IDFC-SSKI's stock bets for the next 12 months

Indian companies are in an earnings upgrade cycle and every quarter from hereon will see an upgrade, believes Pathik Gandotra MD and Head of Research at IDFC SSKI Securities.

In an interview to CNBC-TV18, Gandotra spoke on what stocks/sectors may outperform in a market that he says will do well and his outlook for earnings across the board.

Below is a transcript of the interview. Also watch the video.

Q: What did you do after this earnings season? Some of your peers have not really come out thumping the table after this earnings season. Were you convinced?

A: The earnings season went broadly on line with what we thought. We did not expect great earnings to come through this quarter in terms of year-on-year (YoY) numbers. But we expected earnings to improve sequentially and they have. They have improved 5% sequentially although Sensex earnings are down 14% YoY and our universe earnings, excluding the oil-marketing companies, are down by 3%. Including the oil marketing companies, they have gone up 30%. But that was more or less in line with expectations.

We have been consistently saying that we expect the economy to revive and the market to be in a bullish phase. We stick to our target of 20,000 over a nine- to 12-month horizon.

Q: What is your earnings per share (EPS) target both for this year and the coming year on the Sensex companies put toegether?

A: The EPS target is Rs 800 for this year and Rs 1,032 for next year.

Q: Do you believe that there will be significant upgrades going forward or after looking at this quarter you are becoming a little more cautious in the expectation that there will be serial upgrades running through the next four quarters?

A: I am absolutely convinced that from hereon, every single quarter, the earnings will get upgraded because the pace of the economic expansion is something, which the analyst community, including my own, is not estimating.

Obviously, analysts would look at the sectors in more details. So as the macro things fall into place, it will lead them to upgrade.

So the upgrade cycle is firmly in place. I would tend to think that earnings upgrade across sectors like autos, cement, across capital goods and even metals from next year onwards, which would see earnings to be substantially higher than what our current estimates are.

Q: For this Rs 800 EPS – what are you predicating for the second half (H2) of the financial year by way of earnings growth?

A: 46%.

Q: And which sectors lead that 46%?

A: It’s auto, metals, banks, IT services — all will do very well in earnings for H2. What our thesis here is that you will see six-quarters at the minimum of 20% plus growth in the index earnings, every single quarter. Which is why I think in the face of such a massive earnings expansion that is waiting to happen, it is highly unlikely that the market will not do well.

That is why I think you will reach peak earnings next year. When you were looking at index of 22,000 in January 2008, everybody believed that earnings of FY09 would be in the regions of Rs 1,100 or Rs 1,050. I think that is where the earnings are coming to for next year as well.

Q: What is it from banks that are your strongest overweight now, because you have indicated that that will lead the market to higher levels?

A: We like the whole host of PSU and private banks. I think PSU banks will do well from hereon because I don’t think bond yields are going to go up significantly till at least January-February and credit growth will revive and credit costs will be contained because asset quality pressures have eased. So if we put all these three together, combined with lower valuations PSU banks should do over the next quarter.

Private Banks are longer-term structural stories where we think significant gains in market share will start happening from next year onwards. So our top picks in banks today are ICICI Bank, Axis Bank and State Bank of India.

Q: An interesting non index pick that you have is Jet Airways. What is the story there?

A: It is all about incrementalism. I think incrementally things are improving for Jet Airways. We think that with traffic improving, with the fact that load factors are going up and with the fact that a bulk of their business is international, which is also significantly higher load factors, I think the stock should do well.

Secondly, if you look at stocks, which have been gone through debt stress, if one looks at the biggest out performers in this year — people who have been under debt stress and when the debt stress goes away is when the maximum returns come, which is what I believe will happen in Jet Airways as well.

Q: To go back to banking, you also seem to like smaller names like Yes Bank, IndusInd Bank even Shriram Transport Finance. What attracts you at the lower end of the financial spectrum?

A: All these three companies have the ability to significantly expand their market share from where it is today. Each of them has a different story. IndusInd Bank is under new management team and is all set to grow its market share very profitably. If one looks at their numbers that have panned out last four-five quarters, they have been amazing, the bank is growing more than 100% every quarter and its growing profitably as well.

Yes Bank is a franchise which has been through rough times in the last year but has come out of that very amicably. Given the fact that their capital adequacy has improved without them raising capital because the credit quality of portfolio has been extremely good and so Yes Bank is now all set to rollout its retail strategy going forward and on the back of that we see significant market share expansion as well and so we are very positive on Yes Bank.

Shriram Transport is one of its kind of company. It is into second hand truck financing where there is no competition whatsoever, competitors have come and gone but the franchise remains very strong and now with the uptick that we see in the commercial vehicle (CV) cycle coming forward, I think the business their will go up very significantly.

Q: One of our re-rating triggers for the market in calendar year 2010 is what happens on the GST front, any preliminary takeaways on what was released yesterday and which sectors may then stand to benefit?

A: We are still doing our work there and so I reserve my comments there. But my big point is that as long as they get the GST rolling in a comprehensive fashion, I think we should be good.

Q: What about PSU disinvestment?

A: Here we clearly see traction, at least the government is talking; if you hear from the investment banking circles, people are already making visits to the government to figure out and I think there is some action happening there. So I think there will be serious effort by the government to disinvest next year which will alleviate the fiscal deficit which is what will keep bond yields low.

Q: In your 20,000 Sensex target you seem to favour many of the high beta sectors like real estate, metals, is it because balance sheet repair has happened or you believe in earnings acceleration for those sectors?

A: The first phase of the rally, in both the sectors was because balance sheet repair had happened. In the second phase I think there will be earnings acceleration. I think real estate companies would have hopefully learnt from their past mistakes and would not go around and buy land funding it from short-term sources and so if they actually start developing properties where we think huge under utilization or under penetration, we think that sector will stand to benefit

On metals our view is that global prices will eventually start moving up, I cannot say that across all metals but on aluminium we are very bullish.

Source : CNBC-TV18

Experts' stock ideas to play volatile markets

The market on Thursday broke down after a rally this week. Experts talk about the road ahead and advise stocks/sectors.

“There is still momentum in the global liquidity and you will have large bouts of liquidity,” said Jagdish Malkani, Country Head of Taib Capital. He added that valuations especially for front-liners were rich and that those with a long-term view should buy only stocks like defensives or out-of-favour sectors like telecom due to current valuations.

Here’s his advice to play the liquidity game: “I would certainly keep a fair bit of cash sloshing around for such times when you have such odd bloodbath. What works for you varies but it could be anywhere from 20-50% cash levels for such occasions,” he said, adding, “My appeal to retail and high net-worth individuals would be in at least 80% largecaps because while the midcaps give you that great run-up and the huge hits to the boundary and the multi-baggers — God help you if the music stops, as we know those go completely into the ice age whereas at least if you have Reliance or HDFC or SBI you cannot lose that much sleep.”

Stock/sector picks

Media stocks: Malkani said he prefers the print media space — “they make real money as opposed to a whole lot of other media space,” — and likes Jagran Prakashan though it had become a bit expensive of late. “NDTV is also making a bit of a play, it’s one that is popular with FIIs and there is a story there with an NBC stake coming through possibly. If that news comes out whether it’s being placed again and at what levels — that would bring a lot of cash into the company.”

Shree Renuka Sugar: “The company recently bought a Brazil firm with about 45,000 acres of land for cultivation of sugarcane with a cane crushing of about 20,000 tonne per day,” said Investment Advisor SP Tulsian, adding that the financials of the company would improve vastly because of the deal. “The company should be able to post an earnings per share of close to Rs 30 plus for FY10 post the deal, which is quite positive.”

Divestment candidates: The run-up seen in many of the potential PSU divestment candidates was unwarranted, said Tulsian. He added that the euphoria of the government divesting some stake in those companies coupled with their low-float in the market were resulting in a run-up beyond what fundamentals called for.

Century Textiles: Anyone with a six-month view could buy Century Textiles, said Tulsian. “The company is starting work of a mill in Worli, Mumbai,” he said. “The only concern for the Q2 results was the company’s paper division as it was making losses otherwise it would have been a profitable quarter. In that quarter, it posted a loss of about Rs 25 crore on EBIT level. Overall the Worli news is positive for the stock.”

The financial panic is over: Warren Buffett

Warren Buffett, perhaps the world's most admired investor, said on Thursday the financial panic that gripped the globe last year is a thing of the past, even as the US economy's struggles persist.

"The financial panic is behind us," the world's second-richest person said at Columbia University's business school. "Our economy was sputtering, still is sputtering some."

Buffett, 79, nevertheless said there is greater opportunity for investments inside the United States than outside, noting that the US economy is far larger than any other.

He appeared at Columbia with Microsoft Corp founder Bill Gates, the world's richest person and a Buffett friend and bridge partner.

Last month, preliminary government data showed the US economy expanded in the third quarter, the first three-month period of growth since the second quarter of 2008.

Nonetheless, the US unemployment rate last month reached 10.2%, the first double-digit reading in 26 years.

Buffett last week made a big bet on the US economy when his Berkshire Hathaway Inc agreed to pay about USD 26.4 billion for the 77% of railroad company Burlington Northern Santa Fe Corp that it did not already own.

"There will be more people in this country, 10, 20, 30 years from now," Buffett said. "They'll be moving more and more goods back and forth to each other and the most environmentally friendly and cost-efficient way of doing that is railroads."

Buffett said rail transport uses one-third less fuel and pollutes the air less than trucks, and that one train can supplant about 280 trucks.

Gates, who is also a Berkshire director, said other sectors might also boost the economy over the long term, including information technology, energy and medicine.

Separately, Buffett advised the US government not to coddle companies that need bailouts to survive or preserve capital.

"More sticks are called for," he said.

Buffett gave Federal Reserve Chairman Ben Bernanke and US Treasury Secretary Timothy Geithner "high marks" for how they managed the financial crisis.

The billionaire has praised Bernanke in the past, while mocking Geithner's stress tests for banks.

CNBC television was a host for the Columbia event.

5 high-profile stocks to be avoided at the current juncture

Investing in stocks is always fraught with risks and, therefore, the choice of stocks depends, to a large extent, on the risk appetite of investors. For instance, some high-risk stocks which may look attractive to a particular class of investors may not seem to be a good bet to investors who are not willing to take a chance.

Still, according to experts, there are many high-profile stocks around which are not worth investing at the moment. It does not, however, mean that all of them are essentially a bad bet and should never be considered for investment. In fact, anything may happen tomorrow which may turn the tide in their favour and may make them the darling of investors again.

That does not, however, mean that one should throw all one’s caution to the wind and should go for any stock which is available for investment. For the sake of common and risk-averse investors, therefore, here we take a look at some high-profile, high-risk stocks which, according to market experts, need to be avoided at the current juncture.

Here they go:

Indiabulls Power:

Indiabulls Power has a very high-risk profile for the average retail investor. The company is to start generating cash flows only after 2012. It is planning to set up 6,615-MW of thermal power generation capacity at a cost of Rs 31,052 crore in the next four years.

Also, “the company is yet to arrange fuel linkages for all its projects, except for the Amravati Phase 1 project which is to come up by June-September 2012. Further, the company lacks operating history and experience in power generation which increases the doubt over its ability to execute projects of such mammoth scale,” says Ashish Kapur, CEO, Invest Shoppe India Ltd.

It is better, therefore, to avoid this stock at the moment, and instead watch the company’s performance for some time before taking a call.

Omaxe:

The balance sheet of the company is overburdened with debt. The company’s debt of around Rs 2,000 cr is more than its market capitalization of Rs 1700 cr. Also, the company’s construction activities have decreased a lot.

“Omaxe is one of the real estate players mainly focused on building and promoting luxury villas and penthouses, the demand for which has seen a drastic fall and will take a long time to recover. This has impacted the company’s results very severely. Thus, we believe that though the outlook for the realty sector is improving, yet one should avoid this counter,” advises Kapur.

MTNL:

The company’s performance has been lackluster in the previous few quarters due to limited presence (saturated circles of Mumbai and Delhi) and increasing customer preference for other telecom players like Airtel, Vodafone and Idea. The sector has become very competitive due to new players entering the market which are likely to impact ARPU adversely. The Mobile Number Portability (MNP) is also going to affect the mobile segment of MTNL. The growth of subscriber base is also under pressure.

“Though the company has a cash balance of nearly Rs 4,800 crore, yet the imminent 3G license fee payment is expected to result in a cash outflow of nearly Rs 640 crore. Further, the expected losses in the coming years are a cause of concern,” says the MD of one of India’s leading stock broking houses on condition of anonymity.

HFCL:

The company has questionable fundamentals as there have been huge accumulated losses in the book. This stock used to be traders’ delight during the IT Bull Run in 2000 and hit an all time high of nearly 2450. There are more than 44 crore shares issued and lots of investors are already stuck in the stock.

“Therefore, on every rise this stock will be under pressure. Promoters hold only 2% of the total shares whereas public holding is about 68% and the rest is mostly held by domestic institutions. Moreover, there has been no dividend or any other benevolent corporate activity for years that may help investors,” says Kapur.

Educomp:

Education is a high growth sector and this stock has been a star performer for the last couple of years. However, every sector and stock idea reaches a stagnation point at some stage. Usually this happens when the valuations are very high and the view of nearly all market participants is very positive on the stock.

Kapur says, “Educomp is one such company where the valuations are very high and factor in all the positives that are likely to unfold over the next couple of years. The risk-reward ratio in this stock is very unfavourable. Though this is still a favourite of the market, we believe it is better to be a contrarian now and recommend existing investors to book profits and new investors to stay away from this counter.”

The Journey of Rakesh Jhunjhunwala

Source: ET

We have seen a 80% rise in the stock markets over the last one year, the highest pace in fact in the last eight years and one man saw this happening. We are talking about the pied piper of the Indian stock markets, none other than Rakesh Jhunjhunwala. A journey which started with just Rs. 5000 has now moved to this place, RaRe Enterprises (Ra-Rakesh Jhunjhunwala, Re- Rekha Jhunjhunwala). Rakesh Jhunjhunwala spoke exclusively to ET Now of his experience with the markets and about his journey to the top.

When you first ventured into the stock markets, it must have been a huge gamble 20 years ago. You qualified as a CA, what made you take that step?

My father was also interested in stocks. When I was a young child, he and his friends would drink in the evening and discuss about the stock market. I would listen to them and one day I asked him why do these prices fluctuate. He told me to check if there is a news item on Gwalior Rayon in the newspaper, and if there was Gwalio Rayon’s price would fluctuate the next day.

I found it very interesting and I got fascinated by stocks, I self-taught myself. My father told me to do whatever I wanted in life but at least get professionally qualified.

I was always a reasonably good student so I took up chartered accountancy. In January 1985, I completed my CA. I told my father I wanted to go to the stock market. My father reacted by telling me not to ask him or any of his friends for money. He, however, told me that I could live in the house in Mumbai and that if I did not do well in the market I could always earn my livelihood as chartered accountant. This sense of security really drove me in life.

But your first real large investment was Sesa Goa, I am curious to understand Sesa Goa, a commodity company, what prompted you to invest in Sesa Goa?

Sesa Goa had a big fall because there was a depression in the iron ore industry and then prices for the next year had been considerably raised about 20-25%. The stock was available abysmally cheap around Rs. 25-26. There was a projection of a very good growth in profitability in the next year but nobody seemed to believe it.

When I saw the facts, I wanted to invest but I did not have capital. Between 1986 and 1989 I must have earned Rs 20-25 lakhs. After 1986, the market went into a big depression for two three years but I put that money in Tata Power and the Tata Power stocks became about 1100-1200.

Now I was worth Rs 50-55 lakhs. I bought 4 lakh shares of Sesa Goa in forward trading, worth Rs 1 crore. I sold about 2-2.5 lakh shares at Rs 60-65 and another 1 lakh at Rs 150-175. The prices then went up to Rs 2200 and I sold some shares. I did some other trading too. I had net worth of about Rs 2 – 2.5 crore.

Was there any point of time when you came close to thinking that this is not for you or was it always a goal from the beginning?

I would not say that I did not come to a point where I had doubts in my mind, but my family circumstances and the support of my parents and my wife and my brother always let me do what I wanted in life. As long as I was not risking anything which I had not made with my own hands and I was playing with my money, I thought it was fine.

Your mother insisted that stock market is for gamblers, your wife is saying that she is a good luck charm, there was perhaps some amount of family resistance when you started your entry into stocks.

I would not say there was some kind of resitance, there was only some kind of apprehension. They never stopped me from going, they only warned me. There can be no greater well wisher for me in life than my mother. My mother says every man’s luck is his woman.

People will laugh at me, but when they ask me to make a wish for the next life, I will say I want the same parents, same brother and sister, same wife, same friends.

Are you superstitious, to what extent do you feel that luck has something to do with it?

I would not say I am superstitious. When you acknowledge that you have been lucky or you have been successful because of circumstances which are not what you have done or created, then you get humility, you do you feel that I am what I am because of what I am. You feel you are what you are because a set of circumstances came together and those circumstances were not brought together only by you, they were also brought together by fate. For example if Rakesh Jhunjhunwala has earned some wealth in life, the fact that the index was 150 when he came here and today the index is 17500, is one of the biggest contributors of the creation of the wealth, yes.

Did you ever in your wildest dreams imagine that we would be at these levels?

When index was at 150 points I did not have so much idea of markets but surely in 2002-2003 I felt that markets will see levels and India will see prosperity which we can’t imagine right now. I still hold that view.

What does Rakesh Jhunjhunwala do when he does want to take some time out, indulge himself, is there something you enjoy doing?

I enjoy reading, I enjoy watching food shows.

Are you a big foodie?

Yeah, look at my size. Basically my favourite food is street food. I love the Chinese food on the streets, also I love the dosa. I do not get the taste in the paav bhaji anywhere so I tell my wife and then we make it at home. I basically like relaxing, I do not do much physical activity.

Now we know three sides of Rakesh Jhunjhunwala, investor, trader and businessman, you have got a fourth side also and a very prominent fourth side which is the philanthropist, the philanthropist Rakesh Jhunjhunwala because I have been told that you got big plans to construct a children’s home.

I would not call myself a philanthropist and all, it is too early but surely see, we must realise one thing that the giver of this wealth is God, do not think we have earned it because we are smart. Ultimate giver is God and it casts a duty on us that this wealth be used for good social purposes. So it is the aim and ambition of my life that a good portion of the wealth that I earn would be used for good social purposes.

The only sure income that I have is dividend income and I spend one third of my dividend income in charity and I hope to do that in future and also with time I would like to endow at least Rs. 500 crores to a foundation and really work on charitable activity.

Everyone knows that you are both a successful long term investor as well as a trader, how do you manage to balance both?

Short term trading is for short term gain. Long term trading is for long term capital formation. Trading is what gives you the capital to invest. My trading also helps my investing in the sense I use a lot of technical analysis for trading at times.

If the stock is overpriced, I should sell but my trading skills tell me that the stock can remain overvalued or get more overvalued. Hence, I hold on to my investments.

So, I think they complement each other in many ways but they are two distinct compartments totally.

You make investment decisions quickly and with a lot of conviction. We got examples how you made a decision to buy Praj or Matrix, that is unique. When you are investing long term money, you need to assess it, you need some time assessing.

See, one thing first of all, all assessments can only be made up to a point. You are investing in the future, the future is uncertain. So you cannot make any prediction of profits to any preision and you look at the opportunity; you look at the people managing, you look at the competitive ability.

If the margin of what you think the value is and if you think the future can be so great then why spend time assessing it. If I thought that Matrix profits are going to be hundred crores and Matrix market cap is 150 crores then what should I invest, what should I research and what should I think. So when the opportunity is so great…

It is interesting that some of your best ideas have come not because of insider information, not because of insider edge, they have come because of simple common sense and news which is there in public domain.

Yes, they have, because many a times the insiders themselves do not know what is happening. My idea is to credit the factors which drive the portfolio which are the opportunities, the competitive ability, the people, the valuation, the return on capital.

So if those circumstances are present then why will profits not arise.

Welcome back, Samvat 2065, Indian markets have given astonishing return of 80%. Where from here, this Diwali to next Diwali, do you see Indian markets?

I see very very very very bullish for the very very very long term. Bullish for the short term and maybe you could see a correction in the mid-term.

What extent of a correction could we see?

I wish I knew.

Have you made any large investments in the last three months?

I have not made large investments in the last three months because I have been fully invested right through the fall and right through the rise but I did make some investments in the last one or two years.

You have often indicated that it is important to buy but it is equally important to buy at a right price, are prices right?

Well, prices are right. There can be no generalisation, you know, look at the equity, you can still find investment opportunities at these price levels. In 2003 bull market, I made some of the best investments in which I made the largest money.

I made the investment in Praj Industries in January 2004 with the index of 5500 and it nearly doubled and I sold some part of it about 250 times appreciation even now.

Any area that you have been looking to exit or you think it is the right time to exit over the last few months or now?

As far as the exits are concerned, I keep buying-selling something, nothing substantial. The variability in my portfolio will not be more than 5% or 3%. Personally, I have decided that at some point of time, regardless of companies, looking at the macro, I am going to exit all my investments because the history of bull markets tells us that excesses go to such levels and to recapture them takes decades.

What are the biggest driving factors for the markets going ahead?

Well, driving factor for the market is that there is a transition from West to the East. We have good regulation, good trading platforms, there is mountain of savings; we are just going to go up every year driven by growth in GDP demographics, growth in financial markets.

The foreigners have no choice but they will invest where growth is 10%, I think that is what is driving markets.

Is that a case where next 12 to 24 months’ earnings do not expand and PE multiples will expand?

I do not think so. I think earnings will expand faster than what people are anticipating and already none of the results have disappointed.

You have no exposure to real estate, very little exposure to technology and very little exposure again to commodities.

Well, I will not buy real estate even today. Look at the way you can get value for a stock by issuing an old stock and there is the continued circle to get constant earnings. It is speculation of the highest order.

What happens in real estate price discovery is most imperfect and I do not like the general real estate.

Although bullish in the residential real estate in India, I do not think there are models which are sustaining.

As far as technology is concerned, I think it is a mature industry. I am bearish on US dollar, I have large investment in the unlisted space. I have some exposure to commodities and I have a large investment in oil companies.

Maybe it was by design of accident, I missed the cement boom and I never invested again. I missed the cement boom in 2003-2004-2005. As far as other industries are concerned I was bullish on Tata Steel because of the Corus factor, but I did not buy.

So what would Rakesh Jhunjhunwala buy today?

Well, what I buy today and what I sell today is a matter of personal…

Which sector would you look at?

I would look at all India sensitive sectors, retailing, banking, infrastructure, pharma.

How do you see yourself, Rakesh Jhunjhunwala, the family man, the investor or the businessman?

See, the only truth of life is death and that when I am going to die I would say boss, just leave me for three hours, I would buy one stock, I will do some trading, I will spend some time with my children, my wife, I will have two drinks and then you can burn me. So it has to be combination of everything.

Written by Saumil Mehta

Investment styles and mistakes

These are stories about a few friends.

I have 2 friends – aged about 57 years. They were classmates and are now very close to retirement. Their investing philosophies are so different that I could not believe that the accumulated amounts could be so far away from each other. One of them did his MBA and joined ITC – and stayed there for 10 years before he went off on his own.He never married and so had no ‘house’ kind of expenses. Almost all his money (at least theoretically) could be saved.

The other person did not study beyond his graduation and held many jobs – currently he heads the sales function of a small company.

The person who did his MBA entered the equity market – and called himself an investor. However, he was just a incorrigible trader and traded every day. He was lucky to be a shareholder in ITC for a very long period of time and his portfolio other than ITC is a mess. He loses money every year in the markets and has no corpus to write home about. He would lapse into debt ocassionally (a.k.a trading losses) and then settle it from his professional income.

The other friend realised that he was no hare. He chose the traditional Indian way of saving (instead of investing) – ppf, lic, nsc, were his mainstay. Luckily I met him in the early 1990s and introduced him to some small equity portfolio. However he also was bitten by the equity bug and would put small amounts of money into some Fera dilution issue, picked up an odd L&T, Reliance, etc. – but the amounts invested could not have exceeded Rs. 500,000 over a period of 10-15 years. I introduced him to ELSS – and he has been at it for the past I guess about 10 years and with a vengance! He now has a portfolio of about Rs. 68 lakhs in equities.

I know another guy who was largely in debt for most of his life (say till 35, now he is 42) – but now seeks equity related ‘information’ from wherever he can get. In a train journey from Mulund to Mumbai VT if he overhears a share being discussed, he visits every site trying to do some research about it. However the buy or sell decision is mostly made on the group of people who travel with him. The research is some kind of ratification. As he is my neighbor’s friend ocassionally he calls me over telephone for a portfolio review. Of course his portfolio includes a lot of “i have no clue why I bought list” of shares – in fact it is dominated by such shares. Spoke to him last Sunday – he has shares in 44 companies totalling an investment of Rs. 13 lakhs – it is worth only Rs. 19 lakhs – over a period of 6-7 years. Do not know the IRR, but surely under performing ppf if I am not wrong. Quite a numbing experience.

Today the tortoise has a much larger portfolio. The hare and the tortoise story plays itself over in many ways, we close our eyes and refuse to learn. I do not know why.

Lessons:

Equity is a good asset class – but it needs far, far, far greater discipline and knowledge to build a portfolio than what a common man has. If in doubt Index or choose a decent fund manager. The gap between a debt product (with no fund management charges like Ppf) and an index fund (with low charges) is about 2-3% p.a. over a long period of time. However if you pick stocks keep measuring what you are doing. At some stage you need to accept that you cannot screw your own portfolio beyond a poing – of course there is no law against hurting yourself.

Long Term Investment Management & Strategy - Does it always Succeed?

I came across a nice article on web which explains how long term investment strategy could fail in current sitution!! If you have invested in index benchmarked mutual funds or investment schemes with such mutual funds, it could fail in long term. This article is from USA based stock market research publication house, but since global economies are more or less integrated with each others and that a small event in big economies can prove trigger (positive or negative) for our markets, this is a good read.

How the mutual fund industry has sold you a bill of goods, how you can get your money back and make a fortune on top of it.
You’ve heard it all before: A serious-sounding actor on TV will tell you that the way to get rich and secure your retirement is to “invest in a well-diversified mutual fund and hold for the long term.” Sure, he has a nice suit and a trustworthy face, but the cold, hard fact is he is lying to you. If you invested in the S&P 500 14 years ago – back when I started in this business – you would have about the same amount of money you have now.

S&P 500: 14-Year Chart

In fact, given the current suckers’ rally, I would hazard a guess that we haven’t seen the worst.

Why are mutual fund companies lying to you? It’s simple. They make money off of “cash under management.” It is in their best interest that you give them your money so they can hold onto it for decades.

Sure, there have been unique periods when stocks went up over long periods of time, such as the years following the Great Depression and World War II. But those days are over, and may never return in our lifetime. Right now, the U.S. market is analogous to what happened in Japan after its massive real estate bubble popped 20 years ago.

If you remember back in 1990, the “Japanese miracle” was on a roll. Japanese companies such as Toyota, Nintendo and Sony were invading the world. There was lots of hand-wringing because Japanese investors bought up Rockefeller Center in New York City.

At the time, real estate had gotten so expensive in Japan (due to crazy mortgage policies) that one square block in Tokyo was worth more than the
entire state of California!

Then, Japan’s real estate bubble broke. The Nikkei 225 index fell from almost 40,000 to 15,000, and has been bouncing like a ball down the stairs ever since.


Japanese experts and politicians did what U.S. experts and politicians are doing now. They cut their interest rates to zero and started spending money.
They built bridges that no one used, and highways that went nowhere. They spent and spent.

According to numbers from Bloomberg, Japan’s debt-to-GDP will be 147% this year. It now must use 65% of its tax revenue just to make interest payments
on its staggering 20 trillion yen in public debt.

Does any of this sound familiar?
The U.S. is exactly one decade behind Japan in its path to self-destruction. And this is Japan we are talking about – a country full of smart, motivated people. These guys make the Lexus. If it can happen there it can happen here.

And it will… heck, it already is… According to John F. McManus in the New American:

Look at what America’s experts have done in response to our nation’s recession. In every detail, they did exactly what Japan has been doing for 17 years. They cut interest rates, launched public works programs, handed outbusiness loans and bailouts, and created stimulus packages, while the Fed manufactured trillions out of thin air. The result: our nation remains mired in our own slowdown.What happened in Japan is being repeated here (in USA).
Source: Article sent to me in e-Mail by Taipan Publishing Group

Deciding Upon Stocks To Buy - Important Stock Ratios

In an endeavour to keep educating investors on how to buy stocks, here are important stocks related ratios to be looked at while buying stocks. Value investing and fundamental research of stock definitely relies on these financial ratios while making a decision while investing in stocks.

1. Ploughback or Reserves
Every year, the company divides its net profit (profits in hand 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, the company 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:
Shareholders' funds
------------------------------------------------ = Book Value per share
Total quantity of equity shares issued

Shareholders' funds can be computed as such:
Total assets (equity capital to the company's reserves) less total liabilities (money owed to creditors).

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:
Profit Post Tax
------------------------------------------------ = EPS
Total quantity of equity shares issued

This ratio computes the company's earnings on a per share basis. Say, 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 per cent, 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 per cent.

This example shows that instead of looking at the dividends received from to company as the base of investment returns, always look atearnings 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 of the share
------------------------ = P/E
Earnings per share

It shows the degree to which earnings of a share are protected by its price. Say, 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:

Dividend per share
----------------------------- x 100 = Yield
Market price of a share

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 of capital employed (ROCE)
ROCE is the ratio that is calculated as:
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
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.

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.

Bharti Airtel - Is It Time To Buy Stocks?

Bharti Airtel, announced its second quarter FY10 results on Friday, which were quite disappointing. The company’s net profit declined 7.8% to Rs 2,321 crore as against Rs 2,517 crore on a quarter-on-quarter (QoQ) basis. Soon after, the Bharti Airtel stock hit a 52-week low at Rs 290 on the exchanges. The stock was, two months ago, quoting a price of Rs 450.

Is Bharti now so beaten-down that investors can buy at it current levels or is it wiser to stay away from it at even these levels, given the outlook of the telecom sector? Checkout stock analysis and outlook presented by Anand Rathi securities.

Stock close to bottom
“For Bharti, we are closer to the end now in terms of price damage,” says Sanjay Chawla of Anand Rathi Securities. “However, it is the time correction that is likely to be extended and that may well last for another three-six months.”

Chawla adds that market is eyeing two-three developments closely: the impact of tariff cuts on its margins and evidence of the pricing war bottoming out.

“Also, with the Unitech-Telenor launch, Docomo making rapid inroads and number probability to launch soon, the effect of that remains to be seen,” he says. “We don’t see that the time correction is going to end until Q1 results are out.”

He, however, added that stock was close to bottoming out and may stay at current levels for some to come.

“The earnings numbers that we saw are disappointing particularly the fact that the average revenue per user (ARPU) has declined 8% — even when the entire tariff cut was implemented much later,” says Hemang Jani, Senior Vice President, Sharekhan, adding that there was a feeling that the stock may under-perform for the next six months given the competition.

“However, the way I look at Bharti, it’s a company that makes a net profit of Rs 8,500 crore, available at about 11-12 PE and I don’t think we are going to see this kind of a scenario playing out for too long. From an investment perspective at 11 times forward PE, Bharti definitely looks attractive.”

Top 10 Stocks FIIs Buy & Love to Invest In

The last boom in the Indian stock markets was inarguably driven by Foreign Institutional Investors (FIIs). These were companies placing their bets on the Indian growth story and rushing hot money in the stock markets. Here is a list published by MoneyControl.com of such stocks where FII's have biggest percentage share.

1.
Name of company: Sybly Industries Limited
FII share in company: 74.18 %
Best known for: Manufacturing Polyester Yarn and Mercerised

2.
Name of company: Indiabulls Real Estate
FII share in company: 67.43 %
Best known for: Real Estate

3.
Name of company: H D F C
FII share in company: 59.85 %
Best known for: Private sector banking

4.
Name of company: Geodesic
FII share in company: 53.47 %
Best known for: Developing products in the information, communication and entertainment space.

5.
Name of company: Amtek Auto
FII share in company: 50.84 %
Best known for: Manufacturing automotive components

6.
Name of company: IVRCL Infrastructure
FII share in company: 48.04 %
Best known for: Infrastructure sectors like Water & Environment, Transportation, Buildings, and Power

7.
Name of company: Prajay Engineering
FII share in company: 42.55 %
Best known for: Real estate

8.
Name of company: Amtek India
FII share in company: 42.55 %

9.
Name of company: Jain Irrigation
FII share in company: 42.02 %
Best known for: Manufacturing irrigation systems

10.
Name of company: Logix Microsystems
FII share in company: 41.96 %
Best known for: Software Products Company

Make a note, I am not asking you to buy stocks of these companies. This is for your information and the decision for buying stocks depends on performance of respective company. Normally it has been seen that the stocks where FII activities are more, stock price movement is volatile.

Deeper Correction In Stock Markets Expected

Christopher Wood, Equity Strategist, CLSA, says the chances of a deeper correction in global equities are rising. "There is some initial indication of a technical breakdown in the US. Our best case scenario is 1,200 on the S&P 500 by year-end."

He feels an easy monetary policy in Asia can create asset bubbles. "The worst case correction in Asia is at one-third of highs." Wood advises investors to use significant corrections in Asia to buy stocks. “We have reduced our weight on India, and increased our weight on China."

According to him, India is most likely to see the first rate hike in Asia. But was quick to add that the Reserve Bank won't be aggressive in monetary tightening.

If we go by his opinion, worst case correction could be one-third of highs in Asia. In India, I do not believe it could be one third but considerable correction is quiet possible. Do not buy stocks for long term investment for some more time.

Volatile & Trading Stocks For Short Term Gains

Stocks You Must Buy - Volatile & Trading Stocks For Short Term Gains:

These stocks have fallen like there’s no bottom. But the levels at which they are trading offer huge opportunities.

Strategy: Buy on rumours and sell on news.

Suzlon:
Debt is high and so are the receivables. But Tulsi Tanti is willing to dilute his stake and meet commitments. If US President Barack Obama backs energy generation from green sources, Suzlon’s 5 MW wind turbines will be hot. The stock has gained nearly 300 percent since the time it fell to Rs. 35.

Ranbaxy:
The last 12 months have been bad. Sales are down, research hasn’t paid off and US FDA is after it for manufacturing lapses. But the new Japanese owner Daiichi Sankyo has had great successes in research and working with the FDA. Expect them to put Ranbaxy back on an even keel.

NIIT:
As IT crashed so did the IT trainer. Its stock fell 85 percent to Rs. 14. But it is moving beyond IT and is training professionals for banking jobs. The amount spent on education doubled in the last five years and NIIT grew twice as fast, quadrupling its top line. The stock has recovered to half its 52-week high.

Wockhardt:
Its core business is in fine fettle. Its problems are foreign loan repayments and derivative losses. Banks are taking over the company operations and Habil Khorakiwala has put some businesses on the block to pay off debtors. Wockhardt’s strong cash flow should return it to good health in two years.

Hindalco:
The acquisition of Novelis tripled Hindalco’s sales but caused an 11 percent decline in net profits. But aluminum prices are rising and credit is beginning to flow. Hindalco’s nine-month profits look nice. It now has the space to fix Novelis. Tricky but not impossible.

Risk: This one’s clearly a high risk strategy. There could be serious heart ache before the gains come.

Banking, Insurance, Retail and Airlines Stock Picks

Stocks You Must Buy - Banking, Insurance, Retail and Airlines Stock Picks:

Government moves out, lets in private capital, it works more efficiently and delivers great returns. That’s liberalisation. The new government has the mandate to open up sectors like banking, insurance, retail and airlines to private investors. When it does, be there.

Strategy: Simply select the best performers in these sectors.

Crisil:
The 800-pound gorilla of rating agencies, it rates 1,000 firms today. If the financial sector is liberalised, that number could go up to 10,000. Crisil has retained earnings of 75 percent with an ROCE of 42 percent. It is the fourth largest credit rating agency in the world.

ICRA:
There is room for both Crisil and ICRA in the space. At Rs. 788, the company is getting close to its 52-week high of Rs. 900. But the number doesn’t capture the potential arising from RBI’s new rule that all debt products be rated.

HDFC Bank:
A cautious and solid bank, it is safe because its government bond holdings are 3 percent over the statutory liquidity ratio (SLR) requirement.Fiscal liberalisation will benefit this bank because it is in a position to scale up quickly. At Rs. 1,569, the price looks steep based on 2009-10 P/E multiple of 4. This is very much the stock for those who like conservative growth.

Kingfisher Airlines:
The company has a debt-equity ratio of 3:1. And it makes losses. If foreign capital is allowed, you can be sure of one thing: Vijay Mallya will make sure Kingfisher gets it. That will make life a lot easier for the airline.

Oracle Financial:
It suffered when oreign banks went broke. But its earnings jumped 77 percent and revenues rose 23 percent in 2008-09. As its clients come off the ventilator, theywill need to be rewired. Oracle Financial will be waiting.

Risk: The ambiguity of regulatory changes, however, gives them some additional risk. Given that US banks have behaved so badly, it is going to be hard for government to liberalise the financial sector.

Infrastructure Sector Stock Picks

Stocks You Must Buy - Infrastructure Sector Stock Picks

India needs new roads, ports, airports, railway lines and huge amounts of power. Apart from steel and cement, there are several ancillary plays as well. For instance, warehouse network will be needed along the roads and near ports. As more small towns get connected to big cities through roads, vehicle sales will benefit.

Strategy: Not good for paying school fees; great for college education kitty.

Blue Star:
Two decades to reach Rs. 1,000 crore in sales; two years to reach Rs. 2,000 crore in 2008. Non-core businesses are gone and 90 percent of revenues come from refrigeration and cooling products. It’s almost debt-free with an ROCE of over 50 percent. Growing demand for cold storage, outsourcing outfits and other commercial offices in Tier II cities put the estimated non-residential demand for air conditioning at Rs. 38,000 crore.

BHEL:
For 2009-10, the company is increasing its capacity from 10 GW to 15 GW. Capacity additions are ahead of schedule. The slowdown in the global economy has brought down input costs significantly. The company has also taken control of its salary costs that were eroding its profit margins. BHEL will be among the top beneficiaries as India begins to add 20,000 MW of generation capacity each year for the next five years.

Power Finance Corporation:
At about 25 percent, the company’s net profit margin is close to what the best software companies earn at half their price-to-earnings ratio. This public sector company also enjoys the preferred lender status for all the megapower projects in the country. Its employee expenses are just 1 percent of sales.

Mahindra & Mahindra:
Rural India is earning well because of infrastructure boom. M&M’s SUVs are selling briskly and its market share in the SUV space has gone from 51 percent to 57 percent in the last two years. A week after Xylo was launched, M&M received 9,000 bookings, or one-fifth of its annual SUV sales. The stock may be fully priced now but the upshot comes from prosperity in the hinterland that better infrastructure will bring.

Allcargo Global Logistics:
This stock was one of the earliest to recover after it fell dramatically in October. It has already recovered all the lost ground as the company managed to keep its net profits margin above 15 percent. The stock is available at a P/E of 17 on trailing earnings, just as expensive as the broad market. Allcargo, a complete logistics provider, is positioned well to exploit the projected 17 percent in port traffic and the increasing trend of outsourcing of logistics by manufacturing companies.

Risk: Long payback periods are par for the course in infrastructure. As a result, earnings in the near term could be depressed, often in proportion to the borrowed funds. If costs of funds go up, returns could diminish. In some cases, regulatory glitches can also slow down the process as is the case with megapower plants coming up in Uttar Pradesh.

Consumer Durables (FMCG Sector) Stock Picks

Stocks You Must Buy - Consumer Durables (FMCG Sector) Stock Picks

Between 2000 and 2005, nearly a third of the incremental expenditure came from the middle class. Their non-food expenditure rose 70 percent, while expenditure on education doubled. In these years, as per capita income rose 80 percent, Indians also increased their expenses by nearly the same degree.

The same theme will play out in the coming years. The five broad areas to look for companies are: food, essential non-food, education, healthcare (lifestyle) and discretionary expenditure that will include consumer durables and automobiles.

Strategy: Buy it, stash it and have a good night’s sleep.

Page Industries:
A small company that makes a small product with big margins: male underwear. This Rs. 200-crore company makes the Jockey brand and has a net margin of 12 percent and ROCE of 36 percent. The company has effectively positioned its brand in a largely unbranded and unorganised Rs. 900 crore innerwear market. The company is worth a little over $100 million — cheap to even buy as an ongoing business for global competitors.

Pidilite Industries:
Pidilite has brands like Fevicol, M-Seal, car polish Motomax and other assorted consumer art materials and specialised home paints. The three brands are also clear market leaders in their category. The company is available at a market capitalisation of 1.6 times its sales. With a sales growth rate of more than 22 percent for the last five years, there is a lot of steam left as its brands touch fast-growing areas like education, home décor and automobiles.

Dabur:
This company has focus. Five years ago, Dabur got out of the pharmaceutical business and put all its effort, like the best brand companies, behind five of its brands. Since then, its ROCE has consistently remained above 50 percent. It touched 80 percent in 2008. Dabur strategy of focussing on health foods like fruit juices sold under its Real brand is starting to pay dividends.

Procter and Gamble Hygiene:
Over the last three years, the money that P&G invested did not translate into market cap gains. The worm has now turned. Its feminine hygiene line, Whisper, grew at 21 percent and is also the category leader in value terms. Its ROCE, which started dipping since 2006, has again picked up indicating that its new investments are now paying dividends. The stock is trading at its three years highs but is still priced 20 percent below its peers.

Marico:
Till 2008-09 came by, the company’s sales and profits had grown for 30 consecutive quarters, indicating a stable track record. Overthe last five years , the company averaged a 20 percent growth in sales and profits. It recently launched its Saffola range of food products, which is expected to give the company its next round of growth. The stock looks fully priced but its international business and Kaya Skin Clinics have started to deliver returns. Analysts expect these businesses to expand rapidly in the coming years.

Risk: People love this sector when the chips are down. But when bulls are roaming the streets, returns from this sector fall. These stocks have higher valuations than the general market, making them look expensive.