Investment styles and mistakes

These are stories about a few friends.

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

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

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

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

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

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

Lessons:

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

7 tips for investing in stocks

Investment experts always advise investors to stay away from 'junk' stocks. Warren Buffet once famously said "The only time to buy these (junk stocks) is on a day with no 'Y' in it."
Stocks can be as tricky a business for novice investors as they are for seasoned players. However, as Warren Buffet has always propagated, 'Right stocks at the right price' is the way to laugh your way to the bank. This means, avoiding all those 'junk' stocks and setting your sights only on the 'right ones'.

So how do we really separate the wheat from the chaff? In an age where Satyam and Infosys both ruled the roost at one point of time, how do we know which ones are the black sheep and which ones are not?

In this issue of women's weekly, we bring to you the fundamentals of choosing a stock from a long-term perspective:

Sound management

A sound management is like a captain of a ship. The onus of charting out the right direction in still waters and steering the company safely in troubled times lies on the management.

We would even go to the extent of saying that the way in which a management behaves, determines to a great extent, the long term success of the business. You don't want to be an investor in a company where the management takes money from the shareholders to fill its own pockets.

A case in point here would be Satyam. It promised its investors the moon. However, they soon had to settle for sleepless nights as the ugly truth of Satyam reared its head.

Investor mentality

Traders routinely buy and sell the same stocks within a time frame of a few hours. 'Investors', on the other hand, put money in stocks and hold on for a longer period of time, generally at least 2 to 3 years.

Develop an investor mentality. Adopt a long-term investment strategy. While looking at the quarterly results of the company, don't lose sight of the bigger picture. Invest for a longer duration which promises more returns and is not affected by daily market fluctuations.

Research shows that the shorter the duration of investment, the more are the chances of losing money. While, with long term investing, the chances of losing money are lesser.

Remember, the longer the investment period, the greater are the chances of making money.

Practical approach

Emotions need to be kept aside while dealing with stocks. Don't get emotionally attached to your investments. Your aim is to get maximum profits out of your stocks. It's immaterial if this is achieved through selling them, buying them or holding them.

Just because you are emotionally attached to the stock or just because the little voice inside your heart says, "Give it some time and things will work out just fine", does not mean that you have to hold on to a stock when it is destined to hit its nadir.

Consistently Proven track record

At the end of the day, it's all about numbers. Numbers can tell a story - you should just have an ear attuned to understanding their language. It makes sense to thoroughly investigate the company and its track record.

Consistency is the key. If the company is good, it will have a consistent performance. Its income statement will show consistent profits. Its annual reports will talk about the consistent dividends doled out. Ideally, the company should have a dividend history over the past 5 years and a dividend payout comparable with its peers.

In the case of 'growth stocks', the game changes a little. The company may not distribute its' profits as dividends; rather, it would invest the profits back into the venture for future growth. However, all said and done, it should not invest so much that it has to resort to frequent financing from outside. In other words, it should not undertake frequent dilution of equity or raise so much debt that its debt to equity ratio spirals out of control.

Looking at prior records helps one understand the company's capabilities. It gives an idea, shows a direction, and helps to understand the company's vision and the path ahead.

Intensive research

The golden rule to investing is considering the future growth prospects of the company you are investing in. During the dot-com boom, many investors displayed a herd mentality, investing in companies without any research. The result was the dot-com bust that followed.

It is important to not only know the company like the back of your hand but also be aware of the external factors influencing the growth of the stock. The overall state of the economy, the factors influencing political and social environment should also be considered while investing.

Sector growth, the demand supply trend and the competition in the sector also need attention before you decide to invest in a particular stock.

Extensive Homework

If you are a serious investor, you cannot go by intuition alone. You will need to do a lot of homework before zeroing on a particular stock. This should not be difficult. We may be considered impulsive buyers, but we do have our own ways of background research before we make the ultimate buying decision.

Homework before investing would include reading up about the company you are about to invest in. Reading its annual reports, studying the balance sheet, analyzing its profits, assets and liabilities; reading interviews of the top management, keeping yourself updated about the latest economic policies.

In short, being the sponge and soaking every piece of news and information related to your investment.

Serious follow up

Keep a constant track of your investments. Regardless of the market condition, whether it is a bear market or a bull market, it is your money that is at the stake. Your hard earned money! You owe it to yourself to ensure that the savings that you have invested are showing a promise and growing.

It's the last mile that makes the difference in the race. It's not just about the right formula but about the grit to see it through. The grit to emerge as a winner.

Don't lose steam once you invest. Serious follow up is what will differentiate you from other investors. It will be your secret weapon, your protective armour, the secret charm that will help you make the best of your investments.

Source: http://business.rediff.com/report/2009/sep/08/perfin-7-tips-for-investing-in-stocks.htm

The Investment Cycle

			BUY
EPS	PE		SELL
Performance	Perception Check the Pe Drivers
			Buying and selling a stock depends upon: Dynamic Factors Quantitative and Qualitative Factors Absolute and Relative factors

Rs 20,000 cr auto investments ahead

An incremental Rs 20,000 crore investment is expected in the Indian automobile sector in the next 18-22 months.

This, despite the current economic slowdown and possible rethink by some global investors on making huge commitments to the Indian market just yet.

According to figures made available by the Society of Indian Automobile Manufacturers (SIAM), many big-ticket expansion projects are going on stream between now and March 2011.

Bajaj Auto is expanding its two-wheeler manufacturing capacity besides investing in four wheelers; Mahindra & Mahindra, Tata Motors (the Nano plant at Sanand); Honda Motorcycle & Scooter India is getting into the 100 cc motorcycle market and expanding capacity for the purpose.

Then, Andhra Pradesh's MLR Motors is expected to begin its small car project in collaboration with an Italian partner; Daimler if firm on investments in India despite the Hero Group breaking away from a proposed joint venture for commercial vehicles, Piaggio which has already announced plans to enter two-wheeler space and Toyota which has already announced a second small car project in India.

In addition to these investments, at least two internationally known passenger car makers as well as an American superbike brand are among the investors which have lined up for taking part in the Indian growth story.

Besides, French car maker PSA Peugeot Citroen is expected to announce its Indian manufacturing and sourcing plans by September this year.

But wouldn't further capacity creation add to the industry's woes? Already, a back of the envelope estimate pegs passenger car overcapacity to be at least 20% and sales have not exactly been spectacular over the last few months. Even the export front has been a huge disappointment, with first quarter exports growing by just 1.32%!

Siam secretary general Dilip Chenoy points said the government's determination to make India a small car hub needs further fiscal incentives.

"Almost all of the committed investments in the automobile sector have come in and more international companies are willing to come to India despite the global scenario....but for the small car hub dream to take shape, the Government will have to provide more incentives".

Contrasting styles of investment

Value averaging may give better returns compared to sips, but it is complex for retail investors.

onventional wisdom: To get the best return from stock markets, buy when prices are low and sell when they appreciate. But for the common investor, it’s rarely possible, as the stock market does not travel just one way.

To protect returns from the mercurial markets, investors are conventionally advised to invest regularly through a systematic investment plan (SIP). The benefit of an SIP is straight; it averages out the cost of purchase by buying at different levels, thanks to the regular investment. This is also called rupee cost averaging.

Of late, many investors have shifted away from this strategy. This is apparent from the fact that new mutual fund products that book profits regularly have been an instant hit. If you compared SIP returns with lumpsum investment in the current rally, the latter has fared better. Even if you compare the past three-year data, you will see a majority of funds have yielded the same result. The fact, though, is that an SIP fares better over a longer period. Though, it cannot beat lumpsum investment if someone invests at the bottom of the market, which then keeps going up.

For investors who rate value buying above investing a fixed amount every month, there is an alternative strategy. It is called value averaging. This is a more evolved strategy than rupee cost averaging, or SIP. In this, you adjust or vary the amount invested to meet a prescribed target value of the portfolio.

SIP, on the other hand, is a strategy in which you invest a fixed rupee amount on a regular basis, usually monthly purchase of shares or units of mutual funds. When the share or your mutual fund's value falls, you buy slightly more shares or units of the fund for the fixed investment amount, and slightly fewer when the price goes up. In this manner, the investor lowers the average purchase cost. But in value averaging, the investor invests more when prices fall and less, or nil, when it gains.

VALUE AVERAGING AND FINANCIAL GOALS

Using this mechanism, a person can build his financial goal and be sure of attaining it, irrespective of returns from the market. Here’s how it’s done: rather than trying to attain a fixed monthly amount, the investor could fix a compounded annual target growth of his portfolio. So, if you want your portfolio to grow by 15 per cent year-on-year, you contribute in such a manner as to reach this percentage each month.

An example should make this clear. For starters, in the value averaging concept, the investor needs to set a target rate of growth of their portfolio.

That is, with a target rate of growth of portfolio of 15 per cent, you are planning to create a Rs 6 lakh corpus in 10 ten years for say, a car or initial down payment for a house in 10 years.

In the first month, you invest Rs 5,000. However, because the market has fallen by say, 10 per cent, your investment is worth Rs 4,500 at the end of month 1.

Whereas, given the pre-defined rate of growth, your investment should have been worth Rs 5,750. So in month 2, you will have to invest Rs 6,250. Similarly, if the market had gone up by say, 20 per cent (Rs 6,000) the investment required in month 2 would have been only Rs 4,750.

Similarly, over time, depending on the rate of return that has been pre-decided, the targeted sum can be achieved.

VALUE AVERAGING AND RUPEE AVERAGING

In most of the research conducted worldwide, value averaging has always fared better than investments through SIP, though marginally.

Benchmark Mutual Fund, that has an index fund wherein an investor may opt for the value averaging technique, has done research comparing returns from the two investing methods. For SIP, they studied what a fixed amount of Rs 2,000 would yield if invested in the S&P CNX 500 index. For value averaging, the mutual fund started with Rs 2,000 and kept the upper limit of investment to Rs 20,000. The portfolio growth was targeted at 15 per cent each year over 15 years. The result: the latter delivered 2.87 per cent more returns each year.

WHERE SIP SCORES

The main goal of value averaging is to acquire more shares when prices are falling and fewer shares when prices are rising. This happens in rupee cost averaging as well, but the effect is less pronounced, although both will closely resemble market returns over the same period.

The biggest potential pitfall with value averaging is that as an investor's asset base grows, the ability to fund shortfalls can become too large to keep up with. Many investors may not have the potential for funding this shortfall as they save for multiple goals at the same time.

One way around this problem is to allocate a portion of money in a liquid fund and rotate the money when markets fall. But this can have tax implications. Also, when you invest as per market conditions, experts believe the investor is indirectly timing the market.

SIP, on the other hand, is neutral to timing the market. The investor is aware of the monthly outgo and does not need to keep a track of market movements.

CONCLUSION

Value averaging, if done by the investor himself, has some glitches. This method is for investors who can manage unpredictable cash flows. This is because the amount of investment varies with the market condition.

Another financial expert says there is more risk in this mode of investing. "When you put in more money on market corrections, you are exposed more to equities, making this riskier," he said. It will do much better in a rising market, as the portfolio will have few problems in achieving the targeted growth.

To actually benefit from the method, a person will need to regularly invest over a long tenure, of at least eight-nine years. “Here, the person will complete an entire bull-and-bear cycle, to average the value of his purchase,” said an investment adviser.

Investment in Indian Companies by FIIs/NRIs/PIOs

List of companies

Companies in which NRIs/PIOs investment is allowed up to 24% of their Paid-up Capital

1	Alembic Chemical Works Co. Ltd
2	Amar Investments Ltd, Calcutta.
3	Anglo-India Jute Mills Co.Ltd
4	Arvind Mills, Ahmedabad
5	Ashima Syntex Ltd, Ahmedabad
6	Ashoka Viniyoga Ltd
7	Bharat Nidhi Ltd
8	BLB Shares & Financial Services Ltd
9	BPL Ltd
10	Burr Brown (India) Ltd
11	Camac Commercial Company Ltd
12	Ceenik Exports (India) Ltd
13	Cifco Finance Ltd, Mumbai
14	Classic Financial Services & Enterprises Ltd, Calcutta
15	CPPL Ltd,(Reliance Ind. Infrastructure Ltd), Mumbai
16	CRISIL
17	DCM Shriram Consolidated Ltd
18	Dharani Sugars & Chemicals Ltd.
19	Dolphin Offshore Enterprises (I) Ltd
20	Essar Oil Ltd
21	Essar Shipping Ltd, B'lore
22	Essar Steel Ltd
23	Eveready Industries India Ltd
24	Fabworth (I) Ltd
25	Ferro Alloys Corporation Ltd, Tumsar
26	Global Tele Systems Ltd
27	Grasim Industries Ltd
28	Hamco Mining & Smelting Ltd
29	Hindustan Development Corp Ltd, Calcutta
30	Hindusthan Nitroproducts (Gujrat) Ltd
31	Hindustan Transmission Products Ltd, Mumbai
32	HMG Industries Ltd, Mumbai
33	India Securities Ltd
34	IVP Ltd.
35	Jagatjit Industries Ltd, New Delhi
36	Jai Parabolic Springs Ltd, New Delhi
37	Jaysynth Dyechem Ltd
38	Jindal Strips Ltd
39	Jindal Iron & Steel Co.Ltd
40	JJ Spectrum Silk Ltd
41	Kartjikeya Paper & Boards Ltd
42	Lakhani India Ltd
43	Matsushita Television And Audio India Ltd
44	M.P.Agro Fertilisers Ltd, Bhopal
45	Macleod Russel (I) Ltd,
46	Mazda Enterprises Ltd,Mumbai
47	Media Video Ltd
48	Multimetals Ltd, Mumbai
49	National Steel Industries Ltd
50	Nicholas Laboratories India Ltd, Mumbai
51	O.P. Electronics Ltd, Mumbai
52	Oriental Housing Development Finance Corp Ltd
53	Padmini Technologies Ltd.
54	Panacea Biotech Ltd.
55	Pearl Polymers Ltd, New Delhi
56	Piramal Healthcare Ltd
57	PNB Finance & Industries Ltd
58	Rajath Leasing & Finance Ltd
59	Rama Petrochemicals Ltd.
60	Rama Phosphates Ltd.
61	Reliance Industries Ltd, Mumbai
62	Rishra Investment Ltd, Calcutta
63	Rossell Industries Ltd, Calcutta
64	Sahu Properties Ltd
65	Sanghvi Movers Ltd
66	Saurashtra Paper & Board Mills Ltd
67	Saw Pipes Ltd
68	Sayaji Hotel Ltd
69	Sharyans Resources Ltd
70	Shrenuj & Company Ltd
71	Shibir India Ltd, Calcutta
72	Shriram Industries Enterprises Ltd,N.Delhi
73	Silverline Industries Ltd
74	Sonata Software Ltd
75	SRF Ltd
76	Sterling Lease Finance Ltd, Mumbai
77	Svam Software Ltd
78	Synthetics and Chemicals Ltd,Mumbai
79	The Champdany Industries Ltd, Calcutta
80	The Dharamsi Morarji Chemical Company Ltd
81	The Investment Trust of India Ltd
82	The Morarjee Goculdas Spinning & Weaving Company Ltd,Mumbai
83	Tolani Bulk Carrier Ltd
84	Uniworth International Ltd
85	Valecha Engineering Ltd
86	VisualSoft Technologies Ltd
87	Weltermann International Ltd
88	Woolworth (India) Ltd
89	Zora Pharma Ltd

Companies in which NRIs/PIOs investment is allowed up to 17% of their Paid-up Capital

1	Garware Shipping Corporation Ltd

Companies where NRI investment has reached 8% and further purchases are allowed only with prior approval RBI

1.	Astra IDL Ltd.
2.	M/s. Codura Exports Ltd.
3.	IDL Industries Ltd.
4.	Nexus Software Ltd.
5.	Dalmia Cement (Bharat) Ltd.

Companies where NRI investment has already reached 10% and no further purchases can be allowed

1.	DSQ Biotech Ltd
2.	Global Trust Bank Ltd.
3.	Madras Aluminium Co. Ltd
4.	SPL Ltd
5.	Seirra Optima Ltd
6.	The Baroda Rayon Corp
7.	Tai Industries Ltd.

Companies where NRI investment has already reached 22% and no further purchases can be allowed

None

Companies in which FII Investment is allowed upto 30% of their paid up capital

1.	Aptech Ltd
2.	Asian Paints (India) Ltd
3.	Capital Trust Ltd
4.	Container Corporation of India
5.	Ferro Alloys Corporation Ltd
6.	Garware Polyester Ltd
7.	GIVO Ltd (formerly KB&T Ltd)
8.	Gujarat Ambuja Cements Ltd
9.	Infotech Enterprises Ltd.
10.	Mastek Ltd
11.	Orchid Chemicals and Pharmaceuticals Ltd
12.	Pentasoft Technologies Ltd (Pentafour Communications Ltd)
13.	Polyplex Corporation Ltd
14.	Ranbaxy Laboratories Ltd
15.	Software Solutions Integrated Ltd
16.	Sonata Software Ltd
17.	The Credit Rating Information Services of India Ltd.
18.	The Paper Products Ltd
19.	Vikas WSP Ltd

Companies in which FII Investment is allowed upto 40% of their paid up capital

1.	Balaji Telefilms Ltd.
2.	M/s. Burr Brown (India) Ltd.
3.	M/s. Elbee Services Ltd.
4.	Hero Honda Motors Ltd.
5.	Jyoti Structures Ltd
6.	Maars Software International Ltd.
7.	Padmini Technologies Ltd
8.	Pentamedia Graphics Ltd.
9.	Thiru Arooran Sugars Ltd.
10.	UTV Software Ltd.
11.	VisualSoft Technologies Ltd
12.	M/s. Silverline Technologies Ltd.
13.	Ways India Ltd
14.	SSI Ltd

Companies in which FII Investment is allowed upto 49% of their paid up capital

1.	Blue Dart Express Ltd
2.	CRISIL
3.	HDFC Bank Ltd
4.	Hindustan Lever Ltd
5.	Himachal Futuristic Communications Ltd
6.	Infosys Technologies Ltd.
7.	NIIT Ltd.
8.	Dr. Reddy's Laboratories
9.	Panacea Biotec Ltd
10.	Reliance Industries Ltd.
11.	Reliance Petroleum Ltd.
12.	Sofia Software Ltd
13.	Sun Pharmaceutical Industries Ltd
14.	United Breweries Ltd.
15.	United Breweries (Holdings) Ltd.
16.	Zee Telefilms Ltd.

Companies in which NRI/FII Investment is allowed upto 49% of their paid up capital

1.	ICICI Bank Ltd.

Companies in which FII Investment is allowed upto sectoral cap/statutory ceiling of their paid up capital

1.	GTL Ltd. - (74%)
2.	Housing Development Finance Corporation Ltd. - (74%)
3.	Infosys Technologies Ltd. - (100%)
4.	Pentamedia Graphics Ltd. - (100%)
5.	Pentasoft Technologies Ltd. - (100%)
6.	Mascon Global Ltd. - (100%)
7.	Punjab Tractors Ltd. - (64%)
8.	Satyam Computer Services Ltd - (60%)

Companies where 22% FII investment limit has been reached and further purchases are allowed with prior approval of RBI

1.	ACC Ltd.
2.	Digital GlobalSoft Ltd.

Companies where 28% FII investment limit has reached and further purchases are allowed with prior approval of RBI

None

Companies where 38% FII investment limit has reached and further purchases are allowed with prior approval of RBI

None

Companies in which the Caution limit (47%) in respect of maximum permissible foreign holding including NRI/PIO/FII Investment as stipulated by Government has been reached

None

Companies where 49% limit has been reached and no further purchases will be allowed

None

Public Sector banks including SBI in which 18% limit has been reached.

None

Public Sector banks including SBI in which 20% limit has been reached.

1.	State Bank of India

Companies falling under 24%

None

Companies falling under 30%

None

Companies in which the Ban limit in respect of maximum permissible foreign holding including GDR/ADR/FDI/NRI/PIO/FII Investment as stipulated by Government has been reached

1.	ICICI Ltd.

Companies in which the Caution limit (47%) in respect of maximum permissible foreign holding including GDR/ADR/FDI/NRI/PIO/FII Investments as stipulated by Government has reached

	None

---

	Companies in which no purchases are allowed
	Companies in which investments may be made with prior approval of the RBI Source : http://www.capitalmarket.com/

The fund chasers

Ratan Tata

Till a month ago, no punter or investor worth his salt would have dreamed of buying shares of the second largest real estate player in the market, Unitech, which also has the dubious distinction of being one of the most leveraged companies in the sector.

Even as analysts were busy writing the company’s obituary, five large foreign institutions picked up nearly 15 per cent in Unitech for $325 million through a Qualified Institutional Placement (QIP) in mid-April.

QIP is a process by which a company sells securities other than warrants to large institutions. These securities are issued to qualified institutional buyers on a discretionary basis.

Kumar Mangalam Birla

The Unitech QIP has become a landmark of sorts as it clearly indicates that there is still global demand for Indian paper—be it debt or equity—despite risk aversion.

Taking a cue from Unitech and Tata Capital, which raised Rs 1,500 crore through a non-convertible debenture issue in February, corporate India has lined up plans to raise about $6 billion over the next two months.

Says Sunil Ladha, senior vice-president, capital markets, at ICICI Securities: “While this is a positive trend, a lot depends on its sustainability. If it continues for two quarters then it means there is buoyancy in the market and that eventually initial public offers (IPOs) too will come back.”

Ratan Tata, Tata Motors Purpose: To part-finance the Jaguar Land Rover acquisition Mode: Through non-convertible debentures with a full bank guarantee from SBI Rs 3,800 crore Anand Mahindra, Tech Mahindra Purpose: To expand the Satyam acquisition Mode: Allotment of nonconvertible debentures Rs 600 crore Kumar Mangalam Birla, Aditya Birla Nuvo Purpose: To finance financial services business and improve the debt-equity ratio Mode: Issuance of equity in domestic or international markets Rs 1,000 -1,500 crore Sanjay Chandra, Unitech Purpose: To retire a part of its Rs 8,900-crore debt Mode: Qualified institutional placement of shares, which was oversubscribed Rs 1,625 crore G. Mallikarjun Rao, GMR Purpose: For capital expenditure Mode: Private placement or QIP route in domestic or international markets Rs 5,000 crore Kishore Biyani, Future Group Purpose: To improve cash flows and capital expenditure Mode: Raised Rs 336 crore by allotting equity and warrants. Rest to be raised via stake sales. Rs 1,500 crore Shishir Kumar Bajaj, Bajaj Hindusthan Purpose: To reduce debt on its balance sheet Mode: To issue securities in one or more international markets over multiple tranches Rs 1,500 crore

The India fundamentals story, which got derailed last year due to a liquidity crisis, may get revived if the fund-raising plans of companies materialise. According to a Credit Suisse report, if Indian companies succeed in raising $10-15 billion over the next few months, corporate fundamentals could push the market substantially higher by 2010.

In the last one year, Indian companies have found it rather difficult to raise foreign capital due to the global financial crisis. In the last one month, though, the tide has turned slightly with positive economic data flowing from developed economies. Within weeks of five FIIs picking up a stake in Unitech, even the secondary market has rebounded with foreign inflows touching $2.3 billion in fiscal 2009. The first 10 days of May alone have seen inflows of $1 billion.

Despite the surge in the secondary market, few companies across sectors are looking to tap capital markets. Given that most valuations are still much lower than peak levels, promoters are preferring to raise debt rather than dilute their stakes at these levels.

Companies that are heavily leveraged, however, are left with no option but to dilute equity at these levels. Those who are choosing to do this are mostly from sectors that are finding it hard to raise debt.

Explains Anshul Krishnan, head of India Financing Group, leading the capital markets business at Goldman Sachs India: “Most companies in India are still family-owned and equity dilution remains a key consideration for promoters.

Equity dilution is, therefore, happening sooner in those sectors where liquidity is tighter or near-term needs are substantial, like real estate and infrastructure.” So raising equity capital in this environment would be seeking desperate capital.

The India story got a leg-up between 2005 and 2008 due to the huge capital expenditure plans that companies lined up for capacity expansion.

But this time around, Indian companies are seeking capital primarily to clean up their balance sheets.

Last year, when the markets tanked in February, several companies who had raised debt and were ready to tap the capital market, were caught by surprise.

Anand Mahindra

Such companies have been stuck with high levels of debt as they have not been able to raise equity capital. Says Sivasubramanian K.N., senior portfolio manager (Equity) at Franklin Templeton: “A significant portion of re-crore on March 31, 2008, to Rs 10,907 crore by December 2008. With the QIP dilution, its debt-equity ratio will fall to 1.4 from a high of 2.4 in December.

Krishnan, however, has a warning for those looking to raise equity capital: “Given that markets remain volatile, windows of opportunity are coming and going quickly, so companies will have to be prepared with relevant permissions or the conditioning to act whenever opportunities arise. While India is no doubt benefiting on a relative basis now, there is still mixed evidence on the underlying global economic fundamentals and to, therefore, suggest that this is a secular recovery trend might be premature.”

G. Mallikarjun Rao

There are some exceptions to this rule as well. Aditya Birla Nuvo, a company that has under its umbrella the carbon black business, viscose and sunrise business segments like apparel and financial services, raised a debt of Rs 1,500 crore earlier this year and is now preparing to raise equity capital for its expansion plans.

While the financial services sector may not have shown much promise, mutual fund and insurance businesses of the Aditya Birla Group have beaten the industry’s growth rates. Says Sushil Kumar, chief financial officer of Aditya Birla Nuvo: “Even in the tough environment of last financial year our life insurance and asset management businesses delivered substantially higher growth compared to the industry and gained a handsome market share.”

So what does this mean for the economy and capital markets? While there’s no doubt that capital flows into viable projects are positive for the economy, this trend will also help in arresting the current moderation being witnessed in investment growth.

This, along with steady growth in consumption, places the Indian economy in an enviable position. Given that this is just the beginning of a turnaround in the credit crisis, not much should be read into this trend unless it continues for at least two to three quarters, maintain the pundits.

How to pick Stocks for Investment - Part III

In this mini series on how one should pick stocks for investment, I had previously provided some general guidelines in the first part, followed by a discussion of the top-down method of stock selection in the second part.

The bottom-up method of selecting stocks for investment is by far the most time consuming and difficult, particularly for people who don't like to play around with numbers.

Why is the bottom-up method of stock picking difficult? Because you have to sift through thousands of listed stocks to narrow down to the hundred odd companies that meet the basic criteria of being truly investment worthy.

After doing that, you will need to check the fundamentals of each and every one of those short-listed companies to separate the wheat from the chaff. Now you know why brokerages and financial institutions maintain expensive research departments!

One way to cut short the time and effort is to combine the top-down method with the bottom-up method. In other words, first select the handful of sectors that you have some knowledge about. Then limit your stock picking to only those few sectors. That would be by far the safest option for picking stocks for your core portfolio.

There can be no better guide for selecting good stocks than the biggest 'guru' of them all - Benjamin Graham. I learned all about stock picking from his book, 'The Intelligent Investor'. Till date, I use the guidelines suggested by him - with suitable modifications for the Indian environment.

'No risk - no gain' is an old saying. The bottom-up method is the only one for choosing the smaller and somewhat riskier bets for your 'mad money' portfolio. Here are Graham's guidelines for stock picking for the conservative investor, suitably modified:-

1. Adequate size. Market capitalisation, i.e. current share price multiplied by the total number of shares issued and subscribed, should be at least Rs 100 Crores.

2. Strong Financial condition. Current assets should be twice current liabilities, and long-term debt should not exceed working capital.

3. Earnings Stability. Positive earnings per share (EPS) for each of the past 5 (preferably 10) years.

4. Earnings Growth. At least 50% cumulative growth in EPS for the past 10 (preferably 5) years.

5. Dividend record. Consistent dividend payment for the past 5 (preferably 10) years.

6. Moderate P/E ratio. Current share price divided by the average EPS for the past 3 years should not exceed 15.

7. Moderate P/BV ratio. Current share price divided by the book value per share should not exceed 1.5.

Graham also suggested that the result of multiplying the P/E ratio by the P/BV ratio should not exceed 22.5 - for cases where either the P/E ratio is higher than 15 and the P/BV ratio is lower than 1.5, or, the P/E ratio is lower than 15 and the P/BV ratio is higher than 1.5.

So there you have it. This is no secret recipe for untold riches. Stocks picked using these guidelines may not perform as expected. Stocks which do not meet many of the above criteria can fly through the roof. That is the nature of the beast.

During bear markets, you may find most of the listed stocks meeting the above criteria. In bull markets, only tiny caps may meet the guidelines. The in-between stage - like now - is a great time to start your research work for identifying strong stocks for the next up move of the bull run. It will happen after the inevitable correction to the 3 months long rally.

A good starting point is to buy a copy of Capital Market magazine, or visit www.moneycontrol.com for checking out the database of companies, and apply criteria numbered 1, 6 and 7 above to prepare a preliminary short-list. Check whether the short-listed companies have positive cash-flows from operations for at least 4 of the last 5 years.

The ones that make the grade can then be run through the guidelines mentioned in 2, 3, 4 and 5 above. You will finally have a 'buy list' that you can start tracking.

Oh! I almost forgot to mention the corollary to the earlier saying. It is 'no pain - no gain'. For readers who do choose to suffer the pain, there will be a guaranteed gain. I will technically analyse your choice of the 5 top picks from your list and give you approximate buy and sell targets. Absolutely FoC (free of charge).

Now, that can be a ticket to decent money-making, if not untold riches!