BL Research Bureau Foreign institutional investors (FIIs) may have continued to pour money into the Indian markets in recent months, but they weren’t uniformly bullish on all stocks or sectors.
FIIs have actually trimmed their stakes in half of the BSE Sensex companies in the quarter from June to September 2009.
Big names as Bharti Airtel, ONGC, BHEL and ICICI Bank saw a dip in FII ownership over the past quarter. Over 180 companies in the BSE 500 basket also saw a fall in their FII holdings in this period.
Media shed
Shareholding patterns, in fact, show that it was a limited set of stocks that benefited from FII buying in recent months, as they continued to cash out where stock prices had run-up.
FIIs reduced holdings in many index and mid-cap stocks, even as they subscribed enthusiastically to qualified institutional placements.
Media and entertainment was one sector that FIIs singled out for significant selling, trimming their stakes by between 3.5 and 9 percentage points in stocks such as Television Eighteen, NDTV, Wire & Wireless and Entertainment Network.
FIIs have, in fact, been pessimistic on media stocks from the June quarter itself, when stocks such as Balaji Telefilms, Zee News and Reliance MediaWorks saw a drop in FII holdings.
No sector bias
Outside of cutting exposure to media stocks, FIIs did not display much of a sector bias in trimming their holdings and instead, took a stock-specific view for their buys and sells.
For instance, within the sugar sector, the stock of Balrampur Chini Mills saw FIIs trim their stakes by 5.7 percentage points, but Shree Renuka Sugars saw a 4.7 percentage point increase in FII holdings.
While FII holdings in Gammon India fell by 5 percentage points for the quarter, their holdings climbed steeply in stocks such as Maytas Infrastructure, Lanco Infratech and Nagarjuna Construction. They trimmed stakes in mid-sized software player Tanla Solutions, while adding in 3i Infotech.
The realty sector, which raised massive funds through the qualified institutional placement route, was the rare one to see an across-the-board increase in FII holdings. Companies such as Unitech, Hindustan Construction Company, HDIL, DLF and Sobha Developers all saw major increases in FII stakes.
Overall, the level of FII holding in the BSE 500 universe has risen negligibly in the September quarter; from 13.3 per cent in end-June to 13.9 per cent by end-September.
The preceding June quarter saw the FII holdings rise more sharply from 12.5 to 13.3 per cent.
BL Research Bureau Stock price gains have generated crores of rupees in notional wealth for investors holding on to equities so far this year. However, only a small slice of this may have accrued to retail investors.
Stocks in the BSE 500 added over Rs 24-lakh crore in market capitalisation in 2009, mainly through price gains. Of this notional wealth, retail investors saw an accretion of Rs 1.9 lakh crore, while promoters of India Inc walked away with over Rs 13 lakh crore.
These numbers are based on the shareholding patterns of the BSE 500 companies, which account for nearly 94 per cent of the total market capitalisation on the exchanges.
Lion’s share for promoters
Across-the-board gains in stock prices have expanded the market value of the BSE 500 stocks from about Rs 29-lakh crore at the start of this year to about Rs 53-lakh crore now. It is the promoters, holding 56.7 per cent of the market cap of these companies, who raked in the lion’s share of this wealth. That’s probably one reason why the Forbes Rich List released last week showed a doubling of the number of Indian billionaires!
Next in the line of beneficiaries were Foreign Institutional Investors (FIIs) that saw the value of stocks held shoot up by Rs 3.6-lakh crore. Domestic institutions — mutual funds and insurance companies — saw a Rs 2.2-lakh crore addition to their assets from the rally. Individual investors can probably take heart from this, as it is retail savings that domestic institutions redirect into the stock markets.
The accretion to market capitalisation, or notional wealth mentioned above, is a function of both the increase in the number of shares held by investors and the price gains on their stocks, though the latter accounted for the bulk of the gains. Adjusting for changes in the shareholdings, the FIIs pipped all other classes of investors in generating stock price returns. The FIIs saw an 80 per cent stock price appreciation on their holdings between January 1 and now, while retail investors saw a 75 per cent appreciation.
Retail investors cash in
The numbers show that company promoters continue to hold a sizeable, 56.7 per cent, stake in the market capitalisation of the BSE 500 companies (based on end-September 2009 data), even after selling into the rally this year. The FIIs own 13.9 per cent of the market cap, having hiked their stakes from 12.8 per cent at the start of 2009. Domestic institutions too have added to their holdings, and now own 9.1 per cent.
Retail investors, who now hold about 8 per cent of the outstanding market value, have marginally reduced their equity stakes since January. Consistent selling by retail investors over the past few months suggests that they may have used rising stock prices to convert a portion of their equity holdings into cash.
India stands at 10th place with 87% return in 2009.
The BRIC magic has worked this calendar year too with all four countries – Brazil, Russia, India and China – placed among the top 15 in the performance table.
Brazil’s Bovespa index has returned 142 per cent in dollar terms since the beginning of this year and is placed at the top of the returns table containing leading global benchmarks. Russia’s RTS Index comes third with 121 per cent return. India’s Sensex is placed at the tenth spot with 87 per cent gains and China’s Shanghai Composite Index is in the fourteenth place with 74 per cent.
China’s benchmark has slipped five places from the ninth position it was at, towards the end of last week following the sell-off in Chinese stocks this week after their banking regulator asked Chinese banks to improve their capital adequacy ratios.
It is not just the BRIC markets but the entire emerging market universe that has returned stellar gains this year. The indices yielding 3-digit returns and placed among the top ten gainers among global benchmark indices include Peru Lima Index, Jakarta Composite Index and Argentina’s Merval index.
Developed Market indices have yielded relatively lower returns with the Dow returning only 19 per cent this year and the UK’s FTSE and Germany’s DAX returning less that 40 per cent.
The gains in BRIC markets was driven by global funds moving in to these equities once the dollar began its steep decline since April this year. With the waning of fears of a prolonged global recession from the second quarter of 2009, risk appetite returned; leading money back to riskier asset classes such as emerging market equity.
The rapid economic growth envisaged in the BRIC economies in the years ahead has also been a strong factor in attracting funds. IMF, in its world economic outlook has noted that after contracting by about 1 per cent in 2009, global activity is forecast to expand by about 3 per cent in 2010.
The rebound is to be driven by China, India and a number of other emerging Asian countries. Organization for Economic Co-operation and Development (OECD) has echoed this sentiment in its semi-annual outlook, expecting China and India and Brazil to grow by 10-, 7- and 5 per cent in 2010. The report expects Russia’s turnaround to be even more dramatic.
Strength in the currencies of Brazil, India and Russia since March has also been an incentive for foreign funds, since their returns are enhanced by currency gains. Brazilian ‘Real’ has appreciated 26 per cent this year while the Indian Rupee is up 4 per cent.
The out-performance of emerging markets and the BRIC quartet in 2009 is also due to the fact that their equity markets had a relatively benign first quarter. Most of the emerging market benchmarks including India did not re-test their October 2008 lows, while the Dow dived 26 per cent in the first three months before turning around.
The fixed deposit scheme of Unitech is suitable for investors who can stomach some risk. The sharp downturn witnessed in the real estate sector, fund crisis faced by many players in the sector and the slow pick-up in demand for real estate place the business of Unitech in the high-risk category. Unitech's large size, established brand name and improved financials have, however, been steadily aiding recovery.
The attractive interest rates of as much as 12 per cent per annum for a three-year period can be construed as a premium payout for the risk involved.
Investment strategies
Investors can adopt a two-pronged strategy to reduce their risk term/exposure.
Short tenure: One, investors can restrict the term of their fixed deposit to six months to one year, locking their money for a short period and yet enjoying an interest rate of 11 per cent – a return not presently available in bank fixed deposits and most credit worthy financial institutions.
A six-month deposit is, however, available only under the cumulative option (where interest is paid on maturity) and would entail a minimum investment of Rs 25,000.
Interest payout: Investors can consider the two-year interest payout option (called Scheme A), available on a quarterly basis, at 11.5 per cent per annum. This would allow cash out on the interest, even as the principal continues to earn returns.
Net of tax, assuming a 10 per cent tax slab, you would earn an interest of 10.3 per cent if you opt for a two-year term under Scheme A.
A payout option, would however, require you to invest a minimum sum of Rs 25,000. Banks currently offer a maximum of 7.5 per cent for up to 2 years.
Cumulative option
While the above two investment strategies would be our preferred mode of investments, individuals who can assume higher risk can consider taking the two-year cumulative option where interest would be compounded and paid out only on maturity. Without doubt, the cumulative option is certain to offer superior yields as you earn “interest on interest”. Besides, the company has made the cumulative scheme attractive by compounding interest on a monthly basis.
For instance, if you consider the two-year cumulative scheme, Rs 10,000 would grow to Rs 12,572 at the end of two years, at an interest rate of 11.5 per cent. This would work to a yield of 12 per cent over the term. However, net of tax (assumed at 10 per cent), the yield would be about 11 per cent.
Investors can refrain from the three-year term as bank interest rates may themselves see a revival. The latter would then provide a safer and attractive option.
The company
Unitech is among the few real estate developers with a pan-India presence. The company's present projects measure to 21.5 million sq.ft. across nine cities, that include large projects in Gurgaon, Noida, Mumbai, Chennai and Kolkata. After being hit by the 2008 real estate crash, Unitech was also faced with a situation of mounting debt by late 2008. While it took resorted to a debt restructuring programme initially, the company thereafter offered residential projects at discounts to market prices and launched a number of affordable homes in order to revive working capital flows. Simultaneously in 2009, it successfully raised about Rs 4500 crore of equity in two tranches through qualified institutional placements.
These measures have enabled the company to bring back its net debt to equity ratio to a healthy 0.6 times in September, from a worrying 1.8 times in March. A good portion of the QIP funds have been used to repay debt, with the rest being ploughed for construction work.
The company has sold 50 per cent of the total area launched, a good part being residential projects. It has raised about Rs 550 crore through these sales so far; the rest of the payments, being mostly linked to construction, would only flow in a staggered manner. The company's interest obligations appear adequately covered by profits, despite decline in earnings over the past year and a half.
Additional interest: The fixed deposit scheme offers an additional 0.5 per cent per annum for its employees, shareholders (minimum holding of 100 shares), property owners as well as senior citizens above 60 years.
An investor with a wide exposure to small caps can beat the Nifty.
Astronomers say life exists on earth because of the Goldilocks Principle. The planet is neither too hot nor too cold; it's just the right temperature like the porridge Goldilocks ate. The investor's equivalent would be the stock, which is receiving just the right amount of attention.
While being a gross over-simplification, it is true that over-hyped stocks also tend to be inflated in price. Completely ignored stocks can continue to be ignored, and under-priced. Of course, there is subjectivity involved in judging the ‘right amount’ of attention. Are we talking substantial institutional coverage and occasional headlines? Are we talking ‘passing mentions’ in business channels or single column items in pink papers?
Any of these may qualify because investment is a subjective exercise. Some prefer to enter a stock early before it has institutional support. Others enter only when there is solid institutional coverage. Still others only enter when it's a big company and making headlines.
Quite often, the attention is a function of size. Big companies are rarely completely off the radar because media and institutional investors track them with dedication. Quarterly statements are dissected and usually, there is guidance and forward projections. Changes in management, in marketing strategy and ad budgets are also noted and debated.
Midcaps also make the news with regularity. At the least, analysts collate quarterly results and do the slicing and dicing. Small caps very rarely make the news unless something unusual happens. Some small caps never make the news beyond statutory coverage at the time of IPOs.
The low risk investor focusses on the highly-covered large caps. These are generally the least volatile segment due to the widely-disseminated information. Of course, stocks as a class are always volatile assets but there are two further safety factors available for large caps.
One is that they contain large institutional holdings and that puts a floor on price. The second safety factor is that they are liquid; there is always a chance of cutting losses. The medium risk investor focusses on mid-caps. Here too, there is usually institutional coverage. Volatility tends to be more than with large caps. But there is usually enough reserve liquidity to cut losses and enough institutional holding to put floors on prices.
Only big risk-takers touch small caps because these tend to extra volatility and carry extra risks. There is usually no institutional holding and hence, no floor. There is also a great deal of opacity and absence of information in terms of governance, marketing strategy (if any), etc.
However, given the lack of information, any coverage of a small-cap is worth noting. It usually denotes either an exceptionally favourable event or an exceptionally unfavourable one. There is a high “signal to noise” ratio because there is little noise.
Between May 2004, when the first UPA government took charge, and January 2008, there was a bull run. The Nifty, which is of course, large-caps, generated returns of around 392 per cent from trough to peak. The NSE Midcap Index registered returns of around 440 per cent and the BSE Small Caps returned 704 per cent. Between January 2008 and October 2008, the Nifty lost 65 per cent while the Midcaps lost 73 per cent and the Smallcaps 77 percent.
If we assume passive holdings between May 2004-October 2008, the Nifty was up 77 per cent (CAGR 15.5%) while the Midcaps was up 46 per cent (CAGR 10%) and the Smallcaps was up 85 per cent (CAGR 16.5%). The movements can be viewed in the light of the theory that high risk needs to be associated with higher returns. The Nifty follower risked less than the small cap dabbler but on balance, gains less. The Midcaps investor was the worst off.
However, there is another practical point. The Nifty is easily tracked and hedged, via index funds and derivatives. The Midcaps comprises 234 companies, while the Small Caps comprises 474 companies and neither is covered by index funds. Both are impossible to track for small investors.
At best, we can say is that an investor with wide coverage of small caps would have a good shot at beating the Nifty. But the excessive volatility makes it possible that there would be a large negative (or positive) tracking error in benchmarking any small caps portfolio to the Smallcaps Index. This is where some judicious filtering on the basis of the Goldilocks Principle may help.
The head of the IMF, Mr Dominique Strauss-Kahn, said here on Monday that although the worst of the global financial storm had passed, the world economy remains "highly vulnerable."
"Today the storm has passed. The worst has been averted thanks to a bold and rapid policy response and thanks to cooperation," he told delegates at the annual conference of the Confederation of British Industry (CBI) — Britain’s biggest employers group.
"We can say that the recovery has started but everyone understands that it is very fragile and still dependent on policy support. The financial conditions have improved but are still far from normal."
Mr Strauss-Kahn, who is the managing director of the International Monetary Fund, added: "The economy ... (is) getting better, but (is) still highly vulnerable."
"During the crisis, everyone was united by a common purpose. Going forward, this might dissolve. So the road ahead will be less clear cut."
The governments have committed trillions of dollars in stimulus and guarantees and central banks have cut interest rates to record lows since the financial crisis intensified after the collapse of Lehman Brothers in September 2008.
Mr Strauss-Kahn added that nations needed to cooperate more to build on signs of worldwide economic recovery.
"The global economy has made remarkable progress over the past year, but as we stand on the cusp of recovery, new and complex challenges are already popping up," he said.
"How do we deal with these challenges? In my view, there is really only one fundamental answer — to persevere with the spirit of cooperation that has brought us to this point."
He added: "The challenges... all require cooperation. We need cooperation on exit strategies. We need cooperation on the new growth model. We need cooperation on financial sector regulation."
The CBI is meanwhile focusing its latest annual London conference on how businesses can best recover from Britain’s longest rece-ssion on record. Britain is the last major world power still mired in recession, after the eurozone, France, Germany, Japan and the United States all emerged from a steep global economic downturn.
Please let me know the prospects of Voltamp and Alstom Projects. Sultan Mohideen
Voltamp Transformers (Rs 741.7): The recovery from the March low of Rs 265 in Voltamp is halting at the key intermediate-term resistance of Rs 900. The stock has been unable to penetrate this level over the last four months and has been moving in a narrow range just below it. The medium-term trend in this stock however continues to be up and if the stock holds above Rs 650, then it can move higher to Rs 1,100 or Rs 1,300 over the next twelve months.
Investors with a medium-term perspective can hold with a stop at Rs 650. Decline below Rs 650 will imply an impending move to Rs 510. Long-term investors can hold the stock as long as it trades above this level.
Alstom Projects India (Rs 521.3): In our review of this stock in July 2008, we had indicated that the long-term support was in the zone between Rs 200 and Rs 240. Alstom Projects rebounded many times from this zone between October 2008 and February 2009 before moving up to the recent peak of Rs 610. Immediate resistance for the stock is at Rs 650 that is half of the losses recorded in 2008. If this level is surpassed, the stock can rally to Rs 760.
Investors with a short-term horizon can hold with a stop at Rs 470 while long-term investors can hold with a deeper stop at Rs 345.
I am holding Indian Hotels purchased at Rs 86 and Deepak Fertilisers at Rs 64 for the last one year. Please tell me whether both the stocks will touch Rs 115 in next 3 months. Alok Varshney
Indian Hotels Company (Rs 83.9): Indian Hotels faces strong intermediate term resistance at Rs 86 that occurs at 38.2 per cent retracement of the 2008 fall.
The stock moved beyond this level in the second week of November but has not managed a strong close beyond this level yet. However the medium-term trend continues to be strong and the stock could attain the levels of Rs 104 or Rs 115 in the next three months. Investors with a medium-term perspective can hold the stock with a stop at Rs 78.
The stock has formed a long-term trough at Rs 34 in March and even if the stock launches in to an intermediate decline, it is likely to find support at Rs 56. Long-term investors should therefore hold this stock with a stop at Rs 55.
Deepak Fertilizers & Petrochemicals Corporation (Rs 90.3): Deepak Fertilizer is also in a strong medium-term up-trend and can attain your target of Rs 115 in the next three months. The stock has retraced half the slide from the December 2007 peak of Rs 167.
Key intermediate resistance for the stock is at Rs 110 and Rs 128 and the stock can form a peak between these two levels also. Stop-loss for investors can be at Rs 82. Breach of this level will pull the stock down to Rs 67.
I am planning to invest in Indusind Bank at current levels. What are the stock's prospects? J K Venkatesh Prasad
Indusind Bank (Rs 120.7): In our review of this stock in August, when the stock was poised at Rs 95, we had noted a positive bias in the medium-term outlook and a possible move towards Rs 105 or Rs 135 in this period.
The stock recorded the peak of Rs 145 on October 20 and has turned volatile since then as the previous all-time high was at Rs 136, recorded in December 2007 is in the vicinity. The spectacular move from March low of Rs 26 denotes that a fresh long-term up-trend is in motion in this stock.
However one-leg of this up-trend could have ended at Rs 145 and the stock appears to be in a medium-term correction that can result is a sideways movement between Rs 100 and Rs 150 for a few more months.
Investors wishing to buy this stock can do so in declines close to the Rs 100 mark with a stop at Rs 95. Subsequent supports are Rs 86 and Rs 72. Minimum target on a break-out above Rs 145 is Rs 174.
What are the prospects of Electrotherm India and Lloyd Electric and Engineering? TomlinTomichan
Electrotherm India (Rs 250): This stock is biding its time after the recent peak of Rs 306. The medium-term view on this stock will stay positive as long as it holds above Rs 218.
If this level is not breached, a rally to Rs 360 or Rs 430 can be expected over the ensuing 12 months. Investors can therefore hold the stock with a stop at Rs 200. Key medium-term support for the stock exists at Rs 160.
Lloyd Electric & Engineering (Rs 55): This stock is making a valiant effort to claw upwards from the July low of Rs 27. Key medium-term resistance for this stock is at Rs 62, where it is currently pausing.
Though the trend along both the short and medium-term time frames continue to be up, the stock could get in to a mild decline from here that pulls it down to Rs 45. Investors can hold the stock as long as this support holds.
Those wishing to buy the stock can do so on a firm weekly close above Rs 65. The medium-term target would then be Rs 96.
What are the technical prospects of Pidilite Industries for the next 12 months? Sanjeev Shahane
Pidilite Industries (Rs 196.2): The crash of 2008 made Pidilite Industries halt at the long-term support band between Rs 80 and Rs 90 and the stock has recouped almost all the losses since then. There will however be some difficulty in surpassing the long-term resistance zone between Rs 200 and Rs 220. Inability to surpass this level will result in the stock moving sideways between Rs 130 and Rs 200 for the next 12 months. Long-term investors can therefore hold with a stop at Rs 120 while those with a shorter investment horizon can divest some of their holding in the resistance band mentioned above.
Long-term target on a strong break above Rs 220 is Rs 300.
Kindly advise me on the short and long-term targets of Parsvanath Developers. Suresh Dabke
Parsvanath Developers (Rs 104.5): This stock continues in the throes of the bear's grip. The medium-term resistance at Rs 165 remains unconquered and as long as the stock remains below this level, it is expected to vacillate in a wide band between Rs 50 and Rs 150. In other words, the stock can move close to its March lows over the medium-term. Long-term outlook will turn positive only on a weekly close above Rs 165. Subsequent target is Rs 250.
The short-term trend in the stock is also down and a decline to Rs 91 or Rs 76 is possible in this period. Short-term investors can hold it with a stop at Rs 85.
In 1994, the entire MF industry in the country managed assets of about Rs25,000 crore, with almost all of it in closed-end funds. Compare this with the volumes today: with around 3,500 funds (and over 10,000 plans), hacking through the thicket of near-identical funds is a daunting task. We profile the top 5 fund houses, their strategies and key drivers
Despite having been around for about a decade, the variables in its favour—brand name, product range, performance and partnership with Sun Life—were not reflected in its scale of business. Hopefully, that is changing as this asset management company is now one of the fastest growing players.
Though it boasts of a distribution network of 120 branches across India, with 2.4 million customers, equity assets (which predominantly come from the retail base) still form a very small portion of overall assets. The retail component in the fixed-income basket is around 40%. Now the fund is working on increasing penetration across the country and brand-building.
Over the past 12 months, it has done well on the equity side. Exactly a year ago, of the 14 Birla Sun Life MF funds which boasted of five-star and four-star ratings, just one was an equity offering—Birla Sun Life Equity. This time, their list has five equity funds and two hybrids (a monthly income plan and an equity-oriented balanced fund).
One of the fund industry’s sturdiest shops, HDFC Mutual Fund has historically been a consistent outperformer. In fact, in 2008 all its four schemes—HDFC Equity, HDFC Growth, HDFC 200 and HDFC Taxsaver—fell much less than the category average.
This year, they have once again proved their merit.
This asset management company has witnessed some phenomenal growth in the past year. Its market share has actually gone up from 9.9% (August 2008) to 12.53% (August 2009). In the second half of 2008, HDFC Mutual Fund overtook ICICI Prudential Mutual Fund as the second largest fund house in the country in terms of assets under management.
When one looks at the composition of assets, it’s worth noting that the growth has come from money going into the liquid and liquid-plus segment. In September 2008, the fund house had 28% of its assets in equity and 39% in cash. A year later, the equity component has dropped to 21% while cash has zoomed to 70.32%.
Over the past decade, it has not limited itself to fixed maturity plans (FMPs). Though it does have a fairly good spread on the equity side, the fund house is known for its huge fixed-income business. The ICICI Prudential Flexible Income Plan, for instance, has assets of Rs32,858 crore and ICICI Prudential Liquid Fund had Rs20,825 crore of assets under management (as of September). Its gilt offerings are excellent. In the medium-term debt category, its best funds are ICICI Prudential Income Plan and ICICI Prudential Long Term Regular, though the latter hit a rough patch last year and underperformed the category average.
Its liquid funds now have almost 30% of the assets in instruments with very high liquidity.
ICICI Prudential Infrastructure and ICICI Prudential Dynamic are its best offerings. ICICI Prudential Tax Plan was a category underperformer over the past few years but has been doing very well recently. Ditto for ICICI Prudential Discovery, whose performance has impressed this year.
This fund has a history of sporting huge corpuses. In fact, the firm’s culture places a premium on running a big fund. Thanks to very aggressive distribution, marketing and brand management, it has managed to rope in the money. In all fairness, though, credit also needs to be given to performance and the wide asset mix.
Its first two equity funds, Reliance Vision and Reliance Growth, put it in the limelight in 2002 and 2003. Their performance was smartly leveraged, along with the Reliance brand, to gain investor attention. It worked and Reliance Mutual Fund became India’s largest private sector MF in 2006 and the largest fund the next year. The fund went on to create history by mopping up Rs2,700 crore for the new fund offering (NFO) of Reliance Equity Advantage NFO (2007) and Rs5,660 crore for Reliance Natural Resources Retail NFO (2008).
While some schemes may perform better than others, the fund has never really had a disaster with any of its offerings. A bone of contention has always been the huge size of the corpus.
In 2003, Unit Trust of India was split into two—UTI Mutual Fund and Special Undertaking of UTI, which housed all the assured return schemes. After the bifurcation, UTI MF was left with less than Rs14,500 crore of assets under management, but was still the largest fund in the country. Now it is down to the fourth position. Interestingly, this slippage in order is not due to the shrinking of UTI’s asset base, which has been robust. It’s simply that its growth has been slower than that of its peers.
Its best performing equity funds are UTI Infrastructure, UTI Opportunities and UTI Dividend Yield. The Transportation and Logistics Fund, which was the earlier auto sector fund, has been delivering fabulously this year. On the fixed income side, its best performers are UTI Money Market Mutual Fund and UTI Floating Rate ST Regular, and its debt-oriented hybrid fund.
UTI Mutual Fund has the largest investor base, a massive distribution network and is one of the most profitable fund companies in the country.
Since: February 1964
TOTAL ASSETS : Rs73,589 cr
The MF industry seems to be on a recovery path after the losses in September. The industry registered an increase in assets as the money coming into funds increased substantially. Investors added to its coffers by as much as Rs1,41,291 crore, resulting in a percentage change, over September, of 22.50%. However, there is a flip side to this. Open-end income schemes and gold exchange-traded funds (ETFs) were the only two categories that registered inflows, while all other categories registered outflows. Open-end income schemes, which registered inflows of Rs1,49,957 crore, thus went up by 52.35%.
A comeback for Arbitrage funds
Arbitrage funds may just have made a comeback. At least that is the signal Kotak Asset Management Co. Ltd is sending by reopening the door to fresh investment in its arbitrage fund. The trend may well be set for their return as these funds thrive in a volatile stock market environment—the higher the volatility, the higher the chance of mis-pricing of stocks in the spot and derivatives markets. This works especially in a bull market. Arbitrage funds stop fresh inflows if they see opportunities dwindling or if the fund size becomes too large, which prevents the fund manager from optimizing returns.
Fidelity India Value Fund from Fidelity MF
Fidelity MF has launched Fidelity India Value Fund, an open-end diversified equity fund. It will invest in Indian and international equities, with special emphasis on undervalued securities. It has been benchmarked to the BSE 200. The fund allocation will be 80-100% of net assets in equity, and up to 20% in cash, debt and domestic exchange-traded funds (ETFs). The fund may invest up to 10% in foreign securities, including overseas ETFs. The exit load applicable will be 1% if redeemed within one year, while the minimum amount for lumpsum investments is Rs5,000. The new fund offer (NFO) is open till 15 December.
ICICI Prudential to launch ICICI Prudential Oil Fund
ICICI Prudential MF has filed an offer document with Securities and Exchange Board of India (Sebi) to launch ICICI Prudential Oil Fund. It will be an open-end debt fund that will invest in oil-linked debentures created by investment banks, where these debentures will provide coupons (returns) linked to oil prices. It would be the first oil fund available to domestic investors. The aim of the fund manager would be to invest 80% of the total assets in oil-price-linked foreign debt securities. The fund can hold 20% of the debentures till maturity.
Earlier this year, when the Securities and Exchange Board of India (SEBI) mooted extending trading hours on Indian bourses, it essentially hoped to facilitate better price discovery and thereby help investors. Another, but more understated, part of the agenda was to infuse life into the derivatives segments, especially the Nifty Futures trading where the fear was that our markets will get exported.
Generally speaking, the most important hours on the stock markets are the first and the last hours. Almost 55-60 per cent of the volumes are registered during these two hours. The problem was, because of the time difference between India and countries in the Far East, these markets were well into their trading day when the BSE/NSE opened. Volatility in these markets affected the Indian markets and often the difference between the closing and opening prices was steep. An early opening of the market is expected to correct this.
Second, and equally critical, is the issue of the market for Nifty Futures which have also been listed on the Singapore Exchange. It was apparent that given the fact that Singapore Exchange opened earlier than the BSE/NSE and that a lot of the institutional investors in the Indian market were also based there, increasingly, the market for Nifty Futures was moving to Singapore. The extended trading hours will correct this to an extent.
But there are other issues which might still need time to get sorted out. For one, the extended hours would mean additional pressure on the back office processes. Any lag in these could be disastrous for a brokerage house in terms of risk management. While a lot has been said about how institutional brokerages will now have to work longer hours, I think the real challenges will be faced by brokerages that cater more to the retail clients. Fact is institutional brokerages already work longer hours to coincide with the hours put in by their clients in India or Hong Kong or Singapore. It is the retail brokerages with offices running into thousands that will have to make arrangements to coordinate their front and back office processes.
I don’t think volumes will go up significantly for the brokerages and, as a result, neither would the revenues. The larger issue for brokerages has been the numerous holidays, which could also impact volatility and activity, and we are hoping that these will be cut down. For the extended hours to work smoothly it is critical to ensure that the settlement process with banks is aligned. Despite the efforts by the central bank, the Real Time Gross Settlement (RTGS) system so far has been a limited success. Now, with the amount of time for settlement being curtailed, it is even more critical that RBI as well as the banking system push for RTGS more aggressively.
The ideal solution would be to have only index futures traded for extended hours while everything else continues with the current schedule. This will achieve all the benefits of longer hours while still not stretching the brokerage back office.
To summarise, while the modified version of extended trading hours for only index futures markets would be welcome, it might mean adjustments in the short run for brokerage houses. Market players will have to automate their systems to a greater extent to ensure that there are no lags in the settlement process.
The move by IVRCL Infrastructures to transfer its BOT projects to IVR Prime is positive for the duo.
In a recent move, IVRCL Infrastructures & Projects (IVRCL) has decided to transfer its BOT projects in the water and road segments to IVR Prime Urban Developers. The deal is seen as favourable for both the companies on various counts and will enhance clarity on the company’s business structure. Going ahead, the prospects of both companies look good. For IVRCL, given its strong order book position and huge investments planned towards infrastructure creation, its revenue visibility is stronger.
The deal IVRCL is one of the leading players in the infrastructure space having presence in growing segments like water, irrigation and roads. IVRCL is merging its two wholly owned subsidiaries namely, IVR Strategic Resources & Services and IVRCL Water Infrastructures with IVR Prime (a listed real estate player). Both the 100 per cent subsidiaries own and operate nine BOT projects in the water and road segments; of this five projects are completed or nearing completion while four are in early stages of development. The total value of these assets is estimated at about Rs 938 crore, which looks fair at about 2.1 times the book value of equity investments (Rs 450 crore) in these projects.
Gains for IVRCL The consolidation of all its BOT projects under one entity will provide clarity on the company’s business structure. It will also enable IVRCL to bid for larger projects as this deal will lead to an improvement in its debt-equity ratio and effective utilisation of shareholders’ funds. As a consideration for transfer of these businesses, IVRCL will get 5.95 crore shares in IVR Prime, which will increase its stake in IVR Prime to 80.5 per cent. Thus, it will continue to gain from the growth in the businesses of its subsidiaries.
VALUE OF IVRCL STAKE
Pre merger
Post merger
Outstandaing shares (in crore)
6.4
12.4
IVRCL Stake in IVR Prime (%)
62.4
80.5
No of shares held by IVRCL (in crore)
4
9.95
CMP of IVR Prime (Rs)
158
158
Value of IVRCL stake (Rs cr)
631.9
1,562.30
Value of IVRCL stake (Rs per share)
117
Better visibility for IVR Prime IVR Prime covers all segments of real estate development including housing, commercial and retail. The company has a land bank of over 3,300 acres spread across cities like Hyderabad, Bangalore, Chennai, Vishakhapatnam, Pune, Noida and Nagpur. Despite its huge land bank across major cities, IVR Prime is not doing well primarily given the slowdown in the real estate market. During 2008-09, IVR Prime reported an 87 per cent decline in sales while net profits fell by 95 per cent.
VALUATION OF BOT ASSETS
Share issued by IVR Prime (in cr)
5.9
CMP of IVR Prime (in Rs)
158.0
Transaction value (Rs cr)
938.5
Invest. value of transferred BOT proj. (Rs cr)
450.0
P/BV (x)
2.1
The situation was equally grim in the recent quarter ended September 2009, as the company reported revenues of mere Rs 34 lakh and a loss of Rs 6.1 crore. But now, the group wants to gradually depart from the real estate business and will possibly look for disposing off some of its assets (land bank) and use the funds for the infrastructure projects, which provide greater scope to grow given management’s experience and capabilities in this sector. Besides, it will offer relatively smoother revenue streams for the company, compared to the lumpy revenues in the real estate business.
Higher leveraging While it has a large land bank, IVR Prime does not have any debt in its book and is sitting on a large net worth of Rs 1,093 crore (including minority shareholders). Analysts believe that most of IVR Prime’s assets are not utilised fully and this move could benefit the company. According to analysts’ estimates, post merger the company’s net worth will increase to almost Rs 2,000 crore, which can be further leveraged to raise funds (including debt) enabling IVR Prime to bid for larger BOT projects in the infrastructure space, especially the large PPP projects which are expected to come in the road segment.
Conclusion Analysts believe that there would be more clarity now in terms of the structure of the business. IVRCL Infra will operate in the construction segment, whereas IVR Prime will own the various infrastructure assets in the BOT space. The deal is thus, considered to be a winning proposition for both the companies where the assets can be utilised to their optimum levels and focus can remain on the infrastructure space particularly the BOT projects, where the government is keen to encourage private participation.
FINANCIALS
in Rs crore
H1FY10
H1FY09
% change
FY10E
Net sales
2,350
2,106
11.6
5,665
EBIDTA
224
191
17
545
Net profit
84
100
-15.3
236
EPS (Rs)
6.3
7.5
-15.5
17.5
PE (x)
-
-
22.1
Consolidated financials of IVRCL Infra Source: CapitaLine; E: analyst estimates
For IVRCL, it already has an order book of Rs 14,900 crore, which is over 3 times its 2008-09 revenues and provides enough visibility and growth. Analysts are positive on IVRCL, and they value the company between Rs 380-460 per share on the SOTP basis including the valuations of its listed subsidiary Hindustan Dorr Oliver, in which IVRCL holds a 52 per cent stake.
Big ticket power investments should ensure that REC grows its loan book rapidly in the future.
As part of the government’s disinvestment programme, Rural Electrification Corporation (REC) would be one of the first public sector companies to tap the primary market. The follow-on offer, comprising 15 per cent fresh equity and five per cent offer for sale by the government, would fetch around Rs 3,750 crore at the two-week average price of Rs 220. The management expects to file its draft prospectus by mid-December and hopes to hit the market by the end of the fiscal. A major part of the proceeds (about Rs 2,800 crore) would be going to the company coffers, which would help it to finance the growing needs of the power sector. While over 60,000 MW of power generating capacity is expected to be added in the current five-year plan (2008-2012), which has already been generating increased business volumes for financiers like REC (it proposes to disburse a lakh crore in this period), the target of 100,000 MW for the next five-year plan (2012-2017) indicates that volume growth should remain robust. Apart from higher business volumes, REC’s ability to sustain margins will ensure robust profit growth for the next couple of years.
Robust demand A sum of rupees 10 lakh crore is expected to be invested in the power sector in the eleventh Five-year Plan. Around three-fourth of investments are set to be made by government related utilities. With most of them being the mainstay of REC’s customer profile, expect the company to lend a reasonably large portion in the future also. REC had sanctioned loans worth Rs 1.2 lakh crore in the last three years. Besides, participation of the private players in the power projects is on the way-up, and is also throwing up opportunities for the company. In view of this, REC expects to increase lending to private sector power projects from 6 per cent to 15 per cent in the next three years.
The deceleration in the economic growth in the second half of 2008-09, saw sanctions slowing. As things improved from there-on, REC had started to lend more. In the first half of 2009-10, the company sanctioned loans equivalent to almost 80 per cent of total loans it sanctioned in the entire 2008-09. Little wonder, REC has been able to report strong growth in revenues in the first half, while profits have grown faster thanks to the company’s ability to curb operating expenses.
Going ahead, the management expects to sanction loans worth Rs 50,000 crore in 2009-10. Disbursements are set to increase in line; it grew at 27 per cent in the last three years, and the company expects to sustain 25-27 per cent growth on an average for the next two years.
REC's had primarily been a financier to the transmission and distribution (T&D) segments in the past; it is changing its profile towards generation projects gradually. This is evident in the way the share of generation segment has moved up in the recent years, up from 22 per cent in Q1 FY08 to 38 per cent as of Q2 FY10. The change in asset mix towards the generation segment gives a balance to REC’s asset profile; however, the management feels that this proportion would increase up-to 50 per cent in the next two years.
Margins stable REC had consistently been able to maintain spreads of around 3 per cent. In the recent quarter also, the spreads were 3.35 per cent as REC benefited from lower funding costs. REC has access to capital gains tax exemption bonds (issued under Section 54EC) that are been sourced at lower rates (interest rate of 6.25 per cent) compared to relatively more expensive sources like banks. However, in spite of the declining share of these bonds in total borrowings (as REC borrowed more from other sources), the company has been able to maintain spreads.
However, going ahead, things may be a bit different. In 2007, the share of low-cost 54EC bonds was 46 per cent and subsequently it reduced to 32 per cent in 2008-09. It further fell to 22 per cent in Q2 FY10, as REC retired some bonds issued earlier. While this figure could further reduce to 10-15 per cent in 2010-11, with loans (given to customers) worth Rs 7,800 crore and Rs 12,000 crore expected to be reset (at higher yields) in 2009-10 and 2010-11, respectively, it should offset the pressure on spreads in the medium-term. Going ahead, REC’s management feels confident of sustaining spreads in the region of 2.75-3 per cent on a regular basis.
STEADY GROWTH
in Rs crore
FY09
H1 FY10
% Chg
FY10E
Net interest income
1,768
1,167
39
2,380
Operating income
2,036
1,317
40
2,533
Net profit
1,272
966
71
1,793
EPS (Rs)
14.8
-
-
20.9
P/E (x)
15.9
-
-
11.3
P/BV (x)
2.8
-
-
2.4
E: analyst estimates; % change is y-o-y
Conclusion While a majority of REC’s lending is to central and state electricity boards, it is either secured by escrow or mortgage ensuring better recovery and timely settlement of loans. Thus, asset quality, which had remained intact with net non performing assets at 0.04 per cent as on Q2 FY10, should remain healthy.
Initiatives to link risk weight to credit rating as well as separate categorisation of NBFCs engaged in infrastructure lending would provide easier access to funds to companies like REC.
Going ahead, with demand expected to remain robust and margins likely to stay healthy, expect REC’s loan book and net profit to grow at 25 per cent annually in the next two years. At Rs 232, the stock is trading at 2.4 times its 2009-10 book (pre-offer), and can be considered on dips.
Bharat Electronics’ (BEL) order backlog at the end of October 2009 stood at Rs 12,260 crore, up 18 per cent from Rs 10,390 crore as on April 1, 2009. The company has seen healthy order inflows of Rs 3,950 crore in the first half of 2009-10 and expects more to follow in the second half. Nevertheless, some of the orders received also relate to “off-set clause” as per the new defence procurement policy. The brokerage feels that the “off-set provision” for defence procurement has opened new avenues for the company’s growth.
Revenues in the first half of 2009-10 have grown 89 per cent year-on-year (y-o-y) and earnings by 146 per cent. Though this growth seems exponential, it is not indicative of growth for the year and is a function of equally spread-out revenue in 2009-10, compared to 2008-09.
The brokerage has raised its target price for BEL to Rs 2,144 (from Rs 1,998 earlier), which is 17 times and 15.5 times the estimated EPS for 2010-11 and 2011-12, respectively. As BEL should continue to deliver strong growth in earnings as well as order inflows in the future, the brokerage maintains a buy on the stock.
Pantaloon Retail Reco price: Rs 324 Current market price: Rs 335.25 Target price: Rs 400 Upside: 19.3% Brokerage: India Infoline
Pantaloon Retail (PRIL) has begun the restructuring of its existing businesses along three verticals. This would entail firstly, the consolidation of PRIL as a pure retail play and transfer of the Big Bazaar and Food Bazaar formats into wholly-owned subsidiaries of PRIL, secondly, transfer of all non-retail businesses into a separate company and thirdly, value unlocking in the financial services businesses.
The management hinted at a possible tie-up with an international retailer to ramp up its discount food format, which could have an exposure of as high as 65-70 per cent (of sales) to food products. It said that the induction of such a foreign partner is one of the drivers for the planned Big Bazaar hive-off.
PRIL derives 30 per cent of revenues from its private labels, which has given the company leverage in its relationships with category leaders such as Nestle and Kellogg’s. PRIL is also expected to do a private-label launch in cereals. To extend the reach of its private labels beyond its own store, the company could be exploring the idea of buying out an FMCG company, preferably one focused on foods. The Big Bazaar hive-off would allow efficient use of capital, transform PRIL into a pure retail play and allow investors a direct exposure to pure discount retailing if and when Big Bazaar gets listed. Maintain buy.
Reliance Industries (RIL) did not make any acquisition-related announcement at its AGM contrary to Street expectations. The key announcements include peak gas production from KG D-6 block to be achieved by second half of 2009-10, oil production from KG block at around 8,000 barrel per day with peak production to be achieved by end of the fiscal, renewed focus on a new 2 MTPA petrochemical complex at Jamnagar, announced in an AGM two years back and commencement of exploratory drilling in Block 18 in Oman.
The brokerage has maintained its 2009-10 and 2010-11 EPS estimates of Rs 97 and Rs 138, respectively. The brokerage does not rule out the possibility of downside to the earnings estimates for 2009-10 since current chemical and refining margins are below its second half 2009-10 assumptions. It believes that its 2010-11 earnings estimates also look challenging without a very steep recovery in refining and chemical margins.
The 12-month SOTP-based fair valuation has been retained at Rs 1,750. Key upside risks are steep global economic recovery and higher than expected E&P reserves. However, the downside risks to the SOTP-based valuation include weaker than expected chemical and refining margins and unfavourable developments in the ongoing RIL-RNRL legal dispute. The brokerage maintains that the stock looks expensive.
The management has guided that Corus’ capacity utilisation is likely to increase from around 56 per cent in June 2009 quarter to around 85 per cent in March 2009 quarter and maintained its 2009-10 and 2010-11 volume guidance at around 15 million tonne (MT) and around 17 MT, respectively. The management maintained that the full benefit of lower-cost coking coal and iron ore would accrue only from December 2009 quarter. Overall savings is likely to be in the range of $125 per tonne of steel.
Tata Steel might increasingly focus to reduce its debt-equity ratio albeit at the cost of dilution. The GDR issue of $500 million and the CARS to FCCB swap would reduce net debt-equity ratio from 2 in June 2009 quarter to 1.6 post the issue. Post September 2009 quarter standalone results, the management guided for reduction in debt of $1.6 billion in the next 12 months.
Recent uptick in Chinese steel prices and strong recovery in Baltic freight index continue to point towards recovery in global steel. Expect firm to moderately increasing steel prices in March 2009 quarter and then into 2010-11. With increasing volume growth, firm to moderately increasing European steel prices and reducing costs at Corus going forward, the brokerage has increased their 2010-11 EV/EBITDA estimates for Corus from 4.5 to 5.5, and maintains buy on the stock.
The management of Jaiprakash Associates (JAL) announced that the company is looking at diluting 15 per cent stake in its subsidiary, Jaypee Infratech (JIL), for Rs 2,500 crore. JIL is constructing the 165-kilometre-long six-lane Yamuna Expressway (formerly Taj Expressway) connecting Greater Noida and Agra. The company would be filing the draft red herring prospectus for JIL in a week and will hit the markets with a public offering in January 2010.
Assuming JAL makes a fresh issue of equity to raise Rs 2,500 crore, the indicated equity value of JIL works out to around Rs 16,670 crore. Accordingly, the derived value of JAL's holding of 95.5 crore of JIL's shares works out to Rs 14,005 crore. This is marginally higher than the value of Rs 14,512 crore assigned in the brokerage’s SOTP valuation of JAL.
Though it sees JAL emerging as a leading infrastructure player in the next few years, there is limited upside from the current level based on SOTP valuation of Rs 266. At the current market price, the stock is trading at 24.8 times 2010-11 earnings estimate. Maintain hold.
