Infosys, TCS, ITC in Forbes 2010 'Asia Fab 50' list

Infosys, TCS, ITC and Mahindra and Mahindra are among the 16 Indian companies named in Forbes' magazine's 2010 compilation of the Asia-Pacific's 50 biggest listed companies.

 

India and China together account for 32 of the 50 companies in Forbes' sixth annual 'Asia's Fabulous 50 listed companies'. The other Indian companies making it to the list are Adani Enterprises, Axis Bank, Bharat Heavy Electricals, Dr Reddy's Laboratories, HCL Technologies, HDFC Bank, Hindalco Industries, Jindal Steel and Power, JSW Steel, Kotak Mahindra Bank, Larsen and Toubro and Sterlite Industries. When the list was first compiled in 2005, only five Chinese and three Indian outfits made the cut. "Economies around Asia bounced back last year and so did many of our Fabulous 50 companies. Earnings, revenues and stock prices soared almost across the board after a rocky time the previous year," Forbes said.

Among the Indian firms, Forbes specifically talks about Axis Bank and ITC.
"The two are leaders in their industry -- Axis Bank, India's third-largest non-state-owned bank, and ITC, led by Y C Deveshwar, who is determined to give ITC a life beyond tobacco.
"Axis, with USD 41 billion in assets and nearly 22,000 employees, is one of the fastest-growing companies in the country," Forbes said. Its revenues rose 29 per cent to hit USD 3.4 billion dollars in the year ended March 31, while net profit jumped 57 per cent to USD 553 million. "It's this performance that puts Axis on the Fab 50 for the second straight year. The bank is looking to add 200 branches this year to the 1,055 it already has," it noted.

Crediting Axis Bank Chief Executive Shikha Sharma for the bank's performance, Forbes said, "In the 15 months since she took charge, Sharma has teased out the bank's strengths - infrastructure finance, retail banking, processing payments and lending to small and medium-size enterprises." "She's also put more emphasis on risk management," it said, quoting Sharma as saying, "It's not about being the biggest. We want to grow our book sensibly. We want to do something that we are confident of executing well." In its profile of ITC and Chairman Y C Deveshwar, Forbes says, "In Deveshwar's era, ITC has clearly achieved more than a measure of progress. Today about half of its net revenues of USD 4.3 billion comes from cigarettes and the other half from hotels, paperboard, infotech, agribusiness and now increasingly, foods and personal care. "By the time Deveshwar is to step down in April, 2012, he will have spent more than 15 years as chairman of ITC. But that's not a sobriquet that Deveshwar really cares about. "For the past decade, he's been transforming ITC from a cigarette-maker to a fast-moving consumer goods company," Forbes added.

In the last three years, he has "upped the ante" and taken on a plethora of global and local rivals, including Unilever, Procter & Gamble, PepsiCo, Britannia, Nestlé and Parle Agro, all at one go.
The company's five-year plan envisions a nearly four-fold growth in revenues, Forbes said.
"In the consumer business, you need scale to build a franchise. It is a chicken-and-egg problem. We will infuse life into these businesses so that they can stand on their own legs," Forbes quotes Deveshwar as saying on his future plans for the company.

To compile the list, Forbes started with 936 companies that had at least USD 3 billion dollars in revenue or market capitalisation. It took into account these companies' revenue, operating earnings and return on capital over the past five years in order to rank them. It also considered the most recent results, share-price movements and outlook. 

These 50 companies boast of "solid financial track records, coupled with great management and entrepreneurial skill," it said.

Other companies featured on the list are Australian materials giant Rio Tinto, Chinese technology firm Lenovo, Japanese technology company Nintendo, South Korea's Samsung Engineering and Taiwan's tech giants Acer and HTC. Only two companies boast of featuring in every edition of the list, Hong Kong's Li & Fung and India's Infosys Technologies, while five companies saw their streaks end this year, including Australia's BHP Billiton and India's Wipro.

China has 16 companies on the list, followed by Hong Kong and Taiwan (4 each), South Korea (3), Australia and Japan (2 each) and Indonesia, Singapore and Thailand (1 each).
In terms of industry, technology companies dominated the list this year, with 10 representatives.
The materials industry had the second largest representation through eight companies.

Source: The Indian Express

ICICI joins club of 10 most valuable companies

The country's top private sector lender, ICICI Bank, made its entry into the list of the top-10 most valuable companies by market capitalisation this week, helped by a sharp rise in banking stocks.

 

With a market capitalisation (m-cap) of 1,28,016 crore, ICICI Bank now features at tenth rank in the list, knocking state-run BHEL out of the prestigious club. During the past week, ICICI Bank added Rs 10,809.4 crore to its m-cap. Analysts said a sharp rise in financial stocks during the past week pushed up the m-cap of most banks. "Banks led from the front on optimism that lending will pick up in a fast-growing Indian economy and that they are well capitalised," a broker said. Though the rush for banking stocks helped ICICI Bank make an entry into the top-10 club, its rival, HDFC Bank, is still lagging behind and is ranked at thirteenth, whereas mortgage lender HDFC is seventeenth in terms of market capitalisation. The past week was fabulous for equity investors and the shareholders of nine of the top-10 companies became richer by a whopping Rs 72,810.43 crore. Except MMTC, all the top-10 companies saw value addition, with the maximum contribution coming in from corporate leader Reliance Industries Ltd.

Enjoying the numero-uno position, RIL saw the addition of Rs 22,509.77 crore to its m-cap during the past week. At the end of trade on Friday, the Mukesh Ambani-led energy giant was valued at Rs 3,35,928.98 crore. During the week, RIL's shares rose by 7.1 per cent to regain the Rs 1,000-level for the first time in over a month. State-run ONGC continues to hold on to the second position, while SBI was third and TCS fourth. Infosys was at fifth, NTPC at sixth, MMTC at the seventh, Bharti Airtel at eight and ITC at ninth. Oil and gas major ONGC added Rs 9,207.84 crore to its kitty to take its m-cap to Rs 2,99,142.36 crore, while public sector lender SBI saw its valuation swell by Rs 7,080.14 crore to Rs 1,96,465.91 crore. IT giants TCS and Infosys Technologies together added Rs 12,698.12 crore to their combined m-cap. The valuation of these two companies stood at Rs 1,78,584 crore and Rs 1,70,683 crore, respectively. Power major NTPC enlarged its valuation by Rs 2,968.37 crore to Rs 1,69,815.25 crore, but trading firm MMTC saw its m-cap eroded by Rs 3,285 crore to Rs 1,36,930 crore.

The country's top telco, Bharti Airtel, added Rs 3,170.93 crore to take its m-cap to Rs 1,35,913.24 crore, while FMCG major ITC saw its valuation expand by Rs 4,365.86 crore to Rs 1,28,907.7 crore.
During the week, the BSE benchmark Sensex recorded a gain of 4.2 per cent and ended at 19,594.75 -- its best close since January 17, 2008.
Source: Business Standard

Punjab National Bank (PNB) - Stock that gained 64% in one year

Published on Fri, Sep 24, 2010 at 17:45   |  Updated at Fri, Sep 24, 2010 at 22:47  |  Source : CNBC-TV18

The country's second largest public sector bank, Punjab National Bank (PNB) has seen a consistent rise in its stock price over the last one year. It has risen 64.5% in the last 52 weeks on the back of a strong performance in the last fiscal and its plans to increase its international footprint. It touched an intraday high today of Rs 1,300.25 and an intraday low of Rs 1,266.70. The share ended the day at Rs 1,285.15, up Rs 13.85, or 1.09%. There were pending buy orders of 445 shares, with no sellers available. The bank has a market capitalisation of Rs 40,521.10 crore.

Why the run-up?

With the economy projected to surpass 8.5% growth in GDP in the current fiscal, leading banks are expected to post higher profits on strong loan demand from the retail side as well as from corporates. A growing economy would also boost banks' asset quality while consumer defaults or bad loans are expected to fall. With well over 5,000 branches, PNB is well poised to take advantage of a growing India, after it reported a near 25% increase in net profit for the fiscal ended March 31, 2010, on the back of higher interest income.

The bank is also all set to build its footprint overseas. It has targetted to double its revenues from international operations by 2013. The bank plans to start a subsidiary in Canada to tap the country's significant punjabi population. It has foreign branches in Hong Kong, Kazakhstan, Shanghai, Singapore, Kabul and Dubai, as well as a subsidiary in the UK, and is expanding in more overseas markets. It also plans to upgrade its representative office in Norway into a full-fledged branch.

It is also looking to benefit from business opportunities due to a growth in bilateral trade by planning a foray into African markets like South Africa and Ghana and the South Asian nation, Indonesia.

The bank has charted out plans to grow inorganically in Kazakhstan, with its decision to acquire 64% stake in JSC Dana Bank for USD 24 million.

For the quarter ended June 2010, the bank reported a net profit of Rs 1,068 crore versus Rs 832 crore, a growth of 28.37% on a year-over-year basis (YoY). Its net interest income (NII) rose 40.67% to Rs 2,619 crore from Rs 1,861.8 crore YoY.

Around 15 lakh Punjab National Bank shares got traded in BSE FII segment today at Rs 1,525 per share. The block deal was executed at 17% premium to its (current) market price of Rs 1,295 per share.

What experts say:

Technical Analyst Sudarshan Sukhani says PSU banks are on a roll and have a long story ahead. "Punjab National Bank is a very good bank and the sector is excellent." Sukhani feels a two-year time horizon to get any long-term gains is the right timeframe for investment in the bank. He expects the bank to outperform the banking index.

VK Sharma of HDFC Securities said PNB continues to be a robust PSU bank and recommends investors to hold on to the stock from a long-term perspective.

Peer comparison:

Company	Last Price	Market Cap.	Net Interest	Net Profit (Rs cr)	Total Assets (Rs cr)
		(Rs. cr.)	Income (Rs cr)
SBI	3,141	199,478	70,994	9,166	1,053,414
PNB	1,285	40,527	21,467	3,905	296,633
Bank of Baroda	876	32,028	16,698	3,058	278,317
Bank of India	497	26,114	17,878	1,741	274,966
Canara Bank	574	23,514	18,752	3,021	264,741
Union Bank	385	19,460	13,303	2,075	195,162
Indian Bank	265	11,372	7,857	1,555	84,122
IDBI Bank	153	11,084	15,273	1,031	233,572
Oriental Bank	441	11,045	10,257	1,135	137,431
Allahabad Bank	228	10,194	8,369	1,206	97,648

Why you need to diversify your investments

Published on Fri, Sep 24, 2010 at 13:08   |  Updated at Fri, Sep 24, 2010 at 14:13  |  Source : Moneycontrol.com

Reduce risk without compromising returns.
In our article Risk versus Return we highlight how every investment has a risk attached. And how the higher the risk, the higher should be the expected return from any investment. This probably then imply that if you want to reduce the risk in your portfolio, the only choice for you is to move your investments into low yielding investments. Right? Wrong.

Diversification across investments is another way to reduce the risk of your portfolio.
To understand how, look at this simple example (it involves some basic statistical concepts but don’t get turned off, its simple to understand and you can get into the calculations only if you want) - Say, there are two assets A and B. Both assets have a potential return of 10% and a standard deviation (a statistical measure which measures the variability (i.e. risk) of the potential returns) of 20%. Also, the returns of both these assets are uncorrelated i.e. the performance of Asset A is not dependent at all on the performance of Asset B.
Now assume you invest equally in both these assets. Your weighted potential return (0.5 * 10% + 0.5 * 10%) will equal 10% - this is the same return as that for the individual assets. However, due to the fact that you have now spread your risk over two uncorrelated assets, the standard deviation (i.e. risk) of your portfolio will be 14.1% (lower than the 20% for each individual asset). Refer to the supporting Statistical Analysis if you want to understand how.

It is important to understand what this means.

You would have been able to reduce the risk profile of you’re the returns on your portfolio to 14.1% (from 20% for an individual asset) without having to compromise on your returns, merely by diversifying. So, by choosing two assets whose returns are not correlated (this is important) like say Stock A which is a pharmaceutical company and Stock B which is a software company, you can reduce your risk while not necessarily having to reduce your returns.

In summary, there are two things that are important to keep in mind while planning your investments -
1. Every asset has a risk attached to it. And, the higher the risk, the higher should be its expected returns.
2. Don’t put all your eggs in one basket.

By diversifying across assets, you can reduce your risk without necessarily having to reduce your returns. You don’t have to get into calculating standard deviation of the return of your assets, you need to just be aware that if you diversify your portfolio, your overall portfolio risk will be lower.

To get the maximum benefit of reducing your risk through diversification spread your portfolio across different assets whose returns are not 100% correlated. Different assets should ideally span across different asset classes such as fixed income, equity, real estate, gold as well as different investment options within these asset classes e.g within equity shares, your exposure should be to companies in different sectors; or within fixed income investments, partly government risk and partly corporate risk.

As a thumb rule, diversify your investments across 15-20 different individual assets.

Risk versus Returns

Published on Fri, Sep 24, 2010 at 13:19   |  Updated at Fri, Sep 24, 2010 at 14:13  |  Source : Moneycontrol.com

Every investment has an attached risk
'Just buy this blue-chip stock, there’s no risk at all.' For most people who invest in shares there is a good chance that you’ve heard someone say this before. For most people who just put their money away in bonds or deposits, one of your main reasons for this probably is -‘I don’t want to take any risk at all, I just want my money safe.’
Are these statements true? Is investing in bonds or deposits completely risk-free? Or investing in blue-chip stocks necessarily very low risk? NO.

Whenever more than one outcome is possible from an investment, there is always some amount of risk. Only the level of risk is different.

Use risk to analyse expected returns
While investing, risk is measured to evaluate the kind of returns you should expect from the investment. Or your return expectations should be based on the level of risk you can bear. In principle, the higher the risk, the higher the returns that should be required.
Empirically returns across various asset classes show that investment in equity shares give the highest level of returns in the long-term, followed by corporate bonds and deposits and lastly bank deposits and government debt. Not surprisingly, the level of risk is also in the same order.
You might be saying - how can debt be risky? It is.

Companies that run into financial trouble could delay your interest payments or even default on paying back your money. Even government debt has some amount of risk. How? Simply put, governments like companies also face the risk of financial problems. However, lack of funds for a company could result in the company defaulting on a loan repayment. But a government can always print more currency and repay its borrowings. So you will get your money back. BUT, there is a hidden cost (risk). Printing more currency is likely to lead to higher inflation and hence lower real returns on your investment (see our article Impact of Inflation to understand about real returns).

Agreed that the chances of governments or well-managed companies getting into serious financial troubles are low. But that is only difference in the level of risk. There is a risk attached, and that cannot be questioned.

Understanding risk vs return essential for good financial planning
You might ask - why is it so important to understand the risk versus return relationship? Because if you don’t, it is quite likely that your investment returns will not match your risk profile and consequently you are not managing your hard-earned money well. A wasted opportunity, as even a small difference in your investment returns (at the same level of risk) can make a BIG difference to your financial wealth (due to the astounding Power of Compounding).

To understand the importance of managing your money well read Guide To Financial Planning. This article highlights why financial planning is not as difficult as it sounds and how you can easily make your hard-earned money work for you.
Also you can use our Risk Analyser to understand your risk profile (both your risk-taking capacity and your risk tolerance level) and read The Need To Diversify to understand how you can increase your expected returns while not increasing your level of risk.

Common mistakes committed in the equity market

Published on Tue, Sep 21, 2010 at 14:33   |  Updated at Tue, Sep 21, 2010 at 14:37  |  Source : Moneycontrol.com

Throughout your investing career, it is likely that you will be guilty of committing a lot of mistakes. There is no one today who has not committed costly financial mistakes including the legendary Warren Buffet. However it is the ability to recognize and learn from your mistakes that will determine whether you are able to achieve your investment objectives. It is thus paramount to commit as few mistakes as possible. Failure is often the best teacher provided you allow yourself to be taught. 

 

The last three months have exposed investors to several such mistakes. Here we highlight eight of the common ones.

1. Relying on tips and hearsay is the first and most common mistake committed by most investors.
2. Expecting Big Gains fast. Very few people have the mindset and patience required to invest in equity. A common expectation is to make big gains quickly. There is no focus on the risk the investment exposes your portfolio to. A classic example of recent times was the Power sector. Any stock that had the name ‘Power’ in it was considered sacrosanct. People did not even care about risk involved in taking exposure to such stocks. Instant gratification is injurious to your wealth.
3. Leverage in equity markets can have disastrous consequences not just on your financial health but on your physical health.
4. It’s not easy to always make money in equities and there could be periods of negative returns. Though over time, returns can even out, in the short run there could be sizeable downside. So don’t be surprised by it. Understand, expect corrections and be realistic.
5. Have reasonable expectations from equity. As an asset class equity should technically deliver returns in line with corporate earnings. However we do not invest in a utopian stock market but a market that drives on hope, greed and fear. Hence you are bound to see eras of excesses and exuberance and those of pessimism.
6. It’s all easy to know ‘Buy low and sell high’, but majority of people would end up doing exactly the opposite. Most investment banks, brokerages, hedge funds, FIIs, domestic investors, gurus and analysts are super confident in a bullish market when highs are torn apart every other day. Things suddenly change for them when the market corrects and no one is ready to put even their thumb in the market. Learn to embrace market sell offs. People who could not earlier invest had an excellent opportunity to invest at 14000 to 15000 levels but I do not know too many people who had the gut to really invest.
7. When the market corrects, do not put all your eggs immediately. Corrections that happen after very sharp rallies tend to extend themselves over a few months. One of the strategies that can be adopted is to invest in a staggered fashion. You should start investing if the market has corrected by more than 15-20% and go higher when it crosses 30-35%. There is no way to know what the bottom could be and I don’t know how people come up with their holy predictions on how lower can the index go. When the going is bad, all one hears is bad news and it’s very important to grow beyond these daily projections. Investing is certainly not a poker game and you would be harming your economic interests by following what a bunch of unknown people are doing.
8. Don’t keep looking at your portfolio because things are not going to change even if you see it many times. A quarterly or semi annual review should be good enough for most people. Looking daily is harmful to your overall thought process and can urge you to take emotional decisions whether on the way up or way down.

 

This is the time to take stock of what you actually have. The first step is to understand the various investments in your portfolio and how they fit within the overall scheme of things.
 
Most people would like to see their investments grow right from day one. For a long term investor, it should not matter if prices do not rise right away. Infact if investment values indeed go down, you should be happy to see your buying happening at lower levels. Eventually when the market recovers, you are bound to get much higher returns because of these inefficiencies in a turbulent market. The only time your stock prices should be up is when you need to sell. 

Currently one sees lower volumes in the market due to fear and several other factors. The increase in STT (securities transaction tax) and short term capital gains tax also has had some impact on volumes. There is a lack of clarity on the direction of the market. However just because this is the case, there is no need to change your investment strategy. Continue to buy in a staggered fashion and just stay put if you already have.

Get rich. Do NOTHING!

Published on Fri, Sep 24, 2010 at 15:00   |  Updated at Fri, Sep 24, 2010 at 15:15  |  Source : Moneycontrol.com

SOME guys have all the luck. A year ago, a friend of mine sold some ancestral property and hit the jackpot. He asked me, quite sensibly, to help him invest it in stocks.Being totally new to the stock market, he thought he would need to watch a business channel throughout the day, be on the phone and carry a laptop, so that he could trade all the time! I didn't ask him to do any of it. Instead, I told him to pursue a hobby, take a holiday, meet his family, start a business, do just about anything, as long as it was not trading. 

Invest and wait
I believe investments are not meant to keep you busy. They are meant to make you rich. People who can't have their morning coffee without watching the stock prices don't know the real meaning of investing. The true investors select their stocks carefully and go fishing in Alaska. No, that's not bizarre. Staying diverted actually helps stay invested for a longer time and let the money grow along with the invested company. See how the power of compounding helps grow your money! 

My friend took my advice. He invested the money in a few companies with strong fundamentals and a visible growth. In one year, his investments fetched around 95 per cent returns.

So, when you forget about your investments, you: 

a. Save time

b. Save cost involved in the form of brokerage. The smart brokers who tell you to trade actively are only filling their own pockets.

c. Avoid fretting and the temptation to sell if the stocks prices fall by 10 per cent.

d. Avoid greed and the temptation to buy if it rose by 30 per cent.

e. Follow the Warren Buffet style of investment. Do you think the champion stockbroker would care if the stock markets closed for a whole year? And we all know how rich he is.

f. Give time for your seeds to sow. If you keep removing your seed and change soil every other day, your seed will remain a seed.

g. Enjoy your morning cup of coffee.

Remember, the people who check their stock price every 30 minutes don't become rich, they just become busy.

- Yogesh Chabria

The author dreams of making each and every Indian financially literate the Happionaire™ Way. His latest bestselling book, Happionaire’s Cash The Crash helps investors make the most of now, while sharing little known insider secrets. You can get in touch with him at yogesh.chabria@moneycontrol.com

Will it be bulls or bears?

The bulls have clearly taken control of the market, with key indices spurting over three per cent in the last two days and scaling to their 32-month highs. The main reasons for this latest rally include strong foreign institutional investor (FII) flows, healthy Indian and Chinese manufacturing data as well as less than severe Basel-III norms.

But does the market have enough steam to keep the momentum going? The bulls may be in charge as of now on the back of a strong domestic performance, but the weak recovery in Western economies and India’s dependence on foreign flows make the domestic markets vulnerable to external shocks. Hence, the jury is still out on which of the two sentiments will prevail. We highlight the key macroeconomic parameters to keep in mind before participating or abstaining from this rally.

WHERE THE BULLS SCORE

Growth story intact
A 13.8 per cent growth in industrial production was the single biggest reason for the markets’ upmove and analysts expect the growth momentum to continue, given the upcoming festive season. Although industrial growth is likely to moderate towards the end of the year due to the high base, overall growth is likely to be robust and driven by consumer goods and, to a lesser extent, capital goods. GDP growth is also likely to be 8-8.5 per cent, driven by agriculture and industrial growth which, in turn, should result in a demand surge and benefit domestic market-focused companies.

Reforms on track
The government has scored reasonably well on long-pending reforms like gas price rationalisation, fuel price decontrol, tax reforms and relaxing of foreign direct investment (FDI) in media and retail. These are a key ingredient in ensuring faster growth, enabling such key sectors as roads, power and telecom able to get higher investments. So, expect growth to remain on track and also help bridge the fiscal deficit gap.

Monsoon
The cumulative rainfall, which was in deficit till July (by 13 per cent), has seen a good recovery and now – for the first week ended September – the deficit is just 0.6 per cent below the long period average (LPA). Better monsoon has not only improved sentiments for the Indian equity markets, but could also help in higher rural demand and lower agri-commodity prices in the near to medium term and, thus, improve demand for products and services.

Surge in FII inflows
FIIs have poured nearly Rs 64,000 crore into the Indian markets since January and – given the slow economic recovery back home and the sustainable domestic story – these are unlikely to abate in the near term. Still, while strong flows have led to the Sensex jumping 20 per cent over the last four months, investors need to keep in mind that FII flows are a double-edged sword, as was seen in the aftermath of the Lehman collapse (in 2008) and could be a source of worry if the tide turns.

WHEN BEARS MAY COME INTO PLAY

Interest rates & inflation
Backed by the strong economic growth, RBI continues to raise its key rates to curb inflation. Since January this year, it has increased the repo rate by 50 basis points to 5.25 per cent and cash reserve ratio by 100 basis points to six per cent. This has also led to banks raising their prime lending rates by about 50 basis points to 11.75-13.25 per cent.

More important, economists expect the rates to move up further by 50-75 basis points. Increase in interest rates could emerge as a threat for the markets and corporate earnings, which are in recovery mode currently.

External trade
Among other worries, the revival in the export markets is equally important as many large companies have an overseas exposure. However, the growth in exports is cooling down — the growth in July was only at 13.2 per cent, the slowest in the last nine months. This is due to slower-than-expected growth in demand from developed countries.

The situation is expected to prevail as demand in international markets, particularly in the US and Europe, remains weak. Also, the impact of withdrawal of stimulus benefits and lower demand from China has been felt on Indian exports.

Earnings growth & valuations
The June quarter results were disappointing with aggregate results of 3,000 companies in the manufacturing sector, reporting a decline of 6.43 per cent in net profit from last year. Some of the issues were higher commodity prices compared to last year, coupled with higher interest rates. Analysts are now apprehensive about earnings growth over the next two-three quarters.

The Sensex is currently trading 18 times 2010-11, which is marginally higher compared to historical valuations. In terms of valuations, Indian markets – currently trading at 20-30 per cent higher than key global indices – are amongst the most expensive globally. Some experts, though, justify the premium consequent to better growth rate and visibility vis-à-vis others.

5 Reasons to Believe in India's Bull Run

India’s exchange traded funds are on a forward march, with the country’s benchmark index entering what some analysts believe to be a bull market. Can it stay there? Here are a few reasons why the answer may be yes.

    * The Bombay Stock Exchange’s Sensitive Index, or Sensex, crossed the 19,000 mark for the first time since Jan. 18, 2008, writes Hemal Savai for Bloomberg.

    * Industrial output, which grew 13.8% in July, is a major factor for growth in India. The double-digit output growth was much higher than the single-digit growth previously expected, comments James Lamont for The Financial Times.

    * Christopher Wood, strategist at CLSA Asia-Pacific Markets, predicts that the country’s annual economic growth may top 9% in the next five years, which would make the country the world’s fastest-growing major economy. The economy expanded 8.8% in the second quarter year-over-year.

    * India is seen as the only economy in Asia driven by domestic demand. India’s export gains fell more than 50% in July to 13.2% from the previous month.

    * The Reserve Bank of India is reducing its credit-tightening policies as inflation abates and companies signal a peak in short-term borrowing costs, reports Anil Varma for Bloomberg. The Central Bank estimates that inflation will drop to 6% by March 31, compared to an average 10.5% in the first seven months of the year. Bond yields have widened to 0.63% against swap rates since February.

Better-than-expected growth numbers may prompt the central bank to further adjust interest rates, but current monetary policies still favor growth over inflation.

RCom: Dropped calls

While implementation of number portability and focus on profitability are positives, deleveraging the balance sheet is key.

The stock of Reliance Communications (RCom) is down seven per cent since August (as of September 17) on negative news flow related to the sale of its tower assets and on equity stake to a strategic investor. The decline looks worse when compared to the 10-16 per cent rise in the share price of Bharti Airtel and Idea Cellular. The company has for some time been wanting to sell its tower assets to help take care of its debt pile, which jumped post the 3G and BWA auctions. Most analysts have revised their price targets downwards but feel a re-rating is possible if RCom is able to cut its debt meaningfully.

RCom is sitting on a debt pile (net) of Rs 33,500 crore, five times its June quarter annualised Ebitda (earnings before interest, tax, depreciation and amortisation). Of this , a big part is repayable in next one year. An Anand Rathi report says that as of June, of the Rs 38,200 crore of gross debt, 44 per cent (Rs 16,600 crore) is due within the next year. In addition, FCCBs to the tune of Rs 1,600 crore and Rs 5,300 crore are to be redeemed by May 2011 and May 2012, respectively. While an estimated operating cash flow for the next two financial years in the region of Rs 11,000 crore is comforting, 3G-related capital expenditure (among others) would mean that raising additional capital to fund expansion would become necessary. It is in this context that the company would want to monetise its tower assets and sell a strategic stake. The company, however, says its capex on the rollout of 3G services will be minimal.
 

RCOM: BEST VALUE?
FY12 Estimates	Rcom	Bharti	Idea
Price/Earnings (x)	14.5	15.6	32.9
EV/Ebitda (x)	8.6	6.1	6.8
Price/Sales (x)	1.3	2.1	1.4
Price/Book (x)	0.8	2.4	1.9
Bloomberg consensus estimates All figures are as on September 17, 2010

Favourable macro environment
While competitive pricing continues in select markets, with players looking to increase their share, analysts believe that integrated telecom plays such as RCom and Bharti Airtel are best placed to survive this period of hyper-competition. An HSBC report says significant pressures on rates has led to average revenues per minute (ARPMs) for the sector declining by 23 per cent over the past year. Existing players have been able to maintain their market share in recent quarters and are expected to enhance margins a year hence, when the competitive intensity is likely to lessen. Analysts say that consolidation over the next 18 months will result in the number of national players halving to 7-8. Analysts at Elara Securities believe RCom will benefit the most from implementation of the mobile number portability regime. It is also one of only three companies to get licences in 13 of the 3G circles. While these are positives, analysts believe the major upside for the stock will happen once the deleveraging plan goes through.
 

STABILISING MARGINS
In Rs  crore	FY10	FY11E	FY12E
Revenues	22,132	22,682	25,586
% chg y-o-y	-3.6	2.5	12.8
Ebitda	7,820	7,290	8,388
Ebitda (%)	35.3	32.1	32.8
Net profit	2,047*	2,116	2,484
*Adjusted                  E: Estimates Source: Company, analyst reports, Bloomberg consensus estimates

Profitability focus
RCom in the past couple of quarters has been focussing on improving its profitability by reducing its free minutes and improving paid minutes usage. For the June quarter, RComm reduced its free minutes by half. With this strategy, RComm, which saw its ARPM fall by about 30 per cent since March, is looking at stabilising its revenues per minute at 44-45 paise. It believes its current RPMs, at 44p, are in line with those of other players as compared to the situation a few quarters earlier, when its RPMs were about 10p less than the industry average.

Valuations
Despite a five per cent surge in its stock price each on Friday and Monday, the RCom stock is trading at a discount to its peers. This is likely to continue, say analysts, till the debt concerns persist. The stock is trading at a 15.2 times its 2011-12 earnings and can be considered from a two-year perspective.

Analyst's corner

SBI
Reco Price: Rs 3,094,
Target Price: Rs 3,500

SBI has witnessed strong loan book expansion of 20 per cent last year. Key drivers have been robust branch addition in past three years and the new-found aggressiveness with respect to retail loans. IIFL estimates SBI’s advances to grow by 20 per cent in 2010-11. Its NIM would remain stable in the medium-term driven by a stronger credit demand.

The recent deposits and lending rate hike would have a net negligible impact. NPL (non-performing loans) risk is the highest for SBI with net NPLs comprising 16.5 per cent of networth. SBI requires additional provisioning of about Rs 2,800 crore to reach the stipulated 70 per cent by Sept 2011. It expects SBI’s balance sheet to witness 18.5 per cent CAGR growth over FY10-12. Maintain buy.

—IIFL

JSW STEEL
Reco Price: Rs 1,197,
Target Price: Rs 1,372

By March 2011, the company’s consolidated debt-equity is expected to decline to 0.7:1 from 1.7:1 in March 2010. JSW has cut its 2010-11 crude steel volume guidance from 7 mt to 6.5 mt due to subdued demand from construction and real estate segments. Soft iron ore prices could lead to Ebitda per tonne of $180. Shipments of iron ore and coking coal from JSW’s Chile and US mines, respectively, are expected to begin in 2010-11.

The company has planned capex of Rs 12,000 crore to set up a 3 mt per annum greenfield HR steel capacity in West Bengal. Maintain buy.

—Edelweiss Securities

Time to be cautious

Optimism prevails, but so do concerns.

The phrase most experts use to describe the current rally in the markets is: “Probably, this time will be different.” On Tuesday, the Sensex closed over the physiologically important 20,000-mark, which is just about 1,200 points away from its all-time high of January 2008. While there are fundamental reasons that justify the rally, there are concerns as well, especially about the pace of rally and its sustainability in the near term. Positively, there is a clear difference in the rally of 2008 and the current one, with the latter on solid ground. “In 2008, dreams were being bought. It was frenzied — people were jumping in as if there was no tomorrow. At this point, there are no bubbles. But the pace of the rise has been scorching, so it might correct a bit,” says Gul Teckchandani, an investment expert.

“In 2008, everything – commodity prices, global economy or the markets – were at peak. Now, these indicators are still showing a recovery,” says Swati Kulkarni, vice-president and fund manager, UTI Asset Management. 

Fundamentals remain sound: The economic growth dipped to almost 5.8 per cent in the quarter ended December 2008, but it has again recovered to pre-crisis levels and grew by 8.8 per cent in the latest June quarter, which has resulted in renewed optimism among investors. Not only this, the double-digit growth in industrial activity, a better-than-expected monsoon, revival in industrial capex and improvement in corporate earnings have also helped. Next year, too, GDP growth is expected to be good at 8-8.5 per cent.

Liquidity: Liquidity is the single-largest factor driving the market. Fears of a double-dip and slow growth in the western world have put fast-growing emerging markets on top of the buying list of global investors. Year-till-date, FII investments in India have crossed Rs 1,00,000 crore, which is the highest ever. The sustainability of this will depend on India’s ability to maintain growth as well as global news flow.
 

THEN AND NOW
Valuations	31-Jan-08	20-Sep-10
Sensex level	21,000	20,000
PE (x)	25.8	19.0
P/B (x)	4.7	3.7
Market cap/GDP (x)	1.8	1.2
Liquidity
FII investments (Rs  cr) *	54,565	109,307
SBI PLR (%)	12.75	12.25
Intrest rates (%)	14-15	12-13
Credit growth (%)	22.3	16.7
Money supply (%)	21.4	17.4
Fundamentals	FY08	FY11E
GDP growth (%)	9.2	8.0
Crude oil price ($/bbl)	82.2	75.0
Average WPI (%)	4.8	7.9
Export growth (%)	28.9	15.0
Capital formation (%)	37.7	35.0
Earnings growth (%) ^	16.0	30.0
E: Estimates; ^ For Sensex; *12 months to January 31, 2008 and 12 months to Sept 20, 2010; FII net figures in cash segment;   WPI: Wholesale Price Index (inflation)  Source: Bloomberg, Sebi, analyst reports

Valuations, not cheap: Valuations, however, are not cheap anymore. This is also a reason that there could be higher volatility in the short term. The consensus earnings estimate for Sensex is Rs 1,046 for 2010-11 and Rs 1,257 for 2011-12. Based on 2011-12 earnings, the Sensex is available at about 16 times, which is slightly over its 10-year average valuation. But, at 19 times 2010-11 earnings’ estimate, it is expensive. “This is a sharp rally driven by liquidity, which is also a reason that valuations are getting stretched from the short-term perspective. There could be a correction, but when (timing) — we do not know,” says Ved Prakash Chaturvedi, MD, Tata AMC.

Outlook: While experts suggest that the outlook remains positive, there is also a need to be cautious due to the sharp rise in prices and the fact that markets have already started to factor in 2011-12 earnings. While they expect the near term to be choppy with bouts of volatility, a correction of 15-20 per cent is also likely. Although its timing is not easy to predict. The advice to investors is to keep an eye on liquidity (FII flows) and the need to be selective.

Says Gul Teckchandani, investment expert: “The broad outlook is positive. But, you have to be careful in selecting your stocks and, alternatively, brace for a 20-25 per cent correction.” He adds there are opportunities in select pockets, like power, infrastructure, oil & gas as well as select auto segments like commercial vehicles. These haven’t really participated in the rally.

On the other hand, Macquarie’s analysts are overweight on industrials, materials and healthcare.

“Invest right and then sit tight”

Investors needn't worry about market valuations and macro events, provided they have the right sectors and stocks. - MOTILAL OSWAL, CMD, MOTILAL OSWAL FINANCIAL SERVICES

 

Srividhya Sivakumar

Buy right and sit tight is what Mr Motilal Oswal , CMD, Motilal Oswal Financial Services, advises retail investors. In an interview with Business Line, he shared his views on market valuations and the broking industry.

Markets have run up significantly in recent times. What's your advice for investors who are waiting to invest in the market?

Well, markets certainly aren't as cheap as they were earlier but a lot of stocks and sectors are still available at reasonable valuations. I would advise investors to look for stocks that are available at less than market valuations. . Investors just need to make sure their stock selection is right. Buy right and sit tight, is what I always tell retail investors. They needn't worry about market valuations and all the macro events, provided they have the right sectors and stocks. That said, investors need to diversify and not put too much money into too few sectors. So as long as the stock selection is good, anytime is good.

Our research says that overall corporate profit growth will be at 24-25 per cent over the next two years. GDP, even taking a pessimistic view, indicates an 8.5 per cent growth. So if you look at the 2012 earnings, the overall market does appear quite reasonable.

Trading volumes haven't really favoured brokerages so far. Do you think that has now changed?

Yes, I am already seeing an uptick in it. If . A lot of retail activity has increased in small- and mid-caps. So there is a definite revival in demand from retail investors. Besides, given the kind of volumes and price movement prevailing now, my sense is that retail activity is here to stay. The market consolidation stage of the last 8-9 months is over and the good times have begun. Even the delivery turnover is going up.

How difficult has it been to operate in a no load regime? Do you think this could impede (your) growth in the MF industry?

The ‘no load' regime has definitely slowed us down. But I am hopeful, as history tells us that whenever something has been done in the interest of the customer, it has always been rewarding in the long run. It may be too early to say, but I think stock exchanges will grow into a big platform to reach out to investors.

They are the best way to distribute MFs, IPOs and equities as they are not only cost-effective and convenient, but transparent too. It just will take us all time to stabilise. Besides, the kind of savings it has brought to investors is huge.

Besides, at a time when debt returns adjusted for inflation are negative, equities will attract a huge amount of money. As an asset class, equities have delivered a 17 per cent compounded returns over the last 30 years. Now, which asset class can beat that!

Equities combined with technology and convenience will continue to remain attractive. I am, therefore, quite optimistic on both the MF and broking businesses.

Do you see a continuous inflow of liquidity into our markets?

Well, as I said earlier, we have significant worth of annual savings now. Interest rates aren't too high so, to that extent, there is money available in the market. In terms of global developments, while there are fears of double-dip recession, my sense is that as long India, as an economy, is doing well, money will come. And if doesn't, we have lot of local money.

What kind of industry consolidation do you see going forward?

If you look at consolidation in terms of market volumes, the top 25 brokers' turnover hasn't changed much in the last couple of years. But consolidation is happening along the lines of brokerage bearing business. That is, if we overlook the proprietary volume share (about 35 per cent), and look at only the brokerage bearing quality volume, consolidation is definitely happening.

In terms of M&A activity, we still haven't seen it take off in a big way though there were a couple of transactions in recent times.

Q. But option volumes continue to be high. Are you specifically aligning your business development initiatives along similar lines?

Well, yes the market mix has changed in favour of options, which sees a lot of proprietary volume. But they typically are low brokerage yielding services and we do not do that kind of low brokerage. We do business at our own terms and do not believe in cutting the price. We, however, have a very strong advisory desk to help clients who want to transact in derivatives.

Q. How has your company's product and service offerings changed after the 2008 meltdown?

Firstly, I think the whole process of profiling customers based on their trading activities has fallen in place. We now profile customers based on their risk appetite, trading activities and advice requirement. In all the whole process of customer segmentation has grown in importance.

Second, a whole lot of new features are now available in our online broking service. These services have helped investors feel empowered. There also have been innovations in terms of coming up with product ideas that investors need. Our mutual fund offering - M50, which is India's first fundamentally weighted ETF, is a case in point. Besides that we are working on a couple of new MF products.

At service level, we add value by send portfolio valuations on SMS. We send our clients recommendations based on the stocks they hold. We also provide them with sector-wise allocation using pie charts in their DP statement.

Q. What is your view of algorithmic trading? Do you think it is justified to say that it could make Indian markets vulnerable to sudden falls just like how it happened in the US sometime back?

I think it's a good and a big move. Algorithmic trading is done mostly by institutional traders and is a great tool to bring more efficiency in price discovery. Besides, market falls happen irrespective of algos. It can happen even if a trader manually punches in the orders.