Seven out of top 10 Asian small-cap funds are Indian

ndian funds have grabbed seven out of the top 10 spots in the league table of leading small-cap funds across , thanks to some canny stock-picking amid growing investor appetite for cheap with potential to deliver multi-bagger returns. 

An analysis of nearly 300 Asian small-cap schemes shows leading the charge, delivering an 82% return over the past year. Managed by Vinit Sambre, who has been with DSP BlackRock for a little over three years, this fund has also soundly beaten the 58% rise of BSE’s Small-Cap Index since August 2009. The 30-share benchmark Sensex has gained 20% during this period while the wider BSE 500 Index is up 27%.

The other six schemes — and ING Vysya CUB — have given investors returns between 44% and 57% on a trailing 12-month basis. These schemes manage anywhere between `46 crore and `954 crore.

Four of these funds were launched during the peak of the previous bull run between January 2007 and March 2008, and investors in them have also had to endure a massive erosion in their initial investment in the downturn that followed.

Mutual fund tracking firm Value Research called the DSP fund as an impressive product in the entire “small-cap universe”, noting that the stocks held by it were “credible, known names and there is a marked absence of momentum in the portfolio”. The fund’s holding includes companies with a high return on equity and strong leadership niches in their industries.



Value Research CEO Dhirendra Kumar said the closed-ended nature of some of these funds helped them weather the turbulence. “These funds did not face redemption pressures through the declining phase. This, in turn helped them invest for the longer term,” he said.

The DSP fund became open-ended in June this year and fund manager Mr Sambre has kept nearly 10% of his `311-crore corpus in cash to meet potential redemptions and to latch onto any opportunity in the market.

There are 10 small-cap funds in India, which manage roughly `3,450 crore in stocks. These account for just 2% of the total AUM under equity schemes.

Market experts say that as many large-cap stocks became fully priced and relatively unattractive over the past year, the rally shifted to small caps. Stocks such as cooler maker Symphony and luggage maker VIP Industries have led the small-cap charge in the market. Ahmedabad-based Symphony has surged 830% while VIP has risen 548% in the past 12 months. In comparison, top two gainers on the Sensex — Tata Motors and Tata Consultancy Services — are up 135% and 61%, respectively.

“Many small caps with excellent businesses were trading at a pathetically low valuations — many were trading below book value and at dividend yields of 5-7%,” says Deven Choksey, chief executive officer at KR Choksey Shares & Securities. “They just got purchased heavily.”

Even though small-cap funds have delivered solid returns in the past one year, experts say that investors must be cautious and have just 10-15% of their equity exposure in such funds or companies. This is largely because of the volatile nature of their stock performance.

“Investors should have a strong stomach and the ability to

withstand substantial declines in such funds,” says Mr Kumar at Value Research. 

Multibagger-Delta Corp - Target 250-300 in long term

Mehraboon Irani, Sr. VP - Equity, FCH – Centrum Wealth Managers Ltd , in a chat with ET Now talks about the favourite buys for long term.

ET Now: What is it that you would buy right now, a couple of names may be?

Another company we like as my old favourite, a stock, which I have been following from 2003, which of late virtually anybody and everybody in the street has started talking about, it is a company called Delta Corp, which once upon a time was known as Arrow Webtex. I have been following this company and owning this stock from 2003. We have a target of over Rs 250-300 for this stock over the next 18 months. A whole lot of things are happening in this company. There is a preferential allotment taking place today. Big investors have started entering the stock and now virtually everybody is talking about this particular company, it is in the niche segment called casinos and the gaming business and virtually commands the entire casinos in the country right now and is planning to set up similar casinos in three other places in India besides Sri Lanka, that’s what we understand, so we feel Delta Corp even at the present level is a great buy and virtually it could be a multi-bagger even from here over the next 1.5 years.

Undervalued Penny Stocks – 10 Qualities Of Companies With Undervalued Stock

Undervalued Penny Stocks  CAN make you loads of cash. However, if you want to become rich from penny stock trading you cannot cut corners when trying to find the right penny stock picks. Time invested in research about the company is the answer to finding undervalued penny stocks.  And undervalued stock is the solution to making HUGE  profits.   They can double or even triple your gains. BUT, you must be able to determine which penny stocks are accurately undervalued and which are better left alone.  Below is a list of 10 characteristics of companies with undervalued stock.

1. The company is NOT in the midst of a financial scandal.

2. The company has stable earnings.

3. A low price-to-earnings ratio is NOT due to a major decline in profits.

4. A low price-to-earnings ratio is NOT due to profits realized from capital gains.

5. The company’s price-to-earnings ratio is below its average price-to-earnings ratio for the last 10 years.

6. The company IS selling at a price lower than its tangible asset value.

7. The company’s products are NOT in high-technology that can become obsolete overnight.

8. The company’s trailing 3-years earnings has risen over the past 10 years.

9. The company did not have a loss during the last recession.

10. The company’s credit rating is AAA, AA, or A.

Researching these characteristics can take time.  Sounds like a lot of work?  It is! Having invested in the stock market for over 12 years, it has really simplified my life to use a stock trading program to pick my stocks.  They are pros at finding undervalued stocks, which saves me time. Bottom line this service allows me to spend more time with my family. You might want to look into using one as well. You can click here for more information.  They really help in taking the risk out of investing, especially for people who do not have the experience or the time needed to thoroughly do the research.

Spotting Undervalued Stocks: A SIMPLE APPROACH

There are lot of proven companies like Reliance Industries, Bajaj Auto, Infosys technologies and so on. But they might be fully valued. The whole market is watching their business activities and news relating to any change that may be positive or negative for those companies. Market quickly reacts to such information and as such their value would reflect their perceived business prospects at any given point of time.
The prices of such stocks may take a random walk on the basis of certain general news which affects the overall market sentiments but having no effect on their prospects. Those kind of situations give opportunity to get into such great stocks at a price below the normal valuations. Such events and news won't often come. Even if they occur also how will one know what is the right price to enter a stock. Volumes have been written on how to value stocks and volumes remain to be written on the subject. This is because the circumstances keep on changing and new valuation parameters are designed and employed to meet changing circumstances.

Methodology Issue
Though there are many complex valuation methods we need to have a holistic analysis that the company is doing well on all counts and not just valuation. Let us try to look into a methodology which can help an investor adjust the limits of his parameters based on his overall outlook. The methodology is more of quantitative in nature to eliminate subjectivity and requires good amount of past data regarding their balance sheet,
profit and loss account and cashflows to pinpoint undervalued stocks. This step by step approach can help you try and find a few good undervalued stocks. But sometimes you may not find one also. Yes finding
undervalued stocks are like finding oyster pearl from deep inside the sea! The analysis involves 5 basic factors and selects only those which satisfy all the parameters used for each

Stability
Stability can be attributed to the stable income generation capacity of the company and its potential to grow. The current sales should be more than a particular limit. For e.g. let us say that the current sales should be more than Rs.100 crores. This kind of limit is required as many companies won't be able to grow fast unless they achieve a critical mass in revenues. They need enough money to expand rapidly and revenues are the primary source for that. Hundreds of small companies remain small because after meeting the regular business expenses they won't be left with enough cash flow to grow. The second parameter is that the sales should be growing continuously. If the sales are up in one year, down in another and the pattern is repeated then there is some serious problem in the overall management of the business or the nature of the business. It is better not to buy shares of such companies. The growth in sales shows the demand for the products and services of the company and its continuity represents either the growth in market for the company's products or services or the company's ability to stay on top of competition. Reasonably you should look for a company whose sales are growing above 20% year on year.

Profitability factor. It is up to you whether to relax a parameter because some other parameter is so good so that it will negate the weakness of the other parameter. The 5 factors to analyse the stocks in the market are Stability, Profitability, Capital Structure, Management and Valuation. The first 4 factors except Management are quantitative factors and Management is qualitative factor.
Profitability means different things to different people. For a lender the total cash flow generated out of operation is very important. But for an equity investor the Net Profit Margin (NPM) is more important.
Because his cash flows in terms of dividend or increase in investment value through creating additional reserves can be done through the net profit only. If the NPM is very low like 2-3% then a small negative change in the sales would see that the company turns into red. Ideally you should look for companies which can generate NPM of 10% or more, continuously. The continuity factor is very important because it shows that the company is not growing at the expense of margins. NPM is calculated as Net Profit After Taxes divided by the Net Income. When we consider the stability factor also into account the minimum Earning Per Share (EPS) of double the face value would be ideal. This shows that the company is able to generate good money for the shareholders. The higher EPS reflects the fact that the company is in the business for long and the resources are under full utilization. The company should also give a reasonable Return on the Networth (RONW). This is nothing but the share capital plus reserves. The consistency or continuous growth of the RONW signifies that the assets are employed in good manner. The more the RONW the better the business is doing. It would be good to look around for a company which gives RONW above the expected equity returns.

Capital Structure
Capital Structure needs to be analyzed in 2 ways. One is with respect to the equity and debt combination and the other is in terms of the share holding pattern. Companies used to borrow money for expansion of business in order to grow. Ideally a company should not have more than 2 times the equity capital as debt. The advantage of borrowing is that the company expects to earn a higher return than the cost of interest thus increasing the net profit available to the shareholders. But if the borrowing is too high, in a down market company when margins are under pressure the company will find it difficult to generate enough profit to be shared with the shareholders. Before deducting interest and taxes, if the company's profits are more than 5 time the interest liability then we can fairly assume that the company is fairly placed. More the interest coverage ratio, better the ability of the company to survive in adverse conditions. The interest coverage ration is calculated as Profit Before Interest and Taxes divided by the Interest Paid. Secondly you have to see whether the promoters have substantial stake in the company and also whether any institutional investment is there. If the total of promoters and institutions as shareholders is more than 50% it may be considered as good.

Management
Management's integrity, accountability and honesty to shareholders and other stake holders should play a vital role in deciding whether to select the stock or not. There are notorious promoters who siphon out money through accounting juggleries and also take decision on diluting equity without considering the interest of other shareholders. The existing shareholders would not get any benefit in such scenarios. If a company pays good dividends, issues bonus shares or rights shares to existing shareholders it can be fairly considered as investor friendly. Also the management's approach to the labour force, promptness in meeting regulatory requirements, relationship with vendors and customer satisfaction are factors to be looked into. As this is a subjective analysis you should be trying to get as much news material on the company by surfing the internet or going through old business news papers or business magazines.

Valuation
By going through all the above steps you may find few good companies but now you need to find their valuation also. Here the simple way is to check the Price to Earnings (P/E) Ratio and the Price to Earnings Growth (PEG) Ratios. P/E ratio should be ideally below 14.2 if the opportunity cost is 7%. This means that if you can get a return of 7% from bank deposit which you are foregoing by investing in the stock, the stock should minimum generate earnings which would equal to the bank interest. P/E is calculated as Price per share divided by EPS. But P/E does not reflect the earnings growth over the future years and hence is very conservative. So you need to also look into the PEG Ratio. PEG ratio is calculated as P/E divided by the Annual Earnings Growth. So if you expect the net profits to grow by 30% then the PEG ratio for a stock with P/E of 14.2 will be 14.2/30 = 0.473 (You should not take the percentage into account in calculating this). A PEG ratio of less than 0.5 is a good sign of undiscovered value. There are a lot of methods for valuation. You can also calculate the discounted value of the free cash flows over the expected time horizon of your investment. But most of these involve tedious calculations. Many of the things like sectoral outlook or business model analysis are not considered in this methodology. But it is sure that there won't be many stocks which could qualify on all counts. So you need not worry about it. The stocks you find can be considered as stable with growth prospects, having good profitability, with low default risk, having good investor participation, fair management and at a price which is intrinsically higher than its currently quoted price.

Stocks to scoop up when the market falls

The stock market may be poised for a significant correction. Keep your powder dry. Look to buy these stocks at lower prices

Indian stock markets have remained stuck in a narrow range for some time now, as if undecided on the correct direction in which to move. While the economy as a whole is putting its best foot forward, the bulls look tired. Since January this year, when the Sensex opened at 17,473, the bellwether index has ebbed and flowed-touching a low of 15,652 in February and hitting a high of 18,475 in August. The Sensex is now hovering around the 19,900 mark. We had advised readers earlier not to have huge expectations from the equity markets this year, against the backdrop of the spectacular 88% rally of the preceding 12 months. We had cautioned, "...if stocks keep rising in the second year, they would do so in a much more muted fashion... The market will go through multiple twists and turns during the year and, in the end, may deliver small gains." The gains over the past 8 months in the Sensex? Just 3%.

So where will the markets go from here? At current valuations, the market is quite expensive. The Sensex is now trading at a price-earnings (PE) multiple of nearly 21. Various fundamental and macro factors suggest that the market is now ripe for a correction. For one, corporate India churned out disappointing numbers for the June quarter, belying the market's expectations. While revenues of the top 100 BSE companies witnessed a strong 22% aggregate growth, operating profits barely budged an inch, rising by a mere 1%. This fell short of the market's expectations; it was anticipating a 20% growth in operating profit for the entire FY10-11. The latest quarterly performance may not bode well for the rest of the year. It is obvious that, since profit growth is lagging so far behind revenue growth, companies are reeling under severe cost pressures.

If India Inc continues to display such indifferent results heading into the second quarter of this fiscal, it may be a strong enough cue for investors to lose confidence and offload, for now.

Another strong indicator of the downside risk to the market is the current huge position in the equity futures segment at the National Stock Exchange (NSE). The open interest in the equity futures at NSE recently zoomed to Rs68,200 crore. With this, the ratio of total traded value of open interest in stock futures and index futures has crossed 70:30 - the level it had reached before the market's freefall in 2008 - clearly underlining the risk of a correction. In the recent past, whenever the ratio of open interest in stock futures and index futures has crossed 70:30, the NSE Nifty has usually corrected by around 10%-12%. The Nifty had corrected 10.16% (around 534 points) on 15th January, when the ratio had crossed this level. It happened again on 26th April, when the Nifty slumped by 9.71% (around 1,722 points) after the ratio touched 70:30 again.

Also, the India Volatility Index (VIX), which captures the expected market volatility over the short term, recently slipped to a low of 16.15 - its lowest on a closing basis since its launch. Volatility rarely goes up in a rising market, especially in a strong bull market; it usually coincides with a fall in the market.

For all these reasons, we believe that the market is set for a drop of at least 10%-12%, (see box) translating into a correction of around 1,800-2,000 points. This is the very opportunity most investors would be looking for - to enter the market and get great deals at bargain prices. Here are a few such stocks which are worth considering once the correction takes place. Apply the standard stop-loss of 20% below purchase price or from the highest daily closing price, if the stock has rallied more than 50%.

Stocks for a Rainy Day

Textiles may be boring bets but they have given terrific returns, if bought at the right price. We had earlier recommended Shri Lakshmi Cotsyn in October 2009. The stock is up 54%. Some select textiles stocks are still good bets. Indian domestic consumption of textiles is growing fast, at 15% annually, and is driving the revenues of companies like TT Ltd (TTL). Additionally, textiles companies garner substantial money from exports. TTL is the flagship company of the 58-year-old TT group, a household name in textiles with its popular TT brand. Earlier known as Tirupati Texknit, it is now a vertically integrated textiles manufacturer, mainly producing cotton, yarn, fabric, garments and accessories.

Its processing units are located at Gajroula (Uttar Pradesh), Avinashi, Dharapuram, Dharampur and Tirupur (Tamil Nadu), Gondal and Rajula (Gujarat) with installed capacities of 60,000 metric tonnes per annum (mtpa) ginned cotton, two million kg knitted fabrics and 55,824 spindles as on 31 March 2010. It also has wind mills generating 3.75MW of electricity for captive use in Tamil Nadu and Gujarat. The company is planning to increase its presence in the 'clean energy' segment through a major foray in clean power generation in the coming years. Major export destinations for its products include Indonesia, Malaysia, Turkey, China, Mauritius, Egypt, Brazil, Europe and USA. The company expects to achieve about 40% growth in turnover and much higher profits for this fiscal. This marks a turnaround in the fortunes of the company which struggled during the slowdown of 2008-09. It has placed higher emphasis on domestic sales, reduced exposure to commodities business like raw cotton fibre, and focused on brand building and value-added products. It has also tied up with all major organised retail chains to establish its presence. Its financials have improved in the recent quarters. Over the past five quarters, sales and operating profit have risen 57% and 116%, respectively. Its operating margin stands at 10% but RoE is impressive at 27%.

Increased prosperity of Indians is leading to higher consumption and investments. As Indians look to borrow money to buy durables and put money in investment products, Indian financial services companies will do well, providing loans and channelling investments. One of the best known finance companies is Bajaj Finserv Lending (BFL). It started its operations by financing two-wheelers of Bajaj Auto. Over time, it has expanded its operations to finance consumer durables also. It now finances two-wheelers and other consumer durables, extends personal loans, small business loans, finances construction equipment, and provides loans against securities. It started construction equipment finance and loans against securities in June 2010.

The total size of construction equipment credit market is approximately Rs15,000 crore, dominated by banks and select non-banking finance companies (NBFCs). The infrastructure segment is a growth area and BFL should do well. Loans against securities is a Rs5,000-crore business which is dominated by private banks and NBFCs. It is not growing rapidly and BFL will take some time to gain a foothold in the business against established players.

With the substantial pick-up in auto sales volumes, the company's disbursements have grown at a rapid pace. Its loan book last year grew a whopping 87% to Rs4,585 crore compared with that in FY08-09, led by a 267% growth in mortgage-based lending. Two-wheeler loan disbursements grew by 74% in FY09-10, thanks to strong growth in two-wheeler demand throughout the country. With receivables of Rs4,026 crore, BFL is one of the leading, diversified NBFCs in the country. Its asset quality has also improved considerably-non performing assets (NPAs) have declined to 1.8% from its year-ago level, when they aggregated 4.5%.

BFL's strategy of focusing on 'mass affluent' customers and major dealerships has begun to yield significant benefits through lower operating costs and improved risk performance. The June 2010 quarter performance was impressive. Its revenues and operating profit surged 57% and 205%, respectively. The five-quarter average sales and operating profit growth stand at a robust 54% and 220%, respectively. Its operating margin is decent at 17%.

The tyre industry is expected to clock 7%-8% growth in this fiscal, thanks to strong volumes in the automobile industry. TVS Srichakra is one of the leading two- and three-wheeler tyre manufacturers in India rolling out over 11 million tyres per annum. It is one of the major suppliers to all leading original equipment manufacturers, namely, TVS Motors, Hero Honda, Bajaj Auto and Yamaha Motors and has a strong network of over 2,050 dealers and 23 depots to cater to the after-sales market. The company is a global player, exporting to USA, Europe, Africa, South America and South East Asia. For the export market, it manufactures industrial pneumatic tyres, farm & implements tyres, skid steer tyres, multipurpose tyres, floatation tyres, etc. It has a state-of-the-art manufacturing facility at Madurai in Tamil Nadu, spread over an area of 2.5 lakh sq m.

Last year, the company set up another plant in Pantnagar, Uttarakhand. As per the latest available figures, the company has an installed capacity for 12.21 million automotive tyres and 12.86 million automotive tubes.

During the June quarter, the company registered 43% growth in sales and 31% jump in operating profits. Over the past five quarters, its sales and operating profit growth have averaged 26% and 63%, respectively. Operating margin is around 9% and RoE is robust at 35%.

PI Industries is into agri-inputs, contract research and manufacturing services (CRAMS) for fine chemicals, polymers and engineering services. Founded in 1947, it was earlier known as Pesticides India and was renamed PI Industries in 1993 to reflect its new diversified businesses. Key products in agri-inputs include crop protection, specialty products, plant nutrients and seeds. One of the leading companies in CRAMS, the company has long-term tie-ups with leading chemicals companies across the globe for newly invented products. Its manufacturing facilities spread over 90,000 sq m are located at Udaipur (Rajasthan), Panoli (Gujarat), and Jammu (Jammu & Kashmir) with captive power generation facilities. It offers a one-stop shop for all customer requirements in fine chemicals ranging from process evaluation, bench-scale trials, kilo lab, pilot plant to commercial manufacturing for various multinational companies from Japan, USA and Europe. In the polymers segment, the company offers engineering compounds of a large number of polymers as also a large range of customised grades and special grades like high heat-resistant and impact-modified grades. It has also developed expertise in product development for automobiles, electrical & electronics appliances, white goods and other industries.

Impressed with PI's prospects, in November 2009, Standard Chartered Private Equity invested Rs50 crore. The company's sales and operating profit growth over five quarters have averaged 17% and 31%, respectively. Operating margin has averaged 16%. In the June quarter, sales grew 14% while operating profit was up 5% over the corresponding quarter last year.

Softening pulp prices and revival in demand for paper have boosted the volumes and margins of paper companies like Tamil Nadu Newsprint & Papers Ltd (TNPL). Established by the government in the early 1980s, its product range includes business stationery, classical writing, computer stationery, newsprint, premium printing and quality printing. TNPL has the largest bagasse-based plant in the world, which will have an installed capacity of 400,000 tonnes per annum (tpa) by October 2010. The addition of 155,000tpa capacity involves installation of a state-of-the-art paper machine, backward integration of chemical bagasse pulp elemental chlorine free (ECF) bleach plant and a new high pressure multifuel boiler at a total outlay of Rs1,000 crore. The company is a market leader in stationery and the largest exporter of wood-free paper. TNPL had implemented farm forestry and captive plantation in 37,556 acres and 2,735 acres, respectively, up to March 2009. It has planned to increase the plantation area by about 15,000 acres every year to reach the target of 100,000 acres by 2012-13. TNPL also plans to install a captive de-inked pulp line of 300tpa capacity at a capital outlay of Rs174 crore, a project expected to be completed by December 2011. TNPL's June quarter performance was stellar. Its sales and operating profit zoomed 62% and 77%, respectively, over the corresponding quarter last year. Its operating margin has averaged a healthy 29% over the past five quarters. Expect a jump of 40% in net profit for 2011 and another 30%-40% next year.

Symphony Comfort Systems (SCS) is the world's largest manufacturer of portable air-coolers. Its range of products includes portable coolers, desert coolers, air-conditioners, ventilation fans, room heaters, water heaters and water purifiers. The company has a sizeable presence in the export market which reduces the seasonality factor of its business in the domestic market. Its products are exported to over 25 countries including Dubai, Burundi, Namibia, Bahrain, Nepal, Senegal, Oman, Sudan, Saudi Arabia, Tanzania, Switzerland, Sri Lanka, etc. In order to establish its products in European countries, SCS successfully obtained CE certification for two of its models, viz., Sumo and Mini Kaizen. It has, over the years, built on its core strengths to become a leader in air-coolers. The company has a world-class facility located at Thol, near Ahmedabad (Gujarat). SCS is looking to expand its distribution network within the country to cater to the rising demand for air-coolers. It recently acquired a 49% stake in Singapore-based Sylvan Holdings, which has a majority holding in Mexico-based IMPCO, a manufacturer of a variety of industrial and small coolers. This investment is expected to benefit SCS through strategic market penetration with an increased range aided by IMPCO's established relationships with renowned and well-known large-format stores. Over the past five quarters, the company's sales and operating profit growth has averaged 119% and 233%, respectively. Its operating margin has also averaged a strong 21%. RoE is spectacular at 84%.

(This article is based on secondary research. The report is for information only. None of the stock information, data and company information presented herein constitutes a recommendation or solicitation of any offer to buy or sell any securities. Investors must do their own research and due diligence before acting on any security).

Mutual funds: Why hold is better than sold now

It’s a pity that investors are withdrawing money from mutual funds. Most new funds launched in the past year have outperformed their benchmarks

The stock markets have see-sawed intermittently in the past year, even as the mutual fund industry has faced its toughest battle for survival against the blizzards unleashed by market regulator Securities and Exchange Board of India (SEBI). These trying times witnessed the launch of several new mutual fund schemes.

Remarkably, a majority of these schemes have outperformed their respective benchmarks over the short duration of their existence. This feat has been achieved by 10 of the 13 new equity diversified schemes launched in this period. The Canara Robeco FORCE Fund stood out with an exceptional performance. Launched in September 2009, this Fund has delivered stellar returns (36%), as against its benchmark, the S&P Nifty, which gained only 13% over this period. The Fund invests primarily in companies in the finance, retail and entertainment sectors. Its top holdings as on 31st August were HDFC Bank, State Bank of India, Punjab National Bank, Sun TV Network and Pantaloon Retail.

Another strong performer was the Sahara Star Value Fund, which clocked 23% returns since its launch in September 2009. Its benchmark, the BSE 200, gained only 13% over the period. The Fund seeks to generate capital appreciation through select companies based on specific value parameters. Mid-cap stocks like Mirc Electronics, Suprajit Engineering, United Phosphorus, Artson Engineering and Accentia Technologies are among its top picks.

Similarly, Religare Business Leaders Fund and Kotak Select Focus Fund have done well since their launch. Religare's Fund has managed to deliver 19% returns since its launch in late August last year, as compared with its benchmark, the S&P Nifty, which registered 14% growth over the period. As the name suggests, this Fund invests mainly in companies that are leaders in their respective industries. Infosys Technologies, Reliance Industries, Larsen & Toubro, ICICI Bank and HDFC form the largest chunk of its portfolio, although RIL would have dragged its performance down.

 

Kotak Select Focus Fund has managed to post a gain of 18% as against its benchmark, the S&P Nifty, which gained 12% since the Fund's launch in September 2009. This Fund, which invests in companies in sectors like finance, energy, healthcare and FMCG, has among its top holdings ONGC, SBI, Glaxo Consumer Healthcare, Axis Bank and Infosys Technologies.

The Religare PSU Equity Fund and Fidelity India Value Fund are also among the outperformers. Launched in November 2009, Religare PSU Equity Fund has clocked a 13% return, with its benchmark (the BSE PSU index) managing 7% gains over the same period. The Fund invests only in public sector enterprises and has sizeable holdings in ONGC, Oil India, NTPC, Indian Oil Corporation and BHEL. Fidelity India Value Fund recorded 12% appreciation since its launch in January 2010, while its benchmark (the BSE 200) moved up by 4%. Its corpus has already touched Rs193 crore. The Fund focuses on undervalued stocks and can also invest in foreign securities in international markets. Among its top picks are Reliance Industries, HDFC Bank, Tata Consultancy Services, Corporation Bank and Ahluwalia Contracts.

Among other outperformers are Axis Equity Fund (up 9%), Mirae Asset Emerging Bluechip Fund, Birla Sun Life India Reforms Fund (each up 6%) and SBI PSU Fund (up 3%).

However, a couple of new funds have disappointed. The Shinsei Industry Leaders Fund has yielded 12% returns since its launch in September last year, while its benchmark (the BSE 100) gained 14% over the same period. Surprisingly, DSP BlackRock Focus 25 Fund also underperformed its benchmark, though only marginally. Launched in June this year, the Fund has struggled to deliver returns amidst a relatively flat market over the past three months. Still, the Fund has generated considerable interest and its corpus has touched nearly Rs736 crore in just three months! Its portfolio has exposure to companies that are among the top 200 by market capitalisation. Among its top holdings are Kotak Mahindra Bank, Tata Motors, BPCL, LIC Housing Finance and Mphasis.

Land deals picking up; real-estate rally likely: Citi

A Citi report says land transactions are picking up in pace and price across the country. A rally in real estate stocks may be round the corner

Real-estate stocks have been some of the worst performers of this year and most of them have lagged behind badly in this rally from 17,000 to 20,000 as well. Is it possible that real-estate companies could get a shot in the arm now that stock markets have done so well? A Citi report says that land transactions are picking up in pace and price across the country and "This highlights the buoyancy in the ground markets, where the developers are going back to buying land in order to create potential pipelines for future development, as they foresee strong sustained demand. Could this be a precursor to a rally in real-estate stocks?

The brokerage firm says that Rs76 billion worth of land transactions involving more than 570 acres have gone through year to date. In the Mumbai Metropolitan Region alone, transactions worth Rs62 billion for almost 370 acres have taken place and it is expected that around 130 acres are still on the block which could fetch Rs72 billion.

It lists a few record Mumbai land deals:

•  60-yr-old south Mumbai bungalow sold for Rs3 billion
•  Kalpataru to buy Clariant land in Thane - Rs80 million/acre
•  Borosil sells 18 acres for Rs8.3 billion - Rs461 million/acre
•  Borivili: Rs0.15 million/sq ft for commercial purposes
•  Bharat Mill fetches record Rs15.05 billion - Rs1,800 million/acre
• Marol industrial plot sold for Rs8.75 billion
• Poddar Mill land sold for Rs4.74 billion, Central Mumbai - Rs1980 million/acre
•  Sunteck Realty buys land in Mumbai suburb Goregaon for Rs1.5 billion -Rs250 million/acre

The report points out that development rights also seems to be back in flavour in Mumbai with deals such as DB Realty bagging the right to redevelop a large chunk of the 100-acre government colony in Bandra (East) along the Western Express highway. Several deals are in the pipeline - Mafatlal Industries' Rs10 billion (expected) deal by selling a seven-acre plot on the edge of the Byculla zoo and the 105-acre land plot owned by Bayer CropScience on the block in Thane.

The report says that transactions are picking up in Delhi and Bengaluru as well - Supertech recently launched a 100-acre project called UpCountry along the expressway with independent plots priced at around Rs12,000/sq mt; Yamuna Expressway Industrial Development Authority is selling land parcels to real-estate developers at nearly 14 times the acquisition cost; New York-based firm Brahma has struck a Rs6 billion-Rs6.5 billion deal for aggregating a 152-acre land parcel in Gurgaon; 1-acre plot on MG Road in central Bengaluru was sold to an undisclosed buyer for close to Rs1 billion.

The stocks, meanwhile, have hardly moved compared with other sectors. DLF has risen from a low of Rs300 at the beginning of September to ~Rs370 now. Unitech has risen from Rs75 to Rs85+, HDIL from Rs250 to Rs270 levels, and Indiabulls has gone up from Rs165 to around Rs177.

A rise in the stock market generally tends to coincide with a rise in property buying across the country and investors put in some of the gains from the market into property. In a recent television interview, Anuj Puri, chairman and country head at Jones Lang Lasalle India, said that the greed for real estate had returned in Indian metros.

Real-estate companies do seem to be in a buoyant mood. Indiabulls, among other big real-estate companies, is coming out regularly with full page advertorials in newspapers touting its past and future projects - this trend was missing for quite a few months now. Godrej Properties' chairman Adi Godrej recently told the media that he expects revenue to jump more than 50% per cent in FY11 as rising incomes will boost demand for housing. He said he will announce about five new projects this year in addition to five that have already been announced.

Domestic funds are believed to have put in around $864 million in 22 realty deals since January this year while foreign funds have invested only $126 million in three deals - mostly because the Indian property market does not appear to be in the value zone for foreign funds which have better opportunities in South-east Asia.

(This article is based on secondary research. The report is for information only. None of the stock information, data and company information presented herein constitutes a recommendation or solicitation of any offer to buy or sell any securities. Investors must do their own research and due diligence before acting on any security. Some of the opinions expressed in this article are the author's own and may not necessarily represent those of Moneylife).

Stocks that would perform in the next rally: A Merrill Lynch analysis

In a recent strategy report BoA-ML says given the speed of the rally, markets are vulnerable to correction and in this situation stocks that have underperformed and are undervalued may perform better than stocks that are expensive and already run up

With the market whooshing past in a frenzy in the last few thousand points, it is very possible that many investors missed the bus. Even if they haven't, the question on most investors' minds is, what now? In a recent strategy report to its institutional investors, BoA-ML says that it might be better to invest in undervalued stocks now since the pace of the rise suggests that a correction might be imminent. Even if there is no correction, and the market uptrend continues, the outperformers may see some rotation.

To arrive at a list of stocks which they believe could outperform from here on, BoA-ML ran some screens. It calculated the mean price to earnings ratio and price to book value of stocks from March 2005 onwards and compared it with their current PER and PBV multiples respectively (excluding stocks that have posted losses in between). The brokerage found that cheap or inexpensive stocks were trading at a discount or small premium to their mean values. Essentially what it found was that most auto, financials, consumers, and some cement names are trading expensive to historic valuations. Real estate, telecom, some pharma, commodity, media and engineering names are trading cheaper than historical valuations.

The report says that some of the large cap stocks that look attractive on this screen are Reliance, Zee, BHEL, Sterlite, Wipro and Maruti. Stocks that could be the most vulnerable in a correction could be SBI, ICICI Bank, HDFC Bank, HDFC, Bajaj Auto, Ambuja Cements, Bharti and ONGC. BoA-ML says that among the stocks that have lagged in the rally, Lupin Labs is one of its preferred stocks while it still continues to like stocks like Tata Motors and United Spirits that have been sharp outperformers in the rally.

Here are some more details from the report:

Stocks that have underperformed in the recent rally: Patni, Hero Honda, Maruti, India Cements, Reliance Industries, Zee, Sterlite, BHEL, JSPL, IVRCL, GMR Infra, Wipro.

Stocks that have outperformed in the recent rally: Tata Motors, Bajaj Auto, SBI, LIC Housing Finance, select PSU banks, DLF, ICICI Bank, Hindalco, Bharti, REC, Power Finance, Asian Paints, Godrej Consumers, Titan, M&M, Hindalco.

Stocks cheap relative to historic valuations: Real estate (like DLF, Purvankara, Omaxe, Anantraj etc.); software (Firstsource, Educomp, Wipro, Patni etc.); commodities (RIL, Sterlite); pharma (Biocon, Glenmark); telecom (Bharti, Idea), Zee and BHEL.

Stocks expensive relative to historic valuations: Autos (like Bajaj Auto, M&M); cement names (India Cement, Shree Cement); financials (LIC Housing Finance, REC, Shriram Transport, Federal Bank and select PSU banks); consumers (Asian Paints, Nestle, Dabur, Godrej); commodities (JSPL, NALCO, SAIL) and pharma ( Dr Reddy's, Cadila, Lupin).

Equity funds: In the roundtrip

The Sensex may have scaled the 20k peak yet again, but have your mutual fund investments followed suit? An analysis of the performance of mutual funds reveals that one in two equity funds beat the Sensex in its round trip from January 15, 2008, when it last closed above 20,000, to September 21, 2010. Mutual funds returned an average of about 2.2 per cent in this period. The funds that outperformed were largely those that had limited NAV losses in the 2008 meltdown.The impressive performance of select sector funds, improving scorecard of mid-cap funds and a wide divergence in overall performance were among the other interesting insights.

Top performers: A good 90 (of the 178) equity funds beat the Sensex in its round trip, with sector-based funds figuring prominently in the list. Given that pharma, consumer goods, banks and auto stocks made the most of this rally, it wasn't a surprise to see funds focussed on these sectors deliver too.

Franklin Pharma, Reliance Pharma, SBI Magnum SFU–FMCG, UTI –Transportation & Logistics, Franklin FMCG and Reliance Banking were among the top five funds in this period. Among underperformers were funds such as Taurus Discovery, Principal Tax Saving and Fortis Future Leaders. Quite a few equity schemes from the JM Pack too were underperformers.Once bitten, twice shy: Most of the funds that had failed to limit their NAV losses during Sensex' down ride, lagged the index in its up turn too. Interestingly, infrastructure funds, which rode the rally last time around, are conspicuous laggards. Funds such as SBI Infrastructure, UTI Infrastructure, Tata Infrastructure and DSPBR T.I.G.E.R. are among the list. However, true to their nature, mid and small-cap funds, which were hit hard in the downturn, bounced back in style.

A score of funds – such as IDFC Premier Equity, Sundaram BNP Paribas S.M.I.L.E, DSP BR Small & Midcap, Sundaram BNP Paribas Select Midcap, Sahara Midcap, Birla Sun Life Midcap and UTI Midcap managed to beat the Sensex despite falling heavily in the downturn. Consistent players: Aside of pharma, auto and FMCG funds, others that fell less and rose more than the Sensex were dividend-yield funds such as Birla Sun Life Dividend Yield, ING Dividend Yield and UTI Dividend Yield.Others such as Quantum Long-Term Equity, HDFC Equity, HDFC Top 200, Franklin India Blue Chip and DSPBR Equity too outperformed in the bull and bear phases.

Precious metals glitter more than stocks on haven buying

Nervous about Western economies, investors turn to gold, silver, platinum and palladium.

If you thought stocks were the best performing asset in the last one year, think again. Precious metals such as gold and silver have done even better. Spot prices of gold on the Multi Commodity Exchange of India have shot up from Rs 15,855 for 10 grams to Rs 19,175 now, notching up a 21 per cent return for one year. Prices of silver have done even better, gaining 23 per cent. The BSE Sensex has managed only 19 per cent return over one year.

Investment demand

Gold has benefitted from reviving jewellery sales in Asia as well as investment demand.

With well-heeled investors once again becoming nervous about the prospects of Western economies, particularly the recovery in the US, buying in precious metals has picked up as a ‘haven' for storing surplus wealth. Exchange-traded funds piggybacking on gold, silver and platinum have seen a spurt in investment interest. Metals such as silver have gained from industrial applications as well.

Global picture

While global gold prices ($1,298/ounce) are at a record high, silver, after a breathtaking rally in the last nine months, hit a 30-year high at $21/ounce on Friday. Platinum prices are at $1643/oz — a two-year high.

Palladium has been another surprise element, delivering an even bigger gain of 84 per cent; its status as a precious metal is supplemented by its usage in premium cars to reduce emissions. With global auto sales charting a sharp revival, palladium has been in demand for use in catalytic converters in high-end cars.

Rupee appreciation Gold has trounced stocks even more convincingly in the global markets, with the yellow metal price in dollar terms delivering a 28 per cent gain since September 2009.

However, for Indian buyers of precious metals, the rupee's appreciation in the last one year (from Rs 48/dollar in September 2009 to Rs 45.2 now) has eroded their effective returns.

Gold prices

Spot prices of gold on the MCX rose 21 per cent over the past year compared with the 28 per cent surge in global gold prices. Gold ETFs, such as GoldBeES, have managed a marginally lower return of 19 per cent matching the Sensex. Investors looking to buy precious metals have the option of buying gold ETFs or trading precious metal futures for gold, silver and platinum on the commodity exchanges.

Making sense of stock splits, bonus issues & share buybacks

Housing Development Finance Corp Ltd (HDFC) has announced a stock split. Each share of a face value of Rs 10 would be split into five shares of face value of Rs 2 each. So what are the implications for investors? Does it indeed increase their wealth? Is a stock split similar to a bonus issue? What about the tax implications? Is their potential for tax planning? Today’s article seeks to address these and related issues.

Stock splits Stock splits are a relatively new phenomenon in the Indian context. It is important that investors understand the reasons that companies may split their shares and how a stock split is different from a bonus issue. In a stock split, the capital of the company remains the same whereas in a bonus issue the capital increases and the reserves decrease. However, in both actions (a stock split and a bonus) the net worth of the company remains unaffected.

Let’s take the HDFC 5 for 1 stock split. This means following the stock split, the company’s shares will start trading at one-fifth the price of the previous day. Consequently, you will own five times the number of shares that you originally owned and the company in turn will have five times the number of shares outstanding.Consider the following example.

The question that arises is if there is no difference to the wealth of the investor, then why does a company announce a stock split? Generally, stock splits are announced to make a scrip more liquid, more affordable to the average investor — since post the split, the share price adjusts proportionately to the split ratio.
Here, it has to be reiterated that the shares only appear to be cheaper, it makes no difference whether in the above example you buy one share for Rs 3,000 or five for Rs 600 each. However, earlier the minimum ticket size was Rs 3,000, now it is a more affordable Rs 600.

As far as the tax implications for stock splits are concerned, well, there aren’t any. A stock split, like a bonus issue, is tax neutral. However, when the shares are sold, the capital gains tax implications are different that what is applicable for bonus issues. Here, the original cost of the shares also has to be reduced. For instance, in the above example if the cost of the 100 shares at Rs 1,500 per share was Rs 1,50,000, after the split the cost of 500 shares would be reduced to Rs 300 per share, thereby keeping the total cost constant at Rs 1,50,000.

Bonus shares
Bonus shares are shares issued free of cost to the shareholders of a company. As this is essentially a book entry (reserves get capitalised), following a bonus issue, though the number of shares increase, the proportional ownership of shareholders does not change.

Also, post the bonus, the share price should fall in proportion to the bonus issue, thereby making no difference to the personal wealth of the share holder. However, more often than not, a bonus is perceived to be a strong signal given out by the company and the consequent demand push for the shares causes the price to move up.

As far as tax is concerned, since no money is paid to acquire bonus shares, these have to be valued at nil cost while calculating capital gains. 

The originally acquired shares will continue to be valued at the price paid at the time of acquisition. An incidental tax planning benefit is that since the market price of the original shares falls on account of the bonus, there may arise an opportunity to book a notional loss on the original shares. This is known as bonus stripping. It may be noted here that through Section 94(8), the Income-Tax Act has introduced measures to curb bonus stripping, but strangely, the same are only applicable to mutual fund units and not to shares.

Share buybacks
Then there are share buybacks. Essar Oil, Reliance, Siemens and Infosys are some examples of companies that have bought back their shares.

Generally, companies buy back their shares when they perceive their own shares to be undervalued or when they have surplus cash for which there is no ready capital investment need.

Share buybacks also prevent dilution of earnings. In other words, a buyback enhances the earnings per share, or conversely, it can prevent an EPS dilution that may be caused by exercises of stock option grants etc.

Last but not the least, a buyback also serves as a substitute for dividend payments. This brings us to the crucial issue of tax implications of a buyback. A very important consideration is whether the amount paid on buyback is dividend or consideration for transfer of shares. If it is indeed considered to be dividend, the same will not be taxable in the hands of the investors. Also, to what extent, if at all, can the amount paid on buyback be taken as dividend? Is the entire amount paid dividend or is it only the premium paid over the face value?

In the case of Anarkali Sarabhai v CIT (1997) 90Taxman509 (SC) had laid down the principle that redemption of shares by the company which issued the shares (in this case preference shares) is tantamount to sale of shares by the shareholders to the company. 

The Finance Act 1999 has reiterated this stand to remove confusion. Now, where any company purchases its own shares, then, the difference between the consideration received by the shareholder and the cost of acquisition will be deemed to be capital gains. Further, this will not be treated as dividend since the definition of dividend does not include payments made by company on purchase of its own shares.