all." What is next best to winning a Nobel Prize? Reading about the ones who made it! So, here is the fourth edition of, Lives of the Laureates, edited by William Breit & Barry T. Hirsch, from Academic Foundation (www.academicundation.com). The book brings together autobiographical essays by 18 Nobel economists. These are from presentations as part of `a continuing lecture series at Trinity College in San Antonio,' where the laureates spoke to lay audiences on `My Evolution as an Economist'. Intro speaks of `an important side benefit of the lecture series'? "the lesson that some of the most illustrious figures of modern economics are human after all." Quotable quotes Begin with W. Arthur Lewis, who won the Nobel Prize in 1979. "I had never intended to be an economist. My mother taught us to make the best of what we have, and that is what I have tried to do," he narrates. "My mother was unsurpassed in the ways of stretching income, and this, combined with loving care, was what enabled her to bring up five sons, who were all minors when she was widowed," reminisces Lewis. "It was psychologically difficult to grow up during the depression," says Lawrence R. Klein. He won the Nobel in 1980 "for the creation of econometric models and the application to the analysis of economic fluctuations and economic policies," as http://nobelprize.org informs. "But I was blessed with something else, that just happened. I was carrying around in my head the feeling that mathematics could be used in the analysis of economic problems." Kenneth J. Arrow, who shared the 1972 Nobel with John R. Hicks, for "pioneering contributions to general economic equilibrium theory and welfare theory," recounts how his family was `very poor for about ten years' after losing everything in the Great Depression. "I was an omnivorous reader, and I added to that a desire to systematise my understanding," says Arrow. Thus, history, for him, "was not merely a set of dates and colourful stories," but "a sequence in which one event flowed out of another." Next is the essay by Paul A. Samuelson, the 1970 Nobel laureate. "I made a deal of money in the late 1940s on the bull side," he informs, and then advocates Samuelson's Law thus: "Always look back. "You may learn something from your residuals. Usually one's forecasts are not so good as one remembers them; the difference may be instructive." Milton Friedman, the 1976 laureate, wonders at "the role that pure chance plays in determining our life history." He cites lines from Robert Frost: "Two roads diverged in a yellow wood, / And sorry I could not travel both I took the one less travelled by, / And that has made all the difference." George J. Stigler, who won the 1982 Nobel "for his seminal studies of industrial structures, functioning of markets and causes and effects of public regulation" divides new economic ideas into two classes: "Those that arise out of the critical examination of the ideas of other economists, and those that seek directly to explain some body of empirical phenomena." After narrating his story, he cautions, "A knowledge of the life of a scholar is more often a source of misunderstanding than of enlightenment about his work." Next is James Tobin, the winner of 1981 Nobel "for his analysis of financial markets and their relations to expenditure decisions, employment, production and prices." He fondly remembers how his professors left the education mostly to the students. "They expected us to teach ourselves and learn from each other, and we did. They treated us as adult partners in scholarly endeavour, not as apprentices." In contrast, today's graduate programmes "try too hard to convey a definite and vast body of material and to test how well students master what we know." The oldest profession Franco Modigliani won the 1985 Nobel "for his pioneering analyses of saving and of financial markets." Economics is the oldest profession in the world, he claims. To substantiate, he narrates a story of how an engineer, an economist, and a surgeon each claimed that his profession was the oldest. "The surgeon spoke first and said, `Remember at the beginning when God took a rib out of Adam and made Eve? Who do you think did that? Obviously, a surgeon.' The engineer, however, was undaunted by all this and said, `Just a moment. You remember that God made the world before that. He separated the land from the sea. Who do you think did that except an engineer?' `Just a moment,' protested the economist, `Before God made the world, what was there? Chaos. Who do you think was responsible for that?'" Prize addition to your book-shelf.

Asian Paints: Buy

2006-03-27T17:33:00.000-08:00

With the demand environment continuing to be conducive, Asian Paints is well placed to capitalise on the rising opportunities. Our bullish stance is underpinned by the continuing buoyant demand. FOCUS ON the decorative segment is a positive given the buoyant demand for housing. Investments can be considered in the stock of Asian Paints, the leading player in the decoratives space, at the current price of Rs 670. Though it has almost doubled since our previous `buy' recommendation in March last, the stock does not appear to have run out of steam, yet. Our bullish stance is underpinned by the continuing buoyant demand for housing and the positive developments in the infrastructure and the auto sectors. Announcements in the latest Budget also have triggers that are marginally positive for the industry. One pertains to the reduction of peak import duty by 2.5 percentage points to 12.5 per cent that should lower material costs, as a significant portion of inputs are imported. The other concerns the reduction of excise duty on small cars, which by providing a fillip to the auto industry, will indirectly rub off positively on auto paint manufacturers. Prospects Though the bulk of Asian Paints' revenues flow from the decorative segment, its joint venture for auto paints (Asian Paints PPG) and the industrial paints division are exhibiting strong growth. Coupled with rapid activity in the construction sector, we believe Asian Paints is in a demand sweet spot that it is well equipped to take advantage of. Though the performance in Q3 FY-06 may have belied street expectations on account of the extended monsoon playing spoilsport, we view such an event as a one-off occurrence and believe that the long-term structural story is intact. Further, the inherent strength in demand confers on Asian Paints the ability to pass on price increases to the consumer, should there be a hardening of input costs. At the current price, the stock trades at 23 times its expected per-share earnings for FY-07. Reiterate buy.

Tantia Constructions: Invest at cut-off

2006-03-25T19:16:00.000-08:00

ALL SET to capitalise on the infrastructure boom Joint ventures with companies such as IVRCL Infrastructures are likely to enhance visibility and technical qualification. INVESTORS with a penchant for risk can consider investing in the public offer of infrastructure player Tantia Constructions. At the price band of Rs 45-50, the company's share will trade at 12-14 times its expected FY-06 earnings on a fully diluted basis. The price-earnings multiple is at a discount to that of similar-size players such as Valecha Engineering and MSK Projects. A strong order-book, a diversified business profile and strategic joint ventures offer visibility to Tantia's earnings growth. A rise in raw material costs and execution capability are the key risks to the offer. Profile Tantia Constructions builds highways, bridges, railroads and airports. It also develops townships, ports and is into power transmission. The company's shares are listed on the Calcutta and Delhi Stock Exchanges. The company plans to list the existing and new shares offered at the Bombay Stock Exchange. It plans to raise about Rs 10 crore through the offer, the proceeds of which will be used to procure capital equipment needed for construction work, meet long-term working-capital requirements and repay unsecured loans. Diversified order-book At Rs 817 crore, Tantia Constructions' orders on hand are nine times its FY-05 revenues. This order-book position indicates revenue growth for the next couple of years despite a flat trend over the past three years. The order composition is well-diversified over various segments such as roads, rail and urban development projects. This is likely to mitigate the risk of slowdown in revenues from any segment. Strong footing Tantia Constructions is a Kolkata-based company with a strong presence in the eastern parts of India such as Assam and Mizoram. These areas are relatively less penetrated in terms of infrastructure development and hold potential for more business. The Budget has also increased allocation for the eastern region. With a presence in these areas, the company holds an edge over its peers for future projects. At the same time, the political risks associated with execution of projects are also quite high. Tantia Constructions has experience in railway infrastructure; 29 per cent of its orders are from this segment. This business profile is slightly varied from a majority of listed construction companies thus placing the company in a better position to bag projects in the space. Tantia Constructions has joint venture contracts with companies such as IVRCL Infrastructures and Subhash Projects, and this is likely to improve its recognition and technical qualification for future projects. Financials The operating profit margin (OPM) has been above the 9 per cent-mark for the past three years. For the nine months ended December 2005, the OPM stood at 13.8 per cent. Any entry into the public private partnership model, especially for roads, may see the OPM decline slightly. It is, however, likely to remain above the industry average, given the diversified revenue sources. The company has traditionally been highly geared. This situation is likely to ease, as the equity expansion would bring the debt-equity ratio to 1.3. Risks A rise in raw material prices is likely to have a high impact on smaller construction companies such as Tantia Constructions, which cannot command escalation clauses in all contracts. This is likely to hit the bottomline. High order-book for a small player adds the risk of executing projects on time. Any delay in order-book conversion can dent revenue growth. Tantia Constructions is a smaller player compared to frontline infrastructure companies such as Hindustan Construction or Nagarjuna Construction and the company's stock faces the possibility of higher volatility in the event of a market downturn. The modest pricing for this offer is the key attraction. The listing on the BSE may also result in better price discovery. Offer details: The public offer is open from March 27-31. Microsec Capital is the lead manger to the issue.

Aban Loyd Chiles Offshore: Buy

2006-03-23T18:07:00.000-08:00

Charter rates for rigs on a rise High oil prices have triggered exploration activity globally, leading to demand for rigs. Aban will be a prime beneficiary. The stock of Aban Loyd Chiles has the potential to appreciate beyond the recent run-up. At Rs 1,230, it trades at 20 times the expected FY-06 per share earnings. Our positive view is backed by the following facts: A spurt in global exploration activity and, hence, a pick-up in demand for drilling services. The addition of `Aban Abraham', a new drill ship acquired by its subsidiary, and chartered at a higher rate. ONGC recently revising its contract for Aban II at roughly three times its earlier charter rate. A majority of its contracts coming up for renewal in 2007 could get renegotiated at higher rates. The company's strategy to finance its acquisitions through debt and FCCBs could minimise equity dilution and increase return on equity. Exploration on a high Globally, soaring oil prices have led to a heightened exploration activity. After a long lull, oil companies the world over are investing in exploration, leading to a sudden spurt in the demand for drilling services. Big investments are being planned and this could keep the demand going for the next few years. Aban Loyd Chiles charters out rigs used in oil exploration. Five of Aban's rigs are on charter with ONGC. The latter plans to invest close to Rs 15,000 crore over the next few years in exploration, throwing up immense opportunities for Aban. Aban's experience with international players could prove useful in capturing opportunities in West Asia where current charter rates are higher than the rest of the world. On acquisition spree The company has been on an acquisition spree over the last two years. Its fleet has expanded from just three rigs in FY-04 to six jack-up rigs and two drill ships by 2006. Another jack-up rig is under construction and will be added to the fleet by March 2008. The latest addition, `Aban Abraham', has been chartered this quarter and could bolster revenues starting from the January-March quarter of 2006. The fleet acquisition strategy is paying off well in a market where rigs are scarce and rates high. Aban's new additions could get better rates and, thus, keep the revenue and earnings growth momentum going. High charter rates Charter rates have been rising sharply as there are not enough rigs to meet the sudden pick-up in demand over the last two years. A rig takes two-three years to build. High oil prices have triggered oil exploration activity globally and increased the demand for rigs. The current charter rates are at almost three times the levels on existing contracts. As the demand-supply mismatch is expected to continue at least for the next couple of years, Aban should command current charter rates, if not higher, for contracts due for renewal in 2007. Higher charter rates directly add to the bottomline. Recently, ONGC renewed its contract for Aban II for a further three years at thrice the rates it paid earlier. The earlier contract with ONGC expires in November 2006. Financing Buys Aban has been financing all its acquisitions through debt. In FY-05, debt rose three-fold and was at three times the shareholder funds. In FY-06, the company raised further debt of Rs 200 crore. However, the return expected on its new investments could be substantially higher than the debt cost, thus creating value. For example, the company has spent $185 million (roughly Rs 830 crore) on `Aban Abraham'. But given the current charter rates, the payback may take just three years. Aban plans to issue yen-denominated FCCBs to raise roughly Rs 450 crore. This could expand the equity by 25 per cent. The earnings accrual could more than make up for the equity dilution. The stock appears attractive from a long-term perspective and could outperform the broad market for a two/three-year period.

NEW IPO:Uttam Sugar Mills: Avoid

2006-03-20T02:26:00.000-08:00

The offer seems ambitiously priced even after factoring in benefits from the expansion. There are other listed candidates in the sector with more attractive valuations. Adding scale through expansionOffer ambitiously pricedLocation-related risksMore attractive listed sugar plays Investors can avoid subscribing to the initial public offer from Uttam Sugar Mills. The company's expansion plans, when complete, could substantially ramp up earnings from current levels and position the company among the frontline sugar producers. But the offer seems ambitiously priced even after factoring in the benefits from the expansion. There are other listed investment candidates in the sugar sector, with similar potential, available at more attractive valuations. With intense competition for cane in the areas where the company's units are located, the payoffs from the project carry some uncertainty. Capacity expansion Uttam Sugar Mills operates cane crushing capacities of about 9,750 tcd and cogeneration capacities of 26 MW spread over two locations in Uttaranchal. An expansion project for another 3,500 tcd is underway. This initial public offer will fund two new greenfield units with a total capacity of 9,500 tcd and power cogeneration facilities of 45 MW in Western Uttar Pradesh. By October, the scheduled completion date for these projects, Uttam Sugar will control cane crushing capacities of 22,750 tcd and power cogeneration capacities of 81 MW. Though the company has diversified into cogeneration of power from bagasse, it does not plan to completely integrate its operations by processing molasses into ethanol. After reporting small profits in the preceding years, Uttam Sugar reported earnings of Rs 27 crore on revenues of Rs 187 crore in the year ended September 2005. This captures the results for crushing capacities of just 6,250 tcd with 16 MW of power. Uttam Sugar's financials for the preceding years are not really representative of its earnings potential after the expansion projects go onstream. With the benefits from the expansion projects set to kick in, the company's capacities for 2005-06 will be at twice this level and that for 2006-07 will represent a more than threefold increase. With crushing capacities of 22,750 tcd, the company will be among the top ten domestic sugar producers. The expansion, if commissioned on time, will contribute to earnings from the financial year 2006-07 and may be well-timed to take advantage of the favourable phase in the sugar cycle. Potential risks However, there are quite a few risks associated with the offer. For one, the company's capacities are concentrated in Uttaranchal and West Uttar Pradesh, where substantial new capacities are set to come up over the next couple of years, aided by the UP Government's capital subsidy programme. This region is already characterised by severe competition for cane and the concentration of capacities may acerbate the problem. This could push up procurement costs and create problems of cane availability, either of which can delay contribution from the expanded capacities. Second, though the company has diversified into power and has refining capacity to handle raw sugar, it does not have the capacity to process sugar into ethanol. This could reduce the valuation that this stock would enjoy post-listing, in relation to fully integrated sugar producers with similar capacities. The economics appears to be in favour of producers who have fully integrated facilities with a three-way linkage between sugar, ethanol and co-generated power. Integration into ethanol appears particularly attractive now, with the market for bio-fuels expanding in a big way. Finally, the pricing of the offer is ambitious, resulting in a substantial downside risk for investors if the earnings from expanded capacities do not flow in to the extent expected. Given the substantial scaling up of capacities, the offer price is at a steep multiple of about 25 times the trailing earnings. At the higher end of the price band, the offer price of Rs 340 discounts the company's estimated FY-06 earnings by 16-18 times and estimated FY-07 earnings by 12-13 times, if one factors in fully expanded capacities. This pricing leaves a very small margin of comfort for investors, to take care of execution risks. For those looking to ride out the uptrend in the sugar cycle, there are listed companies in the sugar sector with similar growth prospects available at more attractive multiples. Therefore, there appears to be no compelling reason to subscribe to this offer. Offer details Uttam Sugar Mills is making an offer of 40 lakh equity shares with a face value of Rs 10 per share. The price band for the book built offer is Rs 290-340. Bulk of the offer proceeds of Rs 116-120 crore will go towards funding two greenfield cane crushing units totaling to 9,500 tcd. The equity base post-offer will be Rs 25.7 crore.

NEW IPO:Kewal Kiran Clothing: Avoid

2006-03-20T02:18:00.000-08:00

WHILE KKC'S offerings are attractive at the entry level, brand-conscious customers are sure to upgrade, to higher price points. While the product portfolio does enjoy brand recall, KKC will find the going tough over the next couple of years to break away from being just another brand. WHILE KKC'S offerings are attractive at the entry level, brand-conscious customers are sure to upgrade, to higher price points. Investors can avoid the public offer of Kewal Kiran Clothing (KKC). At Rs 275, the upper end of the price band, the offer is valued at about 33 times its annualised per-share earnings for FY-06, on an expanded equity. With capacities likely to double by November and a larger distribution network through retail expansion, KKC may be able to ramp up its earnings over the next three years. The valuation for this business does, however, appear stiff. KKC operates in the branded jeans wear market and owns the Killer, Lawman, Easies and Integriti brands. In the mid-price segment that these brands cater to, competition is stiff and consumer loyalties are fickle. Killer, its flagship brand that has been in the market since 1989, remains a small brand. Players in the premium segment also have an eye on the mid-price segment. While the product portfolio does enjoy brand recall, KKC will find the going tough over the next couple of years to break away from being just another brand. KKC proposes to enter men's formal wear, women's wear and children's wear. Several established players have found the latter two segments tough nuts to crack. KKC has indicated that it may grow inorganically . It is comfortably placed to tap debt to fund acquisitions. But this may not figure in the company's immediate plans. It might be a couple of years before other segments make a strong contribution to financials. Catering to value-conscious KKC derives about 50 per cent of its revenues from Killer, which sells at prices between Rs 500 and Rs 1900. Although the brand is meant to cater to the premium segment, it is yet to establish itself as a strong brand, pitted as it is against the likes of Levi's and Lee. Lawman and Easies are priced Rs 800 upwards. While these brands are attractive at the entry level, brand conscious customers are quick to upgrade to brands such as Levi's at higher price points. KKC's brands do appeal to the price-conscious. There are, however, several brands that offer stiff competition, such as Trigger, Flying Machine, Newport and at even lower price points, Ruf n' Tuf. Styles, colours and washes are easily replicated and it boils down to the fit. What's more, premium brands such as Levi's are entering this segment. Levi's is shortly to introduce the Signature brand in India and will roll out 150 stores for the same. To fight competition, KKC will have to deploy a considerable portion of its resources on advertising and distribution, as will other brands. Rolling out K-Lounge The company hopes to create more visibility for its brands through retail expansion. Its brands are now widely distributed through multi-brand outlets and a few chain stores. KKC does not have much experience in retailing and most of its proposed stores are to be franchisee operated. It plans to roll out more than a 100 stores called K-Lounge, predominantly in smaller cities in the North and the West. The strategy to focus on smaller cities may pay off, given their limited exposure to brands. This might, however, be a vicious cycle. Until the brands gain strength, customers will prefer multi-brand outlets offering more choice. Offer details Kewal Kiran will raise Rs 85 crore from the offer. The price band is Rs 250-275. The offer opens on March 20 and closes March 23. The lead manager is Enam.

Exposure effect

2006-03-18T18:38:00.000-08:00

My friend, who is a fairly successful trader, suffers from a certain bias. He will not buy a stock on which he has suffered a loss of more than 10 per cent in his previous trade. To give an example, he refused to buy VSNL recently because his previous exposure at Rs 395 ended in a huge loss. Some of us suffer from a bias that is complementary to my friend's behaviour. It is called "exposure effect". What is this effect? Take VSNL. Suppose you had bought this stock at Rs 350 some time in early January . You would have taken profits when the stock touched Rs 400 in mid-February. Now, suppose your financial adviser had told you to buy the stock again at Rs 365 in late February, how would you have responded? If you are a typical trader/investor, you may have pounced on the idea of buying VSNL again. You and I are comfortable with stocks that we have already traded with. The reason? We carry this belief that just because we have made profits in a particular stock in the previous trade, we will be able to do so again. Psychologists call this behaviour as the "exposure effect". That is, we express undue liking for things just because we are familiar with them. In fact, advertisers use this behaviour to their advantage, which is why this behaviour is also called "familiarity breeds liking" effect. The point is that such cognitive bias could hamper you from trading profitably. After all, past is no indicator for the future, especially so in the stock market. It is, therefore, not rational for you to expect to successfully trade VSNL or any other stock just because you did so in the past.

To know a hedge fund when you see it

2006-03-18T18:29:00.000-08:00

The most common measure of portfolio risk is standard deviation. "Vikram Pandit and John Havens, former top executives at Morgan Stanley, have raised at least $2 billion for a new hedge fund that probably will begin operations next month," says www.bloomberg.com in a story dated March 16. "Hedge funds, which cater to wealthy investors and institutions, returned 9.3 per cent in 2005, down from an average of 16 per cent a year in the 1990s, according to Chicago-based Hedge Fund Research Inc," notes the report. "There were 2,073 funds started last year, up 44 per cent from 2004. Hedge-fund assets have more than doubled since 2000 to $1.1 trillion. There were 8,661 funds worldwide at the end of last year," are more statistics from Bloomberg. "The first known hedge fund was created by Alfred Winslow Jones in 1949," informs Stuart A. McCrary in Hedge Fund Course, from Wiley (www.wiley.com). The book presents "all the technical and quantitative knowledge necessary to understand hedge funds," apart from providing "an extensive survey of the hedge fund management business." A `typical definition' of hedge fund is: "A loosely regulated investment company that charges incentive fees and usually seeks to generate returns that are not highly correlated to returns on stocks and bonds." It is not as if you know a hedge fund when you see it, because there are no firm lines separating hedge funds from other investments such as `private equity partnerships, venture capital funds and real estate partnerships'. In a recent interview (Business Line, March 12), Aswath Damodaran had opined that `disguised hedge funds' must already be operating in India. "No fund will call itself a hedge fund, but there will be 15 acronyms for hedge funds and they will all be in the market anyway," he'd said. Though hedge funds defy neat categorisation, McCrary groups them into equity, fixed income and other. In the `other' are global macro hedge funds (which have `some of the highest returns of all hedge fund strategies'); currency hedge funds that `take strategic positions in a variety of currencies'; and funds of funds that invest in other hedge funds. The author classifies hedge fund investors into individuals, endowments, pensions, family offices, trusts, foundations, banks and insurance companies. Individuals are "an important group to understand for marketing, investment policy, tax reporting, and public policy." Among these are the high-net-worth ones, with income of at least $200,000 or assets of $1 million. The semi-affluent (with net worth between $500,000 and $1 million) control `between $6 trillion and $8 trillion in assets'! What are the different hedge fund investment techniques? One is `long/short equity', in which the hedge fund picks up sectors and stocks `based on either fundamental or technical valuation'. Another is `event driven ? merger arbitrage'; this anticipates a takeover attempt, buys `the target of a rumoured or announced merger' and sells short the acquirer company shares. "When a hedge fund has investors from many different countries, it is usually efficient to organise the fund in a low-tax or no-tax domicile. This is a tax avoidance strategy but it is not a tax evasion strategy," explains McCrary, in a chapter on `hedge fund business models'. With the help of diagrams, he explains the distribution between assets, liabilities and equity in the fund balance-sheet, before and after loss. Read about SPAN (standardised portfolio analysis of risk) in the `leverage' topic. "SPAN margin equals the largest likely loss on the entire position for a one-day horizon." The chapter on `performance measurement' helps with calculating and averaging returns, and measure investment risk. `The most common measure of portfolio risk' is standard deviation. `Downside deviation' omits `favourable deviations', because "most investors worry less about very good performance than very bad performance". Drawdown is a measure of `cumulative loss from the previous high-water mark'. Investors may like to know answers to questions such as: `How long did it take to recover the largest monthly loss?' And `What is the longest period of time that a drawdown persisted?' Sharpe, Sortino and Treynor ratios, and Jensen's Alpha are other performance measures. There are chapters on accounting, legislation, taxation, risk management, marketing, and derivatives, all in the context of hedge funds. The `brave new hedge fund world' that McCrary foresees "may make no distinction between the traditional money management business and the hedge fund industry". Such a `merger to the mainstream' may augur well for `stronger financial markets and better-managed portfolios', provided there is `constructive oversight from government regulators'. Bankable read.

BuffetSpeak

2006-03-15T18:37:00.000-08:00

Forget the old maxim about nothing succeeding like success: Today, in the executive suite, the all-too-prevalent rule is that nothing succeeds like failure. Unlike many business buyers, Berkshire has no `exit strategy.' We buy to keep. We do, though, have an entrance strategy, looking for businesses in this country or abroad that meet our six criteria and are available at a price that will produce a reasonable return. If you have a business that fits, give me a call. Like a hopeful teenage girl, I'll be waiting by the phone. Currently, the white-hot market in residential real estate of recent years is cooling down, and that should lead to additional acquisition possibilities for us. None of the deals involve the issuance of Berkshire shares. That's a crucial, but often ignored, point: When a management proudly acquires another company for stock, the shareholders of the acquirer are concurrently selling part of their interest in everything they own. Surprises in insurance are far from symmetrical. You are lucky if you get one that is pleasant for every ten that go the other way. Too often, however, insurers react to looming loss problems with optimism. What we do know is that our ignorance (about Nature's onslaught) means we must follow the course prescribed by Pascal in his famous wager about the existence of God. He concluded that since he didn't know the answer, his personal gain/loss ratio dictated an affirmative conclusion. I failed in my attempt to exit (the derivatives business) painlessly, and in the meantime more trades were put on the books. Fault me for dithering. (Charlie Munger, Vice-Chairman of Berkshire, calls it thumb-sucking.) When a problem exists, whether in personal or in business operations, the time to act is now. A `normal' dividend policy, of course ? one-third of earnings paid out, for example ? produces less extreme results but still can provide lush rewards for managers who achieve nothing. If we are delighting customers, eliminating unnecessary costs and improving our products and services, we gain strength. But if we treat customers with indifference or tolerate bloat, our businesses will wither. On a daily basis, the effects of our actions are imperceptible; cumulatively, though, their consequences are enormous. We always, of course, hope to earn more money in the short-term. But when short-term and long-term conflict, widening the moat must take precedence. If a management makes bad decisions in order to hit short-term earnings targets, and consequently gets behind the eight-ball in terms of costs, customer satisfaction or brand strength, no amount of subsequent brilliance will overcome the damage that has been inflicted. Getting fired can produce a particularly bountiful payday for a CEO. Indeed, he can `earn' more in that single day, while cleaning out his desk, than an American worker earns in a lifetime of cleaning toilets. Forget the old maxim about nothing succeeding like success: Today, in the executive suite, the all-too-prevalent rule is that nothing succeeds like failure. Expect no miracles from our equity portfolio. Though we own major interests in a number of strong, highly-profitable businesses, they are not selling at anything like bargain prices. As a group, they may double in value in ten years. The other question that must be addressed is whether the Board will be prepared to make a change if that need should arise not from my death but rather from my decay, particularly if this decay is accompanied by my delusionally thinking that I am reaching new peaks of managerial brilliance. Humans age at greatly varying rates - but sooner or later their talents and vigour decline. When their abilities ebb, so usually do their powers of self-assessment. Someone else often needs to blow the whistle. Every share of Berkshire that I own is destined to go to philanthropies, and I want society to reap the maximum good from these gifts and bequests. It would be a tragedy if the philanthropic potential of my holdings were diminished because my associates shirked their responsibility to (tenderly, I hope) show me the door. Don't worry about this (succession). We have an outstanding group of directors, and they will always do what's right for shareholders. And while we are on the subject, I feel terrific. Excerpts from the letter to shareholders (2005) of Berkshire Hathaway written by its Chairman, Mr Warren Buffett. Full text of letter on http://www.berkshirehathaway.com/letters/2005.html

Raymond: Buy

2006-03-13T21:03:00.000-08:00

Advantage alliances: Raymond takes the joint-venture route to widen product range Heavy investments in expanding facilities will reflect in Raymond's performance over the next couple of years. An attractive candidate for the portfolio from a long-term perspective, though returns could be moderate in the near term. Robust revenue growth likelyInvestment mode to payoffA wider product portfolioJoint venture for denimMore clout, courtesy JV partnerEarnings from JV to accrue in a couple of years Exposure, especially on weakness, can be considered in Raymond. There is strong visibility on the revenue front; the topline in the early quarters of FY-07 could get a boost from new capacities that have been commissioned this month. Raw material prices too appear to be under check. Raymond continues to be comfortably placed to bankroll its aggressive expansion plans with its strong balance-sheet. Once greater clarity emerges on its plans for the denim business, it could get reflected in the valuation levels. The division will soon be part of a joint venture with an international player. While the thrust over the past year has largely been on its core textile business, Raymond appears to be exploring options in other sectors such as engineering, through its subsidiaries. If its investments become significant, the possibility of a restructuring to create focussed listed plays cannot be ruled out. The investments in question are not large enough now. Deployment of surplus funds in projects that may not yield adequate returns, however, poses a risk to shareholders. Performance and valuation We re-visit the stock after our "book profits" call at Rs 344 last May, when Raymond had come off a year of lacklustre performance. Rising raw material prices and expansion costs had threatened to impede earnings growth. Since then, however, the performance has improved substantially on the back of robust revenue growth in its textile and denim divisions, a better contribution from subsidiaries, lower raw material prices and gains from restructuring. In the nine months to December, recurring profits have grown by more than 70 per cent over the corresponding previous period. While the company has performed better than expectations, the stock has not. It may have under-performed the market; the stock is, however, one that is hard to ignore for those who want an exposure to the textile sector. It now trades at 23 times its likely FY-06 per share earnings on a consolidated basis. Price declines linked to market weakness can serve as an attractive entry point for those with a long-term view. As it goes ahead with its relentless expansion, the stock will be well-suited for investors who wish to participate in its growth phase and have expectations of modest returns in the near term. More expansion underway Raymond is in the midst of a heavy investmsent phase. In the first nine months of this fiscal, the company invested about Rs 115 crore in joint ventures and subsidiaries. This is in addition to the Rs 200 crore spent on expanding its denim and worsted fabric capacities, both of which will contribute to operations from the first quarter of FY-07. It has just announced another Rs 200-crore project for setting up an integrated unit for making worsted suiting. This would take its total capacity in this segment to 31 million metres, a size on a par with global levels. Aside from setting up subsidiaries that would manufacture jeans wear, shirts and formal suits, it has formed four international alliances over the past year that would strengthen its presence in existing businesses and broaden its product bouquet. The 50-50 joint venture with the Italian textile group, Gruppo Zambaiti, for making high-value cotton shirting fabric will cater to exports and offer quality fabric to Raymond's domestic brands such as Color-Plus and Park Avenue. Denim pays off Raymond's big-ticket alliance is, however, with UCO of Belgium, which would put its denim business on the global map. The 50:50 joint venture would merge both companies' denim businesses, creating 80 million metres of denim fabric. The gains from the venture are, however, not one of size. UCO brings a lot more to the table, with facilities in the US and Romania. It has a higher revenue base of about Rs 550 crore and expertise in a value-added segment untapped by Raymond ? colour denim. The JV expects to clock revenues of Rs 1,100 crore in its first year of operation. The latter's focus on value-added denim has paid off, with the company weathering the pricing pressure in denim better than its peers. The finer details of the JV are yet to be worked out. The denim division, which accounts for 20 per cent of its revenues, would no longer be an integral part of Raymond. With the operations routed through the JV, Raymond will simply earn its share of profits from the venture. Its business will also not be directly affected by the cyclical nature of the denim business. The earnings flow from the joint venture may show significant growth only over a couple of years.

What is loss aversion?

2006-03-12T18:17:00.000-08:00

Consider this. My friend bought 500 shares of MTNL at Rs 155 in February. He wanted to sell his holding and take profits before trading closed on March 10. But he was told that the stock was likely to go up further. So, he sold 500 shares at Rs 159 and then bought 300 shares at Rs 162, all on the same day! Is his behaviour rational? My friend wanted to take profit even though MTNL had not moved much. Yet, he did not sell when the stock declined to Rs 139 soon after he bought it. He was suffering from what behavioural psychologists call "loss aversion". That is, we typically ride our losses longer with the hope of making profits at a later date. We, however, take our profits sooner, not wanting to risk losing the unrealised gains. Loss aversion, perhaps, explains why my friend sold the shares. But why did he buy 300 shares thereafter? The buy/sell strategy actually amounts to selling only 200 shares, which he could have done anyway. Behavioural psychologists have shown that we engage in "mental accounting". That is, we mentally place transactions in different accounts, and the money in one account is not transferred to another. My friend had opened two such mental accounts. One was for the 500 MTNL shares. A round-trip led to a profit of Rs 4 per share, not taking into account brokerage. He had already decided to buy a book on technical analysis with the realised profits! The second account contained 300 MTNL shares bought at Rs 162 per share. This was an independent transaction on which my friend was willing to suffer loss aversion.

Dabur India: Buy

2006-03-12T18:15:00.000-08:00

Investors can take exposure to the Dabur India stock to capitalise on the upturn in the FMCG sector. Consumer spending on FMCGs appears to be in the initial stages of a cyclical upswing that is likely to last several years. Dabur could report growth rates that are superior to the sector, due to a large brand portfolio and presence in nascent yet promising product categories. The stock trades at a priceearnings multiple of about 30 times trailing 12-month earnings, on par with Indian players and at a discount to Hindustan Lever. Dabur India's key strength lies in the sheer breadth of its product portfolio in the FMCG space, rivalled only by Hindustan Lever. The company owns brands that span several categories - toothpastes, hair care, cosmetics, foods, health supplements and baby care. The recent addition of Balsara Hygiene Products adds home care to this impressive spread. The large basket of brands reduces the company's vulnerability to sluggish performance from one or two of its businesses. With about half of its sales originating from the rural areas, it can also tap into the incipient revival in rural demand for FMCG products. Several of Dabur's new business forays have the potential to ramp up its size. Health supplements, fruit juices, home cleaning products and branded versions of generic products such as honey and rosewater hold promise. Growth rates could also receive a fillip from the increasing focus on modern trade formats, expanding distribution reach and a pan-India presence for its brands. With the addition of Balsara's brands, it reported a 26 per cent growth in sales and 37 per cent growth in profit on consolidated operations in the first 9 months of 2005-06.

Trading tips

2006-03-12T02:27:00.000-08:00

Never try to fight a trend by taking positions against the prevailing trend. Though it may be always tempting to buy a stock that is falling with an intention to lower the average cost of acquisition, such a practice should be avoided. This will be tantamount to throwing good money after bad. Always have a stop-loss and an exit price clearly defined before making a trading decision. There are several methods to arrive at stop-loss levels. If you are unable to identify a logical or reliable stop-loss level, use a fixed money-based stop method, which fits into your psychological comfort zone. Never hold on to a trading or investment position that has moved past your psychological zone of comfort. If you are not disciplined to cut positions on the breach of stop-loss, it could turn out to be a psychologically arduous task to cut those loss-making positions when prices keep moving against you. Always take care of your losses and profit would take care of themselves. Periodical profit booking and re-entry on fresh "buy" triggers are crucial aspects of success in stock market investing. There is nothing wrong or inconsistent in buying a stock at slightly higher levels after having booked profit earlier. The key aspect is to ensure that the long-term trend is intact and there is a valid reason to take fresh exposures. Keep track of stocks you find are in a long-term upward trend and take positions on fresh "buy" triggers. Even after the stop-loss is hit, investors should not ignore the stock they have been tracking. It may well turn out that the stock could reverse trend and get back to the target zone envisaged earlier. The stop-loss might have been hit owing to either an incorrect stop loss or a change in the short-term trend. The stock price may reverse at lower levels and manage to move to the earlier determined target zone.

How long is 'small'

2006-03-10T17:19:00.000-08:00

The Finance Minister, Mr P. Chidambaram, and his ministerial team have chosen to define a small car for the purpose of excise duty cut as one whose overall length (size class) falls within 4,000mm . Another parameter that will restrict the carseligible for the lower level of excise is the engine size: Within 1,200 cc if it is petrol driven and within 1,500cc (or 1.5 litre) if it is diesel. This definition of a small car then restricts the eligible cars to the Maruti quartet ( M800, Alto, Zen and WagonR), the Hyundai Santro and the Tata Indica diesel. Other B-segment cars such as the Fiat Palio, the Suzuki Swift, the Hyundai Getz, theOpel Corsa and the Tata Indica Xeta petrol are not eligible for the excise duty cut owing to the restrictions imposed by the new definition. On the other hand, the definition of a small car in the New Auto Policy announced in 2002 simply calls a small passenger car as one with a total length of up to 3.8 metres. No other restriction or parameter is mentioned. Though the Budget's definition of a small car has actually increased the allowable length by 200mm, to four metres, the other clause is restrictive. Countries such as Japan and Italy give small cars a more restricted definition. But this is largely due to their policy to discourage the use of larger cars, as they occupy more road space, fill out parking lots in crowded cities, consume more fuel and, consequently, pollute even more. Barring Japan, where small cars eligible for subsidies and waivers are restricted to ones with engines within the 660cc size, other countries' definitions are not so restrictive. In the Indian context, the attempt seems to be to make the country a hub for manufacture of such cars. But some in the industry feel that the new Budget definition is too restrictive and may throttle the development of cars in the B+ segment (premium small car), which could turn out to be the future of the small car category. Tata Motors' petrol version of the Indica is not eligible for the excise duty cut. The company's Managing Director, Mr Ravi Kant, welcomed the eight per cent cut but felt that the Government should have stuck with the Auto Policy's definition of a small car. Coming up with new definitions for classifying cars that are eligible for lower excise duty will lead to a lot of confusion and eventually make it even more difficult for manufacturers to plan new products, he felt. Tinkering with the definition, making it more complicated and conflict with the definition announced by another arm of the Government, will only further the problems of car manufacturers who typically have to plan their new products at least three years in advance, he said. Mr Kant, who is also the vice-president of the Society of Indian Automobile Manufacturers (SIAM), pointed out that cutting the excise duty on small cars and offering preferential treatment for this segment of passenger vehicles is not new, but consistency of policy regarding the definition of small cars is essential to avoid sending conflicting signals to the industry.

Malu Paper: Avoid

2006-03-10T17:16:00.000-08:00

Exposures may be avoided in the initial public offering of Malu Paper, as the scope for appreciation appears limited. We have not factored into our recommendation any gains on listing, which we believe may at best be modest. Malu Paper now plans to more than treble its newsprint capacity to about 70,000 tonnes. The project is likely to be commissioned in April 2007; its effect on revenues and earnings may be reflected in a significant manner only from FY-09 onwards. There is bound to be a sizeable scaling up of interest burden, as debt levels are likely to rise by more than five fold. If prices turn lacklustre when the new facilities go full throttle two years hence, it will further stretch the payback period for the project. As prices of waste paper ? the principal raw material ? tend to follow broad trends in the sector, margins may remain at low levels. Limited flexibility in switching between newsprint and writing/printing paper will also add to the risk element. Even a major player such as Tamil Nadu Newsprint has sharply reduced its reliance on newsprint to protect its growth prospects. Malu Paper has had a fairly satisfactory track record over the past few years. We do, however, believe that profitability is unlikely to rise to levels that will lead to attractive per share earnings on an expanded equity base. Based on likely FY-06 earnings, the offer is stiffly priced and if one adds the risks inherent in the expansion, the asking price seems demanding. Investors can skip this offer, as the opportunity cost is also bound to be high. The lead manager to the offer is Microsec Capital. Malu Paper proposes to raise Rs 25 crore through an offer priced at Rs 30 per share.

NEW IPO:Rohit Ferro-Tech: Avoid

2006-03-10T17:14:00.000-08:00

Investors can refrain from subscribing to the initial public offer by Rohit Ferro-Tech. At the offer price of Rs 30 per share, the price-to-earnings multiple works out to 6-7 times its expected FY 07 earnings, on an expanded equity base. This appears stiff relative to Jindal Stainless, Tata Metaliks and Nava Bharat Ferro Alloys. Rohit Ferro-Tech is in the business of manufacturing and trading ferro-alloys with a current capacity of 40,000 tonnes per annum (TPA). The company now plans to set up another ferro alloy plant in Orissa so as to expand its capacity to more than 1,50,000 TPA of ferro alloys. This is expected to commence operations by October. Price trends The company's performance in the last two years was impressive, thanks to the buoyant steel market that helped Rohit Ferro record higher realisations. Steel prices across the board have cooled off and are likely to stabilise at current levels; price-linked earnings growth is, therefore, likely to be moderate. What is more critical is the outlook for the stainless steel segment, as the company's products (ferro alloys) form the principal raw material for making stainless steel. Currently, about 40 per cent of the company's revenues are derived from exports to markets in Europe, China, West Asia and Asia. The demand in these markets has remained sluggish over the past few months and may take a while to pick up. The outlook for the price of various grades of stainless steel points to, at best, flat trends at the international and domestic levels over the medium term. There are also execution risks. The company has applied for mining leases with the Government of Orissa (for chrome and manganese ores). The offer document is, however, silent on contractual agreements entered into for securing long-term supplies. Any delay in procuring the inputs will necessarily mean higher costs and longer gestation period. Several other companies in the group run by the promoters also are in the business of manufacturing ferro alloys, which could involve a conflict of interests. Two group companies, Impex Ferro Tech and Vikash Metal and Power, have tapped the market over the past year. The concentration risk is high, with the top 10 customers accounting for about 95 per cent of the total revenues. High debt levels may also dampen profitability.

NEW IPO:Gallantt Metal: Avoid

2006-03-10T17:10:00.000-08:00

Investors can give this public offer from Gallantt Metal a miss, as the potential for capital appreciation appears low. The absence of a proven track record, the high level of debt financing, the low earnings visibility and the operational risks make the offer unattractive. Gallantt Metal has completed setting up a sponge iron unit and a steel melting shop in Kutch, Gujarat; commercial production commenced in December 2005. From the proceeds of the issue, it proposes to set up an 18 MW captive power plant, which is expected to go on stream by October. During the intermediate period, it plans to buy power from external sources, which is likely to push up fuel costs for the company. Rising costs Moreover, the risks associated with its operations also remain high. First, for iron ore, a basic raw material for billet making, the company proposes to transport it from Karnataka and Orissa. At a time when steel producers are grappling with mounting logistics and transportation costs, this is only likely to push up production costs. Secondly, import of steam coal from Indonesia and South Africa may expose the company to the risks associated with exchange rate and price changes. The offer document does not mention any contractual tie-ups for sourcing its raw materials. As the company has just commenced operations, the lack of a track record is also a concern. The time taken for the project to break-even is likely to be long. We believe, the opportunity cost of locking in funds in the offer is likely to be stiff. About 60 per cent of the project cost of about Rs 190 crore is to be funded by debt. Higher depreciation and interest outgo may dent profitability in the medium term. As per the offer document, the company plans to sell its finished products ? billets and bars ? in western and northern India, although no expression of interest has been received so far. Given its size and scale of operations, it may find the going tough, particularly, as the drive towards consolidation in the steel sector is likely to intensify.

Gates tops Forbes list

2006-03-10T03:35:00.000-08:00

Steel tycoon, Mr Lakshmi Mittal, is the richest Indian and Microsoft Corporation Chairman, Mr Bill Gates with an estimated net worth of $50 billion retains his title as the richest man in the world for the twelfth consecutive year. According to the Forbes magazine annual survey, Mr Gates' fortune increased 7.5 per cent from $46.6 billion last year. The magazine said strong markets around the world contributed to the increase in wealth and the total net worth of the list jumped to $ 2.6 trillion. Mr Gates is followed by 75-year old investor Mr Warren Buffett of the United States with net worth of $42 billion and the Mexican telecom magnate Mr Carlos Slim Helu with $30 billion and Mr Ingvar Kamprad of Sweden, founder of Ikea, the world's biggest h ome furnishing retailer, with $28 billion. Non-resident Indian steel tycoon, Mr Mittal finds fifth place among the world's richest with a net worth of more than $20 billion. The 55-year-old dropped two places to fifth with $23.5 billion dollars, down $1.5 billion. Mr Azim Premji, who owns 82 per cent of the New York listed information technology giant Wipro is second richest Indian with an estimated net worth of $11 billion. Mr Mukesh Ambani with net worth of $7 billion, army officer turned property baron Mr Kushal Pal Singh ($5 billion), Mr Sunil Mittal, who built his Bharti Group into India's largest mobile phone operator with 14 million customers ($4.9 billion) and Mr Kum ar Birla ($4.4 billion) are among those who find place among the top ten richest persons in India. - PTI

Wal-Mart may enter India with local partner

2006-03-10T03:05:00.000-08:00

Wal-Mart, the world's largest retailer, which has been waiting in the wings for the government's go-ahead to enter the Indian market, may consider entering it with a local partner. Ms Beth Keck, Director, International Corporate Affairs, Wal-Mart International, said, "We often work with partners and have done so in countries like Japan, Central America, Mexico and China. They have been able to give us a better understanding of local customers, which has helped us to operate more effectively in these countries. We may consider this approach for India too." She was responding to a specific query from Business Line on the subject. According to information available, Wal-Mart entered Japan, the world's second largest retail market in 2002, by picking up a minority stake in the Tokyo-based Seiyu super market chain. It spent an estimated $600 million last year to increase its stake to over 53 per cent, making Seiyu a Wal-Mart subsidiary. Policy hitch Of course for Wal-Mart, there is still a policy hitch to be over come in India as the present official stance allows only `single brand' retailing to be carried on with foreign direct investment. But here too, Wal-Mart is hoping that things would change. "We welcome the Indian Government's movement in allowing 51 per cent FDI in retail to single brand companies and hope they eventually will open this sector more broadly to foreign investment," Ms Keck added. Asked if Wal-Mart would discuss the issue of a broader scope for FDI in retail, Ms Keck said, "The Indian government's policy on foreign direct investment in retail is just one of several topics which we discuss with Indian government officials. As a purchaser of goods, we also are interested in learning about a wide range of areas that affect our sourcing from the country." The Arkansas-based retailer's interest has to be seen in the context heightened activity in retailing with,corporate heavyweights such as Reliance Industries jumping in on the retail bandwagon to cash in on a market estimated to be worth $350 billion by 2010. Meanwhile, the retailer with $285 billion in revenues is significantly increasing its global sourcing out of India and will source $640 million worth of home wares, textiles, apparel and fine jewellery this year. . "Direct sourcing from the region will continue to grow, as suppliers in India, Sri Lanka and Nepal are innovative and respond quickly to new trends for apparel and goods found in Wal-Mart retail outlets," Ms Keck said.

Incremental sale method

2006-03-07T18:37:00.000-08:00

Consider this. You hold 1,000 shares of Voltas, which you had bought at Rs 715. The stock then declines to Rs 580 and later climbs to Rs 785. You sell your shares at a profit of Rs 70 per share. In less than 12 trading sessions, the stock moves past Rs 1,000. You consider it your bad luck that stocks always move up just after you sell them. If you do suffer from such emotions, take solace in the fact that you are not alone! But what is the remedy to overcome such emotion? Take Voltas. After the stock moves above your cost price, you may be tempted to capture whatever profits the market has to offer. To give way to such emotions, you can sell, say, 200 shares at Rs 785. That way, you lock-in to some profits and at the same time let the rest of the position run for a longer period to capture more gains. But what if the stock moves below your cost price after you sell 200 shares at Rs 785? To protect yourself from such losses, you may employ what technical analysts call a trailing stop loss. You may have placed a stop loss at Rs 515 when you bought the stock. After it moves up, you gradually raise your stop loss. For instance, you may choose to place a stop loss at Rs 775 after you sell 200 shares at Rs 785. So, if the stock declines, you will be able to sell at Rs 775 and pocket the gains. If the stock moves up, you can let your position run with a trailing stop loss. This approach, called the incremental sale method, helps you overcome the bad-luck syndrome.

BOOK REVIEW:This fish market will have you hooked

2006-03-07T18:29:00.000-08:00

In the rarefied world of finance, the last person you may ever want to rub shoulders with is the fishmonger. Yet, off we go this week to a fish market: Pike Place Fish. It is in the "open air market located in the heart of Seattle, Washington," as www.pikeplacefish.com informs. "People come from all over the world to see our world famous crew of fishmongers throwing fish and having fun with customers," is from `About Us' on the site. "There is a series of management books called FISH! written about the philosophy of employee work ethic as a fishmonger in Pike Place Market," alerts Wikipedia. And I have on hand one more book, Catch! by Cyndi Crother, from Tata McGraw-Hill (www.tatamcgrawhill.com). The place employs 15 to 17 fishmongers, though on any given day, six to nine fishmongers sell fish at the market. "While they are best known for the energy and excitement they generate at the market, they are less known for their unprecedented financial results," writes Crother. "In the past 17 years, Pike Place Fish's cost of doing business has dropped nearly 25 per cent, revenues have quadrupled, and profits have increased tenfold." Success mantra What makes them so successful? The simple lesson is that we are responsible for what we experience in life, and for whatever future we cause to happen, explains Crother. "The fishmongers call that idea `It's all over here' ? each person is solely responsible for his or her thoughts, feelings, emotions, decisions, actions... everything." Chris, a fishmonger, tells the author how feedback helps in staying successful: "If I do something that is not aligned to the vision of being world famous or to our quality of service or product, somebody will let me know right them. It's also my responsibility to tell somebody when I notice it in someone else." And the Pike Place Fish site has this to say: "People want to copy us ? to do what we're doing. We keep telling them, `Your success isn't in doing what we do; it's in discovering your own way'." So the fishmongers advise thus: "Don't do what we do ? we made it all up... do what inspires you... make it up! You just have to be (yourself... what inspires you)." What does it mean? "It means commit yourself to who you say you are: act like it, think like it, look like it, feel like it, speak it... be it!" As a result, "You will create your own way by just being yourself, doing what inspires you. The secret to our secret lies in our commitment to being who we say we are." To reinforce, the site urges, "JUST BE IT. Your challenge is to `just be' who you want to be... for free... just because you said so." These fishmongers are `ordinary people living extraordinary lives,' writes Crother. "The catch is that ordinary happens, but greatness is generated." The transformation comes from "being great in all that you do," not just in `one act of greatness'. To help change, the book poses a series of questions as follows: "What is it that you are passionate about? What dreams or goals keep you up at night? What inspires you to get out of bed in the morning?" Worth trying out in the world of investment too. Commitment Awareness of intentions isn't enough. You need `commitment'. This means taking a stand for what your intention is and what you believe in. "Once an intention is established, and a commitment is made, the next step involves relinquishing attachment to the outcome." In the lingo of fishmongers, it means surrendering it to the universe! "This surrender creates the opportunity and the space for unexpected things to happen." Attachment to a specific outcome is dangerous, cautions the author, because "you will inevitably tie your expectations to it." Reminds one of `the secret of action' in the Bhagavad Gita. "Karma Yoga is essentially acting, or doing one's duties in life as per his/her dharma, or duty, without concern of results ? a sort of constant sacrifice of action to the Supreme," explains Wikipedia. Resuming the fish story, believe it or not, the mongers there work at thought level. "When they recognised other people sharing negative thoughts about life, the fishmongers see an opportunity to bring it to light and to offer a new, more powerful thought." Transformation begins now, exhorts Crother. Because time is too precious. Urgent read, to glean success tips from the fish market!

Era Constructions: Buy

2006-03-06T21:54:00.000-08:00

Execution of contracts with better margins, entry into new segments and a rise in order-book position bring earnings visibility to the Era Constructions stock (Rs 278). The Budget, through its fund allocation, has further reiterated the Government's thrust on infrastructure spending. The company is at a stage of moving up the value chain through high-value projects and widening business segments. This will involve an expansion in its equity base. The benefits of these measures are, however, likely to translate into numbers over the next couple of years. Investors can add the stock to their portfolio with a two-year perspective. Any decline linked to the broad markets will serve as an attractive entry point. At the current price, the stock trades at 13 times its expected FY-07 per-share earnings. Era Constructions is engaged in diversified construction activities such as industrial complexes, residential buildings, power and airport projects. It has now forayed into road and railway contracts. The current order-book of Rs 807 crore is five times the FY-05 revenues. If the company is successful in its current bids, the order-book for the year may well close at Rs 1,200 crore. The high order-book, once converted to revenues, is likely to largely neutralise any dilution in earnings that could result from a scaling up of equity capital. Broad client base Era Constructions has clients across private and state enterprises unlike several infrastructure companies, which depend on government orders. Further, the profitability margins from industrial projects in private sectors such as textiles, pharmaceuticals and hospitals are higher than that from core infrastructure projects such as roads or railways. Of the company's orders on hand, about 42 per cent constitute contracts other than infrastructure. This is likely to offset the less attractive margins from infrastructure work. Diversifying revenue Era Constructions is aiming at backward integration by setting up a plant for making pre-engineered building (PEB) material. This will be initiated through a separate entity so as to retain the tax benefits available for construction companies. The new entity will also enjoy excise and sales tax incentives given by Uttaranchal. The PEB industry is at a nascent stage in India but, increasingly, being used in non-residential structures such as power plants, railway stations and airports. The company also plans to enter the real-estate development business through a special purpose vehicle (SPV). Construction work for the real-estate projects would be awarded to Era Constructions. This is likely to supplement company's revenues. Era's bottomline has grown at an annualised rate of 32 per cent over the past three years. The operating profit margins for the past nine months at 13 per cent, is superior to bigger players such as Nagarjuna Construction. This margin may see a reduction of 100-200 basis points, if the company forays into BOT projects. It is, however, likely to remain above the industry average. Any decline in profitability due to the effect of BOT projects is, however, likely to more than adequately compensated by enhanced revenues and the foray into newer segments. In this backdrop, the impact of lower margins on earnings may be marginal. We expect the company to post robust growth in earnings and this could provide support to the higher valuation levels that the stock now commands. Risks The principal risk to our recommendation will be delays in converting order-book to revenues. If the company maintains its track recent in recent years, it may not act as a dampener on valuation. Era Constructions has doubled its equity share capital over the past year. This has enabled it bid for higher value contracts. With further expansion through issue of depository receipts, the company is likely to qualify to bid for Build-Operate Transfer (BOT) projects. If the proceeds are not systematically deployed in projects, the earnings may see a dilution. Even with ramp-up of capital, the company will face competition from bigger players such as Gammon India and Hindustan Construction in the infrastructure space. Inability to win bigger orders may slow down revenue growth. Although the company is not taking a direct route to venture into real estate, the stake in the SPV may expose it to risks associated with real estate-development.

Areva T&D : Buy

2006-03-06T21:46:00.000-08:00

Investment may be considered in the Areva T&D stock at Rs.550. Our recommendation is underpinned by its solid performance over the past three quarters, a substantial expansion in profitability levels and the further scope for margin expansion, once it hives off non-core businesses. A sharper focus on transmission and distribution business may also support rich valuation levels. The enhanced level of interest shown by its new global parent in Indian operations is an added positive. The parent company plans to scale up investments in Areva's Indian operations. As it also plans to step up sourcing from India for the global network, Areva T & D could move to a new growth trajectory over a one-to-two year period. Exports are likely to rise to about to 20 per cent of revenues; they now account for 12 per cent. The likelihood of introduction of new products from the parent's wide product portfolio may also enable Areva to increase its market share in the domestic market. The proposed hiving off of Areva's non-T&D business, which is likely to be completed over the next year, could also free up resources for the core business. The non-T&D business contributes 17 per cent to sales and 13 per cent to profits. The loss of revenues could be offset to an extent by the merger of two privately held companies - Areva T&D Lightning Arresters and Areva T&D Instrument Transformers. The stock trades at a discount to its peers ABB and Siemens. Areva appears to be capable attaining a similar growth trajectory, though on a smaller scale. This makes it an attractive proxy play on large-scale investments that are likely in the power sector. We expect the company to post above 40 per cent earnings growth over the next couple of years.

Solar Explosives: Invest

2006-03-06T03:06:00.000-08:00

HEIGHTENED MINING activity in the past couple of years helped Solar Explosives build a good record on the revenue front. Investors with a long-term perspective and seeking to diversify their portfolio to rake in the opportunities in the coal mining sector can consider investing in the initial public offering by Solar Explosives. Growth opportunities in the coal sector play down the pricing factor, which is at about 15 times its annualised consolidated per-share earnings for FY-06. However, investors with limited exposure in equities can give the offer a go by, as the listing gains are not guaranteed going by the performance of industry peers. The company proposes to raise about Rs 80 crore, a large portion of which it plans to invest in its subsidiaries. Business Solar Explosives manufactures slurry explosives and through its subsidiaries makes detonators, detonator components and bulk explosives. It is among the larger players in the explosives industry. The explosives industry is largely dependant on the mining and infrastructure industries. Capacity expansion in metals, power and cement industries, which are among the major users of coal, is expected to heighten coal mining operations. Increased mining activity would in turn spur demand for explosives. Heightened mining activity in the past couple of years helped Solar Explosives build a good record on the revenue front. The company, on a standalone basis, recorded a 20 per cent growth in revenues and earnings over a four-year period. The performance has continued into the first half of FY-05. Though the company is expected to maintain the growth rate, the stiff valuations at which shares are being offered are a dampener. Details of the issue Solar Explosives plans to expand its bulk explosives facility at a cost of Rs 53 crore and infuse Rs 23 crore as equity in a subsidiary which it plans to set up in Nigeria. The proposed Nigerian subsidiary would manufacture bulk explosives, cartridge explosives and house a magazine storage facility. Solar Explosives is offering 44 lakh shares in the Rs 170-190 price band. The offer, which opens on March 9, closes on March 13. SBI Capital Markets is the manager to the offer and Intime the registrar.

Tata Tea: Buy

2006-02-26T18:04:00.000-08:00

We have decided to step back from the plantation business, but in a phased manner. We will not sell the assets. They will go to the workers and their co-operatives. ? Mr R. K. Krishnakumar, Vice-Chairman of Tata Tea. Tata Tea is well on its way to becoming a pure FMCG play; it has unveiled initiatives for a strategic exit from the plantations business. Last year, it transferred leased plantations in the South to its employees and sold properties it owned. Now it plans to replicate this model for properties in the North-East and West Bengal as also in Sri Lanka. China is also now on its radar as a market with immense promise. We have `buys' outstanding on the stock and maintain our positive view.

Marico Industries: Buy

2006-02-26T17:59:00.000-08:00

Skin care, hair care, salon services, grooming... Marico Industries has just the right businesses in its portfolio to capture the rising spend on lifestyle products by the Young Indian. With the company's growth rates already moving into a higher trajectory this year, the stock has actively participated in the re-rating of the FMCG universe. It now trades at a valuation of 30 times its trailing 12-month earnings, not expensive when compared to other FMCG stocks, but demanding in terms of the required growth in earnings. This may make the stock suitable only to investors with a two/three-year perspective. With the revival in consumer spending still at a nascent stage, investors can add the Marico stock to their portfolio with a return expectation of 12-15 per cent a year. Any meltdown in the stock price in line with the broad market may provide an even more attractive entry point. Focus on margins Coconut oil brand ? Parachute ? and edible oil brands ? Saffola and Sweekar ? have traditionally been the key revenue drivers for Marico. In recent years, the company honed its strategy to break away from the commodity influence on these businesses. In the coconut and vegetable oils business, it has invested in brand-building and stayed away from frequent price re-jigs to keep up with the commodity cycle. As a result, the company's profit margins have remained stable, despite blips in the commodity cycle and the presence of strong regional competitors. New growth engines Over over the past two years, Marico has also been de-focussing on the vegetable oils businesses to build a high-margin portfolio with a wider geographical reach. The company has embarked on a four-prong strategy: It has rolled out a slew of premium brands in conventional businesses to persuade consumers to upgrade. The value-added hair oil brands ? Parachute Jasmine, Parachute Advansed, Shanti Badam Amla and Hair & Care ? have managed to pep up value growth for the hair-care business. The company has also forayed into categories such as hair conditioners (Silk n Shine), male grooming (Parachute after shower cream) and baby care (Sparsh baby oil), which can deliver substantial value growth with higher margins. Marico's hit rate with product launches has been quite good. The company has been actively pursuing expansion opportunities for its brands in the overseas markets such as Bangladesh and West Asia, with considerable success. Parachute is now the largest coconut oil brand in Bangladesh. Marico's overseas forays include Sundari LLC of UK, a global Ayurvedic company acquired a couple of years ago. Sundari's presence has been expanded into spas and leading hotel chains such as Four Seasons and Marriott, across the US and in the Asia-Pacific. The international business contributes only about 12 per cent of Marico's current revenues; it has, however, been growing at a faster pace compared to the domestic business in the past year. Inorganic growth opportunities, wherever and whenever they have arisen, have been snapped up. Marico has acquired a slew of smaller brands over the past two years, to acquire a footprint in regions where it sees growth potential. Camellia and Aromatic, two soap brands in Bangladesh; Manjal, a strong regional brand in Kerala, and Nihar, Hindustan Lever's coconut oil brand are some of Marico's recent acquisitions. Nihar, a Rs 120-crore brand will add directly to Marico's market share in this segment. These brands also have a distribution reach that complements Marico's network. This will be used as a platform to enhance distribution for the older brands in the portfolio. The Kaya business Marico's foray into the salon business with Kaya Skin Clinics gives it a toehold in this promising business. After opening initially in the metros, the clinics are now being rolled out in new markets in India and abroad. Kaya skin clinic, one of the new growth engines. The Kaya business, with 40 clinics, reported Rs 33 crore in revenues in the first nine months of 2005-06. Break-even is expected in 2006-07. Clearly, each of Marico's new business forays has the potential to substantially ramp up its growth rate from the historical average of 13 per cent managed over the past five years. Thanks to the resurgence in consumer spending, the company has managed a 12 per cent growth in sales and a 28 per cent jump in earnings in the consolidated financials for the first nine months of 2005-06. There is an unsustainable element to the earnings growth, as prices of key inputs such as copra were ruling low during this period. In the wake of several promising business initiatives unveiled over the past couple of years, earnings growth could, however, continue to outpace revenue growth over the next few years.

2006-02-26T17:39:00.000-08:00

A robust order-book, pre-qualification for a wide range of infrastructure projects and expanding margins that lend earnings visibility make IVRCL Infrastructures & Projects an attractive option; buy with a one-to-two year perspective. The stock trades at 14 times its expected per- share earnings for FY07. As there is likely to be renewed emphasis on the infrastructure sector, especially in rural areas, IVRCL is likely to be a prime beneficiary. IVRCL is a key player in irrigation and water supply projects. Acquisition of Hindustan Dorr-Oliver has further strengthened its position. A well-diversified portfolio and comfortable networth, which is critical for bidding, are factors that will ensure that IVRCL gets its fair share of business from government projects in road, water and power segments. The current order book of Rs.6, 200 crore is about 6 times the company's FY05 revenues. The surging order book, once converted to revenues, is likely to expand profit margins. Earnings dilution, if foreign borrowings are not utilised for projects, and delays in implementation of government projects, are key risks to our recommendation.

Downside averaging

2006-02-26T17:34:00.000-08:00

One of our clients has a typical trading pattern. He identifies a stock and buys the entire quantity on a single day. He buys more of the stock if it is likely to decline subsequently. The logic is simple. As you buy at lower levels, your average cost comes down. This is called downside averaging. We advised the client not to engage in this strategy. The client argued that research reports sometimes recommend `accumulate', which is equivalent to downside averaging. We had to then explain that downside averaging was different. So, what is the difference? Suppose you decide to buy 1,000 shares of Shree Cement. You are confident that the price will go up from the current level. So, you buy 1,000 shares at Rs 660 per share. The stock later declines to Rs 620 and you buy another 500 shares. Note that you initially wanted to buy only 1,000 shares. You ended up buying 500 shares more because you wanted to lower your cost. That is downside averaging. Accumulation is different. Suppose you expect Shree Cement to go up but you are aware that the stock could also decline to Rs 590 levels. You buy, say, 300 shares to initiate exposure. Later, as the stock moves down, you buy the balance 700 shares at various price levels. This strategy is termed accumulation. You spread your risk by purchasing the shares at various price levels. Importantly, you do not allocate more capital just because the stock declines. The additional money you invest in a loss-making position during downside averaging can be instead used to buy some stock that shows signs of moving up.

BOOK REVIEW:Getting inside the mind of the traders

2006-02-26T17:21:00.000-08:00

To understand markets, try out, Traders, written by Mark Fenton-O'Creevy, Nigel Nicholson, Emma Soane and Paul Willman, from Oxford (www.oup.com). The book is based on a study, over three years, of more than a hundred denizens of financial markets, and their psychological and social influences. A chapter on `Trader Psychology' explains that a well-known trap in trading environments is the reluctance to take the plunge and decide, ever waiting for sufficient information. "Perfectionists who are unable to be swiftly decisive cannot make money, and cannot survive. As the saying goes, `the best is the enemy of the good.'" Market Traps Decisions, therefore, have to satisfice, "by letting a `good enough' threshold trigger choice". Experience shows as the lowering of this threshold. "One strategy is for managers to help them take the perspective of a funnelled focus." Another trap is `base-rate insensitivity'. This shows when you are "over-impressed by percentages while overlooking absolute values." A different pothole in the financial world is `mistaken frequency estimate'. This is `a dysfunctional aspect of our sensitivities,' explain the authors. "We tend to be very poor at evaluating frequencies. Rare events not only stand out, but they are often subjectively perceived to be more frequent than they actually are, especially negative events and major risks." Influence of prior expectations is one more hurdle. "The starving man is more prone to food mirages than the person with the sated appetite." Similarly, trained scientists "are highly prone to seeking evidence that is in line with their cherished theories." Traders too may suffer from such a problem. "If I had a new suit on a bad trading day, I wouldn't wear it again, even if it was brand new," reads one of the trader quotes cited in the book. "It is disturbing, but only human, to find traders as full of superstitions as the rest of us, but at the same time most are aware of this irrationality enough to engage in some healthy discounting."A dangerous challenge is not to chase losses. "The trader who starts to pile up losses in an environment where the bad news keeps coming may be apt to feel loss of control." The authors explain: "If a trader believes, as some do, that all winning trades are due to their good judgment and all losing trades are due to market factors, then they are only a whisker away from megalomania (on a winning streak) and depression (on a losing run)." Watch out for ego-involvement, "the tendency to identify with one's actions". Traders who fall a victim to this can be "obsessive, emotionally reactive, and often living unbalanced lives because of their inability to shut off at the end of the day, weekends and vacations." Such people may not be bad traders; yet, they run a greater risk of "persisting overlong in their engagements with situations where early exit would be the best strategy." Problems aren't over with decision-making. Many problems arise in the aftermath, say the authors. "Reactions to outcomes may defeat rationality ? storing up a legacy of unhelpful orientations to be carried forward into the next decision." Thus `illusion of control' is caused when one makes "a favourable interpretation of the outcome". Not a case of being wise after the event, you'd agree! "Hindsight bias is part of the price we pay for the benefit of reconstructive memory," elaborate the authors. "From here it is a short step to rationalisation ? the tendency to re-evaluate negative outcomes in a positive light." Becoming a trader demands `emotional self-management', such as what an equities trader talks about in this snatch: "Staying emotionally calm all the time is the hardest. It's not so much making or losing money because that's more clinical. It's the constant staying calm and emotionally neutral when people are shouting, yelling, screaming and asking stupid questions." Though trading is a complex environment, there is little training, rues the conclusion. Disappointingly, "Managers emerge from the trading cadre with at best tacit knowledge about managing people under stress." The authors, therefore, see a role for "some form of accreditation on the part of those responsible for traders, to ensure that they at least understand the existence of behavioural implications of heuristics and biases." Helpful clues to understand the trading mind!

IPOs: Rich on listing, lacklustre later

2006-02-22T17:53:00.000-08:00

OVER the past 18 months, post-listing returns on initial public offers have been so good that it has conjured up an image of IPO trees, off which one can pick plenty of low-hanging fruit. The astronomical gains in stocks such as Saksoft, FCS Software, Bartronics, Gateway Distriparks and Bharati Shipyard has only reinforced this perception. In recognition of this heightened interest among retail investors, Standard Chartered Mutual Fund has even come out with a fund that invests only in IPOs. Such are the expectations from IPOs that they are seen as vehicles in which one can zoom past the indices. While that may have been true for a while, in more recent times, investing in public offers has not been a cakewalk. Gains on listing were much lower for the IPOs of 2005, compared to the 2004 crop. Post-listing gains for the IPOs are, barring a few exceptions, hard to come by. Even in the seasoned offers, the returns are more moderate. Rights offers, too, have proved a mixed bag. The writing on the wall is thus clear. If listing gains are significantly high, investors should consider exiting IPOs early, after their trading debut, as the performance tends to deteriorate over time vis-?-vis the Sensex or the Nifty. Greater interest, lower returns: Though market interest in IPOs has been picking up, as reflected by the enthusiastic subscription levels and offer sizes, IPOs in 2005 have under-performed those of the preceding two years. The latter's average listing gains were 56 per cent, against the former's 50 per cent. Among the 2005 IPOs, only Nandan Exim is in the league of top performers, when seen against Sensex returns. Sixteen of the IPOs of 2005 under-performed the broad market indices. Pricing of offers has become more aggressive, in line with the secondary market valuation levels, and this appears to have reduced the scope for gains on listing and post-listing. The new regulatory requirement that FIIs must pay a part of the price upfront has also reduced the scope for subscription levels and listing gains. Different features: The IPOs of 2005 may, however, not strictly be comparable to the offers made in earlier years. There is a discernible change in the number and type of companies that tapped the market in 2005. For instance, textile companies, strapped for funds to exploit the opportunities thrown up by the quota phase-out, made a comeback. The retail sector, with Shoppers' Stop and Piramyd Retail tapping the market, was among the sunrise sectors. Educomp Solutions, Bartronics and GatewayDistriparks, operating in niche businesses, also featured in the 2005 list. Do stocks always close above the offer price on debut trading? Well, expect the unexpected, even in a bull market. Listing gains are not guaranteed, as quite a few stocks shed value on their trading debuts, despite the strong interest in IPOs. Shringar Cinemas and Jaiprakash Hydro are examples in the low-priced category, while Bannari Amman Spinning, Allsec Technologies, and 3i Infotech are instances from the higher-priced IPOs. A common characteristic of IPOs that registered losses on debut trading was low subscription levels; in most such cases, the subscription level was less than six times the offer size. Post-listing gains: How long should one remain invested in an IPO? Investors should consider divesting their exposures in IPOs by the end of the first month from debut trading, as there is little incentive to hold beyond that. Though several stocks debut at a substantial premium over the offer price, such gains take away their ability to outperform the indices after the first day's trading. Over a three-month period, the average post-listing gains from the IPOs of 2005 were lower by 4 percentage points than the Sensex. Investors who missed out on IPO allotments should stay away from entering these stocks, as much of the gains are concentrated on the listing day. For instance, FCS Software, Indoco Remedies and Sasken Technologies, which attracted high subscription interest and listed with huge gains, declined from the first day's price. Is an IPO that is marketed extensively and managed by high-profile lead managers a better option? No. Investors would be better off investing in much less-hyped IPOs; this is substantiated by the post-listing performance of high-profile IPOs such as Jet Airways, Biocon, TCS and NTPC, compared to less-known players such as Nandan Exim, Ramakrishna Forgings, Gateway Distriparks, Bharati Shipyard and Vivimed Labs. Sector takes: Which sectors are better investment options in an IPO? Investors with a long-term perspective should take a cautious approach while taking exposures in IPOs from the pharmaceutical and chemical sectors, as they have been significant under-performers to the broad market indices. Nectar Lifesciences, Mangalam Drugs, and Vardhman Acrylics at current levels are quoting below their offer price. Investors seeking to profit from listing gains could employ their funds more efficiently by avoiding these sectors, as their returns on listing were also not too attractive. A similar strategy may also be adopted for media stocks, both print and electronic. Investors who opted for offers from the construction and engineering space enjoyed rich gains despite low subscription levels in a quite few of them. The price effect: Does the offer price play a factor in returns? While investment literature tells us they should not, the reality, however, is different. The price effect continues to have a hold over the stock market. The IPOs of 2005 that were priced at Rs 99 or below out-performed those pegged at Rs 100 or above. On debut trading, the average return on lower-priced IPOs was 40 per cent, while in the higher priced ones it was 32 per cent. Further, the gap widened in favour of lower-priced IPOs over a five-month period from the listing date. The level of returns from lower-priced IPOs was, however, inconsistent, with listing gains varying from 324 per cent (Saksoft Communications) to just about one per cent (Vikash Metal). In the IPOs priced above Rs 99, gains on listing varied between 4.5 per cent and 128 per cent. This was only a continuation of the trend that prevailed in earlier years, when low-priced offers such as Ramakrishna Forgings and Power Trading Corporation significantly outperformed the high-priced ones, such as Indoco Remedies and Biocon. Book-built vs fixed price: Are book-built offers priced better than fixed-price ones? Well, not really. The book-building process may serve as a medium for better price determination; such offers may also attract higher levels of subscription, but the bidding patterns, ironically, tend to favour the issuer rather than the investor. Fixed price offers, given the lack of book-building to discover the optimal price, may be offered at a more attractive price by the issuer. They do tend to outperform book-built offers. For offers during the preceding three years, average returns of fixed price offers was 63 per cent, against 35 per cent for book-built offers. A few of the notable book-built offers that continue to quote below their offer price include HT Media, Datamatics Technologies and TV Today. What if you miss: If you have missed out on a fundamentally attractive IPO, do not buy in the first few months after listing. Let the euphoria peter out and wait for the stock to stablise. A four-to-six month period may be appropriate. This may also enable you to track earnings announcements, avoid nasty surprises (earnings cards may be spruced up ahead of an offer) and then take an exposure, if the long-term prospects are bright. By doing so, you may miss out on exceptions such as Gateway Distriparks or Bharati Shipyard, which rose consistently even after the listing date. But this approach will, in general, pay richer dividends than plunging headlong in the immediate aftermath of listing. Valuable rights HOW did right offers pan out vis-?-vis seasoned offers? Investment in rights offers generated handsome returns, which were also less volatile than those from seasoned offers. Though stocks that came out with such offers reflected a similar pattern in the run-up to the offer period, the extent of upward trend was more moderate. Most of them also managed to hold on to the gains after they went ex-rights; prominent among them were Simbhaoli Sugar and JMC Projects. Value of holdings (including investment in the rights offers) in Gati, Texmaco, Saregama, ING Vysya Bank, Bihar Caustic, Bharat Forge and MicroInks more than doubled over a six-month period since the stocks went ex-rights. Saint-Gobain Sekurit and Sangam India were the only ones that did not offer immediate value to shareholders who invested in the rights offers. But even in these two cases, six months after the offer, investors enjoyed the benefit of reasonably attractive returns. Seasoned offers: How did `seasoned' (equity issues by established listed companies) offers pan out? A common characteristic of `seasoned' offers has been a sharp rise in market prices in the homestretch to the offer. Stocks such as IVRCL and Emami, among the top gainers, were the only ones to maintain the price momentum in the ensuing five months. Oriental Bank of Commerce and Punjab National Bank under-performed the market during this period. Most seasoned offers proved a disappointment, as they were aggressively priced close to the market price. Do `seasoned' offers with discounted prices to ruling quotes shine? No, again. Any seasoned offer with a discount of more than 20 per cent to market price must be viewed with greatscepticism. This is best exemplified by Jindal Polyfilms; about a month before the close of the offer, the stock ruled about 40 per cent higher than the offer price of Rs 360. But the stock dropped to about Rs 260 by the end of December. Others that reflected a similar pattern included Gujarat Industries Power, Talbros Automotive Components and Dena Bank; six months after the equity issue, they traded below the offer price. Investors may thus opt for such offers more judiciously and selectively.

A phased exit will pay

2006-02-19T17:56:00.000-08:00

Though it is always advised to exit at the right time and re-enter at lower levels, practicing this concept is not all that easy. The difficulty arises in identifying and/or deciding when and at what price to buy or sell or buy, as it is practically impossible to exit at the top or buy at the bottom on a consistent basis. It would also be a futile exercise trying to do so. There is loads of money to be made by capturing the major part of a particular move on a consistent basis. It is always better to adopt a strategy of exiting at different levels on a phased manner. Investors may sell a portion of their holdings once their minimum target return is achieved. Another lot may be sold at the next desired level of return. Hold a portion of the exposure with a trailing stop-loss, as this would ensure that you participate in unusual price run-ups that one gets to see in a few stocks. A similar graded approach may be used when it comes to buying a particular stock. While buying, never let the losses run beyond your zone of comfort. Exit from long positions when the stock declines by a margin, which is just within your tolerable limits, and never hang on to a losing trade in the hope of a recovery, which invariably would turn out to be elusive. We would also like to advise investors not to hold a loss making position beyond a threshold limit of about 10-12 per cent. Any stock would struggle to recover to its earlier highs after having recorded a decline in excess of 12-15 per cent. Unless you are convinced about the long-term prospects and fundamentals, never hold on to a position, which has dropped by over 15 per cent.

BOOK REVIEW:On how to become richer and happier

2006-02-14T17:18:00.000-08:00

BORN `with cerebral palsy and hemiplegia, acute paralysis of left arm and leg', as son of `a labourer and a domestic cleaner', and offered at the age of six `a place for life in a residential home for the seriously mentally or physically disabled'. Not a sob story, but the early bio of Barrie Pearson. He `graduated in theoretical chemistry, became a qualified accountant'. In 1976 he founded Livingstone Guarantee, "the first corporate finance boutique in the UK which became the largest and most successful in the industry," as his book "Serious Money," from Viva (www.vivagroupindia.com) informs. "At any age from your teens to a senior citizen, this book has the power to guide, to motivate and to inspire you to become seriously richer and happier," assures the intro. No gimmicks, only `simple, practical and proven techniques' liberally offered throughout the book. "Identify and pursue the jugular vein of opportunity in any situation," reads one such. "Always assess the downside risk and have a deliverable contingency plan in case of failure, even if the possibility is remote," advises another. "Never ever buy shares as a result of an unsolicited phone call giving you a hot tip which is about to take off," cautions yet another. The book is divided into two parts, for balance. The first is on achieving wealth and success you've always dreamed about. For this, begin by taking stock and setting your financial goals. Aim at minimising your borrowing costs and improving the return on your savings. A chapter titled `vital touchstones to create serious wealth' starts on a philosophical note: "Get to really know yourself." How? By finding answers to the following questions: "What is holding you back from being wealthier? What is letting you down? What mistakes do you repeat?" Make a poster of this exhortation: "Ask yourself: What major opportunity is staring you in the face?" Remember that self-esteem is the difference between winners and losers, and that "good luck is an attitude of mind". To the disabled, Pearson shares his wisdom thus: "Regard disability as an unfair advantage." He says, "Stop even mentioning your disability, get on with what you want to achieve and you will gain huge respect... People are on your side and want to give you the opportunity." For a solid foundation, "do yourself some valuable favours." These include meeting and learning from the rich and the influential, networking seriously, investing in your appearance, developing poise, and improving your skills and qualifications. `Your home is probably the best `proven' opportunity over the long-term,' states Pearson, when discussing how you can develop your house. For instance, "Adding a bedroom, a bathroom or a garage is likely to add net value, whereas turning two small rooms into say, a larger bedroom may reduce value." Also, "Expensive and indulgent makeovers of a kitchen or bathroom are likely to exceed the added value." On gold, the author's tip is to go for ingots, because "jewellery is an indulgence not an investment". The author invites, `Get to the top.' But that presupposes you develop certain traits. "Be unswervingly honest, loyal and reliable," he instructs. "Honesty is more than not stealing from your employer, it is about intellectual honesty and acting with integrity as well... Reliability is a vital quality which is valued at every level in any organisation." Become a resultaholic not a workaholic, says another diktat. "Twenty per cent of the time you spend working delivers 80 per cent of your contribution." So, if you cut back on the less important tasks, "you could save from 10 to 30 hours a week." Coach and train people to take over your job, so that you can reinvent your role to make a more valuable contribution! "Offer to take on some of the tasks carried out by your immediate manager, especially the ones he or she dislikes doing. In this way, seek to learn new skills and more varied experience." Learn also, to think, talk and act strategically. Part two of the book is on becoming truly happier as well. This begins with managing your health. "A combination of sensible living, moderation and balance is likely to pay huge dividends." Pay attention, therefore, to weight, diet, exercise, leisure, and so forth. "The key to exercise is that it should be regular, enjoyable and result in breaking into a sweat but not finishing exhausted." A chapter on investing time in family and friends reminds that becoming richer and happier should go hand-in-hand. "Some couples spend a lot of time together and never really communicate. Effective communication in a partnership is not just about relating the events of the day to each other or discussing topical issues... It is important to understand your partner's feelings and to be sensitive to any signals." Serious read!

$3-billion project to manufacture semiconductors ? SemIndia zeroes in on Hyderabad

2006-02-10T00:22:00.000-08:00

Mr Rajendra Kumar Khare (left), Chairman of India Semiconductor Association, Mr Dayanidhi Maran, Union Minister for Communication and Information Technology SEMINDIA and the Andhra Pradesh Government on Thursday said a $3-billion (about Rs 13,500 crore) project to manufacture semiconductors that go into computers, mobile phones and other digital devices would come up near the upcoming Hyderabad international airport. The project, which was hotly pursued by Chennai, Bangalore and Hyderabad, would now be located in a 1,200-acre site near here. Along with this, two more semiconductor manufacturers ? Nano Tech and Cypress Semiconductor, too, have evinced interest in locating their bases in the Fab City and negotiations are on to woo some more semiconductor companies. While the work of the phase one of the SemIndia project, which will see an investment of $1 billion, would begin next month, the second phase would have an overall investment of $2 billion. However, within months an Assembly Test Mark Pack Plant that would be used by AMD (Advanced Micro Devices) would initially be grounded. AMD is SemIndia's technology partner. Addressing a press conference here on Thursday, the State Chief Minister, Dr. Y.S. Rajashekhara Reddy, the Chairman of SemIndia, Dr. Vinod K. Agarwal, the STPI Director, Mr B.V. Naidu, and Mr Pratap Kondumuri, a venture capitalist, along with senior Government officials, described this as one the largest investments ever made in the country in the technology sector and having the potential for a spin-off effect of drawing more companies. India has missed the opportunity to be part of the hardware growth story and this isseen as a first step towards becoming a $33.6-billion semiconductor market employing about 36 lakh people by the year 2015, as projected by consultants Frost & Sullivan. Dr Agarwal said the Chief Minister and his team of officials made a world of difference in the decision of locating this centre near Hyderabad. Though the announcement of the project location has been made, the promoters of the project and the State are awaiting a Central policy framework that encourages the hardware sector. Though details of the financials were not given out, the project is likely to have 50 per cent equity from the promoters and strategic partners and 50 per cent debt component. Given its capital-intensive nature, the investment by strategic partners would be crucial. The company also expects to support Broadcomm's chip requirements. Giving a perspective on the choice of Andhra Pradesh, Dr Agarwal said that they were in parleys with the three southern States. However, while the response from Tamil Nadu was not encouraging, Karnataka and Andhra Pradesh were in close contention. But the support from Dr Reddy and his team, as also the Union Minister for IT & Communication, Mr Dayanidhi Maran, helped finalise the deal. The Chief Minister said although the State had made significant strides in software and business process outsourcing sectors, the missing element of hardware would now be bridged through SemIndia project. "We will do all that is necessary to ensure that this project comes through at the earliest providing huge job opportunity through both direct and indirect employment." Giving a snapshot of what SemIndia would manufacture, Dr Agarwal said typically a chip that is made here could have structures that are more than 100 times smaller than the human hair.

Tea stocks see revival of interest

2006-02-08T22:32:00.000-08:00

THE tea sector, shunned by the stock market for long, seems to be finally brewing a hot cup, thanks to scrips that are rapidly gathering steam. While leading counters such as Tata Tea, Jayshree Tea, Williamson Tea Assam and McLeod Russel have already started to record large volumes, some of the smaller names are looking up as well, investment circles point out in a reference to stocks such as Goodricke and Apeejay. The market's interest in the sector stems from a combination of factors - a sudden demand for tea at auction houses that have almost run right, a drought in Kenya that may just about turn into a boon for Indian exports, and above all, higher price realisations by domestic producers. The result: a potential addition to the average tea company's bottomline. More than the export market, the industry is raking in the moolah from domestic consumers. The Indian Tea Association, the apex industry body, has already announced that the per capita consumption of tea has increased to 733 grams from 630 grams in 1996-97. "The market has discounted the industry for some time. But several things point to a possible re-rating, at least for the leading players," said Mr Raamdeo Agrawal, MD, Motilal Oswal Securities. As for the dominant names that are currently making news in the market, Tata Tea and Harrisons Malayalam seem to be cases in point. The former, a Nifty constituent, has been rising steadily for the past one year. On Wednesday, it opened at Rs 904 and appreciated intra-day to Rs 922. The 52-week high and low for the counter are Rs 971 and Rs 500 respectively. The RPG group company, Harrisons Malayalam , which is actually a more diversified venture, too has lately assumed greater significance, given the sizeable volumes it is commanding every day. On Wednesday too it saw large number of trades on the NSE. According to Mr Deepak Khaitan, Vice-Chairman , McLeod Russel, "Tea is about the only major commodity that has not done so well on the bourses, especially when compared to sugar. This may well change now". McLeod Russel, incidentally, is the top player in the sector, courtesy its 70 million kg production capacity. The stock is buzzing - on Wednesday, it crossed the Rs 100-mark for the first time this year. As things stand, a host of small players, many with only a few gardens, make up the rear. These are typically low-volume counters that not many investors are aware of. Examples include Diana Tea, Ledo Tea and Norben Tea. Mr Nilesh Shah, President, Kotak Mahindra Mutual Fund , is of the view that Indian tea is a potential gainer because of the country's competitive advantages on this front. "It has to be seen how the sector leverages on its inherent strengths in the days ahead. The market will want to have significant earnings visibility before any serious realignment takes place," he noted. According to Mr P.T. Siganporia, ITA Chairman and Tata Tea MD, tea stocks piled up from 2001 to 2003. In the next two years the inventories decreased. "The current stock positive is similar to what it was in 1999, when the average tea prices sky-rocketed. Buoyancy in the prices would come this year," he said.

From 5k to 10k... Top 4 stocks retain weightage in Sensex

2006-02-07T16:32:00.000-08:00

THE sprint for the Sensex to the 10,000-mark from 5,000 in May 2004 has triggered interesting changes in the weightage of index constituents. During this period, the free float market capitalisation of Sensex has recorded a two-and-half fold rise to Rs 6,14,000 crore. Much of the rise has been contributed by Infosys, ICICI Bank and ITC. The computation of the Sensex is based on the free float factor in contrast to the Nifty, which is based on market cap of stocks as the basis. The free float factor is the share of non-promoter holding in the equity of the index constituents. Four of the top five stocks in the Sensex - Infosys, Reliance (adjusted for demerger), ICICI Bank and ITC have held their positions. Only HDFC has elbowed its way into the top five, pushing ONGC to the sixth position. The top five stocks by weightage accounted for about 40 per cent of the index, both at current levels and in May 2004. Much of the churn in free float Sensex weightage has been concentrated in stocks that figure lower in the pecking order. The stocks that have seen their weightages rise sharply in the Sensex are Bharti Tele-Ventures, BHEL and Gujarat Ambuja Cements. Stocks that have slipped in rankings were Ranbaxy Labs, Tata Motors, Grasim Industries, Reliance Energy and Dr Reddy's Labs. Ranbaxy has been the only stock, which has suffered a decline in its free float market cap. During this period the Sensex composition has also undergone a change. Three stocks- HPCL, MTNL and Zee Telefilms have made way for L&T, NTPC and TCS. The entry of HDFC into the top five stocks and ICICI Bank and HDFC Bank increasing their standing among index constituents reflect the sharp rise in the financial services contribution to Sensex. L&T's entry into the index and the progress made by Gujarat Ambuja reflects the rising investor confidence in the cement and construction sector stocks. Suits pending against pharma companies in courts overseas led to the slide of Dr Reddy's and Ranbaxy in the rankings.

Stocks that missed the bus

2006-02-06T16:31:00.000-08:00

MISSED the entire stock market rally from Sensex 5,000 to 10,000 because you were wary of valuations? Maybe you needn't despair; for there are still a large number of stocks that haven't kept up with the markets' furious pace over the past two years. A good 206 out of the 500 stocks making up the CNX 500 have lagged the Sensex between mid-May 2004 and now, a period over which the Sensex roughly doubled in value. 106 stocks out of the 500 have severely under-performed, managing less than half the Sensex return over the same period. There were even a fair number of stocks that have barely moved. About 51 stocks have returned 15 per cent or less over the past two years. The CNX 500 basket was chosen because it captures a cross-section of well-known companies with reasonable fundamentals. Several of the laggards over the two-year period came from the pharma, banking and mid-cap IT space. Mid-cap IT stocks were hit by a slowdown in growth rates and order flows, relative to their frontline peers. The reversal in the direction of interest rates, which started heading northwards in mid-2004, dampened the enthusiasm for bank stocks. Lupin, Reliance Energy, Biocon, Oriental Bank and Tata Power were some key stocks that have stayed flat or lost ground between May 2004 and now. This analysis shows that the market rally from 5,000 to 10,000 hasn't been as "broad-based" as is widely believed. Capital goods, auto and FMCG stocks have accounted for much of the gains, while sectors such as banking and pharma have stayed out of the limelight. This has made fund houses confident of coming up with winners, if they sift through this list of under-performers. Both Chola Mutual Fund and ING Vysya Fund have recently rolled out new "contrarian" funds that will focus on stocks ignored by the herd over the past two years. These funds claim that investing in a carefully selected portfolio of under-performers has consistently delivered good returns, both in bear markets and in bullish ones.

The journey so far...

2006-02-06T16:25:00.000-08:00

MONDAY invariably appears to have something special for the stock markets. Usually it is a steep fall earning the market the sobriquet, `Black Monday'. But this time around, Monday turned out to be positive for the market sentiment with the Sensex briefly crossing the 10,000-point mark. Incidentally, the index crossed the 9000-mark also on a Monday. It had taken the market just 70 days to achieve this milestone from 9000 that the market recorded on November 28, 2005. This is the fastest 1000-point move recorded by the index in the last decade and a little more as the Sensex raced past the 4000 mark way back in March 1992. Here is a look at the journey over the years. 1000 points on July 25, 1990: The Sensex touched the four-digit figure for the first time on this date from the time debuted in 1986 with the base year as 1978-79 and an initial score of 100. The first milestone thus took a long while to come. 2000 on January 15, 1992: It took 538 days for the index to move to the 2,000. The move was underpinned by the liberal economic policy initiatives undertaken by the then finance minister Dr. Manmohan Singh. 3000 On February 29, 1992: The Sensex crossed the 3000-mark in 45 days. 4000 on March 30, 1992: Helped by the Harshad Mehta euphoria, the move to the 4000-mark was even more swift with the Sensex taking just 28 days to cross this barrier. 5000 on October 8, 1999: The crash following the Harshad Mehta scam pushed the market into a bearish phase. It took more than 7 years for the Sensex to cross the 5,000-mark as the BJP-led coalition won the majority in the Lok Sabha election. 6000 on February 11, 2000: The global euphoria for technology sector stocks pushed the stock markets across the globe including the Sensex to historic highs. The index moved past the 6000-mark in a span of 126 days. 7000 on June 20, 2005: Though the Sensex crossed 6,000-mark in February 2000, it failed to close past it. It took more than four years for the Sensex to close past this level on Jan 2, 2004. The meltdown in the equity market consequent to the burst of the Internet bubble, pushed the markets went into a major bearish phase. Stock markets across the globe saw huge correction. It took almost 63 months for the Sensex to get back to 7000. Reports of an amicable settlement to the tiff between the Ambani brothers buoyed market sentiment. Led by the Reliance group pack, the Sensex moved past 7,000 points in about 63 months. 8000 on September 8, 2005: The surge in the FII inflow during 2005 was the key factor behind the bull market witnessed in the year 2005. The Sensex crossed the 8000 mark in 78 days. 9000 On November 28, 2005: It took 78 days to move to the 9000-mark on the back of surging FII inflows and active retail investors participation. 10000 on February 6, 2006: The Sensex crossed the magical 10000-mark in 70 days but closed shy of this level at 9981.

Sensex 100 & 10,000: A dramatic story

2006-02-06T15:56:00.000-08:00

SENSEX 10,000 is obviously a far cry from Sensex 100 in terms of numbers. The most interesting aspect is, however, the changes in the basket of Sensex stocks (refer table 1). Stocks such as Asian Cables, Scindia Steamship, Bombay Burmah, Zenith and Indian Organic Chemicals were part of the Sensex initially, when it was started in 1986 with a base period as 1978-79 with a value of 100.These stocks barely attract investor attention now. There are only eight stocks, which have remained in the Sensex at both these levels. Only six ? Hindustan Lever, ITC, Tata Steel, Tata Motors, Grasim and ACC ? never went out. A plethora of other changes to the Sensex basket have left us with a portfolio of stocks that reflects the Indian economy and its transition over the past couple of decades. IT was initially unknown quantity in the Indian context though TCS and Infosys had started operations on a small scale. They have now become key components of the index. Several PSU stocks, too, figure prominently now, while the Sensex at 1,000 was made of the then-private sector blue-chip companies. Interestingly, only two stocks ? ACC and Tata Motors ? traded at above Rs 100; today, despite stocks splits, 29 of the 30 stocks trade at above Rs 100. The exception is Gujarat Ambuja, which, too, has slipped below Rs 100 only due to bonus and stock split in mid-2005. Even over the past decade, the composition of the Sensex (refer table 2) reveals the dominant presence of the finance and IT sector. They have gained space, as commodity, consumer products, auto and diversified sector plays have shed share. Share of commodity stocks have declined from 42 per cent to 27 per cent despite the inclusion of ONGC, which has a weight of 13.5 per cent. The composition of the top ten stocks reflects the changes in the economy with only Reliance and ITC retaining their presence over the past decade

Market scales 10k tower ? Sensex up 238 pts; Nifty gains 2 pc

2006-02-06T15:42:00.000-08:00

AFTER a week spent testing the heights, the BSE Sensex finally crossed the 10,000-point mark on Monday before retreating to close in the more familiar terrain of 9,980.42 points, up 237.84 from the previous day's close. The new milestone, reached minutes before trading session's end, was greeted with applause and cheer across securities firms in the city. "There was so much shouting and loud clapping in our office that most of the people from neighbouring offices rushed in to join the celebration. We distributed pedhas," said Mr Alok Nanavaty, Director, V.K. Nanavaty Share & Stock Brokers Ltd. At its highest, the Sensex touched 10,002.83 points. Of the 30 Sensex stocks, 29 moved up, the sole exception being Wipro, which slipped by Rs 1.45 to Rs 514.25. The biggest gainer was ICICI Bank, up by over 6 per cent. Sustained FII interest in Indian stocks and further expected inflows from mutual funds kept shares on an upward momentum, said Mr Rahul Rege, Senior Vice-President, Sharekhan. The uptrend at other Asian bourses also boosted sentiment, dealers said. Three recent New Fund Offers (NFOs) from mutual funds ? UTI, SBI Mutual Fund and Fidelity ? had garnered money in excess of Rs 5,000 crore. Ample liquidity in the form of FII and MF investments into the market coupled with buoyant economic growth have helped the market's steady upward movement, said Mr R. Sreesankar, Head - Research, IL&FS Investsmart Ltd. FIIs have invested $1.18 billion so far in Indian stocks in 2006. According to Mr Nanavaty, the trigger for today's sudden surge was the recent correction. "Last week, the markets had moved down by 350-400 points. But the undertone is strong. RBI's revision of GDP growth from 7-7.5 to 8 per cent also augurs well," he said. The advance-decline ratio for most indices was positive. Nifty rises: The S&P CNX Nifty moved up by 2.04 per cent to end at 3000.45. Of the 50 Nifty stocks, 42 moved up. Top five gainers were ICICI Bank, Ranbaxy, Sun Pharma, Glaxo and Dabur. However, a segment of the market advised caution. "Today's was a sharp ascent. It is time to be cautious. Much of the upturn was limited to frontline stocks. This is the time for serious profit booking," said Mr Rajan Shah, Chief Investment Officer, Angel Broking. According to Mr Andrew Holland, Executive Vice-President, DSP Merrill Lynch, stocks valuations were quite stretched. "The market's breadth was not too good. A few stocks ramped up the index. No doubt, the 10,000-mark calls for celebration but it is business as usual," said Mr Raamdeo Agrawal, Managing Director, Motilal Oswal Securities. The overall trend in the market was seen as firm, though a correction was not ruled out.

Hotels: Venture and gain

2006-02-05T17:41:00.000-08:00

HOTEL stocks have had a dream run in the markets over the past two years. So much so, stocks such as Oriental Hotels, Hotel Leelaventure and Asian Hotels, which have provided returns of 75-100 per cent over the past year, have been underperformers in the sector. Valuations of hotel stocks now rule high, with stocks such as Indian Hotels, EIH and Taj GVK trading at between 35 and 40 times their expected FY-06 per share earnings. Prospects, however, remain bright for the sector. The demand-supply mismatch is likely to persist at least till mid-2007 and if growth in demand continues to outstrip the addition of rooms, the gap could widen further. Shareholders can, therefore, hold on to hotel stocks across the board from a one-year perspective. Long-term investors, however, would be better off sticking to the top-rung stocks, as only leading chains such as Indian Hotels, Taj GVK and Hotel Leela show signs of aggressive expansion. Most of the fresh supply would come in 2008. As a result, room rates and occupancy rates may decline, but settle at rates higher than what had prevailed in the past. Cities such as Bangalore could, however, be exposed to greater downside risk, as rates have been pushed to unsustainable levels. Hotels on an expansion phase will be better-placed to absorb the decline in occupancies and rates over the long term, as the addition in rooms could partially offset the pressure on rates. As valuations are high, investors' tolerance to a slack in performance will be low. The performance of hotel companies is vulnerable to events such as terrorism and national disasters. As performance is now largely driven by the boom in the economy, a slowdown in business activity could impact performance as well. Chains such as Hotel Leela and Taj GVK are expanding their presence by way of debt and internal accruals. Successful execution of these expansion plans would depend on their ability to sustain their performance. The party continues The party that began in late 2004 continued well up to end-2005, especially for hotels with a presence in Bangalore, Hyderabad, Mumbai and the National Capital Region of Delhi. With near-full occupancies and soaring demand, room rates trended further upwards. The Hotel Leela Palace Kempinski in Bangalore is now one of the more expensive hotels in Asia; a study by UK's leading travel management company, Business Travel International, has rated hotels in Bangalore as the third-most expensive for business travellers in the world. Expectedly, the likes of Taj GVK, with its dominant presence in Hyderabad and Hotel Leela, with its flagship Leela Palace Kempinski in Bangalore, boasted operating margins of more than 50 per cent in the October-December quarter. Revenues have been buoyant across the board due to increasing tourist arrivals. There has, however, been a slowdown in arrivals in December. Room rates in cities such as Bangalore have been exorbitant, turning away leisure travellers. A lack of quality hotels in the mid-priced and budget segment also explains the slowdown in arrivals. The demand from business travellers is expected to be unabated. In Bangalore, Gurgaon and Chennai, substantial commercial space is being created, which can only boost arrivals to these cities. The trend could be similar in cities where business travel has been a key driver of revenues. These factors will continue to help hotels with a dominant presence in Bangalore, Hyderabad, Delhi and Mumbai sustain their room rates for another year, till fresh supply springs up. Hotels in Chennai and Kolkata, which have been traditionally price-sensitive, have seen a significant improvement in tariffs in FY-06, and are expected to witness stronger growth in rates. View on mid-cap plays Given the sharp run up in prices, there are few stocks that trade at attractive valuations. The stocks of Asian Hotels, Hotel Leelaventure and Oriental Hotels look relatively less expensive, trading at less than 30 times their trailing four-quarters' per share earnings. They offer a good exposure from a one-year perspective. Asian Hotels and Hotel Leelaventure are best placed in terms of their prime locations. Asian Hotels has a presence in key metros such as Delhi, Mumbai and Kolkata. Performance of its Kolkata property, which has acted as a drag on profitability due to lower rates, has improved considerably. Occupancies and room rates in Delhi and Mumbai are likely to remain robust and higher demand will easily absorb new supply in these cities. Hotel Leela, which has seen a sharp increase in profitability, is now better placed to tackle its debt problem. It has raised convertible debt from overseas to partly fund its nearly Rs 800-crore expansion plan. Its properties in Hyderabad, Chennai and Pune are expected to be commissioned in early 2008, contribute to revenues from FY-09 and to earnings beyond that period, indicating a long gestation period. (The manner in which it deploys cashflows over the next two years would be a key driver of valuations. Its Bangalore property could suffer a decline in rates, if all the supply proposed in the city does come up. Its new properties, if executed on time, could partly offset this risk.) Investors with an appetite for risk can consider Oriental Hotels. The company has been a relative under-performer, with a presence in leisure destinations and a price-sensitive market such as Chennai. There could, however, be room for upside in room rates in its properties located in Chennai, Vizag, Mangalore and Kochi. Chennai, in particular, is likely to emerge as a strong business destination. Trading volumes tend to be thin in this stock. The downside risk to performance, however, appears minimum.

It's a mixed show by PSBs in Q3

2006-02-01T17:38:00.000-08:00

PUBLIC sector banks have once again come up with a mixed bag in their third quarter results. Some have posted spectacular growth in profits, trebling and quadrupling the same. Banks who did very well in this quarter were Union Bank, Bank of Baroda and Dena Bank. Some medium sized banks such as Andhra Bank, Vijaya Bank and Oriental Bank who had done well earlier had a relatively poor quarter. Corporation Bank was also the only one to post a 29-per cent dip in profits. 37 per cent net growth: On the average, 17 banks reported a 37 per cent growth in net profits. Banks gained from a 17 per cent growth in interest income, fuelled by increased lending. Loan growth has been of the order of 30 per cent. Interestingly, most banks reported a drop in other income during this quarter. For the 17 banks, other income dipped 8 per cent. The rising cost of deposits was reflected partially in the higher costs that banks paid out during the quarter. Interest costs were up 21 per cent. This might go up further as many banks are in the process of reviewing their rates. Interest rates may rise: Banks are competing to secure more resources and this may see interest rates inching up. Deposit growth has been of the order of 17 per cent and will need to gather more steam to keep pace with burgeoning loan growth. SBI's performance: Industry leader State Bank of India had a very modest performance. The bank posted a mere 1.5 per cent growth in profits at Rs 1,115 crore for the quarter. This came despite a gain of nearly Rs 1,100 crore due to extraordinary circumstances. The bank redeemed the India Millennium Deposits to the tune of nearly $7.1 billion. At the time of launch of the scheme, the exchange rate was Rs 46.65 to the dollar. At the time of redemption, a month ago, the exchange rate was at Rs 45.12 to the dollar. This gain of Rs 1.5 per dollar could have fetched the bank nearly Rs 750 crore. The bank had reported an exchange gain of Rs 531.54 crore as other income. Despite this gain, its other income dipped nearly 18 per cent in the quarter. SBI had also contributed to a fund with the Reserve Bank of India for possible depreciation of the rupee when the IMD scheme was launched. This amounted to about Rs 564 crore that has since been returned to SBI. This amount was reduced from interest expenses in SBI's books, according to the notes provided. SBI's interest income also included about Rs 954 crore earned as interest on refund of income-tax. Apart from this, there was also a change in the accounting policy for its investments in Regional Rural Banks that resulted in profits being higher by Rs 87 crore. Remove the effect of these changes and extraordinary income and SBI might well have posted a dip in profits in this quarter. The other five big banks, Punjab National Bank, Canara Bank, Union Bank, Bank of Baroda and Bank of India posted relatively good results this quarter.

Marginal drop in growth of infrastructure industries

2006-01-31T07:15:00.000-08:00

THE six core infrastructure industries, including crude petroleum, coal, cement and electricity, witnessed a marginal decline in growth to 4.7 per cent in December 2005 from 4.8 per cent in the same month last year. For the April-December 2005-06 period, the six core industries saw a decline in growth to 4.5 per cent from 6.4 per cent in the comparable period last year, an official communiqué said. This marginal decline in infrastructure growth during December 2005 was largely on account of a sharp decline in crude oil output and poor performance in the power sector. According to the data released, the crude petroleum production registered a negative growth of 8.1 per cent (provisional) in December 2005 compared to minus 0.6 per cent in December 2004. For the nine-month (April-December 2005-06) period, the crude petroleum production registered a negative growth of 5.9 per cent compared to 2.8 per cent in the same period last year. Petroleum refinery production registered a growth of 8.8 per cent December 2005 (9.2 per cent). For the nine-month period, the growth was 0.4 per cent (provisional) compared to 6.6 per cent in the same period of 2004-05. Coal saw a growth of 6.6 per cent (7.7 per cent) in December, while the production grew by 5.7 per cent during April-December 2005-06 period (7.3 per cent.) In electricity, the growth was 2.9 per cent in December 2005 (4.4 per cent). For the April-December period, the growth was 4.7 per cent (6.4 per cent). Cement production registered a double-digit growth of 13.4 per cent (8.3 per cent). Production grew by 10.9 per cent in April-December (6.9 per cent).

Tax-loss harvesting

2006-01-15T22:24:00.000-08:00

AT THIS time of the year, you may be investing in small savings schemes or eligible mutual funds to reduce your tax liability. If you are an active trader, there is another way to reduce your tax burden. It is called tax-loss harvesting. Suppose you had bought 1,000 shares of a tech company at Rs 50 per share. If the current market price is Rs 30 per share, your short-term unrealised loss is Rs 20,000. Assume that you already have short-term trading profits of Rs 50,000. If you sell the tech stock, you can set-off the losses against your trading profits of Rs 50,000. This will reduce your tax burden. Of course, selling a loss-making position requires discipline and emotional strength. A typical trader may be unwilling to take losses. She may instead wait and earn a profit from that position. This has two disadvantages. One is the opportunity lost in not being able to buy another stock with the money locked up in the loss-making position. The other is the opportunity lost in improving after-tax returns. Suppose you hold on to your loss-making position. You will have to pay taxes on your profits worth Rs 50,000. That will be Rs 5,000 (10 per cent on Rs 50,000). So, your after-tax profits will be Rs 25,000 (Rs 45,000 less Rs 20,000 loss). If you sell the loss-making position, you will have to pay taxes on Rs 30,000 (Rs 50,000 profits less Rs 20,000 loss). Your after-tax profits will, hence, be Rs 27,000 (tax is paid only on Rs 30,000). That is why tax-loss harvesting is a popular form of enhancing after-tax portfolio returns among professional traders and money managers.

The search for the 17-PE stocks

2006-01-15T22:16:00.000-08:00

STOCK market indices have doubled from their lows of May 2004 and the price-to-earnings (PE) multiple of many of these indices, as indicated by stock exchanges, is puzzlingly still only about 17. Many fund managers advocate caution but they reason the market is not necessarily over-valued since the PE is only 17. But where are those stocks with a PE of 17 or lower? A PE of 17 is more of a myth. A substantial segment of the stock market universe, going by market capitalisation, is trading at significantly higher valuations. In particular, larger stocks are trading at relatively rich valuations. Misleading stories: In recent days, one of the oft-heard formulations about the stock market goes like this: The Indian stock market is now trading at PE of 17. With earnings growing at about 15 per cent, the forward PE is less than 15. Ergo, the market is attractively valued. Look closer, however, and you will be hard-pressed to find stocks that you like trading at such attractive valuations. Half the stocks with a market capitalisation of over Rs 500 crore are trading at a PE of 22 or more. Half the stocks with a market cap in excess of Rs 1,000 crore are trading at a PE of 24 or more. Stocks of companies that you would think make for less risky investment options, are already trading at rich valuations. No particular number can capture for you the valuation of the stock market. Trying to find a PE for the market is also an exercise in futility. It is in no way going to make the job of stock-picking easy. Many, however, still feel comfortable using a particular number to capture the stock market's valuation levels. Seventeen is, however, not that number. It is not representative of the valuation levels in the market. Smaller segment: The aggregate market capitalisation of about 3,100 stocks works out to about Rs 22 lakh crore now. Of this, nearly 850 stocks of loss-making companies account for almost Rs 60,000 crore. There are another 1,286 stocks trading at a PE of less than 17. These account for a market capitalisation of Rs 8,16,000 crore. That suggests that only about one-third of the stocks (by market capitalisation) is trading at a PE of less than 17. Nearly 900 of the 1,286 stocks have a market capitalisation of less than Rs 100 crore. That is not a segment most retail investors would want to identify with. What about the potential for diversification? If you are hunting for stocks exclusively within this segment, there appears to be considerably low potential for diversification. Four broad industry classifications oil and gas, banks and finance, power and metals accounted for 99.7 per cent of the market capitalisation of stocks with a PE of less than 17. It would be difficult to outperform benchmark indices with such a less-diversified portfolio of stocks. Tata Equity P/E fund, which invests in stocks with a PE less than that of Sensex, has underperformed the Sensex in the past 12 months. If you want to outperform, you would be forced to adopt a risky strategy of investing in a smaller set of such low PE stocks. If you were to create a meaningfully diversified portfolio, then it would, in all likelihood, include a number of high-PE stocks. That is inevitable. Overvalued? To move from here and state that Indian stocks are overvalued would, however, also be inappropriate. There has been substantial improvement in the productivity of India Inc over the past three years. In addition, the economy has been growing at a robust rate. Investors who have loads of money at their disposal believe that the growth story would continue and that the improvement in productivity is here to stay. From a retail investor's perspective, they should put their money into companies that can, in their view, stay efficient. Most of these stocks are trading at PEs of between 20 and 30. They can also invest in stocks that they consider under-valued and trading at low PEs. Most of all, they would also need to have the patience to hold for a longer term of three years or more. With this kind of a strategy they stand a bright chance of beating returns from the debt market despite the stock market remaining stiffly priced now.

2005: A sizzling year for stocks

2006-01-15T07:03:00.000-08:00

AS WE look back at the course of the equity market in the just-ended year, it is as difficult to describe its highlights as it is to assess the performance of the tennis ace and world No. 1, Roger Federer. Federer, who won almost every match in calendar 2005, enthralled tennis fans with his exploits on the court but proved a sports-writer's nightmare simply because they ran out of adjectives to define his performance. And the equity market has, over the past three years, posed a similar problem for people who track its movements closely. If the movement in 2003 evoked sheer disbelief (for an investing population long used to a Sensex level of 3,000, a year-end close above 6,000 must have been eye-popping), it was more a sense of relief in 2004, as the market stayed above the 6,000-point mark, proving that the previous year's rise was no one-off phenomenon. And, in 2005, when the market, despite the rising crude prices, was still posting returns of about 35 per cent (for the Nifty and the Sensex), the performance compels us to use that adjective attached so frequently to Federer: Awesome. As we look at the events that made 2005 a memorable year at the market, a few key facets stand out. Foreign institutional investors (FIIs): Read that as money, with a capital M. It is a dalliance that began seriously in 2003 and refuses to break up. Net investments of $10 billion (Rs 45,000 crore; up by $2 billion Rs 9,000 crore over 2004) have only reaffirmed the interest that India commands among the FII community. Over the past two years, there has also been a significant rise in the number of FIIs registered with the market regulator. Fund flows into India were also aided by an appreciating rupee, which bolsters FII earnings. In October 2005, the bears rejoiced when the Sensex shed about 1,000 points on the back of FII selling. Alas, that was to be short-lived. The FIIs came back with a bang in November, as if to prove they meant business. With the economy showing resilience and Corporate India likely to post strong growth in earnings, one can expect FII interest to be sustained. Mutual funds: The mutual fund industry was not to be left behind, either. Propelled by the buoyancy in the market, mutual funds laid out the red carpet for the retail investor. And new fund offers were the flavour of the season, with a clutch of them launched in 2005. At the end of the year, mutual funds had raised a staggering Rs 25,000 crore through such offers; adjusting for redemption especially in existing open-end funds mutual funds invested about Rs 22,000 crore. When such a significant sum enters the markets, there is only one way the indices can move northwards. Crude oil prices: The fear of an unrestrained rise in crude oil price loomed large and threatened to derail the growth story. Indeed, with prices touching $70 a barrel, and the widespread impact such price escalation has across industries, the possibility of crude playing the spoil-sport was very real. But India Inc was not deterred by the phenomenon. Makers of two- and four-wheelers continued to report brisk business, though the increase in petrol prices would indeed have pinched consumers; manufacturers of products with crude oil-based inputs resorted to price hikes, aided by a strong demand environment. ONGC was perhaps one company that had no complaints whatsoever about the rising prices. Equity offers: The year 2005 turned out to be another good one for public issues, with about 70 offerings hitting the market (including seasoned offerings). Noticeably absent were PSUs, which raised a packet in 2004. Among the host of public issues, Gateway Distriparks was one that must have considerably swelled investors' coffers. Other quality offers that gave investors reason to cheer included those of Shoppers' Stop, IDFC Shree Renuka Sugars and Suzlon Energy. HT Media was a high-profile offer that turned out to be a disappointment. The equity-offers pipeline for 2006 looks robust, too. Conservative estimates peg the number of offers likely to hit the market at about 100. A few big names that have firmed up plans to enter the market are Bank of Baroda and Union Bank of India with their seasoned offers. Dainik Jagran's offer should hit the market in the early part of 2006. Other big-ticket entities that may tap the market include Reliance Infocomm and Hutchison Essar, from the telecom segment; Air Deccan and Kingfisher Airlines, from the aviation space; and Mahindra Finance and Mahindra BT. Mergers and acquisitions: If 2005 was a good year for investors, it was party time for members of the investment banking community, who took home fat bonuses. And the M&A market turned out to be a two-way street, with foreign majors entering India and home-grown companies setting up shop abroad. A few key deals include the acquisition of a significant stake in Reliance Capital by Mr Anil Ambani (through ADA Enterprises); the UB Group's takeover of the spirits business of its long-standing rival, Shaw Wallace (of the Jumbo Group); Swiss cement giant Holcim entering into an agreement with Gujarat Ambuja Cement; Matrix Laboratories' acquisition of Belgium-based Docpharma (making it the biggest cross-border pharma deal); the induction of Scottish & Newcastle as a strategic partner in United Breweries; and the investment by Vodafone in Bharti Tele-Ventures. Such a trend should continue into 2006 as well. Sectors that are expected to be at the forefront of such activity include financial services (banking and insurance), pharma (both at home and in the developed markets of the US and Europe) and, perhaps, even IT. And finally, penny stocks... : Ah, the lure of penny stocks. There's a certain quality about them that makes even a rational investor gravitate towards them in the expectation of bumper returns. Only to later suffer the mortification of seeing one's entire investment going down the tube. Over the past three years, in no year has the craze for such stocks been as rampant as in 2005. It was not uncommon for stocks to quadruple in the space of a couple of months. And riding the wave were stocks with fancy names such as Gslot Enterntainment, IQMS Software, IOL Broadband and Landmarc Lesiure. Investors who rode the wave just got plain lucky. But those who bought the stock at its peak and are now left with a lemon have only themselves to blame. As we sign off from 2005, we reiterate what we have always maintained: Buy them, but only if you've made up your mind to lose your shirt. Hot sectors THOUGH not in the limelight, stocks of mills that are sitting on huge tracts of land in Mumbai were the star gainers of 2005. Returns from stocks such as Dawn Mills and Phoenix Mills have been truly mind-boggling. The former rose almost five-fold, even as the latter turned out to be spectacular multi-bagger, rising 10-fold over the past year. If you thought that after having been on a tearing run in 2004, construction sector stocks would have paused to take a breather, you would have been quite mistaken. Stocks from this sector continued to be red-hot and given the government's thrust on infrastructure, they could be in for good times in 2006 as well. IVRCL, Hindustan Construction, Gammon India and Madhucon Projects posted stellar gains, with the last named trebling over the past year. Stocks from the sugar sector proved to be a sweetener for investors. On the back of the expectation that prices would rule firm, sugar stocks were marked up sharply over the past year. Also, with the news that a higher percentage of ethanol is to be blended with fuel in Brazil, the largest producer of sugar in the world, the demand-supply balance should remain tight and prices may sport an upward trend. Considering that sugar companies have high operating leverage (an increase in topline leading to a more-than-commensurate increase in earnings), an improvement in the pricing environment will more than work to their benefit. Stock prices of Balrampur Chini, Bajaj Hindusthan, Dhampur Sugars, Bannari Amman Sugars and Sakthi Sugars have more than doubled since December 2004. Engineering stocks also had a dream run. With a swelling order book, companies that deal with power and related equipment such as ABB, Siemens, and Crompton Greaves, from the large-cap space, delivered handsome returns. Stocks from the mid- and small-cap sectors, such as Kalpataru Power, RPG Transmission, KEC International and Emco, were also prominent gainers. Other multi-baggers from this sector were Elecon Engineering, Patel Engineering, Greaves Cotton, Sanghvi Movers and Praj Industries.

After eight years, the `dividend dogs' disappoint

2006-01-15T06:56:00.000-08:00

FOR eight consecutive years, the Dogs-of-the-BSE-100 strategy had delivered returns superior to that of the index itself. For three years in a row, it had also delivered returns that were better than that of the average diversified equity fund. That streak was broken in 2005. In the year that just ended, the Dogs of BSE-100 delivered returns of 15.3 per cent. The BSE-100 registered returns of 38.4 per cent. The average mutual fund delivered returns of 48 per cent. The strategy's value has, however, not diminished at all. It would not be prudent to discard any strategy that has done well in three out of four years. Besides, unusual conditions were behind the under-performance in 2005. If market forces had been allowed to run their course, the returns from such a strategy would have, in all probability, been superior to those from the index. In addition, the Dogs of BSE-100 have turned in positive returns for nine consecutive years, while the BSE-100 itself has turned in negative returns in three of the past nine years. Behind the strategy: The `Dividend Dogs of BSE-100' strategy is similar to the `Dogs-of-the-Dow' strategy followed in the US. In the US, the strategy involves investing in stocks that are a part of the Dow Jones Index and have a high dividend yield. The strategy has been found to beat the market consistently in the US. Adapted versions of the strategy in the UK and Canada have also delivered index-beating returns. The strategy in India involves: ranking stocks that are part of BSE-100 in terms of dividend yield; picking the top ten stocks in terms of dividend yield; investing equal sums in these stocks; and staying invested in them for a year. Poor show in 2005: Seven of the 10 stocks in the 2005 portfolio were from the public sector. The non-public sector stocks in the portfolio Hindustan Lever, Hero Honda Motors and GE Shipping comfortably outpaced the index, delivering returns of 40 per cent plus. Stocks that were hobbled by Government policies proved to be a drag on the strategy's performance. Four of the 10 stocks were particularly handicapped by inaction on the Government's policy front BPCL, HPCL, Kochi Refineries, Indian Oil and Vijaya Bank. Average returns for the other five stocks were almost on par with the BSE-100's returns. It is possible to argue that if Government policies had changed faster, then performance would have been far better. This argument is irrelevant to analyse the strategy's performance in 2005; but it is valuable when we consider its usefulness in the years ahead. This is because if you feel that inaction on the policy front would not turn out to be such a critical negative factor for PSU stocks every year, then it makes sense to persist with the strategy. This conviction is necessary as the portfolio for 2006 also contains stocks of seven public sector companies. Portfolio for 2006: The following stocks make it to the portfolio for 2006: SAIL, Chennai Petroleum, HPCL, Shipping Corporation, Vijaya Bank, GE Shipping, JSW Steel, Allahabad Bank, Tata Steel and ONGC. The average dividend yield of this portfolio is 4.3 per cent, which is identical to the dividend yield offered by the top ten stocks at the beginning of 2004 and 2005. The dividend yield for BSE-100 is 1.6 per cent. For all the past performance of this strategy, the portfolio for 2006 is hardly inspiring. Only four sectors are represented in this portfolio steel, shipping, public sector banks and oil. All four suffer from poor visibility on the earnings growth front, and this is reflected in the valuation of stocks. The average price-to-earnings multiple of the stocks is five, compared to 17 for the BSE-100. This strategy does, however, presume that concerns relating to company performance are overdone. Prices are beaten down more than warranted, and the stocks are thus trading below their intrinsic value. This premise was proved to be wrong in 2005, although it worked wonders in the earlier years. As far as 2006 is concerned, principal risks to the portfolio performance stem from a continued increase in crude oil prices. This could affect the performance of Chennai Petroleum and HPCL. It would also affect margins of SAIL, JSW Steel and Tata Steel. Shipping volumes and prices would also be affected, as the global economy would slow down. Vijaya Bank and Allahabad Bank could also suffer due to a rise in interest rates related to rise in crude oil prices. If the crude price cools down all stocks in the portfolio would benefit in different ways. ONGC will be unaffected as its realisation is still considerably below the prevailing international crude price. Such a boost to portfolio returns will also enhance the value of the strategy considerably.

Safety features in demat

2006-01-07T22:00:00.000-08:00

How will I know that my Depository Participant (DP) has updated my account after each transaction? Your DP will give you a transaction statement periodically, which will detail your current balances and the various transactions you have done through the depository account. If you so desire, your DP may provide transaction statement at intervals shorter than the stipulated ones, probably at a cost. At what frequency will I receive my transaction statement from my DP? You will receive a transaction statement from your DP once in a quarter. If you have done any transaction during the quarter, you will receive the statement within fifteen days of the transaction. What is to be done if there are any discrepancies in my transaction statement? In case of any discrepancy in the transaction statement, you can contact your DP. If the discrepancy cannot be resolved at the DP level, you should approach NSDL. NSDL also sends out a statement of holdings to a few clients of DPs, picked at random. In case the balance in your account as indicated by your DP does not tally with the balance as indicated by NSDL, you can contact your DP/NSDL for clarification What security do I have if the only proof of my holdings in the depository is merely a piece of paper indicating my account balance? No transaction can be effected in your account without your written authorisation. Further, if you are away for a long time, you have the facility of freezing your account wherein only credits into your account will be allowed and no debit will be possible. What precautions does NSDL take to protect the data in its depository system? The data carries a high importance in the NSDL depository system. NSDL has taken necessary steps to protect the transmission and storage of data. The data is protected from unauthorised access, manipulation and destruction. The following back up practices are adopted to protect the data: Local Back up Remote Back up Disaster Recovery Site In addition to this, every DP is required to take daily back up, at the end of each day of operation. Can I freeze my account? NSDL system provides the facility to freeze the depository accounts for any debits or for both, debits and credits. In an account which is "freezed for debits", no debits will be permitted from the account, till the time it is unfreezed. What should I do if my DP is unable to resolve my problem? In case of failure of a DP to resolve your grievance, you can write to the investor grievance cell of NSDL at the following address: The Officer in Charge, Investor Grievance Cell, National Securities Depository Ltd, 4th Floor, Trade World Kamala Mills Compound, Senapati Bapat Marg, Lower Parel, Mumbai - 400 013. Email : relations@nsdl.co.in Source: www.nsdl.co.in

Stocks for you

2006-01-07T17:04:00.000-08:00

SBI (Rs 941): A positive trend prevailed during the week. The stock appears to be on course to move to the target zone of Rs 1,050-1,100. This stock appears to be among the top picks from the banking sector. Investors may include the stock in their portfolio at prevailing price levels. Price weakness may be used to enhance holdings. The positive view would be invalidated on a close below Rs 860. Long-term investors may hold with a stop-loss at Rs 860. Short-term traders may have the stop-loss at Rs 900. A close below Rs 900 will be an early indicator of the onset of short-term bearish trend. A close below Rs 860 would push the stock into a bearish orbit. Reliance Ind (Rs 919): The stock ruled firm and also moved to the target zone of Rs 935-940 that was mentioned in earlier weeks. Though there is a possibility of the stock dropping to the Rs 890-895 range in the short-term, the long-term outlook appears positive. The stock is likely to move to the next target range at Rs 945-950. The bullish outlook would warrant a reassessment only on a close below Rs 810. A close above Rs 936 would be a sign of strength and fresh exposures may be considered subsequently, with a stop-loss at Rs 910. Stop-loss for existing long positions may be placed at Rs 885. Tata Steel (Rs 385): The price action has been devoid of any trend in the recent weeks. The stock is consolidating in a narrow trading range. This has resulted in a steady contraction in volatility. A sharp movement, triggered by an increase in volatility, often follows such a situation. A close above Rs 400 would be a positive sign, while a close below Rs 365 would impart weakness. Hold with a stop-loss at Rs 365. Satyam Computer (Rs 760): A bullish trend prevailed as anticipated last week. The stock also moved to the target zone of Rs 765-770. The recent upward move does not appear complete. A rally to Rs 800-810 appears likely. The positive view would warrant a reassessment only on a close below Rs 725. Remain invested with a stop-loss at Rs 725. Fresh exposures may also be considered on weakness, with the same stop-loss. Infosys (Rs 3,055): The stock managed to close above the trendline that acted as a strong resistance level in earlier weeks. With the company scheduled to announce its third quarter results shortly, the volatility is likely to increase this week. There is strong support at Rs 2,940-2,960. Investors may consider long positions on weakness, with a stop-loss at Rs 2,930. The stock appears to be headed towards Rs 3,190-3,200.

Seersucker theory

2006-01-07T16:24:00.000-08:00

MY FRIEND subscribes to seven newsletters that provide him with trading ideas on a daily basis. He buys a stock only if three or more of these newsletters recommend the same stock on a given day. He does this because one newsletter is no better than the other in forecasting price movements, though these newsletters are a lot costlier than the rest. My friend refuses to discontinue subscription to these newsletters. His behaviour may appear rational if you agree with the seersucker theory. What is this theory? In 1980, Scott Armstrong, professor at the Wharton School, University of Pennsylvania, published a paper in which he concluded that it does not pay to hire the best expert for forecasting changes. The reason? Studies have concluded that expertise above a certain level does not really add value to forecasting changes. You do not really need to hire a PhD or a person with 20 years of market experience to forecast price changes. You may be better off hiring a person who understands the market and charges one-tenth the fees. My friend knows this. After all, evidence shows that one newsletter is no better than the other. Yet, he did not stop subscription to the costlier newsletters. Why? Prof Armstrong argues that such behaviour helps in avoiding responsibility. What if my friend stops the costlier newsletters and that decision leads to more loss-making trades? Hiring well-known experts in a field may prove costly but also helps my friend avoid responsibility for a bad decision. This is the seersucker theory. It is so called because no matter how the much evidence that seers do not exist, suckers (like my friend) will pay for the advice.

13 things your stock broker won't tell you

2006-01-06T19:00:00.000-08:00

Dont go by tips from your friendly neighbourhood broker. Do your own analyses. Smart Investor: Hi, whats up? Advisor: Nothing, except the stock market is rangebound, with Sensex hovering around 9,600. Smart Investor: Can we review the entire approach to equity investment at these levels of boom market. Advisor: Fine. We may jot down some broad principles and we may call them Axioms. As you know, these axioms are all my work but based on several excellent books on the vast and fascinating subject of stock market investment like One Up the Wall Street; Beating the Street; both by Peter Lynch; Zulu Principle by Jim Slater; The Warren Buffet Way; to name only a few of them. Axiom One: Where there is profit, there is always risk. Greater the opportunity of profit, greater the possibility of loss: There is a close direct relationship between the risk and the reward. Higher the reward, greater the risk. Though this is fairly simple, it is always observed in breach. Axiom Two: Gentlemen who prefer BONDS, dont know what they are missing. On Bonds, there is no return ON our money; there is only return OF our money: Bonds being Debt instruments unlike equity, yield only fixed return and with inflation and income tax factored in, there is often no return at all. Axiom Three: Equity Investment is risk investment: Investing in equity shares of companies is risk related because returns are linked to the companys profits unlike investing in bank deposits or bonds or debentures where the returns are fixed and accrue to investors regardless of the companys profits. Axiom Four: Stock market behaviour is unpredictable: Stock market behaviour is dependent on human behaviour and since times immemorial, it has been established that human behaviour can never be predicted with any reasonable accuracy; and hence we have fluctuations in prices of commodities, things and stocks based on greed, emotions, hopes, fantasies, fear and dreams resulting in opportunities of making money out of such fluctuations! Axiom Five: Not all common stocks are common: Though equity shares as an investment class is one, each company has a distinct identity and performs differently and therefore rewards its investors also differently. Axiom Six: Investing is nothing but arbitrage of ignorance: Investing is basically profiting from pricing and difference in market perception of a given product at a given point of time. Stock market is one place where the buyer and the seller both think that they are smart in their decision. Axiom Seven: Elephants dont gallop, zebras do: Stock prices of big companies with large capitalizations move up or down rather slowly compared to smaller companies because there is not much of market ignorance on big companies to capitalize on. Hence smaller companies tend to reward its investors more handsomely. Axiom Eight: Equity investment is not for everyone, nor for all times of a persons life: One needs not only cash but also courage to be an equity investor. There has to be a positive mental temperament and willingness to absorb occasional losses. Those prone to panic at losses should remain invested in fixed deposits with banks and Government Bonds. If you dont know who you are, stock market is too expensive a place to find it out! Even for a risk loving investor, there is no single static investment strategy valid from his cradle to crematorium. Axiom Nine: Investors make mistake in buying not good stocks at high prices but in buying bad stocks at low prices. A lay investor tends to buy unsound companies at cheap prices instead of solid companies at high prices. Axiom Ten: Equity investment cant maximize your income; but it can maximize your wealth. Actual yield by way of dividends on equity shares with reference to their market value is often as low as 1 percent on our investment. But capital appreciation in equity values can be mind blowingly high. Ask initial investors of Infosys, Pantaloon to name only two companies. Axiom Eleven: Saving for investment is not a punishment. Investing is making conscious choices about how you will use your money. It is not about choosing to live rich or die rich. It is about how you want you and your dear ones should live during your lifetime and thereafter. Axiom Twelve: On Stock Prices: (i) There is no high price or low price of a stock. There is only the market price of the stock nor any price too high for you to buy or too low for you to sell. (ii) In isolation, price of a stock is not relevant. What is important is whether a share is underpriced or overpriced, overvalued or undervalued. (iii) We do not invest in Stock Market Index; nor in Stock Market; nor in individual companies. We invest in a stock at a price at the correct time. (iv) You cant control the market nor the individual stock prices; but you can control your reaction to the market. (v) Intelligent investing is knowing what to buy; smart investing is knowing when to buy. (vi) Your profit is determined by your purchase price and not your sale price. Timing your purchase is important. (vii) Dont ask the price of the stock, ask what is the worth of the entire company to know whether the stock is worth investing. Axiom Thirteen: On Share Brokers: (i) Dont expect your broker to help you to earn for you. He is there to earn from you. (ii) The sub-broker made money and the main broker made money and two out of three making money in a single transaction is not a bad bargain. (iii) Never ask a broker whether you should buy a particular stock, it is like asking a barber if you needed a haircut. Investor: This was great education!

What do the charts portray?

2005-12-31T18:19:00.000-08:00

THE BSE Sensex (9386) and S&P CNX Nifty (2834) enjoyed another north-bound year in 2005. A look at the weekly and monthly charts indicates that the long-term outlook is bullish. Having recorded a 41 per cent gain in 2005, the Sensex appears headed towards the target zone at 9900-10200. This target is likely to be reached in early 2006. The index is likely to get into a major corrective phase on the completion of the present leg of the upward move. The analysis is based on the premise that the index is in Wave 5 of the sequence of waves that commenced at the low of 4227 recorded on May 17, 2004. In Elliott Wave terminology, the Sensex completed Wave 1 at the high of 6696 (week ended Jan 8, 2005), Wave 2 at 6138 (April 29, 2005), Wave 3 at 8821 (October 7, 2005) and Wave 4 at the low of 7656 (October 28). Wave 5 is likely to be completed at the target zone of 9900-10200. If the index faces resistance at this target zone, there is a possibility of a subsequent fall to at least 9000-9100. If our Elliott Wave analysis is correct, there is a fair chance that the index would fail to hold at 9000-9100 range and could get into a sharper correction extending up to 7400-7600. The possibility of a drop to 7400-7600 would be negated on a close above 10700. This would indicate that the undertone is bullish and 2006 could turn out to be another memorable year for the investors in the equity market. For the moment, we would stick to the view that the index is likely to top out at 9900-10200 and probably get into a major corrective phase subsequently. As far the S&P CNX Nifty is concerned, a move to 3100-3150 range appears likely. After registering a top at around this target zone, the index could drop to 2300-2400 subsequently. This view would be negated on a close above 3200. A close below 2720 for the Nifty and 9000 for the Sensex would be an early indicator that the domestic stock market is getting into a major corrective phase. For the long-term investors, any sharp correction on the anticipated lines will present an opportunity to accumulate stocks. The major upward move would commence on the completion of the anticipated correction. For the moment, we advise investors to remain cautious and take profits regularly.

WISH YOU ALL A VERY HAPPY AND PROSPROUS NEW YEAR 2006

2005-12-31T16:39:00.000-08:00

FREE LUNCH IS OVER

2005-12-06T19:49:00.000-08:00

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CERTIFIED FINANCIAL ADVISOR OFFERS HIS SERVICES

2005-11-14T20:38:00.000-08:00

All the esteemed user of my blog especially from USA UK FRANCE AUSTRALIA PAKISTAN PHILLIPINES MALAYSIA CANANDA SINGAPORE GERMANY BRAZIL DENMARK SAUDI ARABIA OMAN JAPAN DUBAI THAILAND MEXICO INDIA may contact the email id given below for their requirements of investment in mutual funds,equities trading,insurance and other financial products in the emerging market of india. Portfolio management and investments in stocks are welcome. Nominal charges will be applicable. Email ID is certfinadv@yahoo.co.in ONLINE CONSULTATION THRU EMAIL WELCOME

SUCCESS IS ALL ABOUT HAVING THE COURAGE TO TAKE RISK

2005-08-11T00:50:00.000-07:00

POEM ON RISK TO LAUGH IS TO RISK APPEARING THE FOOL. TO WEEP IS TO RISK APPEARING SENTIMENTAL. TO REACH OUT FOR ANOTHER IS TO RISK INVOLVEMNT. TO EXPOSE FEELINGS TO IS TO RISK EXPOSING YOUR TRUE SELF. TO PLACE IDEAS AND DREAMS BEFORE A CROWD IS TO RISK BEING CALLED NAIVE. TO LOVE IS TO RISK NOT BEING LOVED IN RETURN. TO LIVE IS TO RISK DESPAIR. TO TRY IS TO RISK FAILURE. BUT RISK MUST BE TAKEN, BECAUSE THE GREATEST HAZARD IN LIFE IS TO RISK NOTHING. THE PERSON, WHO RISKS NOTHING, DOES NOTHING, HAS NOTHING, IS NOTHING AND BECOMES NOTHING. THEY MAY AVOID SUFFERING AND SORROW, BUT THEY CANNOT LEARN, FEEL, CHANGE, GROW, LOVE,LIVE. CHAINED BY THEIR CERTITUDE, THEY ARE SLAVE; THEY HAVE FOREFEITED THEIR FREEDOM. ONLY A PERSON WHO TAKES RISKS IS TRULY FREE. AUTHOR: JANET RAND

THE TENTH COMMANDMENT

2005-06-25T04:42:00.000-07:00

"FOCUS ON ONE OR TWO TECHNIQUES THAT WORK FOR YOU" * Most successful traders follow only one or two trading techniques rather than constantly search for new ones. * It is stronly recommended that you find a trading technique that works for you, refine your approach and STICK TO IT like a leech. Happy trading/investing

THE NINTH COMMANDMENT

2005-06-25T04:20:00.000-07:00

The Ninth Commandment is: "DO NOT OVERTRADE" The explanation is: * You can make fifty trades a day, but if you do the only way you would probably make money is thru sheer luck. * Watch the stocks you are interested in and wait for as many factors to be in your favour as possible before you execute a trade. * Remember, each stock has its own pace, Rhythem and trading characteristics. * Make yourself familiar with your stocks personalities and then wait for opportunities that promise big profits. * Limit yourself to trading IN AROUND TEN STOCKS at a time. * This will help you focus on and understand your stocks IN-DEPTH. Happy trading/investing

THE EIGHTH COMMANDMENT

2005-06-25T04:12:00.000-07:00

The Eighth commandment is : "IF IT SOUNDS TOO GOOD TO BE TRUE, IT PROBABLY IS" The explanation is : * Remember, there is no such thing as a free lunch. * If a trading opportunity seems wildly better than the others, there are probably hidden risks that you do not understand. Happy trading/investing

THE SEVENTH COMMANDMENT

2005-06-24T08:18:00.000-07:00

The Seventh Commandment is : " DIVERSIFY" *Follow the time tested golden rule and as with almost all things in life. " DO NOT PUT ALL YOUR EGGS IN ONE BASKET" * This makes sense while investing or trading. * No matter how much you know about a particular company, there is no guarantee that the price of the stock will perform accordingly. Happy trading/investing

THE SIXTH COMMANDMENT

2005-06-24T08:07:00.000-07:00

The Sixth Commandment is: " NOT DOING ANYTHING IS ALSO TAKING A POSITION" * If the market is very volatile or is in a consolidation phase, as a short-term trader you might not be able to identify and follow a trend for a certain period of time. * Do not let your need to trade make a BUY or SELL something just for the ACTION! Remember , it is not necessary for you to catch all the action all the time to be able to make big money Happy trading/Happy investing

THE FIFTH COMMANDMENT

2005-06-03T08:27:00.000-07:00

Do not use "STOP LIMIT" An order to buy/sell when the stock trades at the "STOP" price but constrained by a limit price, is called a STOP LIMIT ORDER. For example, an order to "Sell Stop @ Rs.100/- limit Rs.98/-" means" Sell the stock if it trades @Rs.100/-, but at a price above Rs.98/-". It is strongly recommended that for trading you try not to use "STOP LIMIT" orders because if a stock is volatile, it might run through your limit price without your order being executed. You might be left holding a position you do not want to! Happy investing/trading

THE FOURTH COMMANDMENT

2005-06-02T08:59:00.000-07:00

"TRAILING STOPS" A trailing stop is basically a stop order where you keep increasing/decreasing the stop price as the stock advances/declines. To make it simple, think of trailing stops as stop ordersplaced at a certain percentage of the market price. For example, if you have bought a stock @ Rs.100/- and you had a stop loss of Rs.90/- This means that you have stop loss of 10%. If the stock appreciates to Rs.120/- , you can continue to have a stop loss of 10% by increasing your stop loss to Rs.108/-. You have a trailing stop for a buy position when you increase your stop loss as the price increases. And vice versa for a trailing stop for a sell position. TRAILING STOPS CAN HELP YOU CATCH A GOOD PORTION OF A STOCK's MOVEMENT WHILE PROTECTING YOUR CAPITAL. Happy Investing/Trading

THE THIRD COMMANDMENT

2005-06-01T08:25:00.000-07:00

ALWAYS USE "STOP LOSS" ORDERS, AND TRAILING STOPS. BUT NOT "STOP LIMIT" The explanation for the above commandment is : Stop orders help you take the emotion out of trading a stock. A Stop Loss Order is a buy/sell order that is automatically executed if a stock touches a pre-selected trigger price. For example, if you bought a stock @ Rs100/-and you want to limit our potential loss on this position, you could place a standing order to sell the stock "AT MARKET PRICE", if it trades @Rs.90/- or less. This is called a "STOP LOSS" order, or a "STOP ORDER". Pl note there is a risk that you will be able to sell at less than your pre-selected price because of volatality of the market. However, this is a good way to protect your capital, as you are making sure you rationally define the level of risk you are willing to take and you execute it without getting emotionally attached. Happy trading/investing.

THE SECOND COMMANDMENT

2005-05-30T09:05:00.000-07:00

Second commandment is: The market is always right, no matter how much you think it is not! The explanation is as follows: Although when you make a trading decision, you should feel absolutely confident that you are RIGHT, you must also recognise that the MARKET can prove you WRONG. For every buy/sell trade, it is recommended to set a price at which you will acknowledge if you have gone wrong in your trade decision, and then just take the LOSS and get OUT! Happy trading /investing

TEN COMMANDMENTS FOR STOCK TRADERS/INVESTORS

2005-05-29T06:23:00.000-07:00

THE FIRST COMMANDMENT IS: PRESERVE YOUR CAPITAL-CUT YOUR LOSSES SHORT,LET PROFITS RIDE. The explanation for this improtant rule is as follows: Successful trading is a big war built of several small battles being won or lost. To win the war, you have to fight all the battles- you can not afford to run out of ammunition midway. To preserve your ammunition, withdraw quickly from the losing batlles and force the winning battles as far as you can. Happy trading/investing I will cover the next commandment in the next session.