Keep Low Expectations

Will 2010 be one of those rare periods when satisfactory returns could be expected? History is telling us that we shouldn’t count on it :
In January of 2009, when I wrote this column, I presented the readers of this magazine with the following table (Multiple effect). The table shows what happened in the past to the average returns over a three-year holding period for investors who invested in Indian equities (Nifty) at various levels of the market’s P/E (price/earnings) multiples. As one would expect the higher was the market’s P/E multiple at the time of investment, the lower were the subsequent returns.

As I write this, 2009 is about to end. Let’s see if the table’s conclusions were confirmed or contradicted by the market in 2009. When I wrote the January 2009 column, Nifty’s P/E multiple was 13.49 which is the cheapest range in the table. The table implied that if history is a good guide, then Indian markets should do well. In 2009 till date, Nifty has risen by 68 per cent, so one can say that history did prove to be a useful guide after all.

At present Nifty’s P/E multiple is 22.21, which, as the table shows implies that we should keep our expectations low. Are there other indicators which support my view and are there indicators which could prove this conclusion wrong? The answer is yes, and yes.

Let’s first look at supporting evidence. Let’s look at Nifty’s dividend yield over time. Let’s see what returns were earned by investors over one-year and three-year periods at various levels of dividend yields.

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Multiple effect

The higher the P/E, the lower were the subsequent returns

Nifty’s P/E (x)	Three-year returns (%)
Less than 14	152.10
14 - 16	112.39
16 - 18	79.14
18 - 20	51.18
20 - 22	21.18
22 - 24	-14.98
24 - 26	-32.92
26 - 28	-36.60
28 - 30	-40.17

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The unique thing about this analysis is that I have not focused on average returns which can skew results. Rather, I have plotted all the data points on two scatter graphs.

The graph below shows how investors fared over a one-year holding period when dividend yield was below 1 per cent, implying expensive market levels, between 1 per cent and 2 per cent, implying moderate market levels, and above 2 per cent, implying cheap market levels. All the data points since NSE started publishing data have been plotted on the chart.

As the graph shows, as dividend yield rose, so did one-year forward returns. High returns on equities were earned when Nifty’s dividend yield was more than 1.5 per cent.

High returns on equities were earned when Nifty’s dividend yield was more than 1.5 per cent.2009 was one such year

2009 was one such year. At the beginning of 2009, Nifty’s dividend yield was 1.9 per cent. As 2009 ends, Nifty’s dividend yield stands at 0.99 per cent.

So if history is a good guide, how likely is it that 2010 will be a very good year for equities? To answer this question, take a look at the left side of the scatter graph — the area covering all data points on the left side of the red line when dividend yield was less than 1 per cent. Notice that of all the days on which Nifty’s dividend yield was below 1 per cent, for most of such days the returns for the next one year were negative. There were some days when returns were positive but those were rare. Moreover, even on those rare occasions, returns never exceeded 30 per cent.

Will 2010 be one of those rare periods when satisfactory returns could be expected? I can’t say. What I can say is that history is telling us that we shouldn’t count on it.

The graph, which covers three-year forward returns, tells the same story.

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Yield that matters

On the days when Nifty’s dividend yield was below 1 per cent, for most such days the returns for the next one year and three years were negative. Nifty’s current dividend yield stands at 0.99 per cent

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When Nifty’s dividend yield falls below 1 per cent, which is the case at present, Nifty has rarely done well over the next one year and three years.

Now, let’s look at some disconfirming evidence. Recent media reports claimed that the advance tax payments by Indian listed companies for financial year 2010 has risen by more than 30 per cent over the payments made last year. If this is correct, then it indicates that Indian companies expect higher earnings. Higher earnings imply higher dividends. If earnings are indeed about to rise, accompanied with a rise in dividends, then Nifty’s dividend yield at today’s market level would rise above 1 per cent.

The higher the yield rises, the more attractive will investing in Nifty become but low dividend yields are associated with low returns.

This does not have to mean that you should not invest in equities. After all there are several high quality stocks which have higher dividend yields and lower price/earnings ratios than Nifty.

My own view is that India is very well placed to create enormous wealth for long-term equity investors given its growth potential, and its high return on equity (among the highest in the world). While equity prices at present may have run a bit ahead of the underlying fundamentals, investors who keep their expectations low for the near term and continue to invest intelligently in Indian equities will have more than satisfactory results a decade from now and beyond.

Happy investing for 2010!

Is The Sensex Dipping To 12K A Possibility?

Backdrop: A more than 8 per cent drop in the market over just ten trading sessions has set off concerns about a slide again

Hinges On Global Conditions

The prospects of the Sensex going back to 12,000 levels are remote. It may happen only if, internationally, the economic conditions deteriorate again and there is double-dip recession globally. Fundamentally, the domestic economy has picked up pace and this is reflected in the latest assessment of the RBI, which has pegged FY10 GDP growth at 7.5 per cent. The high investment rate should hold it in good stead and government stimulus is expected to be withdrawn only in tandem with economic growth. This growth should percolate to corporate profits, leading to higher growth in FY11 over that in FY10. Valuations based on FY11 consensus earnings are not demanding. Globally, India and China are seen as preferred investment destinations on account of strong domestic demand and relatively higher growth rates. These factors are expected to attract money into the markets over the medium term.

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Andrew Holland
CEO

Ambit Capital

No Possibility At All

I do not think the Sensex at 12k as a possibility at all. Because, firstly, I don’t see a repeat of the disastrous times of 2008. The financial authorities across the globe have restored liquidity through stimulus packages to prop up their economies. Even though central banks are thinking of withdrawing the accommodative stance, they will be mindful of the growth path, especially in the emerging markets. I am particularly confident about India, as it has reasonable GDP growth prospects of 7.5 per cent in FY11 and 8.5 per cent in FY12. This is commendable, as compared to the 3-4 per cent growth in developed economies. Secondly, I believe that in the forthcoming year we will see accelerating growth rates transfer into incremental revenues for Indian companies, thus expanding bottom lines. In the following year, we expect a 20-30 per cent upwards revision in the India earnings story that will reflect in Sensex earnings as well.

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Market Voices

The mainland authorities have launched different measures to prevent the economy from overheating and asset bubbles forming. This is a good thing as it will help the mainland’s growth to stabilise and a stable environment there is definitely beneficial to Hong Kong.

Norman Chan, Hong Kong Monetary Authority chief executive Norman Chan said in a briefing to the city’s legislative council.

I don’t see a slowdown in lending as a bad thing. It moderates risk to some degree because people don’t go overboard.

Mark Mobius, Chairman of Templeton Asset Management, who oversees about $34 billion in emerging markets funds, said in an interview at a conference in Sydney that China’s lending slowdown may benefit the domestic economy.

In the long term, we cannot have sustainable and durable economic growth without getting our fiscal house in order.

Barack Obama, US President in his introductory remarks to the White House’s fiscal 2011 budget warned that the US must tackle its mountain of debt to ensure sustainable growth.

The government and the Bank of Japan are dealing with deflation with their own tools, while sharing the same policy direction. The government should not mention specific monetary policy measures.

Naoto Kan, Japan Finance Minister said the government and the BOJ would continue to cooperate, but refrained from saying what specific steps the Bank of Japan should take

Hindustan unilever' - Running Aground?

Hindustan unilever's price war with the competition opens questions about the future :

Hindustan Unilever (HUL), once the darling of investors, has remained unrewarded in the current market rally. It is the only stock that gave negative returns during this period. The quick answer to this is, even as other stocks moved up on prospects of better economic recovery, HUL has been bogged down by the recent spate of price wars in the FMCG industry. But what would you say of HUL’s share price over the last decade? It has remained at the same level even without price wars through the entire period. Does that mean the company has lost its sheen, or is it a case of market mispricing providing an opportunity to buy a good stock at cheap price?

Price war. In December 2009, P&G Home Products introduced Tide Natural, a new version of Tide, at a price lower than HUL’s Rin. HUL reacted by taking P&G to court, arguing the name “natural” is misleading. P&G followed this by cutting the price of its Tide soap bar. HUL retaliated by offering more detergent at the same price. The war reached its peak when HUL, for the first time, brought out an ad which made a direct comparison between its brand Rin and P&G’s Tide.This kind of price war is not new in the FMCG industry, but the severity seen this time was last witnessed in 2004. Then, P&G, cut the price of its two detergent brands, Ariel and Tide, to the extent of 50 per cent. Though HUL didn’t match the price cut, it did reduce the price of its brands Surf Excel and Surf Blue in the range of 30-40 per cent. Soon, the price war that was initiated in the detergent segment spilled over to other categories. The result was both companies took severe hits on their margins.

At first, the logic behind such a game looks simple. Says Aashish Upganlawar, an FMCG analyst at the brokerage firm Sharekhan: “Companies want to increase their market share.” Though market share comes at the cost of margin, companies take it differently. Adds Upganlawar: “Once you get the customer to your brand, you can concentrate on profitability later.”

The real game. Fighting for market share is a good strategy when the market for a product is limited, but it fails to explain why HUL and P&G are fighting, when there is scope for increasing per capita consumption of FMCG products as well penetration. The reason is found in the similarities in the price wars of 2004 and 2009. P&G started the war on both occasions, in the detergents segment. So it looks like P&G is aggressive in cutting prices. But why does it do so? A comparison between HUL and P&G’s product portfolio explains it. HUL has a product portfolio that has at least one brand for each section of the society (based on economic strata). For example, in detergents, Surf Excel is for the affluent, Rin is for the aspiring (middle segment) and Wheel for the striving. P&G till recently had failed to replicate this model in India. In detergents, it has Ariel for the affluent and Tide for the aspiring, but does not have a discount product for the striving class. This time around, during rising inflation, as HUL consumers downtraded, they moved from expensive to discounted products. For example, a consumer using Rin started buying Wheel. But even as this happened, they remained with a HUL brand. So, HUL’s volume grew but realisation did not improve. Meanwhile, P&G faced a real threat. If a consumer of Tide down-trades, there are no options left in P&G’s portfolio, and the consumer switches to some HUL brand or any other brand in the market. This time, P&G tried to bridge this gap by introducing Tide Natural at a price below its brand Tide. Say analysts Amnish Aggarwal and Nikhil Kumar of Motilal Oswal Securities in a note: “P&G has launched Tide Naturals at a lower price point to prevent loss of consumers to the economy segment.” It was also priced in the range between HUL’s Rin and Wheel to attract customers who down-trade from Rin or up-trade from Wheel. This alarmed HUL and the war began.

Why did HUL go wrong? Surprisingly, HUL has underperformed the overall sector growth in terms of top line and bottom line. If we look at the last ten years, HUL lies in the bottom quartile of the FMCG index. The CAGR net sales and net profit is 8.2 per cent and 9.87 per cent. P&G, on the other hand, has grown at 20 per cent CAGR in the last seven years. Sales and net profit growth of other players such as Nestle and Godrej Consumer Products are around 13 per cent and 20 per cent, respectively. Also, over the years, HUL has lost market share in most of the product categories it has a presence in.

Some analysts consider this downward progression as natural. Says Anand Shah of Angel Broking: “HUL is in many categories, so it can’t outpace the industry. It is bound to lose market share in some of the categories. It’s just that in the last two years, the process has intensified.”

But there are larger issues at HUL that need to be mentioned. An important one is the change in management’s focus. Says Sanjay Singh of ICICI Securities: “There was a lot of focus on short-term earnings rather than long-term sustainability of the earnings. Earlier CEOs have been there for a very small period of time, so they tried to dress up the numbers while they were there.” Its profound impact is that HUL, which was earlier known for creating new market segments, seems short of innovations. Products like Lifebuoy and Close Up, which created altogether different markets, are now missing. Upganlawar seconded this view: “They haven’t been innovative enough to launch new products.” Figures from HUL’s parent company Unilever also support the fact that Unilever has not been competitive, compared to its peers like P&G, in spending on R&D that ultimately results in innovations.

What lies ahead? Though, for some time now, HUL does not seem be taking enough steps to stem the fall in its market share, the December-2009 (Q3FY10) result shows a change in HUL’s strategy. An example is the company’s efforts to maintain volume growth even if it had to match price cuts by its competitors. The positive impact is seen across almost all its brands, which gained market shares during the previous quarter. A sudden step-up in advertisement expenses to build brand value is another positive signal. It touched 14 per cent of the turnover in the previous quarter, compared to 9 per cent earlier. HUL has also re-launched many brands during this quarter to help the volume grow. The management tone has also changed. “Innovation” and “competitiveness” were used more often in Q3FY10 analyst presentations than in previous quarters. Though it is not talking about building a new market segment altogether, it does look focused on developing existing premium markets such as hair conditioners, surface cleaner and deodorants.

The most important transformation seems to be a change in the way the company rewards its executives. Says Singh: “Because you can’t keep the margin perpetually high and ultimately the growth has to come from volume growth, the focus on volume growth has increased. Earlier, the variable pay was more on bottom-line growth, but now it is a mix of market share (a direct consequence of volume growth) and bottom line.”

Your call. Although HUL’s management has indicated changes in its strategy, it is still to be seen whether it holds on to them in the coming quarters. Adds Singh: “In FMCG, even if you do something, the result may be visible six month or one year later.” So one thing is clear; the numbers from HUL might not look attractive in the next few quarters. However, you could take a call on company’s stock based on its valuation. Most of the time, its stock has traded at an earning multiple above 25, which has currently fallen to 22. Moreover, at the current price, its dividend yield is around 3, which is the highest among Sensex companies. When the price war ends, the share price could also appreciate. From the current level, the stock price does not seem to be going down much as market has already factored negative scenarios. So you can bet on HUL stock if you like steady stream of cash flows (dividends) and can wait for price appreciation.

Stock basics - Balance Sheet

It is a financial statement that sums up a company’s assets, liabilities and shareholders’ equity at a particular point in time. These three sections provide investors an idea about what the company owns and owes, and the amount invested by shareholders.

Significance

Although a balance sheet should be the starting point of a company’s analysis, it is often ignored by investors. One of the major reasons is that it is mandatory for companies to disclose earnings every quarter, but disclosing balance sheet is required only at the end of year. However, it is the balance sheet that indicates a company’s true earnings potential.

In Greater Detail

A company can acquire assets in two ways. The first is by borrowing money, which is called liability. The second is contribution from its shareholders (shareholders’ equity). So, items on a balance sheet can be presented in the form of an equation, the left of which is assets and the right is the sum of liability and shareholders’ equity. Here we look at what constitutes a company’s assets, liability and shareholders’ equity.

A Assets. Companies classify their assets under two heads.

Current Assets. These are assets that the company expects to be converted into cash in a year. An example is inventory that it expects to sell in a year and receive cash for it. Companies also sell goods or provide services on credit. The cash they expect to receive in lieu of it is also an asset, and is called ‘receivables’. A company’s short-term investments, cash and bank balance are also called current assets.

Non-current Assets. These are assets that the company intends to use for more than a year, e.g. land and machinery. Some intangible things, such as copyrights and patents, also fall under this category.

B Liability. Like assets, liability can also be short-term and long-term.

Current Liability. These are debt or liabilities due in year. For example, a company may have taken a short-term loan, or it could be liable to pay for raw materials it has purchased on credit.

Non-current Liability. These are the liabilities that will become due after a year.

C Shareholders’ Equity. It is the amount contributed by the owners of a company. Another item that gets added to equity is the company’s residual net profit (profit left after paying dividends to its shareholders).

Buoyed By Vitality

With a strong product portfolio and sound financial fundamentals, the stock is a steal at the current valuation levels :

The risk of investing in a mid-cap stock currently is that you may end up buying it expensive even if the company’s growth prospects are high. Unichem Laboratories, a 66-year-old pharma company, is in a different group. Its growth is visible, yet its stock is available cheap (if you look at it separately or compare it with other companies in the BSE Healthcare Index). Unichem mainly manufactures formulations (the final product that is consumed by patients), and a small part of its revenue comes from active pharmaceutical ingredients (API; used in manufacturing final drugs).

Business performance. Unichem is mainly active in domestic formulations and the API market, which account for over 80 per cent of its total income. In the December 2009-end quarter (Q3FY10), its domestic income grew a healthy 18.51 per cent year-on-year (y-o-y). Both formulations and API businesses contributed—formulations grew 18.6 per cent and API grew 26.3 per cent.

In the domestic market, Unichem has a large portfolio of brands and is present in around one-tenth of the 1,495 therapeutic sub-groups tracked by the pharmaceutical market research company ORG-IMS. It is the leader in 17 therapeutic groups and among the top five in 69 therapeutic sub-groups. Its brands Vizylac and Ampoxin have a market share of as high as 33.2 per cent and 43.7 per cent, respectively.

One of company’s main strengths is its high-quality manufacturing infrastructure. While other Indian pharma companies are facing regulatory hurdles in penetrating the US market, Unichem is well set to grow fast there. Most of its manufacturing units are approved by the Food and Drug Administration (FDA), US, and it should not face regulatory hurdles in selling drugs manufactured at its India-based facility. The company has a strong pipeline of ANDAs (abbreviated new drug applications; required for selling generic drugs in the US) and has also got a few approvals. These indicate that the company’s international business is set to grow fast on the current low base.

Financial performance. Unichem has performed consistently over the years. Sales and net profit have grown at a compounded rate of 13.52 per cent and 28.60 per cent, respectively, in the last 10 years. Higher growth in profit than sales is a result of continuous improvement in its operational efficiency. The return on capital employed (RoCE) has risen from 15.77 per cent in March 2000 to 30.10 per cent at the end of previous quarter. The balance sheet is clean with a very low level of debt. Even then, the company has generated a high return on shareholders’ capital, with a return on equity of 22.40 per cent at the end of the previous quarter.

Investment rationale. Until recently, Unichem has been focussing on its domestic business, where it should continue to grow at a healthy pace given its strong brands, wide distribution and rapport with doctors. The next leg of growth will be from its international operations, which have a small base currently. Unichem already has regulatory approvals in the US for some of its brands. There are more in the pipeline. In the UK, it already has a presence through its 100-per cent subsidiary Niche Generics. The company assists in the sale and distribution of generic products in UK market, and it is expected to break even soon. This will boost Unichem’s bottom line in the future.

Given the visibility on Unichem’s growth, its stock is attractively priced even though its value has doubled in the last one year. At Rs 437, it is trading 12 times its annualised earnings per share for FY2010 as compared with the industry’s PE of 26.64.

Big Risk In Writing Calls

You Do earn a premium while writing calls, but then it’s not for the faint-hearted:

If you are a retail investor, you should tread with caution in writing call options. Unlike buying a call option, where your loss is restricted to the premium amount, writing calls carry unlimited risk. Writing or selling a call option is a stand you take when you have a bearish view on the market. In options-speak, writing or selling calls are the same. Retail investors could opt for covered calls, that is write a call option only when one holds a reasonable amount of physical shares. Unlike buying a call option where you pay a premium, in writing call options, the writer of the option gets to earn the premium. Here’s an example of how it works.

The basics of call writing

Assume the Nifty is trading at 5,000 and you enter into a contract to sell a Nifty call option at 5,000 (strike price). This would imply that you are taking an obligation to sell Nifty at 5,000 on a future date (expiry date) irrespective of the price prevailing at the expiry date of the contract. Since you are bearing the risk on the call, you demand a premium of Rs 100 from the option buyer. The call option buyer pays you this premium. But the loss of the call option buyer is limited to the premium he pays, whereas your loss is unlimited.

How you lose big

If on the date of contract expiry, Nifty is trading at a level below 5,000, say, 4,500, the buyer of the call option will ignore his right to buy at 5,000 since he is getting the Nifty at a cheaper rate from the market. But if Nifty is trading at a level above 5,000, say 5500, the buyer of the call option will exercise his right to buy Nifty from you at 5,000. So, as an option writer or seller, you will have to bear the losses. In this example, if the Nifty closes at 5,500, then the loss would be Rs 400, after factoring in the premium you received of Rs 100. (See Writing On The Wall). The higher the Nifty goes in this case, the higher will be your losses. The leverage factor magnifies the losses. Being an option seller exposes you to a possibility of sizeable losses, which could exceed the premium that you have charged the option buyer, which in this example is Rs 100. The chart shows that if Nifty settles at any level below 5,100 on the contract expiry date, you would not incur losses, which is after taking into consideration the premium you have earned.

Institutions love it

Options are more commonly written by institutional investors. One of the reasons is that institutional investors buy and sell stocks in relatively high quantities.

When they have determined a level at which they plan to off-load a sizeable quantity of a particular company’s stock, it would lead to a good amount of selling pressure as the quantity of sale of shares could be high. As a result, there is a fair chance that the share price would witness a resistance and find it difficult to overcome that level on the upside in the near term. To make the best of such opportunity, institutional investors would write a call option at that level.

Should you sell futures or write call options?

Both these stands are a bet on the market declining. When you go short on futures, you would benefit if the stock price declines. More the market declines, the more you earn. But when you have written a call you benefit even if the stock price stays where it is as you earn the premium. However your earning is restricted to the premium and does not rise in relation to the magnitude of fall in the stock price.

Stick To Stronghold

Never be in a hurry to collect quick profits, holding on to stocks might help:

Last week, a reader commented to me about his own investment behaviour—“While I often find good stocks to invest in, when I look back, I find that I usually exit them too early. How do I prevent this?”

In my reply, I told him this behaviour is not uncommon, and usually happens under one of two circumstances:

1. Many investors exit a share when it dips sharply downwards, whether due to a disturbance across equity markets, or due to a disruption in the company’s profits, as reported in its quarterly numbers. The former problem is easily dealt with—market sell-offs give one an opportunity to buy into companies one favours. When it is the latter, one needs to assess whether it is an early warning of some deep problem in the company’s business, or a one-off problem. Normally, it is the one-off incidents that cause prices to dip or spike sharply. Deeper problems tend to surface slowly, and give the investor several quarters to decide whether he wants to remain in the share or get out. In other words, sharp drops in the price of a share are a time to re-look at the company’s performance, not necessarily a time to react by getting out.

2. Equally common, an investor says—“I bought this share for Rs x, it has now reached my target of Rs. 2x (or whatever target he has). Let me take my profit and exit”.

This is bad! Not because I have anything against price targets, but because such targets need to be related to the performance of a company, and not to the price at which the share was purchased. The moment one starts thinking this way, one’s price target for the company should change at least every quarter, when the company presents its report card. If the company’s performance is likely to be affected by any external changes, such as commodity prices, interest rates, or governmental regulation, then changes in these must cause one to reframe the price target, too.

I try to slot every share I am following into one of these three categories—‘BUY’, ‘SELL’, and ‘HOLD’. Sharp price changes and quarterly results are compulsory reasons to examine every share, and check whether it needs a category change.

If a share suddenly shifts into ‘SELL’ category, because the price has risen sharply, or circumstances have changed, that’s the easiest thing to deal with!

One-off incidents cause prices to dip or spike sharply. Deeper problems tend to surface gradually

If a share I own moves into ‘BUY’ zone, say because its price has dropped, that’s actually a wonderful place to be in—one has been holding the share a while; hopefully one understands the business a bit better than when one first bought it; and now it is available for less. It’s like a discount on your favourite flavour of ice-cream. Time to order two scoops, rather than one. Or, worse, start thinking, “must be something wrong with strawberry ice-cream, if they’re discounting it. Better stick to that boring vanilla.”

And shares in the ‘HOLD’ band? I love shares which coast in this band for years—even if my broker doesn’t. If I bought them at a good price, and the company’s earnings keep rising steadily, their price rises too, without sending price-earnings ratios into the ‘SELL’ zone. As long as the bulk of one’s shares are in the ‘HOLD’ zone, one’s portfolio can be very responsive to new opportunities: since one does not look at such shares as screaming ‘BUY’s, one is not too unhappy about exiting such shares to invest in new opportunities one sights, when an attractive, fresh opportunity presents itself.

In the absence of such events, don’t be in a hurry to take your profits. “HOLD”, if I might coin a cheesy phrase, “IS GOLD”.

4 common strategies to build MF portfolio

MOST mutual fund investors end up investing in three-four schemes with the investment split between systematic investment plans (SIPs) and lump sum. This means that while one has a portfolio of mutual funds -there is a hardly any strategy to manage that fund portfolio. Financial Chronicle talks about how to manage a mutual fund portfolio by walking through the most common strategies and discusses with experts each strategy's pros and cons.

The first and most commonly used mutual fund strategy is one where the investor basically has no plan or structure: Blind strategy. This happens when the investment amount and funds, as well as goals, are not set. The investor blindly puts in money into three-four funds and expects big re turns. If you already have a plan, then adding money to the portfolio is really easy. But you see easy. But you see in this strategy, nothing is fixed, which is the reason why this strategy will have the least success.

Most investors start off their mutual fund investment experience with this strategy and get disillusioned.

The second most commonly used strategy is market timing, a rare ability to get into and out of sectors at the `right' time. Investors believe this fund is the `hot' fund right now. Even experts find it hard to time the market leave alone retail investors to be able to successfully do this.

Retail investors often lack the resources, time and expertise required to analyse the movements of the stock market. The `risks' in timing the market out weigh the likely `gains'.

Once people TMENT Once people burn their hands with the first two strategies, they adopt the third most common ploy: Buy and hold. Make no mistake about it, but this strategy has solid statistics to back it and it will make money most of the time.

This strategy is most popular because it is easy to employ and taxes and exit loads are minimum.

However, the biggest problem is the selection/choice of funds. How do you choose the fund that is re ally going to profit if you hold it for a long time? Selecting the right fund is an imperative to succeed. The fourth common mutual fund portfolio strategy looks at performance weighting. Here, you re-examine your portfolio mix from time to time and fine tune them by selling some of the funds that did the best to buy some of the funds that did the worst.

Let's say you divided your investment sum in four parts with each fund having 25 per cent allocation.

After a year, performance may prompt tweaking the allocation to two funds having 70 per cent, while the other two have 30 per cent.

The problem is people do it too simplistically. One-year performances could be misleading if just three months have made all the difference. The worst-performing funds may be the ones that carry more risks and now you are putting more money into it.

Economic recovery, inflation may hit gold prices

The behaviour of various asset classes over the past six months, suggests that the markets are not sure about the global economic recovery. While the domestic equity market has remained somewhat trapped in a range, gold prices have showed a significant swing as it posted an all-time high in December 2009.

Gold’s subsequent performance in 2010 indicates a further boost to its status as a store of value. The physical (or consumption demand) for the yellow metal slumped to multi-decade lows while the investment or speculative demand has increased. This makes for an interesting recipe while assessing the future outlook of gold price.

The continued accumulation of gold by exchangetraded funds (ETFs) and bullion traders/investors, suggests that the price movement from here on will largely be driven by investors’ sentiment, which in turn, depends on the pace of the global economic recovery and inflation trajectory in key economies. Any sign of weakness in the global economy or the specter of run-away inflation could support a rally in gold and conversely, a better-than-expected economic growth or moderation in inflation will lead to a sell-off in the yellow metal.

SAFE HAVEN

Unlike other commodities, gold is regarded as a monetary asset since the precious metal’s physical consumption is restricted in jewellery making and to an extent some industrial applications. This uniqueness was more than apparent in the past two years when gold withstood the debacle in the equity markets and posted a y-o-y gain of 25% in 2008.

Even if the usual negative correlation that the yellow metal shares with the equities has been put to test in this duration, the deviations were caused by margin requirement in the market plunge of 2008 and excess liquidity in 2009. Since the last quarter of 2009, there has been more than one development highlighting gold’s status of an alternative currency.

In October 2009, CME (Chicago Mercantile Exchange) announced that the exchange will accept gold as collateral for trading. In the same month, the commodity made its intermediate high of $1098 per ounce when the Reserve Bank of India (RBI) bought 200 metric tonne of gold from IMF (International Monetary Fund). More recently in 2010 following the Greece debt debacle, the gold prices not only surged by 5% but also showed a divergence from the decline in Euro, a currency with which it generally maintains a positive correlation.

FUNDAMENTAL SHIFT

Even fundamentally gold demonstrated a striking new demand supply equation in 2009. The first dimension of this equation was a decline in the jewellery demand to its lowest level in nearly two decades. As can be seen from the chart, the jewellery demand, which on an average contributed nearly 70% of total consumption during 2002-2008, accounted for just half of the total gold demand in 2009.


Secondly, the scrap supply reached an all-time high in 2009 growing by 27% yo-y for a second consecutive year. The overall supply also got a boost from a rise in mine production for the first time since 2005. The mine supply was up 6% from 2008 in turn contributing to an 11% growth in total supply during the period.

Collectively, these factors indicate the weak fundamentals for gold prices as a commodity. On the other hand, certain aspects of the demand supply equation reiterate the higher weight gained by gold as a monetary asset. The retail investment demand in the form of bars, coins and other such products dropped by a fifth from that that in 2008.

However, it still remained 35% higher than its average in the preceding five years and on quarterly basis showed rebounded in Q2-Q4 from a substantial drop in the first quarter of 2009. ETFs (exchange-traded funds or products), yet another part of the investment or speculative demand, almost doubled in 2009 to its highest since their inception in 2003.

The last but probably the most outstanding factor that highlights the increasing role of gold as a monetary asset is the plunge in sales by the official sector, central banks and monetary authorities, for a second consecutive year. Furthermore, on a quarterly basis, the official sector turned net buyer during the past three quarters of 2009.

Besides the much talked about buying from RBI, central banks of China and Sri Lanka, countries like Russia, Philippines and Belarus have added a substantial chunk of gold in their reserves in the past two years. While India and China make into top 10 official holders of gold in absolute terms, when compared to the US and many European countries gold still constitute less than 10% of their total reserves (1.6% and 6.9%), respectively.

ECONOMIC RECOVERY VS INFLATION

Given the backdrop of the lower physical demand and visible recovery in economic conditions; inflation and persistence of the investor demand could act as catalyst and give a further push to gold prices. It is observed that typically gold outperforms other asst classes in the event of extended recession.

In the past three out of six recessions since 1971, gold prices maintained a positive momentum. However, in the four instances prices also experienced a pressure in its initial stages of the economic recovery. However, this time around that does not seem to be the case given that since March 2009, which is believed the beginning of the economic recovery, gold prices have gained close to 20%. The reason behind this gain could be the fears of inflation, which is likely to follow the massive liquidity the global monetary systems have experienced since 2008.

INDIAN PRICES: CATCH 22?

Following a three-fold increase in prices in the past six years, the consumption demand from India, one of the biggest contributors to the total jewellery demand, has declined by nearly 30%. As can be seen from the chart, the average quarterly consumption demand from India dropped to 120 tonne from an average of 175 tonne during 2004-2009.

In line with this decline, India’s average monthly imports of gold experienced a 35% fall to 28.30 tonne in 2009 from an average of 43.30 tonne in 2008. The local prices, which are a function of the international gold prices and movement in Indian rupee, have established a higher base, particularly since March 2009. The fluctuations in the rupee exchange rate cause excessive swings in domestic gold prices.

An analysis of the fluctuation in the monthly prices of international spot gold, MCX future prices and the rupee exchange rate since 2008 substantiates this distortion. During this period of 27 months, there were 17 months when the monthly swing in rupee exchange rate was more than 1% in any direction.

Out of these 17 months, percentage change in the MCX future prices, a gauge of the domestic prices, deviated from the change in the international spot prices by an extent of the change in rupee exchange rate.

For example, at the end of March 2010, while international spot prices declined by 0.4% compared to the previous month, the decline in gold March future on MCX was 2.9%, thanks to a 2.5% appreciation of rupee (or a 2.5% decline in absolute rupee dollar exchange rate) during the month.

The correction in international gold prices generally follows a strengthening US dollar. However, a stronger dollar causes the rupee to depreciate in turn limiting the extent of price decline of the domestic gold prices.

OUTLOOK

Currently, the international prices are trading near $1140 per ounce while domestic prices are hovering around Rs 16,600 per 10 gm. To gain further momentum, it would be essential for the international and spot prices to overtake the near time highs of $1170 and Rs 17,200, respectively.

However, in case of a correction, supports for international prices are expected to come near $1100-1070 while the local prices could fall in the range of Rs 16,300-16,000. A decline below $1070, or Rs 16,000, will be essential for the correction to turn into a freefall.

Investor's Eye [April 26, 2010]

HDFC Bank

Cluster: Evergreen

Recommendation: Buy

Price target: Rs2,205

Current market price: Rs1,991

Price target revised to Rs2,205 Result highlights HDFC Bank?s Q4FY2010 performance was largely in line with our expectations. The bank?s net profit grew by 32.6% year on year (yoy) to Rs836.6 crore vs our expectation of Rs826 crore. The profit growth was mainly driven by a healthy growth in the net interest income (NII) and lower provisioning during the quarter. The NII for the quarter grew by a healthy 27% yoy to Rs2,351.4 crore. The NII growth was largely driven by an improved credit growth as well as a sequential expansion in the reported net interest margin (NIM). The sequential expansion in the NIM could be traced to a 50-basis-point sequential decline in the cost of deposits that outpaced the contraction in the yields on customer assets. Moreover, the current account and savings account (CASA) ratio improved to 52%, which also helped the bank in maintaining its margins. As expected, the non-interest income performance was weaker as the non-interest income declined by 19% yoy to Rs903.6 crore. Importantly, the fee income growth was decent at 7% yoy (considering one time items in Q4FY2009) while the foreign exchange (forex) related income grew by 18% yoy. However, this was outweighed by a treasury loss of Rs47.3 crore vs a Rs243.6-crore profit in the year-ago quarter, leading to decline in the overall non-interest income. The operating expenses growth was contained at 11.8% yoy. Consequently, the cost-to-income ratio for the quarter stood at 47.9%. Though the pre-provisioning profit was moderate at 8% yoy, the core operating profit grew by an impressive 31.3%% yoy to Rs1,741.7 crore. Importantly, the provisions during the quarter declined by 33.1% yoy to Rs439.9 crore. Of the total provisions, a major chunk was towards loan losses. Consequently, the provisioning coverage stood improved at 78.4% compared with 72.4% in the previous quarter. The asset quality of the bank improved on a sequential basis. The gross non-performing assets (GNPA) declined by 8% quarter on quarter (qoq) to Rs1,816.8 crore while the net NPAs (NNPA) declined by 28% qoq driven by the improvement in the provision cover during the quarter. In relative terms, the %GNPA declined to 1.43% from 1.98% in Q4FY2009. The restructured assets now form 0.3% of the advances book, down from 0.4% at end of Q3FY2010. In Q4FY2010, the advances grew by 27.3% yoy to Rs125,830.6 crore with the deposit growth relatively slower at 17.2% yoy to Rs167,404.4 crore. Importantly, the demand deposits grew by a strong 37.5% yoy and 8.9% qoq while the term deposits were largely flattish yoy. Consequently, the CASA ratio of the bank improved to 52%. The capital adequacy ratio (CAR) of the bank as at the end of Q4FY2010 stood comfortable at 17.4% compared with 18.3% during the previous quarter. HDFC Bank continues its streak of consistent performance. Banking on its consistent performance, visible optimisation of CBoP assets and further revival in credit demand in FY2011, we maintain our positive stance on the stock. We draw significant comfort from the bank?s healthy asset quality position. We are maintaining our earnings estimates for FY2011 and introduce our FY2012 estimates. At the current market price of Rs1,990, HDFC Bank trades at 17.9x FY2012E earnings per share (EPS), 9.8x FY2012E pre-provisioning profit (PPP) and 3.2x FY2012E price-book value. We maintain our Buy recommendation on the stock with a revised price target of Rs2,205. ICICI Bank

Cluster: Apple Green

Recommendation: Buy

Price target: Rs1,243

Current market price: Rs960

Price target revised to Rs1,243 Result highlights For Q4FY2010 ICICI Bank reported a bottom line of Rs1,005.6 crore, which includes a gain of Rs203 crore from the sale of the merchant acquisition business. Adjusting for the same the bottom line is largely in line with our estimate. The net interest income (NII) came in at Rs2,034.9 crore, down 5% year on year (yoy) and below our estimate, as the bank continued to contract its balance sheet against our expectation of a flattish trend. Meanwhile, the net interest margin (NIM) was stable at 2.6% sequentially. The non-interest income registered a growth of 13% yoy and stood at Rs1,890.8 crore, driven by a healthy fee income growth and a treasury gain of Rs196 crore (includes a gain of Rs203 crore from the sale of the merchant acquisition business). The continued declining trend in absolute terms of the operating expenses for the previous seven quarters reversed during Q4FY2010 with a sequential increase of 12%. The bulk of the increase can be traced to staff expenses, which witnessed a sequential rise of 36.5%. On asset quality front, during the quarter under review, the bank witnessed a 6% sequential increase in its gross non-performing assets (GNPA). However, the incremental gross slippages came off to Rs700 crore in Q4FY2010 from Rs750 crore in the previous quarter and approximately Rs1,200 crore run rate seen in the few quarters before that. The %GNPA stood at 5.06% (up 22 basis points quarter on quarter [qoq]) while the % net NPA (NNPA) stood at 2.12% (down 30 basis points qoq). The provisioning coverage of the bank improved significantly by 830 basis points qoq to 59.5%. ICICI Bank?s advances dipped by 17% yoy to Rs181,206 crore and the deposits contracted by 7.5% yoy to Rs202,017 crore, though on a sequential basis there was a growth of 1.1% and 2.2% in the advances and deposits respectively. Though the bank continued to operate in capital preservation mode, the bank is clearly turning to balance sheet growth (FY2011 loan growth guidance 16-20% yoy). Importantly, the current account and savings account (CASA) ratio improved sharply by 210 basis points qoq to 41.7%, driven by a strong 7.6% sequential growth in the demand deposits. The bank?s capital adequacy ratio (CAR) as on March 31, 2009 was 19.4% (as per Basel II norms), in line with that in the previous quarter. Importantly, the tier-I CAR stood high at 14.0%, one of the highest among its peers. Going forward, the bank intends to leverage its capital by focussing on balance sheet growth again. The consolidated profit of the bank for FY2010 grew by a healthy 31% Rs4,670 crore yoy, driven by improved bottom line performance for the insurance subsidiaries of the bank as well as mutual fund related business. The life insurance business of the bank turned profitable over the year while the general insurance business saw its bottom line increase five-fold over the year. At the current market price of Rs960, ICICI Bank trades at 15.8x its FY2012E earnings per share (EPS), 9.2x FY2011E pre-provisioning profit (PPP) per share and 1.8x its FY2012E standalone book value (BV) per share. We have tweaked our earnings estimates to factor in the additional information. We maintain our Buy recommendation on the stock with a revised price target of Rs1,243. Godrej Consumer Products

Cluster: Apple Green

Recommendation: Hold

Price target: Rs309

Current market price: Rs298

Downgraded to Hold Result highlights Godrej Consumer Products Ltd (GCPL)?s Q4FY2010 results are not comparable on a year-on-year (y-o-y) basis on account of consolidation of Godrej Sara Lee?s 49% stake in Q2FY2010. The bottom line growth for Q4FY2010 exceeds our estimate due to a higher-than-expected operating profit margin (OPM), however the stand-alone revenue growth, at just 2.1%, was disappointing. The consolidated net sales for the quarter went up by 48.6% year on year (yoy) to Rs509.2 crore, which is less than our estimate of Rs533.7 crore. The stand-alone (domestic) business registered a disappointing performance with the sales growing by just 2.1% yoy to Rs282.4 crore. This we believe is mainly on account of ~5% y-o-y decline in the sales of the soap segment (which contributes ~60% to the stand-alone sales). On the other hand, the international operations logged in a strong performance with the revenues growing by ~19.0% yoy, mainly on account of a robust performance of Rapidol and Kinky, which saw their revenues grow by ~60.0% yoy and ~27% yoy respectively during the quarter. Godrej Sara Lee contributed Rs147.0 crore to the consolidated revenues during the quarter. In spite of high spends towards advertisement cost and other expenditures, the OPM improved by 176 basis points to 21.1% (ahead of our estimate of 19.5%) mainly on account a lower y-o-y raw material cost as percentage to sales. The raw material cost as percentage to sales stood at 44.5% in Q4FY2010 as against 50.9% in Q4FY2009. The operating profit grew by 62.1% yoy to Rs107.2 crore, ahead of our estimate of Rs103.8 crore. Thus, despite a lower-than-expected growth in the top line, the bottom line grew by 54.6% yoy to Rs91.8 crore (ahead of our estimate of Rs85.6 crore), which is in line with a strong expansion in the OPM. We have revised our bottom line estimates for FY2011 and FY2012 downwards by 6.4% and 5.0% respectively, primarily to factor in the lower sales growth trajectory in the soap segment and the higher raw material cost. We expect the international business along with the recent acquisitions to register a robust growth in the coming years. In the domestic operations though the performance of the soap business (that showed signs of stress in Q4FY2010) needs to be watched out. At the current market price, the stock trades at 23.7x its FY2011E earnings per share (EPS) of Rs12.6 and 20.3x its FY2012E of Rs14.7. In line with our downward revision in the earnings estimates, our revised price target stands at Rs309 (21x its FY012E EPS). In view of the limited upside from the current level, we are downgrading our recommendation from Buy to Hold. However, we believe, the investors would do well to hold on to the stock as the likelihood of further acquisition announcements (especially in Latin America) would keep the stock in flavour and could bring in further upside potential. Also, though not quantifiable currently due to lack of information, the EPS accretive nature (as indicated by the management) of the Megassari deal could bring in a further upside to the EPS estimates and hence the stock price.

Maruti Suzuki India

Cluster: Apple Green

Recommendation: Hold

Price target: Rs1,473

Current market price: Rs1,335

Price target revised to Rs1,473

Result highlights

• Maruti Suzuki India (Maruti)?s Q4FY2010 results were in line with our expectation at the operating level, however a lower-than-expected other income pulled down the net profit below our expectations.
• The total income for the quarter grew by 30.7% year on year (yoy) to Rs8,280.8 crore on the back of a robust 21.5% year-on-year (y-o-y) growth in the volumes and a 7.5% y-o-y growth in the net average realisation.
• The operating profit margin (OPM) at 11.7% was in line with our expectation of 11.2% and was higher by 614 basis points on a y-o-y basis. The margin expansion was on account of a 277-basis-point y-o-y decline in the raw material cost as a percentage to the total income at 77.4% (the same was however 162 basis points higher on a quarter-on-quarter [q-o-q] basis). Furthermore, a 310-basis-point y-o-y decline in the other expenses as a percentage to the total income at 9% for the quarter led the operating profit to grow by a hefty 175.8% yoy to Rs967.3 crore (against our expectation of Rs914.2 crore).
• On account of much lower yields on investments in the quarter as compared to the corresponding quarter of the last year, the other income came in significantly below expectations, at Rs222.7 crore (a growth of 9.2% yoy), which subdued the performance at the operating level. Consequently, the reported net profit surged by a stellar 170% yoy to Rs656.5 crore (as against our expectation of Rs731 crore).
• For FY2010, the company has also announced a final dividend of Rs6 per share (face value of Rs5 per share).
• Maruti is likely to face headwinds both on the sales volume growth and the profit margin front going ahead. While the high base of FY2010, aggravating competition and upturn in the interest rate cycle pose a challenge to growth in volumes, the rising commodity prices are likely to pressurise the profitability.
• Though we maintain our estimates for FY2011, we are reducing our estimates for FY2012 by 4.8%. Our FY2012 estimates stand revised downwards factoring in a higher capital expenditure (capex) of Rs3,000 crore for FY2012, which will reduce the free cash on the books, thereby leading to a higher depreciation and lower other income.
• As a consequence of the downward revision in our earnings estimates for FY2012 and to factor in the above risks to the growth going ahead and a moderate earnings compounded annual growth rate (CAGR) of 10.3% for FY2010-12E, we have reduced our target price multiple to 14x (from 16x earlier). We have also rolled over our price target to FY2012 earnings.
• At the current market price, the stock is trading at 14.2x its FY2011E earnings and 12.7x its FY2012 earnings. We maintain our Hold recommendation on the stock with a revised price target of Rs1,473. We expect the stock to underperform in the near term and rather prefer Mahindra & Mahindra (M&M) in the automobile space.

Sun Pharmaceutical Industries

Cluster: Ugly Duckling

Recommendation: Buy

Price target: Rs1,757

Current market price: Rs1,604

Price target revised Rs1,757

• The twin blow of unfavourable decisions for Protonix and Eloxatin would remain as an overhang on the stock in the near term. In order to factor in the loss in the Eloxatin opportunity, we downgrade our earnings estimate by 4.2% for FY2011. Our FY2012 earnings estimate remains largely unchanged given the resumption of Eloxatin sales in FY2012. This brings our earnings per share (EPS) estimate to Rs72 for FY2011 and to Rs84.5 for FY2012. We await more clarity on the Protonix front from the management and the court?s decision.

• However, we continue to believe that Sun Pharma remains one of the best pharmaceutical plays in India with its superior business model, leadership in chronic therapies, strong balance sheet and more limited competition opportunities like Effexor XR. With the impact of Caraco Pharmaceuticals and Taro Pharmaceuticals (Taro) already built in the price, we believe that the stock?s valuations reflect most of the negatives and the risk-reward ratio has become favourable for investors. At the current market price of Rs1,604, Sun Pharma is valued at 22.4x FY2011E and 19.1x its FY2012E fully diluted earnings. Thus, we maintain our Buy recommendation on the stock with a revised price target of Rs1,757 (20x its FY2012E and Rs67 for Taro).

Reliance Industries

Cluster: Evergreen

Recommendation: Hold

Price target: Rs1,215

Current market price: Rs1,070

Earnings below estimates; time to look for cash flow utilisation strategy

Key points

• Reliance Industries Ltd (RIL)?s Q4FY2010 adjusted net income grew by 29.9% year on year (yoy) to Rs4,710 crore, which is significantly below our and the street?s estimates. This is due to a lower-than-anticipated margin in the oil & gas business (on account of a higher-than-expected depletion rate for KG D-6 block) and a lower-than-expected gross refining margin (GRM) of USD7.5 per barrel for the refining business. However, at the operating level, the performance was much better and only marginally below the expectations. A large part of the swing in the net profit is due to a sudden jump in the depreciation charge, which went up to Rs3,392 crore in Q4FY2010 as compared to Rs2,795 crore in Q3FY2010.
• We have revised our earnings per share (EPS) estimate for FY2011 and FY2012 to incorporate: (1) the revision in our exchange rate assumption to Rs45 for FY2011 and Rs44 for FY2012, 2) a higher depreciation expenses, and 3) a slightly lower KG D-6 gas volume in FY2011. The negative impact of the above assumption is partially offset by higher petrochemical production volume and an increase in our GRM assumption for FY2012 to USD10.9 (we maintain our FY2011 GRM assumption at USD9.5 per barrel). Consequently, our revised EPS estimates now stand at Rs70.9 for FY2011 and Rs81.1 for FY2012.
• With strong demand for petroleum products, we expect the crack spreads for the middle distillates (especially gasoline and gas oil) to improve in the near to medium term. This coupled with a likely increase in the light heavy crude oil price differential at the level of USD2-3 per barrel, will help RIL to enhance its spread over the Singapore GRM. Further, RIL has signed up with Cairn for the supply of 55-60 barrel per day of cheaper Mangala crude and is also consuming KG D-6 gas for its refineries. Hence, we expect the GRM of the refining segment to improve strongly to USD9.5 per barrel in FY2011 and USD10.9 per barrel in FY2012 from USD6.6 per barrel in FY2010. We highlight that the additional supply of petroleum products on account of addition of new capacities would also remain under check due to closure of 1.43 million barrels per day (mbpd) of refining capacity.
• As per our expectation, the petrochemical segment reported a strong earnings before interest and tax (EBIT) in Q4FY2010 with the EBIT margin increasing by 45 basis points on a sequential basis to14.4%. Although the petrochem margin has been strong (supported by delay in new capacity additions), we expect the same to narrow down slightly in the next few quarters due to significant capacity addition in the Middle East. In terms of the domestic market, we see strong demand coming in from agriculture, packaging, infrastructure and automobile sectors.
• The gas production from KG D-6 field averaged 60mmscmd in Q4FY2010 (which is close to the exit rate of Q3FY2010). The company has said that the design capacity of KG D-6 gas production facilities has achieved a flow rate of 80mmscmd. With the production volumes being tested by RIL, the production ramp is largely dependent upon the HVJ pipeline capacity expansion by GAIL (which is expected by October 2010). We have factored in a gas price of USD4.2 per mmbtu and a seven-year income tax holiday in our valuations and estimates.
• Although the company?s Q4FY2010 earnings were significantly below our estimate, we are more focused on the company?s strategy to utilise the huge cash flow (USD10-12 billion over FY2011-12E) that it is expected to generate over the next couple of years. The company?s recent acquisition of a 40% stake in Atlas Energy?s Marcellus Shale gas acreage is a small-ticket acquisition. Hence, we expect strong acquisition related news flow to continue in the near term, which would indicate towards the deployment of cash flow and the long-term growth prospects of the company.
• We maintain our price target of Rs1,215 and Hold recommendation on the stock, as the company still faces uncertainties on: 1) the tax benefits on the natural gas business under section 80-IB (clarity still awaited), and (2) the gas pricing including the court case with Reliance Natural Resources Ltd (RNRL). At the current market price, the stock trades at a price/earnings ratio of 13.2x FY2012 earnings and an enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA) of 7.3x FY2012.

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VIEWPOINT

Pantaloon Retail

Robust same stores sales growth drives the top line

Result highlights

• Pantaloon Retail?s Q3FY2010 top line grew by 25% year on year (yoy) to Rs2,057 crore, which is in line with our expectation of Rs2,050 crore. 71% (Rs1,440 crore) of the turnover came from the value segment, whereas 29% (Rs628 crore) was chipped in by the lifestyle segment.
• As expected, discount offerings during the quarter (Sabse Saste 4 din) led the gross margin dilute by 90 basis points and 120 basis points on a quarter-on-quarter (q-o-q) and year-on-year (y-o-y) basis respectively to 29.1%? which is in line with our projection of 29.3%. The gross margin for the value retail segment stood at 25%, while that for the lifestyle segment came in at 38.9%
• The operating profit went up by 25% yoy to Rs216 crore, close to our projection of Rs215 crore. The value retail and the lifestyle segment registered an operating profit margin of 7.4% and 17.8% respectively.
• The profit after tax (PAT) registering a robust 63% y-o-y and 10% q-o-q growth to Rs56 crore came in slightly higher than our expectation of Rs54 crore. The bottom line growth was aided by strong operating performance coupled with lower finance cost during the quarter. The Future value subsidiary reported a profit of Rs23 crore (PAT at 1.6%), while the lifestyle segment earned Rs30 crore as profit during the quarter.
• During the quarter, the company dropped down its value retail business and transferred the same into a wholly-owned subsidiary?Future Value Retail. Hence it has reported results for the stand-alone Pantaloon Retail without incorporating the earnings of Future Value Retail segment. Further, the company proposes to evolve to a consolidated reporting from FY2011 to provide a holistic view of the performance.