Should you buy stocks of IT companies for long term?

I came across an article while researching on future of Indian IT Stocks and to make a decision whether I should buy stocks of IT companies for my long term investment portfolio. Here is my opinion.

The article talks about "Stop Outsourcing and Create American Jobs Act of 2010", an act that is targeted to punish American companies who "outsource" the projects and work to offshore companies such as IT companies in India.

Title and link of article: Another Proposed Law To Stop Offshore Outsourcing. If you read the first immediate comment of an American reader just below the article, you would understand the sentiments people carry against outsourcing, specially India. Why India? Because Indian IT companies have largest share of outsourcing from American corporates.

Last month, Congressmen Gary Peters, Tim Bishop and Jerry McNerney proposed this legislation to curb outsourcing to countries such as India. The Stop Outsourcing and Create American Jobs Act of 2010, the Bill clearly aims to discourage US firms from shipping jobs overseas.

So how does it bothers IT stocks in India? If this act passes, American government could go barring the American companies, who are outsourcing the work, from participating in government contracts. So these companies have to think twice before outsourcing.

A lot is being written against the outsourcing and to keep the American jobs in America. The Bill, being initiated by Senator Charles Schumer, is expected to focus on H-1B and L1 visas given to IT and other professionals and could possibly impose some restrictions on them. The similar is expected to be done to keep jobs in American soil and with Americans, as a very common feeling is developing that recession has took a toll on millions of American jobs and Americans are losing their jobs to other countries.

The elections to the US Senate are scheduled to be held in November 2010 and the sentiment against outsourcing will only rise in time to come.

Another fact lies in the title of this article "China replaces India as preferred outsourcing destination". Though at the moment the country has still not reached the level of maturity seen in India, the growth of China's outsourcing market is significant. Indian IT companies have got a big competitor right next door and it is rising!

With these developments, I strongly feel that it is going to be extremely difficult in future for Indian IT companies to even keep up the growth rates they are accustomed to in last 10 years. This ultimately is going to take toll on their overall profitability and profit growth. The kind of explosive growth experienced by Indian IT companies in past few years could stall in future and so would freeze the growth of their stock price.

Finding a multibagger stock out of Indian IT companies stable is going to be extremely difficult in future. It is my gut feeling to not to keep my portfolio relied on IT stocks for growth. I would be glad to know your opinions, you may use comment form below to post your opinions.

TOP 100 Stocks with the Lowest P/E- on Jun 16, 2010

Following is the list of stocks having the maximum P/E (PE). The list is generated as on 16th June 2010

But at the same time it should be remembered that P/E is not only a single factor that should be checked or considered while purchasing a stock, there are other factors involved too such as the YoY profits of the company, EPS, etc..

1 Kutch Salt & Al P/E 0.05
2 Shree Rani S P/E 0.12
3 Krishna Filamen P/E 0.12
4 Guj Poly AVX P/E 0.21
5 Centennial Sutu P/E 0.44
6 Specular Market P/E 0.47
7 Hind Composites P/E 0.49
8 Coromandel Agro P/E 0.5
9 Rose Investment P/E 0.54
10 Shalimar Wires P/E 0.56
11 Ras Propack Lam P/E 0.7
12 Kirloskar Oil P/E 0.79
13 JMDE Packaging P/E 0.83
14 Simbhaoli Sugar P/E 0.84
15 Bombay Cycle P/E 0.88
16 Winro Commercia P/E 0.91
17 Siddhartha Tube P/E 0.93
18 Cybele Ind P/E 0.93
19 Rama Phosphates P/E 0.93
20 Polar Ind P/E 0.94
21 Vision Corp P/E 0.99
22 Signet Ind P/E 1.15
23 Ganesh Benzo P/E 1.18
24 Eastern Sugar P/E 1.19
25 Samtel Color P/E 1.2
26 Compac Disc P/E 1.27
27 Temptation Food P/E 1.27
28 JK Synthetics P/E 1.28
29 Metrochem P/E 1.29
30 MM Rubber P/E 1.37
31 Ficom Industrie P/E 1.38
32 Triveni Glass P/E 1.4
33 DCM P/E 1.42
34 Pasupati Acrylo P/E 1.51
35 Mukesh Babu Fin P/E 1.53
36 Sakthi Sugars P/E 1.57
37 Apte Amalgam P/E 1.59
38 Sand Plast P/E 1.6
39 Oswal Overseas P/E 1.6
40 Sri Ramakrishna P/E 1.7
41 GeeCee Ventures P/E 1.71
42 Raasi Finance P/E 1.76
43 Pee Cee Cosma P/E 1.78
44 Wallfort Fin P/E 1.79
45 Hanjer Fibres P/E 1.81
46 Morgan Ventures P/E 1.84
47 TCFC Finance P/E 1.89
48 Resonance Speci P/E 2.14
49 Harleystreet Ph P/E 2.17
50 Beckons Ind P/E 2.2
51 Hytone Synth P/E 2.25
52 Subex P/E 2.28
53 BLB P/E 2.3
54 Kesar Enterpris P/E 2.3
55 Alumeco India P/E 2.31
56 Flawless Diamon P/E 2.31
57 Jaysynth Dyestu P/E 2.33
58 Adarsh Deriv P/E 2.34
59 Taparia Tools P/E 2.37
60 Vikas WSP P/E 2.38
61 Ponni Sugars(E) P/E 2.4
62 Remi Elektrotec P/E 2.44
63 Dharani Sugars P/E 2.45
64 Hariyana Ship P/E 2.47
65 Ashiana Ispat P/E 2.5
66 Glance Fin P/E 2.51
67 Indian Acrylics P/E 2.52
68 Shri Lakshmi Co P/E 2.56
69 Spenta Inter P/E 2.57
70 Apple Finance P/E 2.62
71 Kakatiya Tex P/E 2.62
72 Pioneer Embroi P/E 2.63
73 Vimal Oils P/E 2.64
74 Oscar Global P/E 2.68
75 Nalin Leasing P/E 2.68
76 South Ispat P/E 2.74
77 Parker Agro P/E 2.75
78 Dharani Finance P/E 2.76
79 Apollo Finvest P/E 2.79
80 Jam Shri Ranjit P/E 2.81
81 Punj Woolcomber P/E 2.84
82 Ceat P/E 2.94
83 Venus Ventures P/E 2.95
84 Amal Products P/E 2.96
85 Parekh Platinum P/E 2.97
86 NR Agarwal P/E 2.97
87 Rama Pulp P/E 2.98
88 Good Luck Steel P/E 2.99
89 SEL Manufacturi P/E 3.02
90 Thiru Arooran P/E 3.03
91 Omnitex Ind P/E 3.04
92 Sri Nachammai P/E 3.06
93 Rajshree Sugars P/E 3.06
94 Rana Sugars P/E 3.06
95 Eveready Ind P/E 3.06
96 Trishakti Elect P/E 3.1
97 Shree Ajit Pulp P/E 3.12
98 Nila Housing P/E 3.13
99 Katwa Udyog P/E 3.14
100 National Plasti P/E 3.16

Top 100 Stocks with the Highest P/E - on Jun 16, 2010

Following is the list of stocks having the maximum P/E (PE). The list is generated as on 16th June 2010

But at the same time it should be remembered that P/E is not only a single factor that should be checked or considered while purchasing a stock, there are other factors involved too such as the YoY profits of the company, EPS, etc..

1 Paran P/E 13,041.67

2 Gujarat Natural P/E 9,090.00

3 Sampada Chem P/E 9,011.67

4 Geefcee Fin P/E 8,185.00

5 Sterling Inter P/E 7,330.00

6 Raghav Ind P/E 6,035.00

7 Intellivate Cap P/E 5,045.00

8 KGN Industries P/E 5,005.71

9 Sai Capital Ltd P/E 5,000.00

10 Nikki Global Fi P/E 4,500.00

11 Precision Elec P/E 4,405.00

12 OCL Iron P/E 4,225.00

13 Pharmasia P/E 4,216.67

14 Advani Hotels P/E 3,960.00

15 Shree Global Tr P/E 3,669.17

16 ACIL Cotton Ind P/E 3,205.00

17 Kailash Ficom P/E 3,170.00

18 Veritas P/E 2,967.40

19 Axon Infotech P/E 1,885.00

20 Prabhav Indust P/E 1,770.00

21 Incap Financial P/E 1,666.67

22 Tribhuvan House P/E 1,635.00

23 Elder Healthcar P/E 1,631.00

24 PVR P/E 1,578.00

25 DJS StockandSha P/E 1,575.00

26 Interlink Petro P/E 1,503.75

27 Splash Media P/E 1,403.77

28 GMR Infra P/E 1,400.00

29 Beta-Kappa Inve P/E 1,385.00

30 Well Pack Paper P/E 1,161.00

31 TRC Finance P/E 1,090.00

32 Jindal Capital P/E 1,050.00

33 Adarsh Plant P/E 1,047.00

34 Oregon Commerci P/E 996.58

35 Hinduja Foundri P/E 942.5

36 Sterlite Projec P/E 937.5

37 Shree Nath Comm P/E 860.47

38 Unisys Soft P/E 860

39 Aryaman Fin Ser P/E 855

40 Kosha Cubidor P/E 826.5

41 Preeti Sec P/E 788

42 MMTC Ltd P/E 761.15

43 Devine Impex P/E 741.67

44 Kadamb Construc P/E 739.17

45 Tatia Global P/E 735

46 Biopac India P/E 731.5

47 Samyak Intern P/E 720

48 Shricon Ind P/E 713.13

49 Zigma Software P/E 709

50 Prraneta Ind P/E 694.17

51 Sanket Internat P/E 650

52 Marathwada Refr P/E 632.93

53 Subuthi Finance P/E 625.77

54 Pithampur Steel P/E 609

55 Ritesh Prop P/E 593.33

56 Jaybharat Texti P/E 577.9

57 Dalal Street In P/E 572.78

58 Spectacle Ind P/E 565.22

59 Sunteck Realty P/E 555

60 Rockon Fintech P/E 550

61 Urja Global P/E 546.36

62 Nouveau Finance P/E 531

63 Essar Oil P/E 530

64 Sparc Systems P/E 525

65 JMD Telefilms P/E 523.41

66 Dunlop India P/E 519.62

67 BPL P/E 518.57

68 Avance Tech P/E 513

69 Websol Energy P/E 477.14

70 Kuvam Intl P/E 476.84

71 Dollex Ind P/E 472.5

72 Rajath Finance P/E 459.38

73 Indo-Asian Proj P/E 447.5

74 Jai Hind Synth P/E 438.33

75 PFL Infotech P/E 431.25

76 JSW Holdings P/E 430.68

77 SVC Resources P/E 428.49

78 Harringtons Ind P/E 422.62

79 Centum Electron P/E 419.42

80 Shriram Needle P/E 407.14

81 Subhkam Capital P/E 400.92

82 Gyan Developers P/E 389.8

83 ACE India P/E 389.44

84 South Latex P/E 375

85 BF Utilities P/E 363.87

86 Zenu Infotech P/E 348.75

87 Cambridge Tech P/E 339.17

88 Cat Technologie P/E 331

89 Crest Animation P/E 325.18

90 IO System P/E 311.88

91 Blue Blends Fin P/E 311.5

92 GVK Power P/E 309.29

93 Vertex Spinning P/E 308

94 Scenario Media P/E 307.81

95 Cubical Fin Ser P/E 303.33

96 Artillegenc Bio P/E 302

97 Hind Copper P/E 300.56

98 Swarna Securite P/E 298.57

99 Amalgamated Ele P/E 290.11

100 Elegant Flori P/E 290

Stock leaders on bumpy economic road, no double-dip

Mid- and small-capitalization stocks often serve as a leading indicator for the direction of the US economy. So what does it say that they they are down roughly 15 to 20 per cent?

As the US economy throws up dismal economic data, putting the ominous possibility of a double-dip recession at the top of Wall Street's talking points, money managers are saying that assessment would be premature

"Right now the market is responding to this fear, and double-dip is in the air... but is it verified in the statistics? And in that case we are saying 'No, there is no double-dip,'" said Milton Ezrati, senior economist and market strategist at Lord Abbett, in Jersey City, New Jersey.

"Particularly in an environment like this it is very dangerous because the market picks up the talk and it will give a lot of false signals," Ezrati said, referring to the influence grim economic data can have on stock markets and vice versa.

Risks of a double-dip have increased, managers admit, as employment and housing have failed to rebound, and, akin to the eternal chicken vs. egg debate, corporate earnings estimates are being revised downward in anticipation of sluggish growth.

"We are in a transition period where small and mid-cap stocks will face headwinds as they face the question of whether earnings projections will be reduced by a more sluggish global economy," said Martin Sass, founder of New York-based investment advisory firm MD Sass.

Sass believes it is premature to declare a double-dip recession is at hand, but notes that earnings estimates are now being revised down rather than up.

In fact, the mean change in aggregate earnings estimates for the third quarter for the S&P SmallCap 600 index fell 1.1 per cent in the last 30 days, according to Thomson Reuters StarMine Professional data.

That is still slightly less negative than the 1.4 per cent drop in the last 30 days for revisions to S&P 500 aggregate earnings estimates.

DOWN SHARPLY

Stocks have tumbled from their late April peak, entering deep into correction territory even after a strong rally on July 7, when most major stock indexes rose over 3 per cent.

According to Canadian investment firm Brockhouse Cooper, over the prior five US recessions, small-cap stocks have outperformed large-cap shares by 4.5 per cent, on average between the market trough and the end of the recession. In the first year of expansion that out-performance is 13.7 per cent.

The S&P 600 SmallCap index is down 16 per cent while the S&P 400 MidCap index is off 15 per cent from April 26 highs.

That may be worse than the 13 per cent drop in the large-cap S&P 500, however, since the March 2009 market trough, mid- and small-cap stocks are up well over 80 per cent versus a 58 per cent rise in the S&P 500.

"We are not forecasting a double-dip, no, just a slow growth environment. Very slow. We think (small-caps) are going to underperform a little bit, more just because of the relative valuations," said Bernie Williams, the head of USA's private investment management division based in San Antonio, Texas.

Williams says he sees shares in a trading range, although he remains "cautiously optimistic."

"If earnings come through and we don't double-dip, we could end up in positive territory for the year," he said.

As a result of their run-up, on a valuation basis, the S&P SmallCap 600 has a forward price-to-earnings ratio of 14.24 per cent versus the S&P 500's 11.6 per cent. The Russell 2000 index of small-cap shares is even higher at 15.74 per cent, according to Thomson Reuters data.

While valuations may be high in mid- and small-cap stocks, one fund manager sees the correction as a buying opportunity.

Aram Green, co-portfolio manager of the Legg Mason ClearBridge small-cap growth fund, says cash is piling up on corporate balance sheets while firms go through a "digestion phase of assimilating people back into their employment base."

That is perhaps one reason for the lull in hiring, which is feeding into market trepidation.

"I think we are going to need more data points, and I think that is why the market is pulling back. They are waiting for that next set of data points," said Green.

"I like the stock market here. These are very attractive valuations and if there is any sort of digestion period, we are talking about a minimal impact in terms of the earnings power of these companies over the next 12 months. At very attractive valuations we are putting money to work."

STOCK ANALYSIS: JSW Energy

With the commissioning of the first unit (300 mw) out of the total 1200mw Ratnagiri project (Maharashtra) in July 2010, JSW Energy’s installed capacity will jump 30 per cent to almost 1300mw.

The Sajjan Jindal group-owned company is well on course to achieve 3410 mw capacity by FY14, with full commissioning of Ratnagiri (1200mw) and Barmer (1080mw) by FY12 itself.  Besides, 8250mw worth of projects are under various stages of development, which will help JEL achieve a project size of about 11500mw by FY16.

Analysts are positive and confident about the company’s capability of achieving the said project targets due to its strong execution track record, financial strength and huge base of operational capacity (1000mw) unlike many other new private entrants. They estimate strong sales and profit CAGR of 54 per cent and 48 per cent respectively between FY10-13E. In FY11, average sales and profits are likely to almost double on a y-o-y basis to Rs 5,530 crore and Rs 1,291 crore, respectively due to phased commissioning of Ratnagiri and Barmer projects. This is over and above 28 per cent and 169 per cent jump in sales and profit at Rs 2,355 crore and Rs 745.5 crore, respectively in FY10 mainly due to a lower base.

The most interesting argument in favour of JEL is the fact that it is also one of the best plays on India’s currently buoyant merchant power story. In FY10, around 70 per cent of the power generated by JEL was sold on merchant basis at Rs 4.5 per unit. Going ahead, though this high share is expected to come down to less than around 50 per cent by FY14, the company is well placed to reap benefits of high merchant power rates in India, thanks to robust power demand on account of strong economic growth and supply lagging behind. The front loaded merchant capacities are likely to benefit the company due to high merchant tariff over the next 2-3years, say analysts.

However, there are risks to being bullish about the company.

Beyond FY14, merchant power rates are going to soften as robust expansion of power plans start getting commissioned. Around 1, 00,000mw is expected to come up by FY14, adding to the current India’s installed capacity of 1, 55,000 mw and thus putting pressure on short-term rates.  JEL witnessed about halving of merchant power rate at Rs 4.5 in FY10. Analysts estimate that spot tariff would converge with regulated tariff of Rs 2.5-3.5 per unit.

Secondly, the company is exposed to fuel availability and its cost. It is dependent on 10 million tonnes per annum (MTPA) imported coal for 3410mw. While more than 60 per cent of the coal will be bought on spot basis, the rest has been tied up on a long-term basis. Also, till the time its lignite mines start operations, which will take 2-3 years, it will need additional 8.5MTPA of coal. By using more of imported coal, JEL is exposed to pricing and exchange risk that could have serious impact on its financial performance, as there is no benefit of pass-through in merchant based projects.

Thus, investors need to watch out for this critical trigger as to how the company reduces its excessive dependence on imported coal. JEL is trying to resolve the issue though slowly. In April, it acquired about 50 per cent stake in South African Coal Mining Holding Ltd (SACMH) having total reserves of 50 million tones. Further, Indian Ocean Mining Ltd, South Africa (IOM) and Osho Venture FZCO, Dubai is now working together with JSW Energy to give JSW access to get 70 per cent of Osho and IOM, which is subject to due diligence. Lastly, the company has been using Chinese equipments for projects under construction (3410mw). There are questions raised about the quality and efficiency of Chinese equipments.

At Rs 125, the stock has given a return of 25 per cent in the last six months over its issue price of Rs 100 since its listing in January 2010. It trades at 10 times and 3.5 times FY12 estimated earnings and book value, respectively. With various positive triggers such as timely commissioning of capacities and announcement of acquisition of coal mines, analysts are nevertheless positive on the company. They have estimated an average one year target price at Rs 163, implying an upside of over 30 per cent.

STOCK ANALYSIS: YES Bank

As Yes Bank looks to expand beyond its mainly wholesale focus (on both lending and funding) to a stronger retail presence by scaling up to 750 branches from the present 150 in the next five years, its strong management and their sound execution history has added conviction on the strong performance going ahead.

The bank has targeted a 35% CAGR growth in advances and marginally higher deposit growth in this period, increasing low-cost CASA deposits (current account and savings account) by 2-3% every year. This should propel its revenues and earnings to grow at a clip of 30% over the next couple of years in tandem with peers, say analysts, adding that although targets are difficult to achieve, management expertise holds the key to execution. Having raised capital last year, the bank is well capitalized to fuel this growth with Tier I ratio at 12.9%.

The bank has seen its balance-sheet grow over 70% CAGR in the last four years, albeit over a small base with both deposits and loans growing at nearly 74% CAGR in this period. Net interest income and net profit after tax grew well over 50% y-o-y in FY10 to Rs 509 crore and Rs 304 crore, respectively. It maintained net interest margins at a reasonable 3.1% in FY10, up 20 bps y-o-y. Its portfolio quality is among the best in business with gross NPA ratio coming down 41 bps to 0.27% and Net NPA at 0.06% and specific loan loss provisioning coverage stands at 78% of gross NPAs. Its return on assets was 1.6% and return on equity was 23.75 for FY10and the bank also announced its first dividend of Rs 1.50 per share.

YES Bank has positioned its business model on a unique platform, with focus on developing wholesale business by catering to mid-tier and large corporates. It has specialized in key sectors including food and agri, engineering, TMT (technology, media and telecom), infrastructure, logistics and healthcare that together make up about 78% of its entire lending portfolio. The bank provides a one-stop shop for all financial services from extending credit to transaction banking to investment banking services with advisory services on accessing capital from debt markets, private equity and IPO’s. This has helped boost fee income 22% y-o-y to Rs 471 crore (48% of total income) in FY10.

This positioning means it is closely geared to the economic cycle with income spurting in an upswing such as in the current environment even as slippages and therefore provisioning requirements come down. However, the bank’s stock trades at a discount to other private bank peers like HDFC Bank and Axis bank, because of its current dependence on wholesale funding.

This dependence makes it vulnerable to margin pressures from higher cost of funds in a tightening cycle and the stock has been under pressure given impending policy rate hikes and expected monetary tightening in the face of runaway inflation. However, the stock has resurfaced after the policy rate hike turned out to be a moderate 25 bps alongwith a continued assurance from the RBI to maintain a calibrated approach to monetary tightening. Analysts believe that there is enough leeway for the bank to pass on the increase in funding costs. As the bank moves to grow its retail liabilities franchise, this risk will come down and with it, the valuation discount to peers giving some headroom for appreciation from these levels according to analysts.

The stock at Rs 275.75 trades at P/B valuation of about 2.6x adjusted book value per share estimates for FY11.

Pvt sector share in sales, profit rises 60% in 10 yrs

Liberalisation and appetite to grow have helped private companies to outpace their public counterparts in the last 10 years, by raising contribution in net sales by 20 percentage points to 68.55 per cent and in net profit, by 24 percentage points to 63.86 per cent.

In other words, net sales of the private sector rose at a compound annual growth rate (CAGR) of 23.48 per cent and net profit at 33.47 per cent, while public sector entities grew at a CAGR of 12.65 per cent in terms of net sales and at 19.3 per cent by net profit.

Information technology (IT), capital goods, metals, telecom, automobiles, construction, infrastructure, pharmaceutical and realty sectors led the private sector growth, while banks and capital goods helped public sector to show double-digit CAGR in sales and profit. The public sector companies were more or less hamstrung by the government control on oil prices and inability to push reform agenda on lack of support from bureaucrats. The government’s failure to list the profitable entities also limited the public sector share in India Inc’s sales and profit.

The private sector entities were fast forward to come out of the control-ridden years to increase and upgrade manufacturing facility, by tapping the capital market through public issues. They also approached banks for endless flow of cheap credit and re-invested profits for future growth.

Reliance Industries integrated itself to become the country’s largest and the world’s most integrated petrochemical company, while Tata Steel, Tata Motors, Hindalco and top pharmaceutical companies enter world map through overseas acquisitions.

The multinational companies (MNC) operating in fast moving consumer goods, capital goods and pharmaceuticals sectors did well, and posted CAGR of 19.55 per cent in sales and 25.43 per cent in net profit.

Hindustan Unilever was the biggest disappointment of the decade. It grew at a CAGR of six-eight per cent in sales and profit. ITC, despite ridden by endless rise in excise duty, registered a CAGR of 18 per cent in sales and profit.

The private sector edged out the public sector, with the number of companies, with net profit of Rs 1,000 crore, growing from one, namely Reliance Industries, in 2000-01 to 37.

The profit buoyancy saw eight private companies become billion dollar profit companies. They were TCS, Infosys Technologies, Wipro, Bharti Airtel and Reliance Communications. ITC and Hindustan Unilever continued to be the two most profitable companies among MNCs. Thanks to 14 state-owned banks, the number of Rs 1,000-crore plus net profit companies in the public sector increased from seven to 31.

The state-owned oil companies continued to dominate the list by sales, occupying four of the top six positions.

The private sector companies, with overseas acquisitions, increased their presence in the top 10 from two to four. Tata Steel joined the Rs 100,000-crore sales leagues on the back of its acquisitions of Corus. Tata Motors doubled its sales after acquiring Jaguar-Land Rover, while Hindalco improved its sales fivefold in two years after acquiring aluminium giant Novelis.

The information technology (IT) sector, which tilted the balance in favour of services sector, has grown manifold in the last 10 years. Now, the top three IT companies together rake in export revenue worth Rs 80,000 crore from Rs 8,000 crore 10 years ago.

Bharti Airtel, an unlisted entity till 2001, now ranks among India’s top 15 companies, with net sales of Rs 42,000 crore. Bharti Airtel is also the fifth largest profitable company in India, with a net profit of Rs 9,163 crore.

Top-10 firms add over Rs 12k cr to m-cap

The country's top-10 corporate firms witnessed an addition of Rs 12,500 crore to their cumulative market capitalisation last week, on the back of a rebound in the domestic as well as global market.

A rally in the telecom stocks late last week helped the country's top telco Bharti Airtel to earn a space in the elite club, with a market cap of Rs 1.17 lakh crore, and pushed out engineering giant L&T from the ninth place in the list.

During the past week, Bharti Airtel's shares gained over 16 per cent. On Friday alone, the scrip climbed over 10 per cent after Credit Suisse upgraded the major Indian telcos.

Corporate behemoth Reliance Industries (RIL) maintained its numero-uno status, though it lost Rs 4,121.09 crore from its m-cap last week. The total market valuation of RIL stood at Rs 3.45 lakh crore for the week ended July 9.
    
With a m-cap of Rs 2.76 lakh crore, state-run energy giant ONGC held the second position, though it saw an erosion of Rs 2,320.67 crore in its m-cap.
    
IT bellwether Infosys toppled state-run power major NTPC from the third position. Infosys added Rs 8,201 crore, the most in top-10 firms, to its m-cap,taking it to Rs 164,796.86 crore, while NTPC's valuation fell by Rs 3,380.64 crore to Rs 1.63 lakh crore.
    
Software exporter TCS climbed to the fifth slot by gaining Rs 6,067.32 crore to Rs 1.51 lakh crore. State-owned SBI earned Rs 6,577.36 crore and jumped to the sixth place. The m-cap of the country's biggest public sector lender stood at Rs 1.50 lakh crore.
    
Trading major MMTC fell to the seventh place and shed Rs 7,262 crore from its m-cap to Rs 1,43,245 crore. Last week MMTC stood at the fifth spot.
    
Power producer BHEL at the eight place saw its valuation swell by Rs 124.83 crore to Rs 1.17 lakh crore.
    
FMCG firm ITC suffered a loss of one place and finished last to shed Rs 639.14 crore taking its valuation to Rs 1.14 lakh crore.

Get Ready for a Cataclysmic Market Crash! (Or Maybe Not)

Could the Dow really drop 90%?

Earlier this month, in an interview that was widely circulated online, market analyst Robert Prechter predicted that the Dow Jones Industrial Average will fall below 1000 within the next six years. The Dow promptly surged back above 10000, but it is worth asking whether Mr. Prechter might be right anyway.

The president of Elliott Wave International, a newsletter publisher and data service in Gainesville, Ga., Mr. Prechter isn't the only pundit predicting a cataclysmic bear market. Richard Russell of Dow Theory Letters has called for a monstrous decline; through a spokeswoman, he declined to confirm a specific price target. Even money guru Robert Kiyosaki has gotten in on the act, conjecturing Dow 5000 in his online column.

Mr. Prechter is a technical analyst who studies the past price performance of the markets for clues to the future. He also believes that investors move in and out of the market on predictable waves of optimism and pessimism. "Because the mania [the bull markets of 1982 to 1999 and 2003 to 2007] was so terrific," he told me this week, "it will be followed by a negative trend in social mood that will lead to a complete retracement." That would put the Dow back to its levels in 1982, below 1000.

"In a deflationary environment, the last thing you want is to own any financial asset," Mr. Prechter added. "If you stay out of stocks, real estate, gold and other commodities, which will all come down together, then you can preserve your purchasing power [in cash] for the next great buying opportunity." He wouldn't tell me what, if anything, he is selling short; he said only that he is "cash laden" with Treasury bills and Swiss money-market instruments.

But wouldn't it be highly unusual for stocks to stagnate for 11 years and then collapse by 90%? "Definitely," Mr. Prechter told me. "It's very rare." But, he points out, it is also very rare for the stock market to fall 50% and end up overvalued, as he says it is now. Still, he says, "I'm taking a big risk" making such a forecast.

Or is he? An extreme forecast doesn't merely grab your attention; ironically, it may strike you as even more convincing than a moderate prediction. A classic psychological experiment at the University of Michigan showed that 54% of people preferred an extreme prediction about stock prices to a more-temperate one. They apparently believed that a forecaster must have high confidence and a solid rationale in order to justify making a dramatic prediction.

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Christophe Vorlet

So, while Dow 1000 may or may not be a good forecast, it isn't bad marketing for newsletters that cost $19 a month, as Mr. Prechter's do. Extreme predictions tend to be popular at market turning points: Back in early 2000, a bullish book called "Dow 36,000" hit the best-seller lists—right before the bull market went into the abattoir. Nowadays, you can buy a used copy for one penny online, if you don't mind paying $3.99 for shipping.

Like all technical analysis, this forecast looks at past prices, not future earnings. A 90% drop in the Dow (if the weighting of its 30 companies didn't change) would leave only one of the components—IBM—trading above $10 a share. Alcoa, Bank of America, General Electric and Pfizer would be under $2 apiece, in danger of being delisted by the New York Stock Exchange.

To get to Dow 1000, the earnings of these leading companies would have to fall by a punishing amount—and investors would have to price them at record-low multiples of those ravaged earnings. Take Pfizer: One way it could lose 90%, says Jeffrey Yale Rubin, director of research at Birinyi Associates, is if its earnings shrank by 70% and its stock traded at a price/earnings ratio of 2.3.

For the whole index, one path to 1000 would be a 65.6% fall in earnings and a P/E of 5, Mr. Rubin says. Earnings fell further during the Great Depression, and the Dow's P/E touched 5.3 in 1979, but never have the two measures gone so low in tandem.

Before their valuations could hit such absurdly low levels, public companies would go private. If Coca-Cola ever traded at five times its earnings, Warren Buffett would buy the whole company faster than you could spell "Vanilla Coke Zero."

When I asked Mr. Prechter if such valuations were realistic, he replied that earnings and dividends must fall drastically to parallel previous bear-market lows. He added that deflation and "social unrest" will "change the perceived value of holding stocks." In that case, a market crash would be the least of your worries.

In the financial markets, nothing is impossible. But in my view, Dow 1000 is about as close to impossible as you can get.

8 Stocks which were bought by institution Investors DII and FII in June 2010

1. . Akzo Nobel India Limited
NSE Code: AKZOINDIA
This Stock was bought By SBI Mutual Fund on 11 June 2010 on average price of Rs 660
Two schemes of SBI MUTUAL FUND Bought 6,18,000 shares
Basically a low volume Stock This Scrip is currently Trading at Rs 791.55(Last Closing Price on 02 july 2010)


2. Bajaj Finserv Limited
NSE Code : BAJAJFINSV
This Scrip was Bought by SWISS FINANCE CORPORATION(MAURITIUS) LIMITED at price of Rs 403.9
They bought 11,05,938
shares


3. Core Projects and Technology
NSE Code : COREPROTEC
THE ROYAL BANK OF SCOTLAND Bought 21,00,000 shares at average price of Rs 232.41 on 28-Jun-10
Last Traded price of the share was Rs 243.80


4. Eveready Industries India
NSE Code : EVEREADY
CITIGROUP GLOBAL MARKETS Purchased this gem on 24-Jun-10
At average trade price of 65.39
They purchased 4,75,000
Yesterday this share closed at Rs 64.75

 
5. Hathway Cable & Datacom
NSE Code: HATHWAY
This Stock was bought By RELIANCE MUTUAL FUND on 29-Jun-10 on average price of Rs 175
RELIANCE MUTUAL FUND Bought 13,00,000 shares
This Scrip is currently Trading at Rs 177.15 (Last Closing Price on 02 july 2010)


6. Prime Focus Limited
NSE Code : PFOCUS
THE ROYAL BANK OF SCOTLAND Bought 1,23,000 shares at average price of Rs 308.25 b on 2-Jul-10
Last Traded price of the share was Rs 306 .


7. TTK PRESTIGE
NSE Code : TTKPRESTIG
This Stock was bought By CITIGROUP on 16-Jun-10 on average price of Rs 855
CITIGROUP Bought 1,00,361 shares
This Scrip is currently Trading at Rs 833 (Last Closing Price on 02 july 2010)


8. Xpro India Limited
NSE Code : XPROINDIA
BIRLA HOLDINGS LIMITED Bought 61500 shares at average price of Rs 48.8 on 24-Jun-10
Currently this share is trading at Rs 42.25
Stock Chart

Geometric: Why Ramesh Damani recommends this stock

Backed by the impeccable Godrej management, Geometric, a turnaround niche software company, is top pick for your share portfolio, says master stock-picker Ramesh Damani

Ramesh Damani is the stock picker with the golden touch as far as we are concerned. Not only is Ramesh Damani  generous with his stock recommendations, his ratio of hits to misses is very high. Ramesh Damani has had an extraordinary stroke of luck with his stock selections. His recent picks VIP Industries, Aegis Logistics, GIC Housing have touched 52 week highs.

What’s more they have even attracted other heavy-weight stock pickers like Rakesh Jhunjhunwala (VIP Industries: Rakesh Jhunjhunwala is buying these shares! Should We?) to increase their holdings. Ramesh Damani‘s other picks like Hawkins Cooker, Banco Products, Precision Wires have soared like rocket stocks. Even beleaguered OMCs like BPCL, IOCL and IOC  have soared like Ramesh Damani always predicted. Even small caps like Linc Pens have touched their 52 week highs. Of course, how much of this is the result of market manipulation by Ramesh Damani and his cahoots and how much is the result of genuine investor interest remains to be seen.

Ramesh Damani’s latest stock pick is a nondescript company called Geometric Ltd.

At first glance, Geometric looks like a mediocre company. So, lets find what it is about Geometric that has caught Ramesh Damani’s eye. 

Geometric’s Financial Results

Geometric’s Key Financials
(Rs cr)	Mar 2010	Mar 2009	YOY
Operating Income	127.17	141.95	-10.41
Total Expenses	105.69	153.48	-31.14
Operating Profit	21.48	-11.53	N.A
Other Income	0.36	1.84	-80.43
PBDIT	21.84	-9.69	N.A
PBT	15.39	-17.54	N.A
Adjusted Net Profit	11.84	-18.52	N.A

Geometric reported mediocre results in the Quarter ended March 2010. 
Geometric’s Consolidated operating revenues increased by 2.6% sequentially in US Dollar terms but remained flat in Rupee terms due to strengthening of Rupee against US Dollar;
Geometric’s Operating profit in Q4 10 was lower at INR 116.15MM as compared to INR 146.83MM in Q3 10;
Geometric’s PAT before extra-ordinary and prior period items for the quarter was INR 119.94 MM (9.1% of revenue). This is a positive factor given the loss of INR 195.74MM in Q4 09;
Geometric’s EPS dropped from INR 2.61 in Q3 10 to INR 1.91 in Q4 10. However, Geometric’s EPS for the year increased from INR 0.55 per share in FY 09 to INR 7.51 per share in FY 10
Geometric’s subsidiary named Geometric Engineering (erstwhile Modern Engineering) incurred an operating loss of USD 1.3MM in FY 10 Vs USD 4.2MM in FY 09

So what’s the story? What did Ramesh Damani see in Geometric that the others missed. Well, here is the answer.

There are a couple of things that must have caught Ramesh Damani’s attention.

The first is that Geometric is owned by the Godrej family. It is no secret that Ramesh Damani is a great fan of the Godrej family and rightly so. It is rare to find a business family as professional and honest as the Godrej family. Also, Adi Godrej and Tanya DubashGodrej family is well known for its integrity. So one can rest well in the confidence that one’s hard earned money will not be squandered away. have great vision from a business perspective. 


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The second, and more important, reason, is that Geometric is engaged in the Engineering Technology and Services segment. It offers Product Lifecycle Management (PLM), Software Product Development and Global Engineering Services. Their products and services are provided to the Product Lifecycle Management (PLM) market, Computer Aided Design and Computer Aided Manufacturing markets worldwide.
The problem with Geometric is that it operates in a niche area with a high exposure to the manufacturing segment. Geometric provides high-end product engineering and manufacturing engineering expertise and solutions. When there was global recession, Geometric suffered. However, that niche area of practice will prove to be a boon as the economy recovers and Geometric makes up for lost ground.
This is reflected in the fact that Geometric won new orders worth USD 13.38 MM in Q4 10 compared to USD 7.19 MM in Q3 10. Ramesh Damani also adverted to this when he said that Geometric was getting new orders from the Godrej‘s as well from other global majors including french conglomerate Dassault.
The next thing that would have caught Ramesh Damani’s attention are the valuations of Geometric. Ramesh Damani is a well known value investor and he is not one to pay more for a share than it deserves. Ramesh Damani is always looking for a bargain.
So, do we have a bargain in Geometric? Lets see. Geometric’s EPS for FY 2010 was Rs. 7.51 per share. At the CMP of Rs. 71, the PE ratio is 9.45. This is not cheap for a madcap company though it is at a slight discount to other comparables like Infotech EnterprisesMindtree (PE 10.38). (PE 12.32) and
What the PE ratio, however, does not tell you is the increasing orders that Geometric may be expecting from Godrej and Dassault. If, Geometric’s performance improves in FY11 (as Ramesh Damani most certainly expects), one can be sure of Geometric zooming up.

Geometric’s Downside Risk

Then the other factor that master stock pickers like Ramesh Damani always like to ask is: What is the worst-case scenario?

Ravishankar G

Even on this front, one can be comfortable with Geometric. First, the management is of impeccable integrity (Godrej) so there is nothing to worry about. The day-to-day management is handled by G Ravishankar, MD & CEO and Priya Jadhav, VP Finance, both of whom are first class professionals.
Geometric book value is about Rs. 30 per share (Rs. 185 crores over 6.21 crore shares). Geometric is virtually debt-free (only Rs. 18.50 crores compared to shareholder funds of Rs. 185 crores). Geometric has a reasonable good business model. So, the downside risk is not severe.

Geometric’s future prospects:

Ramesh Damani is not one to look only into the past. Ramesh Damani became a master stock picker because of his ability to read the future. Ramesh Damani can see gold where others see dust!!
Geometric is promising from that perspective because Geometric expects growth from Engineering services & Products. Geometric intends to focus more on the Engineering services and the product offerings in the future. Geometric’s US arm doing engineering services business is expected to break even in FY 11.
Geometric is also actively trying to reduce risk by diversifying its’ Business & Geographic areas of operation.
From the business segments point of view, Geometric is today heavily reliant on Manufacturing and Automotive sectors. In order to decrease its reliance on these sectors, Geometric has forayed into metrology, medical imaging and machine tools sectors and has entered into partnerships with product OEM’s in these verticals to diversify its service and product vertical offerings.
From the geographical point of view, Geometric relies heavily on the US markets though the revenue contribution from the US has decreased from 70.8% to 63.3%. The dip is made up by increased contribution from the APAC and domestic regions.

Benefits of a concentrated portfolio

In investments, as in life, selective focus and a disciplined approach is the key to success. At any given point of time, there are thousands of companies actively traded on the market and even if only a small percentage of these shares qualified as “good buys”, you would still have a bewildering array of scrips to choose from. 

Warren Buffet is a proponent of the “concentrated portfolio” theory. He believes that a portfolio should not have more than 10 to 12 scrips. He says “I cannot understand why an investor elects to put money into a business that is his 20th favorite rather than simply adding that money to his top choices — the businesses he understands best and present the least risk, along with the greatest profit potential.”

John Maynard Keynes, the celebrated economist, echoed these sentiments when he observed “As time goes on, I get more and more convinced that the right method of investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence.”

Let us list out the advantages and disadvantages of a ‘concentrated portfolio’.

The advantages:

(i) Better research:

When you are forced to put a meaningful sum of money in one share, you are forced to do better research as to the prospects of that share. In a diversified portfolio with several scrips, where the amount invested in each scrip is small, you are lulled into a false sense of security that even if your decision to invest in that scrip was wrong, the consequences will not be that bad. It is better that you take an informed call than that you blindly put in money.

(ii) Focus on performance of each share:

When you have only ten shares to look after, you know exactly what each share is doing. You have your eye on what your average cost is, what the present price is and where it seems to be headed. It is easier to decide whether to hold, accumulate or dump that share.

(iii) Better returns:

If your research was proper, the results of your investment would yield better returns. In a too-diversified portfolio, even you had your share of winners, the returns would get diluted because your holdings in the winners would be small.

Disadvantages:

(i) Risk concentration:

The greatest criticism against concentrated portfolios is that it maximizes risk. E.g. suppose you have invested heavily in Enron. One company’s downfall can wipe out a large portion of your portfolio.

(ii) Too dependent on choosing the “right” share:

If you had to choose between Reliance and L&T or between Maruti Udyog and Tata Motors, what if you picked the wrong one?

Conclusion: The truth is in between. Obviously one cannot put all of one’s eggs in one basket. Diversification is important. But how much? A selection of 10 – 15 scrips can provide the balance between concentration and diversification without compromising returns.

Rakesh Jhunjhunwala‘s tips on investment techniques

ASSET ALLOCATION & COMPOUNDING

The primary factor that Rakesh Jhunjhunwala emphasis is that one should bear in mind the importance of ASSET ALLOCATION and the power of COMPOUNDING.  

Rakesh Jhunjhunwala says that Asset Allocation means that you must be clear in your mind how much money you can spare for your equity investments.

Rakesh Jhunjhunwala emphasizes that the necessity for asset allocations stems from two realities of equities that every investor must be conscious of:

(i) Equity investments are very risky as compared to other asset classes in the short to medium term;

(ii) Equity investments take a long time to deliver results.

Rakesh Jhunjhunwala says that as an investor, you must ensure that the money that you invest in equities are not coming out of the moneys that you have kept aside for necessities and emergenicies.

Rakesh Jhunjhunwala says that you must ensure that a sufficient amount of money is always kept handy and out of the stock market (in debt investments) for meeting expenses on medical care, education, marriage and other unavoidable necessities.

Rakesh Jhunjhunwala says that it only the money remaining after this ASSET ALLOCATION that you must invest in shares.  

Rakesh Jhunjhunwala says that you must also bear in mind your age, your income-earning capacity and your risk-taking ability – also dependent on the number of dependents that you have and their short / medium-term requirements.

Rakesh Jhunjhunwala‘s point about compounding follows logically from the first point. If you are comfortable with letting the money rest in equities for a medium / short period of time, the magic of compounding works by itself.

In one of his presentations, Rakesh Jhunjhunwala showed this table of the magic of compounding.

Rakesh Jhunjhunwala's astonishing compounding example

What this astonishing presentation of Rakesh Jhunjhunwala shows is how if money is allowed to quietly compound, it attains enormous proportions. See how a paltry sum of Rs. 1 lakh per annum over a period of 25 years at a rate of return of 25% becomes an incredible Rs. 2.64 crores.

Imagine if you could save 10 lakhs every year, in 25 years you would have 26 crores, says Rakesh Jhunjhunwala!!

That is the simple but incredible clarity of thinking that Rakesh Jhunjhunwala‘s mind has.

CONVICTION

Rakesh Jhunjhunwala‘s second mantra is that you must have CONVICTION in what you are doing. You must feel it deep in your bones that equities are the way for you. You must be comfortable with the idea that your investments are subject to the vagaries of the market and you must not get sleepless night worrying about your investments.

If you think about it, this mantra is a logical corollary to Rakesh Jhunjhunwala‘s first mantra about Asset Allocation. Your comfort level with equities is directly proportional to the correctness of your asset allocation. If you have correctly kept away from equities the moneys that you need for emergencies and necessities and have only invested long-term funds in the sstock market, you will have no tension only says Rakesh Jhunjhunwala!!

DON’T BE RIGID

Rakesh Jhunjhunwala‘s third mantra is that you must be open to accepting that you have made mistakes. Don’t be rigid or obstinate. Keep an open mind!

Rakesh Jhunjhunwala  says that before buying a share, make sure that you have done proper research and identified all the positives and negatives of the shares.

Rakesh Jhunjhunwala  says that you must not get carried away by the positives of the share. Don’t get carried away by your own logic. What are the risk factors? What are the drawbacks? You must consciously ask yourself this question says Rakesh Jhunjhunwala.

If you have the CONVICTION that you are right about the share, only then go ahead and buy it.

Rakesh Jhunjhunwala says that if you bought a share that turns out to be a dud, accept that reality and do not compound the mistake by hanging on to the dud.

SAFETY OF CAPITAL & ABSOLUTE RETURNS

Rakesh Jhunjhunwala‘s next mantra also follows in logical progression to his other mantras. Take care of your capital! Don’t risk it foolishly! If you have no capital left, where is the question of returns and where is the question of compounding asks Rakesh Jhunjhunwala!

Rakesh Jhunjhunwala‘s tips on HOW TO CHOOSE AN INVESTMENT

Okay, now we come to the most important segment – How to choose an investment?

Rakesh Jhunjhunwala is a genius because it is only a genius who is able to present a successful investment strategy in an easy-to-understand format and most willing to share the formula with his less-fortunate brethren!

Rakesh Jhunjhunwala is like Warren Buffet and Benjamin Graham in emphasizing that we are not buying just a little thing that bounces about 2% every day on the stock market – but we are buying a part of a real business. He urges us to think like an owner of a business would. If you were really buying a business, what is the extent of research you would have done and care taken. Rakesh Jhunjhunwala‘s tips on what we should look for whilst buying a share is a clear indicator that he wants us to think that we are buying a part of a business.

Rakesh Jhunjhunwala says that we must look for the following in any business we are looking to own.

(i) Attractive, addressable external opportunity;

(ii) Sustainable competitive advantage – the "moat" that Warren Buffet always refers to as his investment technique;

(iii) Scalability + operating leverage. How far can the business go – in volume terms and in geographical terms;

(iv) Management quality + integrity. You don’t want to be partners with unscrupulous fellows, do you;

(v) EVA positive over investment horizon. Yes, a short-term aberration in the profitability is acceptable but the idea must turn positive over your investment horizon;

(vi) Valuation: Price –Value divergence. Ultimately, everything boils down to this. What is the value of the Company? And what are you paying for it? Obviously, the more the value and the less the price is the best case scenario.

Rakesh Jhunjhunwala‘s 10 commandments for investors (tips on how YOU can be a great investor):

Rakesh Jhunjhunwala is not a legend for nothing. Not content with telling us what techniques we should adopt whilst picking our portfolio, he also tells us what mental attitude we should cultivate to be a successful investor.

(i) Be an optimist! The necessary quality for investing success;

(ii) Expect a realistic return. Balance fear and greed.

(iii) Invest on broad parameters and the larger picture. Make it an act of wisdom, not intelligence.

(iv) Caveat emptor. Never forget this four-letter word -R-I-S-K.

(v) Be disciplined. Have a game plan.

(vi) Be flexible. For Investing is always in the realms of possibilities.

(vii) Contrarian investing. Not a rule, not ruled out.

(viii) Its important what you buy. It’s more important at what price you buy.

(ix) Have conviction. Be patient. Your patience may be tested, but your conviction will be rewarded.

(x) Make exit an independent decision, not driven by profit or loss.

Each of the said 10 commandments deserves to be etched in stone and read and re-read everyday by anyone who aspires to reach the heights of Rakesh Jhunjhunwala!!

Rakesh Jhunjhunwala‘s tip on when to sell and AN INVESTMENT

Rakesh Jhunjhunwala enhasizes that not only should you know when to buy but you should also know when to sell. As Rakesh Jhunjhunwala says in one of his commandment, learn to balance greed with fear and have reasonable expectations.

(i) Asset Allocation: It is interesting that Rakesh Jhunjhunwala never tires of emphasizing the need for proper asset allocation. If your asset allocation has gone haywire, don’t hesitate to sell to bring it back on track;

(ii) Review of Critical Factors: when you make an investment, you have hopefully paid attenbtion to the factors that Rakesh Jhunjhunwala emphasized that you should bear in mind. Keep reviewing these factors, emphasizes Rakesh Jhunjhunwala. If any of them changes adversely, sell;

(iii) Relative Opportunity: Again, trust Rakesh Jhunjhunwala to state the obvious but which all of us overlook. Keep your eyes peeled for better investment opportunities cautions Rakesh Jhunjhunwala. Is Gold a better investment opportunity? If you have that conviction, re-balance your asset allocations;

(iv) EPS or EPS Expectation Peaks: If the EPS has reached levels that can’t be matched in the near future, that’s a sign that you should exit says Rakesh Jhunjhunwala;

(v) PE Absurdity: Keep an eye on irrational behavior from other market participants. If you see a bubble building, get out before it bursts says Rakesh Jhunjhunwala;

(vi) Not Driven by Profit/Loss -Independent. This is a profound statement by Rakesh Jhunjhunwala. Don’t behave like an emotional creature and be averse to loss or get excited by profits. Keep a cool head and evaluate all decisons on an independent platform, cautions Rakesh Jhunjhunwala. Don’t refuse to sell because you don’t want to book losses and don’t rush to sell only because you have made profits. Decide independently, on the merits of the investment and whether it has any more steam left or not.