Thursday, November 29, 2012

REC Tax Free Bonds : 2012

Rural Electrification Corporation Limited (REC) is a public financial institution in the Indian power infrastructure sector. It is engaged in the financing and promotion of transmission, distribution and generation including renewable energy projects throughout India.
REC commenced its operations in 1969 for the purpose of developing the power infrastructure in rural areas.
REC is one of only 16 Indian public sector undertakings to be granted “Navratna” status by the Department of Public Enterprise by virtue of our operational efficiency and financial strength.
The GoI has rated REC’s performance as “Excellent” continuously since Fiscal 1994.
REC has also been ranked among the top ten public sector undertakings in India by the Ministry of Heavy Industries and Public Enterprises for Fiscal 2000, Fiscal 2001, Fiscal 2002, Fiscal 2004 and Fiscal 2005.
The President of India, acting through nominees from the Ministry of Power, currently holds 66.80% of the issued and paid up equity capital of REC.
 
Basic Facts about REC Tax Free Bonds:
Issuer: Rural Electrification Corporation Limited
Issue Open: December 3, 2012
Issue Close: December 10, 2012
Issue Size : Rs 4,500 crores
Face Value: Rs.1000
Minimum Application Size: 5 Bonds (Rs.5000) and in Multiples of 1 Bond (Rs.1000) thereafter
Listing: BSE, NSE (The Bonds are proposed to be listed within 12 working days from Issue Closing Date)
Mode of Allotment: Dematerialised and Physical form
Trading: Only in Dematerialised form

Rating:
  • “CARE AAA” by CARE
  • “CRISIL AAA” by CRISIL
  • “[ICRA] AAA” by ICRA
  • “IND AAA” by IRRPL (formerly Fitch Ratings India Pvt. Ltd)

Categories of Reservation (%age of issue Size):
1. Category I– QIB’s- 30%
2. Category II- Non Institutional Investors-15%
3. Category III– HNI’s*- 15%
4. Category IV– Retail Individual Investors**- 40%
* Individuals and HUFs applying for an amount above Rs. 10 lac
**Individuals and HUFs applying for an amount up to Rs. 10 lac
Interest on Application Money Liable to be Refunded (except for ASBA): 5.00% p.a.
Who is NOT eligible to Invest in REC Tax Free Bonds:

a) Minors without a guardian name;
b) Foreign nationals;
c) Non-Resident Indians;
d) Persons resident outside India;
e) Venture Capital Fund and Foreign Venture Capital Investor;
f) Foreign Institutional Investors, Qualified Foreign Investors;
g) Overseas Corporate Bodies;

Can an applicant make additional / multiple applications? Ans: An Applicant can make one or more Applications for the Bonds for the same or other Series of Bonds, subject to a minimum application size of Rs. 5,000 (5 Bonds).  For the purposes of allotment of Bonds under the Issue, Applications shall be grouped based on the PAN, i.e. Applications under the same PAN shall be grouped together and treated as one Application. Two or more Applications will be deemed to be multiple Applications if the sole or first applicant is one and the same. For the sake of clarity, two or more applications shall be deemed to be a multiple Application for the aforesaid purpose if the PAN number of the sole or the first applicant is one and the same.


To Invest in this issue, Kindly click here - download the application form and make use of it.

Benefits to the Investor:
 The income by way of interest on these Bonds is fully exempt from Income Tax as per provisions under section 10 (15) (iv) (h) of IT Act.
 Since the interest income on these Bonds is exempt from tax, no Tax Deduction at Source is required.
 Wealth Tax is not levied on investment in Bonds under section 2(ea) of the Wealth-tax Act, 1957.
 As per provisions under section 2 (29A) of the I.T. Act, read with section 2 (42A) of the I.T. Act, a listed Bond is treated as a long term capital asset if the same is held for more than 12 months immediately preceding the date of its transfer. Under section 112 of the I.T. Act, capital gains arising on the transfer of listed Bonds shall be taxed @ 10% without Indexation or @ 20% with indexation.


For Application forms, prospectus details, Click here.

Wednesday, November 14, 2012

Practical side of Rakesh Jhunjhunwala

"I advise people that they must put some part of their wealth into equities, but very few listen to me" says Rakesh Jhunjhunwala.

In an interview with Nargis Fakhri on ET Now, Big Bull Rahesh Jhunjhunwala shares his views on market and his success story as an investor. Excerpts:

Nargis Fakhri: I will start with asking you how did you become the most successful investor?

Rakesh Jhunjhunwala: God's grace and elders' blessings.

Nargis Fakhri: So I heard that you started off with a small amount of money and then you created such a massive amount. Do you really think that was God's grace or do you think that you studied a lot?

Rakesh Jhunjhunwala: It could not have come without hard work and ambition; I would say the ability to face failure and doing things in a rational manner and always using the right means for the ends. I believe I may not get my hands where I should never change my means and finally God's grace and elders' blessings.

Nargis Fakhri: Do you have an obsession with money?

Rakesh Jhunjhunwala: I do not think so because I am essentially a middle class person and I have far less wealth than people think, but far more than I need. I have a very simple wife. Only the hunt is more interesting than the kill.

Nargis Fakhri: That passion and drive; is it for money or actually now you said it is the hunt?

Rakesh Jhunjhunwala: It is not that it is not for money, but it is not primarily for the money as well. Somebody has said it is a difference of opinion which makes market interesting. You say A, I say B. I feel very happy when I am proved right and my opinions are fortified or are reflected by the market. I told you the markets are very interesting, like women, always demanding, mysterious, uncertain, volatile.

Nargis Fakhri: I want to know some secrets or some tips but I am not sure if you can give that.

Rakesh Jhunjhunwala: I have to say tips are hazardous for health. You cannot make money on borrowed knowledge. But if you invest some part of your money in the stock market, I'll surely help you.

Nargis Fakhri: It is not like you can tell a layperson to read some books and they might get an idea. You would not gain all that knowledge just like reading few books.

Rakesh Jhunjhunwala: I inherited no money from my father. Of course it was all his blessings. So I had no money, but I got the capital to trade. So I do two activities -- trading and investing. Trading is extremely difficult and 1 out of 5 million is successful in that.

Nargis Fakhri: I do not know how old you were when you took that amount that you did and invested like your first investment.

Rakesh Jhunjhunwala: No, I came into the stock market when I was 25.

Nargis Fakhri: Really. So before 25 and before your first investment, you were already into learning, studying and trying to understand?



Rakesh Jhunjhunwala: Yes, I used to look at stocks from the age of 13.

Nargis Fakhri: And who got you into it?

Rakesh Jhunjhunwala: Well, my father was interested in the stock market and at a young age when some were interested in sports, some in being doctors and some in being journalists, all I was interested in were girls.
Nargis Fakhri: I saw that India was doing really well. I do not know if that was a golden period or is the golden period coming. How do you see the markets; explain it to me, I am a layperson, I do not really understand.

Rakesh Jhunjhunwala: The prospects of Indian stock market depend on the prospects of the Indian economy and I believe that India's growth is inevitable. We are having some kind of a correction and India's chaos is organised chaos.

It is a talented society, multi-cultured. We have the most favourable demographics in the world and we have good skills and entrepreneurship, and all this cannot be reversed. So I am very bullish on the market. The golden period is still ahead of us.

Nargis Fakhri: I have also noticed like western companies coming into India, does that help to increase the market value as well?

Rakesh Jhunjhunwala: India has got a large population. Indians consume a lot. All western companies want markets. How many burgers will McDonald sell to Americans? So they need new markets and that is why they come in and they add to economic prosperity. It is a win-win situation both for the country from which they come and for the Indians.

Nargis Fakhri: Yes, companies like Walmart are supposed to come here?

Rakesh Jhunjhunwala: Yes.

Nargis Fakhri: Why are you bullish on retail investments?

Rakesh Jhunjhunwala: Because India is a very large retail market and a very small part of it is organised. Retailing business in India is $400 billion today. By 2020 it is supposed to be $1.2 trillion, and the shift to organised retailing is going to be big. So it is a big opportunity.

Nargis Fakhri: I found out that only 3% of Indians are invested in Indian stocks, which is less than the global average. So does that mean that people outside of India are investing in Indian supplies?

Rakesh Jhunjhunwala: There are a lot of Indian institutions, insurance companies which I invest in and a lot of money is coming from abroad. We have foreign institutional investors.

Nargis Fakhri: What is your advice to Indian investors?

Rakesh Jhunjhunwala: I have always been advising them to invest in India. When people ask me why don't you invest abroad, I say when the food at home is so good, why eat outside? I advise people that they must put some part of their wealth into Indian equities, but very few of them listen to me.

Disappointing to see Indian investors preferring gold and real estate over equities: Madhusudan Kela


In an interview with ET Now, Madhusudan Kela, Chief Investment Strategist, Reliance Capital, talks  about the factors influencing the markets and his trading bets. Excerpts: 

ET Now: You believe in three things -- bet, but bet big, always look at the size of the opportunity and buy company which has some kind of an competitive advantage. 

Madhusudan Kela: When I hear all these debates about bear markets, actually I now start closing my eyes because to my mind, this market provides such wonderful opportunity and it has provided such wonderful opportunity in the last three years. Actually, the job of an investor to my mind has been easy in the last three years than it was in the bull market because in the bull market, to make money, you are taking disproportionate risk.

So to answer your question, these companies will be there in plethora of sectors. I would hate to pick one sector. This is a 20-year learning. Just to illustrate the point again, auto sector has been going through a tremendous upswing in the last four years. You analyse the performance of all auto companies and the answer will lie there. If you invested in Eicher Motors versus in Escorts, just to name a company, there would have been a disproportionate difference in returns. So I am saying let us not pinpoint a sector. I told you the last time we interacted that there are two strategies -- touch me and touch me not. So from those touch me not areas is where we will have to pinpoint investing areas.

ET Now: Real estate is one touch me not which you are able to touch. 

Madhusudan Kela: Yes, but not the sector as a whole, but a few companies in that space. 

ET Now: Why do you like banks? I would imagine that when you say banks, the PSU banks are part of the touch me not category? 

Madhusudan Kela: Again, I would not categorise it fully. There are some PSU banks which may have gone through tremendous amount of restructuring... Sorry to digress a little bit, but one big thing which I have learnt as an investor in the last 20 years is people get biased positively or negatively. When they get biased negatively, they just close their eyes to any opportunity which is arising and when they get biased positively, they are unwilling to listen to any negative news. 

As an investor, I have learnt this -- never be biased, never close your eyes to any opportunity. So today when you tell me PSU banking space is a sector which will not be looked at, I will never ever consider that. I will again be in a look out mode within the PSU banking sector, i.e. which is the bank which has done aggressive provisioning in the last two-three years, which is the bank which is ready and which has relatively cleaner portfolio. So whenever that cycle turns, maybe that bank will lead this time versus the other banks. So there will be stock specific opportunities in all these sectors.  


Diwali 2012 : Interview with Rakesh Jhunjhunwala

The market is gradually revving up for a bull run that could take off in about 14-15 months time, feels Big Bull Rakesh Jhunjhunwala. He is betting on inflation, and commodity and interest rates to ease hereon. And contrary to popular opinion, Jhunjhunwala expects the 2014 general elections to throw up a strong reformist government.

"We will get a far better government in 2014 or whenever the elections are held, than what people are anticipating," he said in an interview with CNBC-TV18.

"Whichever government comes in, will have to take right decisions even if it is fragmented. I feel we will get BJP-led government and if Mr Modi is made the Prime Minister, I am told he is going to be BJP's prime ministerial candidate, we can have some good work very soon," he said.

On the stocks in his portfolio, Jhunjhunwala is bullish on the long term prospects of Lupin, Praj Industries and Nagarjuna Constructions. And while there have a few disappointments like A2Z and Hindustan Oil Exploration, Jhunjhunwala says he has no regrets since the outperformers have more than made up for the laggards.

Below is an edited transcript of Jhunjhunwalas exclusive interview on CNBC-TV18.

Q: Are you feeling more relaxed and bullish than you were on Diwali last year?

The uncertainty has not gone away, I do not know why. Looking at the screen, price movements of stocks; they are gaining, correcting and again going up. The kind of pessimism that we have and the way the market is gaining! We are at the peak of the interest rate cycle surely. I am bearish on commodities. We have made some kind of a bottom which will not be violated easily; it could be in the start of early bull market. In 2001 September, the market bottomed, but took off after 2003 March. So the real kicker in the market could come after 14-15 months but we could have bottomed. This is a feeling I get, of course I do not see the kind of rise we saw from 2003 to 2007 immediately, but we could have bottomed. It could be an early start for a good market.

Q: You gave the example of 2001 and 2003. What would convince you that we are in a phase like that and a bottom has been formed? Do you think over the next 12-14 months some of the data points will take off once again from here as in 2003? What would you expect to see over the next 12 months from the screen?

First, fall in commodity prices or a fall in inflation. We can surely call it a peak of interest rate cycle and then can have some aggressive correction of interest rates. Second would be some of the resolution or problems, better growth in America, a resolution to the European problems, Greece problems etc. But, most importantly there is an indication of a strong government in India in 2014. In 2014 we are going to get a good, strong reformist government.

Q: If a lot of people believe that it will come in the way of a progression for this bull market then the election uncertainty will actually become more pronounced after 2013-14 with the formation of a government that is fragmented. Do you think it will actually work out in favour of the market?

Yes, because the Congress and the Bharatiya Janata Party (BJP) constitute majority. There are certain regional reasons why someone like Mayawati will not join a government in which Mulayam is participating; Jayalalitha will not join a government in which ADMK is participating. So we have those reasons where Congress and BJP together have a majority or a near majority. Then there has to be a government supported either by the Congress or by the BJP. Also, the fact today is that people are voting for those who are bringing growth and development; it is one of the most important developments. It amounts to maturing of Indian democracy. So, we will get a far better government in 2014 or whenever the elections are held than what people are anticipating. Whichever government comes in, will have to take right decisions even if it is fragmented. I feel we will get BJP-led government and if Mr Modi is made the Prime Minister, I am told he is going to be BJPs prime ministerial candidate, we can have some good work very soon.

Q: What about earnings. You gave me the 2003-2007 example but their earnings trajectory was strong. Do you see the combination of circumstances over the next three-four quarters where we can have a launch pad for the next three-four years in terms of earnings acceleration or are you apprehensive on that score?

We wont have a ferocious bull market, but earnings growth in India can rebound to 20 percent. We had three years of 10-12 percent growth and reduction in interest rates. This in itself will be a big factor both for higher earnings and revival of the investment cycle. People will anticipate that with the revival of the investment cycle and a lot of companies' earnings will go up.

We are not sure about 2001 in terms of the interest rates, inflation or spare capacities with companies. But power companies are unbelievably leveraged. If things turnaround, they can get coal then they can be very profitable and consequently, there will be a big effect of increase in electricity production in India.

Q: How your own portfolio has done since last Diwali? Looking at your set of stocks, Titan and Lupin feature prominently on top of the list once again. Are there some pockets in your portfolio about which you are a bit disappointed at how they have turned out in the last one year?

I do not review my portfolio in that matter on a year to year basis, but within the portfolio Titan Industries and Lupin are very large. They are a large part of my portfolio so, if they do well everything is well. I am disappointed with how Hindustan Oil Exploration Company (HOEC) has performed.

Geometric has performed well. I am extremly disappointed at the way A2Z Maintenance and Engineering Services has performed. So, there have been some hits and misses, but the hits have been in the largest part of my portfolio. So I am happy, I have done quite well.

Q: You have been a long-term holder of Lupin and you have picked up other stocks in the pharmaceutical space. Last year or a year before that had you picked up Orchid. Are you disappointed that other stocks that you have picked from the pharmaceutical sector have not turned out to be the kind of right that Lupin has given you?

I was extremely disappointed with Orchid Chemicals and Pharmaceuticals. I have already sold it. So, Lupin is the only pharma stock, which I have in my portfolio, but I have a large commitment.

Q: Have you been examining other stocks in that space of-late? A clutch of other midcaps like Glenmark Pharma, Divis Laboratories, etc have also been doing very well, almost as well as Lupin has. Is that a place where you have been sniffing around for another good deal?

A: No. I have large investment in Lupin. I have large investment in a pharma company, which is only invested in Ahmedabad and it is doing very well. Therefore, out of choice I have not bought any pharma stocks. I am very confident on the long-term performance of Lupin.

Q: How long will it take to review this investment cycle because some of these bets like A2Z, Punj Lloyd, Praj Industries have tested your patience. When do you think the investment cycle will start getting galvanized and some of these stocks will start doing well again?

I have already exited Punj Lloyd. Even if I have such large investments, I cannot sell them in a bad market. Praj is trying to do some pioneering work on use of grass and other non-agricultural based raw material for ethanol production. Praj has really not done badly, but I agree, price-wise it has not done well. It could be an out-performer in time to come, but it could take a year or two.

Q: The biggest star in your portfolio remains Titan year-after-year, but some other consumer stocks that you have picked like VIP Industries have not quite had the same kind of sheen. Why do you think?

VIP has been affected by a number of reasons; about 30 or 35 percent of VIP sale was through central stores department and the central stores department has now stopped the purchase of a lot of goods. It was also affected by some price competition from Samsonite. We import 80 percent of goods from China and that was affected by the rupee depreciation. However, I am confident that in the time to come, VIP should do well.

Q: You were asking me about the other stock in the infrastructure space. I mentioned Nagarjuna Construction. When do those kinds of stocks start doing well? How long will it take for the investment cycle to get restarted?

A: The bigger problem with the investment cycle is interest liability. If Nagarjuna can reduce its interest liability, which it is making an effort to do by selling some of the BOT projects, they will do well. I must disclose here I am a shareholder and director of Nagarjuna Construction. I have bought shares in the last three months. I am bullish on Nagarjuna personally. It may take two-three years to revive, but the rewards after that will compensate for the waiting.

Q: Any new sectors that have come on your radar of late whether linked to consumption or infrastructure? Anything on which you have not taken big bets in the past?

A: Yes, I have taken a big bet on media which is TV18 its a fairly good bet. I have made an investment in United Spirits, Rallis and Nagarjuna Constructions.

Q: That must have made your Diwali, United Spirits closed day before the Muhurat at more than Rs 1,800, what price did you get in?

A: Let us not discuss the details of my trades, but I can tell you one thing that I have never seen such a price movement in my life. I am reminded of Harshad Mehtas days.

Q: Largecap stocks are not in the habit of moving 35-40 percent in a single day. Does that stock movement make you a little nervous?

A: It may lose 10-15 percent. I am now buying all stocks with 2020 in mind. So, it is okay if I may lose 5-10 percent, what difference does it make?

Q: What convinced you about media because that is a segment where you have taken small bets in the past, but not very significant? Why do you think the story is different this time?

A: Getting news channels now will be extremely difficult. It is a high fixed cost business. So if revenues go up, profitability goes up disproportionately. Thirdly, this whole game of carriage and digitization will change the entire picture for the industry.

After all TV18 is the leader in news and Colors, so the amalgamation of the entertainment channels will make it the second or the third largest media play in TV segment.

Q: You said markets may have bottomed out. You have been speaking earlier about the big bull market in India, you would be surprised if this turns out to be that one?

I give that a 20 percent chance. If we have the right government and the right policy reforms, India will grow double digit. I have no doubt about it.

Additionally, today equity is a bad word. What is the exposure? I think exposure of the household to Indian equity is at the lowest. There is no pension fund investment. India saves USD 750 billion a year. Even USD 1 billion does not come to markets.

I am extremely confident of Indias future because what is happening is good. The Supreme Court is working perfectly, there are civil activists. So, if anything wrong is being done, there are people who are questioning. That is what happens in democracy and that is how a democracy will mature.

Q: So when you say the market has probably found a bottom, did you mean that the market bottomed out in June at 4,700-4,800 or do you think we have a much higher floor on the Nifty right now, maybe say even 5,400?

Because of the uncertainties, which are involved, 4,700-4,800 is surely a bottom. I feel that if nothing untoward happens, it will not test that again.

Q: What about the global situation? We have got USD 20 billion of FII money and that is an important reason why the markets moved higher. Do you see that part of the equation being in place, the global liquidity aspect or does that make you a little nervous?

No, it doesn't make me nervous. I think China is never going to go more than 7-7.5 percent because the kind of investment they want to make in fixed assets is just not going to be sustainable. I think America will do well and eventually Europe will break down. Atleast, some countries will go. Greece will go.

One of the reasons that a lot of money is coming to India is because people perceive that India is at the highest end of the interest rate cycle and if inflation was to come down, it will make a very big difference. India's GDP is not lopsided. We are 57-58 percent of consumption, 15 percent of exports/ balance of investment. Unlike China's economy, the whole breakdown in Japan in 1999 took place because of over investments. Japan also invested 45-47 percent of its economy into fixed assets.

Of course valuation in China is not what was there in Japan. If we Indians get our acts together, we have a chance of outperforming the world. And there are also indications that India is one of the few assets of any substance, which is higher than on the day when QE3 was announced. So, the liquidity effect after that also most assets have lost. It is not just that global liquidity is good. That may be one reason, but people also expect that India will do well.

Q: Any thoughts on gold, would you buy it today?

Some part of our wealth should be in gold or diamonds, on non-stock market assets. I think we should keep some part.

Q: But you do expect that, at some point between this Diwali and next Diwali the market will make a new high on the index?

A new high means nothing according to me. Markets should make a new high, go at least 10 percent above and never go below the last high. Say we have 6,200 on Nifty as the high, it should go to 6,800-6,900 and not come below 6,300-6,400. So, new highs are not so important in index. But ofcourse they are also an indication that markets are good.

Q: What percentage probability would you attach to the event that you just described that the market may take out its previous high by 10 percent and come back and retest it but not break it?

If the market likes the government, it will do it 100 percent.

Tuesday, November 13, 2012

Volatile Market Ahead : interview with Nilesh Shah

Though Indian economy is buoyed down by macro-economic woes, analysts feel that the next year is likely to be better. Nilesh Shah of Axis Direct feels that we can remain bullish for the next year even though the current assessment is not so positive.

"Hopefully in the next year we will have better liquidity and lower interest rates and that should be supportive for IIP numbers," Shah said in an interview to CNBC-TV18.

However, at the same time, he feels that the market is likely to to be highly volatile next year and hence averaging is important. Shah also adds that it is time to build on to fixed income assets.

Here is an edited transcript of his interview.

Q: Are you generally feeling more bullish going into the next year given the macro context?

A: I think we probably can remain bullish for the next year even though the current assessment is not so positive. The IIP numbers are reflecting the sad state of affairs in the current economy. Probably things are bottoming out. Since almost May 2010 we had very tight liquidity. However, hopefully in the next year we will have better liquidity and lower interest rates and that should be supportive for IIP numbers.

Second we had a delayed monsoon. So, the impact of that monsoon will be reflected in the coming months in terms of better rabi crops. While there are reasons to be worried because of the IIP numbers which have just around been negative or marginally positive for last couple of months.

Export growth which in spite of currency depreciating by so much is still turning out to be muted. All these things are worrisome signs in the near term, but hopefully with the process which government has initiated on the reforms side and if actions are taken on the ground we will see better days ahead. Thats what market is pricing in today.



Q: Let me ask you asset allocation question. Since you straddle both the fixed income and the equity markets, next year between this Diwali and next Diwali, say the RBI reduces interest rates by 100 basis points. Do you think equities still have a good chance of outperforming, the kind of returns that bond funds will deliver assuming that there will be some capital gains because of those interest rate cuts?

A: I think we will have volatility in the next year like we had in the last year. Probably three or four months in the next year will give positive return like last year while 8 or 9 months will give marginally negative to zero return next year like last year. So, it will all depend upon how you try to average yourself into the market and while it is very fair for us to say that three or four months will give positive return but no one really knows which three or four months will deliver that return. You will have to average yourself in.

You may start today and Murphy's law will come into play and the market will go down tomorrow. You will have to average yourself in and especially if market gives an opportunity of going down because of something happening on the international side then thats a god sent opportunity for you to average. Assuming that you will not be afraid of volatility and you will be averaging yourself at various levels in the market then probably equities have a far better chance of outperforming fixed income side.

However on the fixed income side its time to build duration. Now the debate has shifted from "if and when the rates will be cut" to "when will the rates be cut?" clearly there will be rate cut movement either in this coming credit policy or after that or after that. Hence building up duration on the fixed income side will be advisable and on equities averaging yourself especially during downturn caused by international events will provide far better returns in the next year.

Q: On Diwali day we expect a little more detail from fund managers than they usually give us. So, if one of your relatives from Gujarat called you and said Nilesh bhai, I have some money where should I invest, banking fund or infra fund? what would you say to them?

A: I will recommend him to do the SIP and I will recommend him to SIP in private sector banks and infrastructure funds. I still think private sector banks will continue to outperform public sector banks partly because their business model seems to be far superior considering the current economic environment. So, my recommendation will be to buy private sector banks and infrastructure funds.

Diwali 2012 : Interesting discussion between Investment Guru's

As we head into Samvat 2069, the mood on the street is much better than what it was last year, especially after the drubbing market received in December. But this time around, the Nifty is at 5700 and not 4600.

CNBC-TV18's Udayan Mukherjee sat down with Ramesh Damani, member, BSE; Madhu Kela of Reliance Capital and Manish Chokhani of Axis Capital to discuss if this run is sustainable, whether it can be trusted and if investors can get overweight on Indian equities once again.

According to Kela, people are missing out on one of the biggest opportunities the market has to offer. "I remain positive on the market despite of the 30-percent run; every dip should be used as a buying opportunity," he said.

Below is an edited transcript of the discussion on CNBC-TV18.

Q: Do you think a bull market has started?

Kela: I have been saying that for sometime now. I think those investors who are focusing on macro-economic factors and indices are actually missing the biggest opportunity in the market. There are so many bottom-up opportunities and if investors are focused on even one that exists in every sector, but obviously when the market mood is positive, it helps. So to that extent, I remain very positive on the market inspite of a 30 percent run. Every dip should be used as a buying opportunity.

Also Read: Media is buzz-word of Samvat 2069; pick a few now: Experts

Q: You have not been table-thumping bullish, but would you concede that a bull market is well underway albeit with some fits and starts?

Chokhani: I share the view that, at this point of time, investors should not be thinking about the bull market, but about stocks. Because while the Index has not performed well, there have been stocks that have offered their investors fantastic returns and I suspect that same thing will continue.

The reason I feel a lot less exuberant is because instead of focusing on investing, I see the other end of the spectrum which includes the corporate sector. While it is great to be making money, unless underlying fundamentals of the country change the benefits will be short-lived and unbalanced. Though I am fully invested, I do not feel bullish.

Q: You have been voicing the most bullish sentiment over the last three-to- four months. Do you have any doubts on the start of a bull-market and the ingredients that are absent today will slowly fall into place?

Damani: If it walks like a duck, looks and quacks like one, then it is a duck. Typically in the first stage of a bull market, it is individual stocks, and not the Index, that move. But look how the market reacts to news- if there is bad news it sells but makes the money back in a day. So, it looks and feels like a new bull market is underway.

We will know for certain only with the passage of time whether this is truly the beginning of a new bull market or just a misleading rally. But the evidence suggests there is leadership in the market, the price action is very suitable and there is zero public participation which of course makes me believe that there is a long way to go.

Q: You would trust the Index at this point because some investors got bullish early in the year, in January and February, and got the whack in June, which has made a lot of other investors skeptical. But are you more confident this time?

Damani: I was confident at that time too. I had earlier explained that these things happen and  typically, the market will go back and test the bottom. But you look through the lows in December and June, individual stocks have been much higher than they were in December.

So clearly if you want to buy large pieces of equity, you have to pay a significant premium in the market. I think markets are never going to give you a straight line or free ride. It will always be choppy and volatile. The fall in June even crushed the bullishness out of me. But individual portfolios are doing well and that is always a good indicator that good times are ahead.

Q: What changes do you suggest to increase the participation in equities?

Kela: We are all doing our best by urging people to participate in equities. There are so many foreigners who are coming and making so much money. I am very confident that participation in equities will increase.

Q: Will it require two years of consecutive performance to change the situation?

Chokhani: I think increased participation in equity in India will take longer unless we can create a systematic engine through the markets to increase participation. I was very hopeful it would happen through the disinvestment programme because the last bull market was really created by privatization, when there was early participation in stocks like Maruti and investors made serious amounts of money.

And I have grave concerns on little being done to keep the two engines of the economy- external trade and the capital markets. Nothing is being done to solve the problems in trade and the reducing percentage of domestic market participation as foreigners own more and more of the country. This should be a cause for alarm.

Industry is looking overseas, from energy and capital to exportable surpluses. Instead of creating companies here, Indian companies are buying companies overseas. These are not good portents for fundamentals four-to-five years down the line. It just leads to an inflationary economy where asset prices are up. I also believe that the market will make a new high between now and next Diwali.

But it remains to be seen if that new high is meaningful in real terms. So all of us on this panel will find 20 great stocks next year. We will probably come back and say the market is up 25-50 percent. But it does not help the overall economy or the country.



Q: Can you make a decisive argument today saying equities will outperform gold and real estate over the next 24 months?

Damani: I have made that argument. I agree that I have never seen such a severe under-ownership of Indian equity. If you are a 25-year old Indian today and you are not looking at equities, you are doing yourself a huge disservice. You are going to wake up at 45 or 50 being very poor because you put your money into fixed deposits or you bought money at the top of the real estate cycle.

The economy cannot touch USD 4 trillion in the next five-six years with a 25-percent savings rate and reduced percentage of Indian equity not move up- it is mathematically not possible. So I think what will happen is that the PE ratios of the good companies will expand dramatically and at some point in this bull market, I am convinced that the retail investor would be the foot pushing the pedal and not the FII investor, but the retail investor. It may take two or three years, but it is going to happen.

Kela: Retail investors should not look at equity only from a 12 or 24-month perspective. In spite of whatever has happened, equity has offered a return of 15.8 percent in the last 25 years. Though in the last five years, the return on equity has been at minus-6 percent, for 20 years the return equity is 21 percent CAGR. Which asset class, including gold even after such a big run offers only 11 percent, offers such huge and consistent returns?

In the last five years, earnings have gone up 41 percent, but the Index has gone down 6 percent. We do not suggest investing all your money. We call for an investment of at least 5-10 percent of your income by taking a little longer-term view similar to fixed deposit, gold or real estate.

Q: Would you advise people to shift to equity funds today?

Kela: Clearly. Gold can be about 10 percent of one's portfolio. There was maximum allocation in gold on fears that the US and Europe will go down, On the back of this if the equity allocation is lesser than that of gold, god help you.

Q: Another hindrance to increased equity participation is the tepid macro growth and problems in the West and shy away from investing in equities. How would you comment on such an approach?

Chokhani: I am again saying that it does not matter whether it is a bull market or not. If we are going to wait for such a situation, the I do not think there is any case to be made for India, at least not in this Samvat.

Q: Do you think consumers can continue to be the leaders, because there is scepticism that money should shift out of the performing consumers now?

Damani: The whole promise of India is the emergence of a strong middle-class in the next five-ten years as the economy reached the USD 4-trillion mark. And this emergence will be led by consumers.



Q: There is the belief that if you are late into the game, it is better to buy investment cycle stocks because they trade at cheap valuations. Is it a dangerous game or do you advocate this?

Chokhani: We are living in an inflationary world now, especially in India with the way the economy is being run. I think inflation has turned endemic represented by falls in the rupee, high deficit resulting in tighter interest rates. So what this means is that for FMCG you have to have pricing power. It is not about volume growth, but pricing power.

And when this is extended for the next 5-10 years at USD 4,000 per capita, the incremental money will go into media, into buying a better car. So At USD 4,000 your basket in FMCG will probably still remain the same. So while there are cash flows, the incremental money will get made in consumption stocks on the discretionary side rather than the FMCG side. And the market is extraordinarily bullish on the media sector.

Q: Is the media segment bullish? In the last four years, I have not even heard the mention of media.

Damani: I love this! Media professionals are not bullish on their own industry. For a bull market to start, you need a very depressed sector which will surprise people on the upside. Given the Digitisation Bill that has been passed and now implemented, I think the revenue stream of the media companies will change and that presents a great opportunity.

All the big corporate houses are foraying into the media businesses because the valuations are depressed and it is a good opportunity. And ad-spends are the lowest in India on television. There is no place but to go, but up. So after creating this great consumer society where everyone wants to advertise, where are they going to advertise? Television. So my sense is that media will be probably one of the sectors powering up the economy in the next few years.

Chokhani: And I just want to put this in context because I have great memories of this sector myself. Zee TV issued an IPO in 1991-92 with a market cap at Rs 25-26 crore. The current market cap is Rs 28,000 crore and the story is just beginning. So it is a fun place to be.

Kela: I also wish to add that now there is an entry barrier for new players. Now getting money whether equity or debt it has become extremely tough. So those few who survive will consolidate and that is already happening in the whole sector.

Q: What have you been buying of late?

Damani: A lot of money has gone into media. Among the largercaps, I like Tata Global and Godrej Properties, even at these rates. Among the smaller caps, we like a recent PSU that has been disinvested called National Building Construction (NBC). Though it is trading at cash value, it looks okay to me.

A private player in the deregulated LPG sector, Aegis Logistics, has also caught my eye. There are lots of stocks offering good value and I urge to investors to open a demat account and buy a piece of India at a great price.

Once that happens, I think investors will make a lot of money just by sitting rather than trying to trade. I think Indian investors need to rid themselves of the idea of flipping stocks over negligible increases. It is a sure way to the poor house and you will only make your brokers rich.

Q: What is the outlook on asset allocation?

Chokhani: Within equities, investors should have a basket of stocks which represent the four big money-making areas in India such as energy, consumption, exports and assets

Q: How does a viewer watching the show do it? Does he wait for a dip or forget about 200-300 points on the Nifty and just start an SIP immediately if you have missed out?

Kela: If you have missed out, then there is no choice. But start somewhere with a view, a perspective.

Q: Will there be significant new highs by Diwali next year?

Damani: It is difficult to say. In the first year of a bull market, indices do not post galloping gains. Those gains tend to show later. So it is really meaningless if the Index makes a new high by Diwali next year. But the bullish undertone of the market is all we are looking for along with adequate liquidity. The amount of stock that foreigners have bought in India has mopped up all the floating stock.

There has been very little dilution. So there is very little overhang in the markets. Outstanding positions are fairly low. It does not take a lot to move the markets nowadays and that is what is happening.  There have been no IPOs, no QIPs and foreigners have bought so much of the floating stock that even domestic institutions will start feeling the heat of under-ownership of Indian equities. So it seems like just a good combination going in for the year ahead.

Q: Can you say with some confidence that the market has put some kind of a bottom in place?

Kela: I would say that. I don't see the market, in all probability, going anywhere near the bottom at least in foreseeable future.

Q: So a bottom is in place?

Kela: Yes, absolutely.

Top Investment Picks on Diwali 2012:

Motilal Oswal has picked up five stocks that it feels will create value for investors in Samvat 2069.

ICICI Bank (Target Price Rs 1,225):

ICICI Bank continues its focus on 5Cs (Credit growth, CASA, Cost efficiency, Credit quality and Capital conservation). Improving domestic loan growth with focus on CASA, stable margins and containment of credit cost would help the bank to further enhance its return ratios.

Sharp improvement in liability profile and asset quality, and better asset liability management has helped ICICI Bank improve its NIM from 2.6-2.7 per cent to 3 per cent. We expect gradual improvement in NIM to continue.

RoA is likely to remain strong at ~1.6 per cent over FY13-14. Core RoE should increase from 11 per cent over FY08-12 to ~16% in FY14, led by increasing leverage and strong RoA.

Tata Motors/ DVR (Target Price Rs 349/210):

JLR product action, market expansion expected to drive 13.4% CAGR (FY12-15). Expect domestic M&HCV segment which has been facing downtrend could witness revival in FY14.

Tata Motor/DVR stock is currently trading at 8.5x/5x FY13E and 5.1x/4.2x FY14E consolidated EPS. Buy with target price of Rs 349 (FY14 SOTP based) for ordinary share and Rs 210 for DVR (40 per cent discount to ordinary).

Dr Reddy's Laboratories (Target Price Rs 2,080):

Dr Reddy's has guided for $2.7 billion revenue and 25% RoCE for FY13, the management expects to achieve this guidance (implies topline growth of 30% YoY) without any major inorganic growth initiatives.

The company continues to focus on its five key markets - US, India, Russia, Germany and UK. The US market will be a key contributor led by the commercialization of its pipeline of 80 ANDAs (pending approval) and the contribution from FTF/ low-competition opportunities.

We expect core EPS CAGR of 18% for FY12-14. DRRD stock trades at 19.8x FY13E and 17x FY14E core earnings.

LIC Housing Finance (Target Price Rs 300):

LICHF has delivered strong performance, both on growth as well as on asset quality front. However, it consistently disappointed on spreads (one of the key RoA drivers) leading to underperformance vs sector.

We believe the spreads have bottomed out and should likely improve from current levels as the benefits on the cost of funds start accruing.

LICHF continues to deliver well on growth and asset quality fronts. It remains well positioned to make the most of the strong growth opportunities in the housing finance industry.

We model in 24% loan CAGR, 20bp decline in margin assumption, average adjusted RoA of ~1.5% and RoE's of ~18% over FY12/14E. The stock trades at 2x FY13E BV and 1.7x FY14E BV.

Diwali Sweets, Impacts and Remedies:

Come Diwali, Happiness fills home. And Sweets are ideal ways to express happiness. No doubt, Small quantity of anything is good. But often we exceed the limits and we end up with health problems.

The objective of this article is to give a positive approach to 'Sweet' Management. Good Luck.

Thursday, November 8, 2012

Interview with Mr.Shankar Naren, CIO, ICICI Prudential MF

ICICI Prudential says mkt is fairly valued; picks sectors
Nov 08, 2012 16:27 | Source: CNBC-TV18
...................................................................
The Indian market has shown some resilience over the last couple of sessions. In an interview to CNBC-TV18, S Naren, CIO equity, ICICI Prudential says the market, barring a few consumer stocks, is reasonably valued. "The market can go to new highs. We need to see fiscal consolidation for that," he adds.

He further says if the fiscal consolidation comes, it would be very beneficial for the market. "If the government manages to do fiscal consolidation in the next four months, it would be very positive for the market."

He likes some of the names in the upstream oil space. "I think some of these stocks are really cheap relative to global valuations," he elaborates.

Since August, he has been pretty positive on the telecom space.

However, he is underweight on the auto sector. "We do like a few select two wheeler companies," he asserts.

Below is the edited transcript of his interview on CNBC-TV18.

Q: We feared a deeper cut after, what we saw overnight, but our market seems to continue to hover around that 5,700 level. Do you think this rangebound trade will continue for a while?

A: A lot of money has come into India in the last one year. That has been of good help in the market rally of the current year. There have been ofcourse good announcements like the diesel price hike, which happened in September. It has also helped this. The next three months has got to see a continuation of the process of fiscal consolidation. The more the fiscal consolidation happens, the more the fundamentals of the market will become much more attractive.

Technically, the market could be strong because money from other parts of the world is coming into India. But that money could well reverse. So, it is a tough call right now to say whether techncials and fundamentals both can be positive. In that case, we can go to new highs. On the other hand, if you have only technicals, which are positive, which is due to the money is coming in from other parts of the world, while it can continue to go on till India gets the money, there is always a risk of reversal.

We, as mutual fund investors, would like to see a fundamental improvement in fiscal consolidation because that will preserve the longer term returns of the market. Whereas a flow based model doesnt preserve the long-term return to the market. It gives good short-term returns to traders.

It has been very difficult to predict flows. So, that is why we would much rather have a situation like what we saw in September like an increase in diesel price hike. Now, there are going to be many opportunities for fiscal consolidation.

Q: What do you do with a sector like autos? We have seen a huge outperformance from Tata Motors today, but there are some cases of slowdown that we are seeing in stocks like Ashok Leyland, etc. In general, how are you placed in the auto sector?

A: We are underweight the sector because we thought that there would be possibly increases in diesel prices and petrol prices. There's a huge amount of oil subsidy. India has been the only country in the world with such a buoyant growth in petroleum consumption because of the subsidies.

However, I dont think that call has really worked for us in the recent past. We do like a few select two-wheeler companies, which have also done well. Our view is that there has to be some slowdown in the sector. But since inflation hasnt come down, the slowdown in the sector has also not happened. So, I think once we see the slowdown, then we believe that would be a time to look at the sector for the longer-term.

Q: SBI comes out with numbers tomorrow. What is your expectation on the same?

A: We do not comment on individual stocks. However, PSU Bank space, people are watching what happening to asset quality. Most of the reaction to stocks post the results have been based on asset quality. There have been one set of banks that have done well on asset quality. Another set of PSU Banks have not done well on asset quality. Price movements in the stock have reflected the moves in asset quality.

Q: Any sectors that have a degree of outperformance as we head into the end of the year? Most pockets are having issues of their own. If you had to plough in some money into one sector that could outperform, which one would it be?

A: We like some of the names in the upstream oil space. I think some of these stocks are really cheap relative to global valuations. Since August, we have been pretty positive on the telecom space saying that the worst is going on. We have always seen that wherever we have invested, when the worst is going on, in any sector, you tend to make a lot of money. These are the kind of things which we like. Midcaps, we have seen good amount of value in select stocks.

If you look at the market, baring a few consumer stocks, which looked overvalued and few high quality names, which look fully valued, the rest of the market is reasonably valued even today. Infact it is those few consumers stocks and really few stocks, quality names, are fully valued. That is responsible for fair valuation of the market. Therefore, there is a lot of opportunity in the market. The market can go to new highs. Ofcourse we need to see fiscal consolidation for that.

If the fiscal consolidation comes, it would be very beneficial for the market. If the government manages to do fiscal consolidation in the next four months, it would be very positive for the market. On valuation grounds, I think, except about 10-15 stocks in the market, the rest of the market doesnt look worrying on valuation. That is why it is still a macro market.

Tuesday, November 6, 2012

Rise and Fall of Zylog Systems:

Zylog Systems Limited namely ZSL in USA and Zylog in other geographies was established in 1995 by Sudarshan Venkataraman. The company is a CMMI certified provider of Onshore, Offshore & Near shore technology solutions and services to enterprises & technology companies across the globe and is a Public Limited Company, listed in the Bombay Stock Exchange (BSE 532883) and National Stock Exchange (NSE ZYLOG) in India.

Zylog shares fell by 62% in span of 15 days. The stock is constantly locked in lower circuit. We tried to understand the profile of the company and the reasons behind the recent crash. Read on to know more...
  • The Company provides software development and consulting service.
  • Zylog derives more than 90 per cent of its revenues from the US and Canada. This geographic mix has meant that the company has remained largely insulated from the debt crisis and slowdown in Europe both in 2008 and 2011. 
  • The company is steadily increasing focus on product and solutions-driven revenues, which may lead to improvement in margins over the next few years.
  • Zylog’s utilisation rates, at more than 87 per cent, are among the highest in the industry. This elevated level of utilisation means that the company has managed to drive significant volumes-based growth.
  • Focusing on the e-governance initiatives globally
  • In India Zylog is into banking and e-governance. With growing e-governence projects, the opportunity is estimated to be around Rs.20000 Crs.
  • Pocketed implementing smart card projects with a couple of state governments
  • Implemented WIFI zone in a seven square kilometre area in Chennai as pilot project.
Company History:
  • 1995 - Zylog Systems Limited established in Chennai, TN, India
  • 1996 - Opens Sales & Marketing office in Edison, NJ, USA
  • 2004 - Zylog Europe incorporated
  • 2004 - Acquires IMPEKsoft and JDAN Systems
  • 2006 - Establishes IDEA Lab, the Research & Development Division
  • 2007 - Acquires EWAK Soft
  • 2007 - Acquires Anodas Software Ltd in UK 2007 – Releases IPO through BSE & NSE
  • 2008 - Acquires Ducont FZ, LLC headquartered in Dubai Internet City, UAE
  • 2008 - Opens a new Global Software Development & Research Centre in Chennai, India
  • 2009 - Launches Wi5 broadband services in India
  • 2010 - Acquires Brainhunter, Canada
  • 2011 – Achieves IBM Premier Partner Status for US & India Location
  • 2012 - Joins Microsoft Platform Modernization Alliance
  • 2012 - Joins Oracle Modernization Alliance (OMA)
Awards
  • VAR Business has awarded ZSL “Top Technology Practices” award for its excellence in “Green Computing for the year 2008”.
  • ZSL Announced as Finalist under Cloud Innovation & Impact Best of Show Categories at IBM Impact 2012
  • ZSL's Powercube DaaS – the Virtual Desktop Solution Won Runner Up Award for Green IT's Virtualization Product of the Year 2012
  • Zylog Systems Ltd (ZSL) Listed as Fastest Growing Mid-Sized Enterprises for the Year 2011 by India Inc 500
  • Listed as 'India's Most Valuable Companies" @ ranks #533 in the Business Today 500: The Next 500 companies in 2009. During the previous year ZSL was ranked #580 in the analysis
  • ZSL Received 2011 Cloud Computing Excellence Award
  • ZSL’s SmartPrise Cloud Manager Won NJTC's Cool Products Competition Runner-up Award for the Year 2011
  • ZSL's SmartPrise Social CRM Won CRN Technology Award 2011 in the Software Productivity Category
  • ZSL Won Runner-up Award for the Mobile Technology Project of the Year 2011 Award from DM Magazine, UK
  • ZSL Listed as the Top Cloud Computing Service Provider by Talkin' Cloud TC 50 Award
Current Crisis:
  • The stock plunged nearly 62% in the past 15 trading sessions to its lowest closing in over two years. But the bigger question now is: what exactly triggered that sell-off and where can the company go from here?
  • Brokers claim that promoters faced problems in raising funds to meet margin calls, forcing lenders to liquidate pledged shares. Zylog's CFO Srihari SP blamed the crash to a speculative attack. "We have a strong reputation in the market and we are confident that we will be able to come out of this soon," he said.
  • The stock's downfall began on October 18 with Karvy Financial Services selling 2.5 lakh shares though a bulk deal on BSE. Srihari said the lenders did not inform the promoters about the margin requirement and also they were not aware of the sale of pledged shares.
  • "When there is a fall in share prices, then there is always an official intimation given by the lender to the borrower of margin fall and time is given either to top up this fall by additional shares or cash before the next morning... technically speaking, this means that both cannot happen on the same day... In our case, the sale happened first and the margin call reason was cited for this sale which itself explains the truth. We have built the company brick by brick over the past 17 years and grown despite some of the worst business challenges in 2001 and 2008," he said.
  • The stock is locked in lower circuit for the last few days, indicating that investors are still not convinced. At Monday's closing, its market cap was Rs 357 crore. Its revenues for FY12 were at Rs 2,273 crore and PAT at Rs 205 crore. In short, the company is available for 0.16 times its FY12 sales, and 1.74 times its FY12 net profit. Promoters held 42.5% at September end, of which 52% is pledged. They have increased holding from 36.6% in the June 2011 quarter following a robust performance.
  • Zylog officials say they have the financial strength to withstand the crisis. The promoters will have to clarify about the percentage of shares pledged and the way to relieve pressure on the stock. Investors may then have a chance to weigh options.
Valuation:
  • Crisil has been covering this stock and had been maintaining a price target of Rs.656 prior to stock split. Infact the stock reached Rs.620 per share prior to stock split.
  • Zylog Systems stock split from face value of Rs.10 to Rs.5 was completed on 03 July 2012, resulting in share price of Rs.310.
  • But the recent crash of 62% in stock price, that too in span of 15 days resulted in the share price at Rs.103.
  • On papers, the valuations look extremly attractive.
  • Against a book value of Rs.251 and EPS of 52, the stock trades at PE of 1.95 and Dividend yield of 4.84.