CONTRA view on financial stocks

Five reasons why as an investor you should hold on to your financial stocks.

• UNDER PENETRATED

According to a report by Boston Consultancy Group, India has the second largest financially excluded population of about 135 million, which is next only to China. Though the development in terms of technology, regulation and compliance has taken place vary rapidly, the financial services sector in India still remains highly under penetrated. Just imagine how big is the opportunity that needs to be tapped. This should be enough motivation for an investor to remain invested in financial stocks.

• EVOLVING CAPITAL MARKET

As per rough estimates, only about 2% of Indian population of 1.1 billion invest in capital markets. Of this, individuals invest only 5% of their total savings into stock markets — an indication of the kind of potential Indian financial services have. The sharp rise in India’s stock markets since 2003 reflects its improving macroeconomic fundamentals. The next growth opportunities, believe analysts, will come from online trading, internet banking, currency derivatives and commodity derivatives in this space. Thus, analysts believe if you hold stocks of brokerage houses, there’s no reason to panic, as growth prospects are robust and will be highly rewarding in days to come.

• LACK OF LINKAGES

The Indian financial sector has remained relatively sheltered from the ongoing volatility in the global markets. The firms in the financial services space don’t have any substantial linkage to the subprime losses in the US except for some banks, which is too low to have any bearing impact. The lack of linkages means they are comparatively insulated against volatility in global markets.

• ATTRACTIVE VALUATION

For the long-term investor, current valuations are fairly attractive. The financial stocks have already factored in negative sentiments. Analysts advise that one could start accumulating value stocks in the financial services space in one’s portfolio. Almost all public sector banks are trading at book values. They have all reduced their non-performing loan book. With a strong retail franchisee network and expanding horizons through bancassurance channel, they will be the king of good times in future.

In the current scenario, when the index has gone down by almost 40% and financial services have taken a big hit due to the financial turmoil in the US and European markets, the valuation has become really compelling and very attractive for investors who have a two to three years horizon.

• CONTRARIAN THOUGHT

The time to buy is when blood is running on the streets. This is a renowned dictum which was issued by Baron Nathan Rothschild in the early 19th century. If you believe in contrarian approach to investing, then there cannot be a better opportunity than now to buy financial stocks. Offloading the financial stocks in the crisis is comparable to selling your livestock during a drought.

Thus, it’s important that you are fully aware of financial considerations of selling stock in a market bottoming out.

Know the key ratios to choose the right stocks!

P/E ratio (Price Earnings Ratio) shows what the market thinks about the earnings potential and future business forecast of a company. Companies with high P/E ratios are the darlings of the investors and thus enjoy a higher market rating. In order to use the P/E ratio properly, take into account the future earnings and growth projections of the company.

Looking to buy stocks but are not aware of how to select them? Are you confused by the various investment advices given by so-called stock market analysts on the stocks to be selected for investment? Don’t worry. Understand the ratios described in this article and make the best possible stock selection.

1. PLOUGHBACK/RESERVES: Every year, the company divides its net profit (profit left after subtracting various expenses including taxes) in two portions: ploughback and dividends. While dividends are handed out to the shareholders, ploughback is kept by the company for its future use and is included in its reserves. Ploughback is essential because besides boosting the company’s reserves, it is a source of funds for the company’s expansion plans. Hence if you are looking for a company with good growth prospects, check its ploughback figures. Reserves are also known as shareholders’ funds, since they belong to the shareholders. If a company’s reserves are twice its equity capital can reward its shareholders with a generous bonus. Also any increase in reserves will push the share price of your share.

2. BOOK VALUE PER SHARE: This ratio shows the worth of each share of a company as per the company’s accounting books. It is calculated as

Book Value per share = Shareholders’ funds / Total quantity of equity shares issued

Shareholders’ funds can be computed by subtracting the total liabilities (money owed to creditors) of the company from its total assets. It can also be calculated by adding the equity capital to the company’s reserves. Book value is an old record that uses the original purchase prices of the assets. However it doesn’t show the present market price of the company’s assets. As a result, this ratio has a restricted use when it comes to estimating the market price of the shares, but can give you an estimate of the minimum price of the company’s shares. It will also help you judge if the share price is overpriced or under-priced.

3. EARNINGS PER SHARE (EPS): One of the most popular investment ratios, it can be computed as: Earnings Per Share (EPS) = Profit Post Tax / Total quantity of equity shares issued

This ratio computes the company’s earnings on a per share basis. E.g. you own 100 shares of ABC Co., each having a face value of Rs 10. Assume the earnings per share is Rs 10 and the dividend declared is 30%, or Rs 3 per share. This implies that on every share of ABC Co., you earn Rs. 6 each year, but you actually get Rs. 3 via dividend. The balance of Rs. 4 per share goes into the ploughback (retained earnings). Had you purchased these shares at par, it implies a return of 60%.

This example shows that instead of looking at the dividends received from to company as the base of investment returns, always look at earnings per share, as it is the actual indicator of the returns earned by your shares.

4. PRICE EARNINGS RATIO (P/E): This ratio highlights the connection between the market price of a share and its EPS.

Price/Earnings Ratio (P/E) = Price of the share / Earnings per share

It shows the degree to which earnings of a share are protected by its price. E.g. if the P/E is 40, it means the share price is 40 times its earnings. So if the company’s EPS is constant, it will need about 40 years to make up for the purchase price of the share, after taking into account the dividends and the capital appreciation. Hence low P/E means you will recover your money quickly.

P/E ratio shows what the market thinks about the earnings potential and future business forecast of a company. Companies with high P/E ratios are the darlings of the investors and thus enjoy a higher market rating. In order to use the P/E ratio properly, take into account the future earnings and growth projections of the company. If the current P/E ratio is low, as against the future prospects of a company, then the shares make an attractive investment option. But if the company is saddled with losses and falling sales, stay away from it, despite the low P/E ratio.

5. DIVIDEND & YIELD: Dividend is the portion of the profit that is distributed amongst shareholders. Companies offering high dividends, normally don’t have much of growth to talk about. This is because the ploughback required to finance future development is insufficient. Similarly, those companies in high growth sector don’t give any dividend. Instead here they give sharp capital appreciation, which ultimately will lead to higher dividends.

So it makes much more sense to invest for capital appreciation instead of dividends. Rather it makes more sense to invest for yield, which is nothing but the association between the dividends and the market price of the shares. Yield (dividend yield) can be calculated as:

Yield = (Dividend per share / market price of a share) x 100

Yield shows the returns in percentage that you can expect via dividends earned by your investment at the current market price. It is more useful than simply focusing on the dividends.

6. RETURN ON CAPITAL EMPLOYED (ROCE): ROCE is the ratio that is calculated as:

ROCE: Operating profit / capital employed (net value + debt)

To get operating profit, add old taxes paid, depreciation, special one-off expenses, and special one-off income and miscellaneous income to get the net profit. The operating profit is a far better indicator of the profits earned by the company instead of the net profit. Hence this ratio is the better indicator of the general performance of the company and the company’s operational efficiency. It is one of the most useful ratio that lets you compare amongst the companies.

7. RETURN ON NET WORTH (RONW): RONW is calculated as RONW = Net Profit / Net Worth

This ratio gives you an idea of the returns generated by investing in the company. While ROCE is an effective measure to get a general overview of the profitability of the company’s business operations, RONW lets you gauge the returns you can earn on your investment. When used along with ROCE, you get an overview of the company’s competence, financial standing and its capacity to generate returns on shareholders’ finances and capital employed.

8. PEG RATIO: PEG is an essential and extensively used ratio for calculating the inbuilt worth of a share. It helps you decide whether the share is under-priced, totally priced or overpriced. To derive the ratio, you have to associate the P/E ratio with the expected growth rate of the company. It assumes that higher the growth rate of the company, higher the P/E ratio of the company’s shares. Vice versa also holds true.

PEG = P/E / expected growth rate of the EPS of the company.

In general, a PEG lesser than 0.5 is a lucrative investment opportunity. However if the PEG exceeds 1.5, it is time to sell.

These are some of the most critical ratios that must be considered when purchasing a share. Extensive reading of the financial performance of the company in newspapers and magazines will help you get all the relevant information to arrive at the correct decision.

Source: http://msn.bankbazaar.com/guide/2009/06/know-the-key-ratios-to-choose-the-right-stocks/

Understanding how a demat account functions

A Demat account is very similar to a bank account. In bank accounts you electronically hold money, whereas in Demat accounts you electronically hold shares. All buying and selling of shares happens through a Demat account. The Securities and Exchange Board of India (SEBI) mandates a demat account for share trading above 500 shares.

With growing financial awareness, more and more people now want to dabble in the share market. To do this, one should understand the basic requirements to trade in shares.

A company enlisted in a stock exchange, is under obligation to offer the securities in both physical and dematerialised mode. As the name suggests physical securities mean actual certificates giving information about the shares of a company owned by a person. In the same manner, Dematerialisation is the process of converting physical shares (share certificates) into an electronic form. Shares once converted into dematerialised form are held in a Demat account. Today, almost all of the shares trading happens using the Demat mode of shares.

What is a Demat Account?

A Demat account is very similar to a bank account. In bank accounts you electronically hold money, whereas in Demat accounts you electronically hold shares. All buying and selling of shares happens through a Demat account. The Securities and Exchange Board of India (SEBI) mandates a demat account for share trading above 500 shares.

Why to use such an exclusive account?

By using a Demat account, you need not be worried about mutilated share certificates, postal delays, and counterfeit shares. Demat account is a safe and convenient means of holding securities just like a bank account is for funds.

What are the features and benefits of a Demat account?

As opposed to the earlier form of dealing in physical certificates with delays in transaction, holding and trading in Demat form has the following benefits:

• Settlement of Securities traded on the exchanges as well as off market transactions
• Risks like forgery, thefts, bad delivery, delays in transfer etc, associated with physical certificates, are eliminated
• Shorter settlements thereby enhancing liquidity
• Pledging of Securities
• Shares allotted in public issues are directly credited into demat account of the applicants in quick time
• Auto Credit of Rights / Bonus / Public Issues / Dividend credit through ECS
• Auto Credit of Public Issue refunds to the bank account
• No stamp duty on transfer of securities held in Demat form (as against 0.5 per cent payable on physical shares)
• Increased liquidity, as securities can be sold at any time during the trading hours (between 9:55 AM to 3:30 PM on all working days), and payment can be received in a very short period of time
• Change of address, Signature, Dividend Mandate, registration of power of attorney, transmission etc. can be effected across companies held in Demat form by a single instruction to the Depository Participant (DP)
• Holding / Transaction details through Internet / email

What steps does on need to take to open a Demat account?

As majority of shares trading happens through a Demat account, it is imperative that an individual dealing in shares has such an account. The minimum age for opening a Demat account is 18 years. To open a Demat account, you must:

1. Choose a Depository Participant or DP (A Depository Participant can be a financial organization like banks, brokers, financial institutions, custodians, etc., acting as an agent of the Depository to make its services available to the investors)
2. Fill up an account opening form provided by DP, attach relevant documents, and sign an agreement with DP in a standard format prescribed by the depository
3. The DP provides the investor with a copy of the agreement and schedule of charges for his future reference
4. DP opens the account and provides the investor with a unique account number, also known as Beneficiary Owner Identification Number (BO ID)

Are there any important things that one must remember about Demat accounts?

There are some things that you must know remember about Demat accounts:

• Pan card is mandatory for opening a Demat account (effective from April 01, 2006)
• Charges applicable (vary from DP to DP):
  • Account Opening Fee
  • Annual Maintenance Fee
  • Custodian Fee
  • Transaction Fee
• Similar to a bank account a Demat account may be closed after a period of inactivity. Check with the DP about the period and the charges associated with reactivating it.

Stocks or mutual funds: What do you prefer?

We all know that investing in equities is the key to build long-term wealth. The two methods of investing in equities are either directly or indirectly. Direct investment entails purchasing stocks directly, while indirect investment entails investing in mutual funds that in turn invest in stocks. So what is investing and how does the investing in stocks differ from investing in mutual fund? What are the pros and cons of both the options?

Definition of investing: Investing is the action of buying an asset with the aim of making profits and earning income. Contrary to what many people believe, investing is a long-term activity, while trading is a short-term activity. A successful investor takes a look at the fundamentals of the asset before putting down his money to buy the asset.

Differences in investing in stocks vs mutual funds: There are many differences between investing in stocks and mutual funds. Here are the major differences between them.

Stocks	Mutual funds
Need a demat account for buying and selling	No need for demat account, except for buying and selling ETFs
Must be traded through a broker except in case of IPO	Can be traded through a financial broker or directly by approaching the fund house
You are the part owner of the company, making you eligible for bonus shares, voting rights etc.	You don’t own shares directly, so you are not eligible for any rights due to the owner
You get dividend if the company makes the profit	Dividend is optional and if chosen will affect the value of your investment by the amount of dividend declared
You have to keep a check on the performance of your holdings	Expert fund managers take care of all the activities
The charges incurred here are the demat charges, and buying/selling charges (only when the transaction takes place)	There is an entry load, exit load, fund management charges and buy sell spread. These charges can significantly affect the returns generated by the fund
Price of a share can be very volatile	Normally the NAVs do not show a significant rise or crash
Need a lot of money to diversify	Diversification can be achieved with amounts as low as Rs. 5000 (or even lesser in case of ELSS)

Pros and cons of both the types of investment:

Stocks:

Pros	Cons
You are the owner of the company	Higher risk since if the company closes down, you tend to lose money
Can earn dividends, which may be your source of income	The fortunes of even the most profitable companies can change suddenly, so you stand to lose the dividend
You can buy/sell in the stocks at the price of your choice by using the option of stop loss	Your stop loss may not be reached, making it difficult for you to trade in the stock
	Suitable only for experienced investors
	Is time consuming as you need to study the fundamentals of the stock
	Diversification needs a lot of money which is not possible for small investors
	May not be liquid, particularly if the company is small or mid-cap

Mutual funds:

Pros	Cons
Managed professionally	You end up paying the charges for availing of this expertise
Diversification can be achieved with nominal amount of Rs 5000	You don’t have a say in deciding where your money is invested. The fund manager decides for you and he may be wrong, thus causing a loss
Very liquid	You have to pay exit load if you redeem your investment before a certain time frame
Can be purchased directly thus saving you from having to pay entry load	High fund management expenses can erode the returns
Unlike companies, mutual funds will not close down. Rather they would be merged into another successful fund.	Tend to be mis-sold by the mutual fund advisors as well as fund houses

While both mutual funds and stocks have their own distinct features, it is up to each individual investor to decide where to invest. For those who have time, expertise and money, direct investing can be done. For others, mutual funds are the way to go. In fact, some funds have managed to outperform their benchmark index. However one important point to be noted is that both are long-term investment options.

Safe investment? Beware of experts!

The power of the financial markets should be daunting but many people are not deterred.

I have friends in Monaco who are amateur currency traders. They don't have the same experience, resources, or the skill, of George Soros.

Nor do they follow a disciplined approach to trading. It's completely crazy that they think they can win. Why do people underestimate the difficulty of making money in the financial markets? I believe there are two main reasons.

The first, which I will discuss here, is the 'experts' in the media...

Beware of 'experts'

The experts in the media promote the idea that markets are easier than they really are. A guy on TV or in the newspaper says that the price is going to do this and do that, and it sounds easy.

The market can be beaten. The message is that the market's behaviour can be forecasted. It's a persistent and seductive message, and people think, 'Ah, I can have a go at that, I can make money out of that'.

You can't blame the average person for following what they read in the newspaper and what they're being told on TV.

However, many so-called experts are just commentators or analysts who often don't have any track record and who often, to my ear, don't even make much sense.

Follow my advice and listen critically, rather than just accept what you're hearing or reading. You may be surprised to find that they're not really experts.

Most professionals are not outguessing the market

You may heed my early warnings that the markets are difficult and that the media underplays the difficulties, but you may also wonder about all the money made by the people working on Wall Street or in the City of London. Surely they know something about markets that you don't?

Let me put you straight on this. The truth is that very few are successfully backing their views on markets. Most of them wouldn't have a clue what the market was going to do. They make money in other ways, such as commission and management fees, in other words by getting a cut on the money you invest!

It's not that people working in finance don't know anything - they are usually very good, very smart people. I respect a lot of them and many are my friends - but the fact is they're making money out of sales, client relationships and by doing transactions, i.e. facilitating the whole process.

Equally, don't be too impressed with your stockbroker just because they sound confident and know a lot of stories and figures.

More information does not necessarily make the market more predictable. The extra information is probably useless as the price has already adjusted for it - it has been 'priced in'.

It's about as useful as playing roulette and knowing whether the roulette wheel was made in Taiwan or Korea.

The critical test is: does the broker make a living out of picking stocks? Probably not. They are sitting in their seat because they're getting the fees you pay them to buy and sell on your behalf.

It's very easy for someone to have a view when it's with someone else's money.

They're not actually making money out of successfully predicting what's going to go up and down. There are, therefore, not a reason for you to take up punting cotton futures in your spare time.

Listen and read very critically

If you are trading or investing, the media probably plays a large role in forming your views, but it always surprises me how often they present faulty logic. So it is vital to learn to be critical of what you read and hear.

Try to spot mistakes such as those in the following real examples.

"Experts say the market is overvalued."

This is a subject I have already touched on. 'Experts' is the most overused word in finance. I see it all the time and wonder who these experts are! The only expert who interests me is someone with a proven track record of predicting the market.

India is entering a long-term bull run

Rediff.com caught up with Reliance Capital Asset Management chief executive officer Sundeep Sikka at his Churchgate, Mumbai office. Sikka, who heads Reliance Mutual Funds, explained the company's continuing success, the state of the Indian mutual fund industry and what potential investors should look for in the future.

'We're entering a long-term bull run'

How badly has the global financial meltdown affected India's mutual fund industry? How did it affect Reliance mutual fund?

I'll put it like this: the previous fiscal year, 2008-2009, has shown that India is neither insulated nor isolated from outside forces. Now, we are truly part of the global economy. So of course there were effects, as you saw with dramatic falls in the markets.

But I'd also like to mention that India is an amazing domestic consumption story. We still have 6 per cent annual growth. If this 6 per cent growth was happening in a Western country, they'd be worried about the economy overheating! So you have to consider that when you hear people say, "Oh, the Indian economy is slowing down."

We, as a fund house, have been very consistent. During the financial crisis, we were able to use cash as a hedge against the worst effects.

Do you think the world economy is on a way to recovery? Or is it just a temporary phase? How about in India? Is the worst over? How do the Lok Sabha poll results factor in?

To understand what's happening, you have to first understand what happened. Major banks in the West failed and liquidity evaporated. This had far-reaching effects all around the world.

But things are now stabilising and improving, especially in India and in certain other Asian countries, like Indonesia. There are positive signs even in the West, too. On Monday, General Motors declared bankruptcy, but the markets hardly reacted at all. If this had happened six months earlier, there would have been a major negative reaction. So things are looking better.

In India, we certainly have seen an upturn recently. While it's impossible to predict the exact direction things will take, the signals are very encouraging. We believe that, at least in India, things are definitely going to keep improving.

And while the upturn cannot be solely attributed to the Lok Sabha poll results, the government being stable is definitely contributing to a bull run. Our view is that we're entering a long-term bull run. It's the right time to be in India.

What are the signs that India is already on its way to recovery?

Go to the airports, they're crowded. People are still flying. Go to the malls, they're crowded. People are still shopping. Go to the showrooms, they're crowded. People are still buying cars. You have to be able to gauge the pulse of the market. Some times, we in the industry and also those in the media, lose sight of this pulse. And the current pulse shows that we are most definitely not in a recession.

So who gets the credit for India averting a major crisis?

We need to compliment the regulator, for controlling things very nicely. The regulator acted prudently and conservatively. Also, India in general has a more conservative investing culture. You must remember: when the distance between a tangible asset and its accompanying financial instrument increases, it can lead to big problems. That in large part is what happened in the West. There were layers and layers between tangible assets and the related financial instruments. That can be dangerous.

In India, we don't have this phenomenon, so we were shielded from some of the worst effects.

'Our biggest opportunity is in infrastructure'

What are your expectations from the new finance minister? And what is your Budget wish-list as CEO and an individual taxpayer?

We have a dream team in place. It's a very knowledgeable group with a clear mandate from the voter. So I expect great things. As a CEO and as an individual, I would most want to see the government focus on infrastructure and education. Those are the two most important issues, in my mind. You work on those areas and it could have a long-reaching positive effect for the country and the economy.

As per the World Bank, India has a huge, almost unprecedented opportunity to invest in infrastructure. So this must happen. There's a lot of opportunity in public transportation. Look at what Delhi's achieved with the metro (rail), and now what Mumbai is looking to do with the Bandra-Worli Sea Link and the upcoming Metro. So to me it's clear that our biggest opportunity is in infrastructure.

What is your message to prospective investors? What points should they keep in mind while buying mutual funds?

One message: Keep investing. Be a long-term investor with a plan and a vision, not a short-term investor.

Also, you should never have 100% equity or 100% debt. You need a healthy balance to maximise your wealth growth potential.

Review your portfolio regularly, but don't watch it obsessively. I honestly believe that, unless you do it for a profession, stay close to the financial world, but not too close.

It's important to go to the experts. You can diagnose yourself when you're sick. You can give yourself medicine. And sometimes it works. But you'd be smart to go to the doctors, because one mistake can hurt you tremendously. It's the same way with investing. One bad mistake can mean financial suicide. So it's important to go to the experts.

Rating of company

Rating of company is a different game than assesing it merely on the basis of promoter' holding.

If Harshad mehta holds 75 % in the company you would be better off without it. On the other hand if Ratan Tata has 75 % you would jump in. That is how he build TCS long before going to IPO.

Promoter's holding is one of the factors which go into rating a company.There are other factors each assigned weightage as per their importance.

1. The Sectors in which it is working
2. How good is financial parameters.
3. Growth prospects
4.Current earning growth, cash flow, equity debt ratio etc.
5.If Pays dividend
6. price history
7. EPS, PE and book value.
8. Risk factors
9. Policy directions of the Govt.
10. FII/FDI involvement
11.Labour relations
12. Brand image
13. Products performace

Govt may dilute stake in listed PSUs to 90%

The Union finance ministry is examining a proposal that seeks to dilute the government's stake in all listed public sector undertakings to at least 90 per cent.

The proposal is an offshoot of the government thinking that there is no need for a big-bang approach to PSU disinvestment. In fact, the new government's agenda for action, finalised by the Cabinet secretariat, had recommended that public sector disinvestment should take place in small doses.

There are about a dozen listed public sector undertakings (PSUs) in which the government's stake is between 90 and 99 per cent. However, given the current buoyancy in stock market prices, the government could raise more than Rs 25,000 crore if it offloaded up to 10 per cent stakes held in these PSUs, a senior finance ministry official said.

The official's estimate of disinvestment proceeds from these PSUs is conservative. At current stock market prices, the government can mobilise around Rs 37,000 crore by selling up to 10 per cent in only the top ten PSUs in which it owns over 90 per cent.

The government's argument is that the Securities and Exchange Board of India's regulations stipulate that all listed companies must have a minimum floating stock of 10 per cent of total equity. The proposed disinvestment in these dozen-odd companies could also be justified as a requirement under Sebi regulations, the official said. Also, disinvestment up to 10 per cent in listed PSUs are least likely to cause any controversy or provoke political opposition.

The dilution of stakes in such PSUs will be one of the major initiatives of the new disinvestment policy expected to be announced in the Union Budget for 2009-10 in the first week of July. The policy will outline the government's blueprint for disinvestment and closure of sick and unviable PSUs.

WHAT'S AT STAKE
Company	Total outstanding In shares (mn)	Govt stake		Disinvested shares (in million)	Price per share (in Rs) on Jun 3
		in %	in shares (mn)
Hindustan Copper	925.22	99.59	921.42	3.79	270.70
MMTC	50.00	99.33	49.67	0.34	28271.15
HMT	760.35	98.88	751.83	8.52	74.34
NMDC	3964.72	98.38	3900.49	64.23	412.00
FACT	354.77	98.11	348.07	6.71	52.45
National Fertilisers	490.58	97.64	479.00	11.58	79.65
Scooters India	42.99	95.38	41.01	1.99	25.05
Andrew Yule & Co	296.33	94.42	279.79	16.54	56.30
Neyveli Lignite	1677.71	93.56	1569.67	108.04	136.60
ITI	288.00	92.98	267.78	20.22	41.15
RCF	551.69	92.50	510.31	41.38	81.59
STC India	60.00	91.02	54.61	5.39	366.45
Shareholding pattern as on 31st March 2009 Source: Business Standard Research Bureau Current disinvested equity calculated on total outstanding shares minus government stake

Internal discussions within the finance ministry on the broad contours of the disinvestment policy have still not concluded. A general consensus, however, has been reached on the proposal to allow listed and unlisted PSUs to tap the capital market to meet their funds requirements, as long as the total government equity in these does not fall below 51 per cent.

One of the issues on which no clarity has emerged is the manner in which the unlisted PSUs will be allowed to tap the capital market with an initial public offer. A section within the ministry is of the view that allowing unlisted PSUs to tap the capital market would not necessarily result in any proceeds for the central exchequer and not help meet the government's fiscal deficit. Hence, such IPOs should be structured in a manner that will enable the government to also divest its stake and mobilise resources to reduce the fiscal deficit.

A contrary view in the ministry is that PSU disinvestment should not be used as an instrument to meet the government fiscal deficit. Instead, it should be used to subject the PSUs to market discipline so that its management can measure its performance through the yardstick of its stock valuation in the open market. Such a view also supports more listed PSUs to float new stock to raise resources from a reviving stock market.

Disinvestment of government equity in PSUs has become an important agenda item for the Budget team in the finance minister after the strong endorsement it received from several industrialists who met Finance Minister Pranab Mukherjee two days ago during a pre-Budget meeting. These industrialists had argued that the finance minister should allow the PSUs to tap the capital market to meet their individual funds requirement for expansion plans.

LIC scans 200 firms for investment

Life Insurance Corporation of India (LIC), the country’s largest institutional investors, is scanning around 200 companies on a daily basis for possible investments, a senior executive said on Wednesday.

LIC managing director D K Mehrotra told reporters on the sidelines of a software launch function that the public sector insurer would look at the the company's credentials and also the industry segments before investing. Its in-house research team was constantly giving feedback on the companies and the industry segments, which were performing well.

In line with its investment plan for the current financial year, LIC was expected to step up equity investment by 25 per cent to around Rs 50,000 crore in equities, as against Rs 40,300 crore during 2008-09.

With the Insurance Regulatory and Development Authority (Irda) asking the life insurer to ensure that there were no fresh companies where LIC’s exposure breached the 10 per cent ceiling, the company was on the lookout for new stocks.

Mehrotra also said that the public sector insurance company would put about 15 per cent of its investable funds in the infrastructure sector though he did not disclose any numbers. "With infrastructure showing signs of recovery, LIC would not shy away from investing in the sector," he said.

"We will not take a short-term call on investments. We are looking for a long-term relationship,'' Mehrotra said, adding that the company would exercise caution in investing in real estate projects in view of the prevailing market conditions.

LIC’s total premium income, which includes renewal premium and first premium income, is expected to be over Rs 1,75,000 crore, around 12 per cent higher than last year’s level of around Rs 1,55,700 crore. The company expected a 4.5 per cent increase in new premium during the current financial year to Rs 50,000 crore, as against Rs 47,828 crore last year.

But if trends over the last few months are anything to go by, LIC would exceed the target with ease. Mehrotra said that over the last two months, premium from the sale of new policies has increased by about 40 per cent. According to the latest Irda data, LIC’s first premium income went up by 69.33 per cent to Rs 2,113.11 crore during April, as against a 10 per cent fall during the last financial year.

Source: Business Standard

Economists raise growth forecasts after elections

Prospects of a stable government at the Centre have prompted at least six economic forecasters to raise their growth estimates for the current fiscal, citing lower-than-expected political risk after the recent general elections.

With the Congress-led United Progressive Alliance coming to power with less than half the number of allies than it had before and the four Left parties out of the picture, the average economists' forecast for GDP growth in 2009-10 has increased over half a percentage point to 6.35 per cent after the election results were announced.

Before the elections, growth was projected at 5.61 per cent, according to data collected from eight economic forecasters. Two forecasts were not revised (see table).

Looking up (Economists' forecasts for India's GDP)
Time period	Before Elections	After Elections
Average	5.61	6.35
Morgan Stanley	5.80	6.20
Nomura	5.30	6.30
Kotak	5.50	6.00
Barclays	5.50	7.00
HSBC	6.20	6.20
Goldman Sachs	5.80	5.80
Bank of America- Merrill Lynch	5.30	6.30
Macquarie Securities	5.50	7.00
Source: Respective research reports

"The political risk has been mitigated with a stable government at the Centre," said Subir Gokarn, chief economist with Standard & Poor's, a rating agency. "A stable government will speed up certain investment decisions so people would be more positive about the future."

Although S&P - which downgraded India's sovereign rating outlook on account of the rising fiscal deficit in January 2009 - has not revised its growth estimate, others like Morgan Stanley, Nomura and Kotak Mahindra had all done so.

The prospect of higher political risk from a widely expected hung Parliament had prompted GDP projections for 2009-10 to be revised downwards.

"The election results will have a positive impact," said Saumitra Chaudhuri, an economist with rating agency ICRA Ltd [Get Quote] and member of the Prime Minister's Economic Advisory Council. He said the negative bias to growth will go out his earlier prediction of 7 per cent, with a range of half a percentage point.

These upward revisions are expected to have an impact on corporate investments, which were the main driver when the Indian economy grew at 9 per cent and above for three years till March 2008, contributing nearly 50 per cent of the expansion in output.

"Given that the UPA no longer needs outside support of the Left, it would now be able to continue with the reform process unhindered," wrote Citigroup analysts in a recent research note.

The four Left parties had voted with the government in the Lok Sabha the last time and had been instrumental in blocking a significant amount of economic reform.

"While trends in consumption are likely to sustain, given that the government had already implemented fiscal stimulus measures over the past year, the UPA's clear majority would now spur investment growth as well," the Citigroup analysis added.

There is now a heavy weight of expectation that the government, free of Left, will push economic reforms in areas like banking, insurance and capital markets that will enable greater capital flow into the economy.

Investors get relief as IPO stocks rise 100%

Shares of companies that did their IPOs in 2008 crashed badly after the equity markets tanked towards the second half of that year. But there is some good news for IPO investors who stuck on, as most IPO stocks have risen close to 100% from their bottoms in October, recouping a part of the investments.

However, a third of the stocks are less than 50% of their offer price, an analysis of 38 IPO stocks show.

Around 11 IPO stocks including Chemcel Bio-Tech , KNR Constructions, Aishwarya Telecom, Sita Shree Food Products, Manjushree Extrusions, Somi Conveyor Beltings, Kiri Dyes, Niral Cement, Birla Cotsyn, Onmobile Global have as on date delivered more than 100% returns from their October 2008 lows.

Around 10 more IPO stocks such as Future Capital, Sejal Glass, Resurgere Mines, J Kumar Infraprojects, KSK Energy and 20 Microns etc. have returned close to 100% gains in the same period.

However, even after such a stupendous rally, IPO stocks such as Chemcel, KNR Constructions, Sita Shree Food, Manjushree Extrusions, Somi Conveyor Beltings and Birla Cotsyn are nearly half way from their IPO offer prices. Others like Future Capital, Sejal Glass, Resurgere Mines, 20 Microns and Cords Cable Industries are also in the same club.

The improved sentiment in the stock markets and the new government in place could help some stocks to recover as analysts increasingly become bullish over India’s prospects.

“Shifting political winds now give a well-balanced Indian economy a real chance to emerge as Asia’s biggest surprise in the years immediately ahead,” Stephen Roach, Morgan Stanley Asia said.