Source: EM

Noel Whittaker, financial author and investment advisor rightly said, “Life is full of uncertainties. Future investment earnings and interest and inflation rates are not known to anybody. However, I can guarantee you one thing. Those who put an investment program in place will have a lot more money when they come to retire than those who never get around to it.”

Getting rich is not an easy thing. But, it is definitely a simple thing. It just requires 3 things: income, time and discipline. Many of us would be having income and time. All that is required is a pinch of discipline to find the perfect flavour. In this article, we highlight the power of regular investing, which is simple yet has the ingredients to make your investment a healthy outcome.

Compounding: Compounding is a financial phenomenon that makes time and money work in your favor. It is what happens when your investment earnings are added to your principal, forming a larger base on which earnings may accumulate. And as your investment base gets larger, it has the potential to grow faster.

For example, if you had Rs 5,000 in an account that paid 5% annually in simple interest for five years, you’d earn Rs250 a year, for a total of Rs 1, 250 in interest. In this case the interest rate and the yield are the same — 5% per year. But the same Rs 5,000 investment paying 5% interest compounded annually for five years would produce a total of Rs 1,381.41 in interest. Because you are earning interest on your interest, the yield – an average of 5.52% per year – is higher than the interest rate.

The real magic of investing comes when you combine the power of compounding with continuous and regular investments – in other words, discipline. For example, if you start with a amount of Rs 50,000 and add only Rs 250 per month, you would have Rs 180,000, Rs 525,382 and Rs 1.4 m after 10, 20, and 30 years, respectively. No wonder Albert Einstein said that compounding is the eighth wonder of the world.

Dollar-cost averaging: Dollar cost averaging also known systematic investment (through SIP for mutual fund schemes) is a technique to reduce market risk through the systematic purchase of securities at predetermined intervals and fixed amounts. Instead of investing in a lump sum, the investor works his way by slowly buying smaller amounts over a longer period of time. This spreads the cost over several periods, thus providing insulation against changes in market price.

Let us assume you decide to put Rs 100 every month in an investment that is currently selling for Rs 10 per share (for this hypothetical example, let us assume that there are no additional charges). The first month you invest Rs 100 and receive 10 shares. Now if, in the second month, the market falls and the price drops to Rs 5 per share, your Rs 100 buys you 20 shares. The market rebounds in the following month, the price jumps to Rs 10 per share, and for your Rs 100 investment, you again receive 10 shares.

As you can see from the above table, you now own 40 shares after a total investment of Rs 300. The latest price is Rs 10, but the average cost to you was Rs 7.5. While this is just a short-term example, by being disciplined and remaining with the program is the key to the long-term success of dollar cost averaging.

Sure, investing in the stock market has risks. There is always the chance that the markets will go nowhere for the next 5 or 10 years and you shall end up no better than where you started. But then, discipline is a way not to eliminate risks but to minimise them. Regular investing combined with the power of compounding will help you earn adequate returns on your investment over a long term.

• Fed may raise rates once more: Morgan Stanley (who cares now!)
• More downside likely in Indian mkts: Lloyd George
• Buy Punj Lloyd: Citigroup
• EMs to rally in few days: DSP ML
• Brokers bullish on Tata Motors, Precot Mills, ONGC
• Bullish on Era Constructions: Motilal Oswal Securities
• Mkts trading at good supply area of 10,500-10,550: Thacker
• Fed may be close to a neutral policy stance: Glassman
• Goldman Sachs digging for gold in midcaps?
• Why Morgan Stanley is overweight on Bajaj Hindustan?
• Portfolio selection is a patient act

• India Pharmaceuticals Outlook - KPMG
• Construction Sector - First Global

Posted by toughiee at 5:58 PM | Permalink | Comments | links to this post

In an almost certain move, the US Federal Reserve in the quarterly FOMC meet once again, did what it has been doing for the past 16 instances, raise the Fed rates by a quarter percentage point (0.25%). Citing the necessity to continue 'policy firming to address inflation risks', the US Fed has raised the benchmark rate to 5.25%, thus dousing hopes of a possible halt in the rate hiking campaign.

The Fed's prime concerns herein were a moderation in economic growth partly reflecting in a gradual cooling of the housing market and the lagged effects of increases in interest rates and energy prices. Also, to keep the inflationary pressures in check going forward, the central bank has cited the necessity to keep the liquidity-tightening monetary policy in place. As against popular belief, the Fed, this time, did not mince words to signal that more such measures will be pertinent in the future. It may be recalled that in the earlier meeting the central bank had added a disclaimer "...the extent and timing of any such firming (in the future) will depend, importantly, on the evolution of the economic outlook as implied by incoming information", thus refusing to spill the beans as to the limit upto which the rates could be raised.

The Fed's comments with regard to the rate hike primarily focused on the longstanding concerns about global imbalances. The solution to which were cited as - greater national savings in the US, increased domestic demand in countries with current account surpluses and a greater flexibility of exchange rates. Readers should note that this rate hiking campaign is not only towards paring the pressure arising from rising inflation levels in the US economy, but also to correct (or reduce) the impact of its huge current account imbalance. Should US economic growth moderate as expected, sustaining the global expansion will require a greater reliance by its trading partners (including India) on their own domestic spending as a source of growth.

The possible repercussions… The uninitiated may note that the Fed funds' rate is similar to the reverse repo rate as used by the RBI to manage liquidity in the Indian banking system. This rate is also a benchmark for other broader interest rates (CRR, prime lending rate) in the economy and impacts the cost of funds and lending rates across asset classes.

RBI may follow suit: It may be recalled that taking cues from its global counterparts, the RBI, in an unexpected move raised the repo and reverse repo rates by a quarter percentage point each early this month. RBI's move of raising the interest rates comes as a calculated step towards aligning the domestic economy with the global one. Thus, with the Fed's appetite for rate hike remaining un-satiated, such moves may be further expected from the RBI.

Rupee depreciation: It is also pertinent to have cognizance of the fact that the accelerated rise in the US Fed rate may have an impact on the Indian economy. The depreciating rupee (against the greenback) vindicates the Indian current account imbalance. A further deficit in the same may lead to the rupee losing further ground, thus making our import bill dearer (notwithstanding the impact of rising crude prices).

Equities bear the brunt…In light of the concerns highlighted by us time and again with respect to a faster rise in US interest rates and FII flows reversing their direction towards the 'more attractive' and 'safer' US treasury bills, investors must draw parallel of the same with the recent correction in the stockmarkets.

Conclusion… The writing is clear on the wall. Rate hikes will continue in the global as well as domestic economic scenario. The same will lead to moderation in corporate earnings (due to higher interest burden) and economic growth. While India's consumption story and lesser dependence on exports leaves it well hedged against the global slowdown, the fiscal imbalance lingers as a vital concern. Investors in equities shall, thus, take into consideration that they need to cover their risks adequately before zeroing on to their investment decisions.

Posted by toughiee at 5:25 PM | Permalink | Comments | links to this post

Source: EM

With the BSE Sensex at its volatile best (or worst), these are indeed difficult times for investors. After the benchmark index hit its all-time high of 12,600+ in May this year, it has since witnessed a significant correction and volatility has taken centre-stage. At every rise, participants take the opportunity to book profits, with sentiment being as yet apprehensive. In such times, what could be the best strategy to use as a long-term investor?

Well, we firmly believe that if one sticks to basics, it is not difficult to earn good returns from equities. The caveat, of course, would be that one has to have the patience to stay invested over a longer period of time, and, most importantly, one should have the ability to keep one's emotions in check. That is, to put it simply, not get carried away in a bull market and buy stocks at obscenely high valuations, and also, not get fooled into thinking negatively in a downward phase, when fear is the primary emotion that drives the market and keeps stocks at lower levels. To use a famous quote from Warren Buffett, the investing legend, "We only attempt to be fearful when everyone else is greedy, and greedy when everyone else is fearful." Thus, being 'long-term greedy' is the best attitude to have in any sort of market.

We run through a brief process of investing here. We are of the firm belief that if one follows a disciplined process of investing, one can accumulate significant wealth over the long-term.

1. Assess your time horizon - are you a trader or an investor?

   There is a significant difference between these 2 classes of people. The word 'investor' is arguably the most misused term in the stock markets. Some people are into share trading as a business, and routinely move into and out of stocks within a time frame of a few hours. These are called 'traders'. 'Investors', on the other hand, would be typically people who, after thorough analysis, put money in stocks and hold on for a longer period of time, generally at least 2 to 3 years. Thus, you must understand exactly where you fit in.

2. If you are an investor, do you have patience and the ability to keep emotions in check?

   If you have identified yourself as belonging to the investor camp, then you should understand that investing in stocks is not that simple. It takes a lot of patience to earn good returns. In a bear market, stocks, despite showing good financial performances, do not necessarily deliver the same returns. You have to keep your confidence in the company, and be patient, as over a longer period of time, the markets do ultimately reward good financial performances. However, most importantly, you must be able to detach from the 'noise' that often travels around in most markets. In simple terms, you must keep focus on business fundamentals, regardless of whether it is a bull or a bear market, and sell the stock if it crosses your target price, and buy if it becomes attractive enough.

3. Have you done your homework before investing your hard-earned money in stocks?

   Before putting money into stocks, it is extremely important to first study the companies that one wishes to invest in. Only if one is aware of the company, its business model, management capabilities, market share, sustainability of growth and stability and consistency in earnings, he must take the plunge. And one must understand the downside as well, before ascertaining the upside. This step, we believe, is more important than actually investing, because the investor is actually aware of where he or she is putting his or her money and at what cost. Once again, it is the process of investing that is of utmost importance. If you do not have the time to do such a study, it is best left to the experts to handle this, that is, investing in a reputed mutual fund.

4. Keep on following up...

   And finally, you must keep a constant track of the companies that you invest in. Regardless of how markets behave, bullish or bearish, you must keep an ear to the ground and accordingly act. For example, if you have invested in Company 'X', having confidence in its future prospects, and the company does not perform in line with your expectations, study clearly as to why this has happened - was it just a one-off difficult year for the company, or has something changed fundamentally that the company might not perform well in future as well. At the end of the day, it is your hard-earned money that you are investing. If you have worked hard to earn that money, why not do so to see your money grow, rather than wither away!

The above is an indicative process that one should use while going about investing in equities. We certainly believe that it is necessary to invest according to a disciplined process, and this is the best way to make money in any market, bull or bear, across economic and market cycles.

Posted by toughiee at 6:49 PM | Permalink | Comments | links to this post

Posted by toughiee at 6:12 PM | Permalink | Comments | links to this post

Ever imagined 'why Infosys is what Infosys is', or for that matter 'why HLL is what HLL is'? What is that 'edge' that separates these companies from the rest in their respective industries? What 'competitive advantages' do these companies hold, and hold them tight, which have helped them grow in both good times and bad? Well, we are here to discuss about what 'competitive advantages' should companies have for them to grow with sustainability over the long term and create wealth for their stakeholders. And in this course, we shall try and understand the 'Competitive Advantage' model of the legendary management guru, Michael Porter.

Competitive advantages can come from ethical leadership and execution strengths such as those held by Infosys, or from distribution systems and scale like those enjoyed by HLL, which also enjoys a recognizable brand. All of these qualities allow companies to maintain high returns on capital and equity, and stay profitable over the long term (while there might be occasional blips in performance due to changing dynamics of the company/industry in which they operate.

Porter's model for Competitive Advantage In his famous book, "Competitive Advantage: Creating and Sustaining Superior Performance", Porter describes how a firm can put the three dynamic yet generic competitive strategies of cost leadership, differentiation and focus into practice. It highlights, for example, how a firm can differentiate itself from its rivals and create a superior business model that lasts over a long period of time.

Cost leadership: This advantage is often achieved by economies of scale. Companies that have the ability to manage growth while building up scale are the ones that are able to hold fort higher than their competitors. A business achieves economies of scale as a result of producing (or selling) more for a reduced average cost. This is gained by distributing fixed costs (costs that do not change as a result in a change of production, like rent, salaries and insurance premium) over an increased number of products. Economies of scale are often incentives for businesses to grow. This is because many small businesses cannot compensate for a sufficient increase in production and sales because of current resources (production space, number of employees and budget) and, therefore, cannot practice economies of scale. Because of reduced costs, businesses can price their products to be more profitable. Examples of Indian companies that benefit from this competitive advantage are Bharat Forge (second biggest forging company in the world), Tata Steel (India's largest steel producer) and Hero Honda (world's largest motorcycle manufacturer).

Differentiation: This involves creating a product that is perceived as unique by its consumers. For this strategy to be successful, the unique features or benefits should provide superior value to customers. And since they (customers) see the product as unrivaled and unequaled, the price elasticity of demand (changes in demand relative to changes in prices) tends to be reduced. Differentiation also tends to make customers more loyal towards 'the' brand. This can provide considerable insulation from competition. Areas of differentiation can be product (i-flex's Flexcube core banking solution), distribution and sales (HLL), marketing and services (Bharti Tele). Now, while maintaining the differentiation advantage, a company cannot ignore its cost position. In all areas that do not affect its differentiation, it should try to decrease costs.

Focus: Following a 'focused' strategy, a company sets out to be 'the' best in a business segment or a group of business segments. A company typically looks to gain a competitive advantage through effectiveness rather than efficiency. This strategy of making a mark in the industry is most suitable for relatively small firms but can be used by any company across any value chain. Examples of 'focus' are well entrenched in companies like Geometric Software (PLM solutions) and IDFC (infrastructure financing).

Conclusion We believe that gaining a competitive advantage is the key especially for mid-size Indian companies to perform well and survive in today's highly globalised and intensely competitive markets. Gaining an upper hand in any of the three advantages mentioned above is very important in today's global markets when firms face global competition. Moreover, as Indian companies (both big and small) take their first steps forward towards becoming global giants, there is an ardent need for them to effectively translate their broad competitive strategies into specific actions required to gain competitive advantage. And that will consequently provide a competitive advantage to 'long-term' investors in the 'long-term' India growth story.

• Brokers bullish on Ranbaxy Labs, TVS Motor, Tata Motors
• Fed to consider 6% rate target for 2007: JP Morgan
• Sugar: Still a sweet story?
• It’s a stock-pickers market out here
• ‘The best hedge for the fund manager is to do his homework well’
• `Foreign investors still bullish on India`

• Reliance Inds - Enam
• Global Imbalances and The India Story - LKP
• Dividend Yeilds - LKP
• Indian Economy - Brics
• Steel Sector - Enam
• IT Sector - Enam

Posted by toughiee at 6:37 PM | Permalink | Comments | links to this post

Source: EM

The taste of apprehension in light of the US Federal Reserve's impending meeting on June 29 was experienced yesterday, as Indian equity markets declined by over 3% with stocks from the capital goods sector witnessing significantly sharper declines. Engineering and construction stocks have been rallying, as they were proclaimed to be the darling of the street based on the strong growth story, which was magnified by their burgeoning order books. 'Attractive PEG ratio' was also used as a reasoning tool to recommend stocks from the sector.

So, what has changed? Nothing really, as far as the fundamentals are concerned! Companies from the sector continue to rake in strong order bookings on the back of infrastructure drive in the country. Key beneficiaries are companies serving the needs of the power, road construction and oil and gas sectors.

However, valuations of companies from the sector have taken a severe beating during the past few weeks. If one were to take a look at the adjacent chart, the magnitude of the fall can easily be identified. For instance, ABB India, which, at its 52-week high levels, was trading at an obnoxious price to earnings multiple of 64.5 times training 12-month (TTM) earnings, currently trades at 43.8 times, which is still stretched from a medium-term perspective. Another stock is Voltas, which has seen valuations decline from 52.6 times TTM earnings to the current (and more reasonable) levels of 37.1 times earnings.

Investors need to understand that strong order bookings, while providing companies with some visibility into the future, should not justify high valuations. Order books follow a long cycle i.e., it takes almost 24 to 36 months for a company like BHEL to convert its order bookings into actual revenues. And in this long period of time, there can be many variables that can play havoc with the company's estimates on the execution front. Some of these variables can be changes in government policy, the overall investment environment, and volatility in input prices (availability of key raw materials and fuel sources) and uncertainty with respect to retention of key personnel. Indian engineering majors 'are' facing some of these issues currently, and that makes the timely execution of the order backlog highly unpredictable.

In high times (when stock prices are rising and everything seems hunky dory), another 'criminal agent' that takes centre-stage is the 'PEG' ratio or 'price to earnings growth ration'. Participants argue that since a company is expected to grow earnings at 40% to 50% per annum in the next 2 to 3 years, they 'must' command similar kind of price to earnings valuations. That is to say that anything below a PEG of 1 is 'attractive'! Another example of plain and simple logic taking backseat while greed being in the driver's seat!

As indicated above, considering that the gestation period for capital good companies is typically long (orders take a long time to convert to revenues), and that several unknown variables can impact performance during this period, using PEG to justify high valuations should be a 'no-no' for long-term investors.

• Brokers bullish on Colgate, Ranbaxy, Bharti Airtel
• Global mkt correction to continue: Morgan Stanley (MS - as usual, a perennial bear!)
• Neutral on Ranbaxy Labs: ML
• LN Mittal: The Sultan of steel!
• The ethanol challenge
• Citigroup keeps faith in India story
• Is PMS to be taxed at a higher rate?

• Greed & Fear - CLSA
• Investment Picks - HDFC

Posted by toughiee at 7:09 PM | Permalink | Comments | links to this post

• Buffett to give away billions to Gates
• 5 Indian firms in global 100 infotech list (is this an investing blog or something else!?) :))
• You just can’t beat the stock markets day in and day out
• The nine stocks that hold promise
• Stocks from peak to now
• Brokers bullish on Aban Loyd Chiles, Lupin, NDTV
• How the BSE 500 performed between 6K and 9K?
• Growth or Dividend: Choose right
• SBI is a good buy: Macquarie
• Rates to harden more: ICICI Bank
• IVRCL Vs HCC: Constructing India!
• Hotels: Rolling out the red carpet
• Jim Rogers Says China Equities, Commodities Will Boom
• A for alpha, B for beta
• Seed of a bull run? Wait for a while
• It's about ERP: Ridham Desai

• India Strategy - UBS
• Forward Estimates (Forward P/E)
• How to read Financial Statements Part 2 - Dr. T. Rawal
• FMCG - SSKI

Posted by toughiee at 6:01 PM | Permalink | Comments | links to this post

In keeping with the FII flows, the Sensex rose from 3,000 points in May 2003 to its peak on May 10, 2006, up 420 per cent! Come May 12, 2006, the bearish sentiment triggered by a combination of factors, ranging from high inflation, rising global interest rates leading to FII outflows, higher crude oil prices and slower economic growth showed no signs of abating, as Indian equities succumbed to cues of weakness across major global markets. For the first time in calendar 2006, the BSE Sensex fell below the so-called support level of 9,000 levels (albeit with no support!). Though the markets have recovered to touch the 10,000 mark, the nervousness among participants is still prevailing.

Like all other sectors, hotel stocks too faced the brunt of the negative sentiment. Almost all stocks from the sector fell from the highs of 2006. The correction in these stocks has, in general, been in line with that of the benchmark index, the BSE Sensex. This can be seen in the chart below, with all the stocks in question – Indian Hotels, Taj GVK, EIH and Oriental Hotels - having lost more or less in line with the Sensex.

However, despite this fall, we continue to be bullish on the hotel industry prospects from a long-term perspective. For long-term investors, this seems to be a good opportunity to enter the markets and buy stocks at more reasonable valuations, as the fundamentals are still intact.

Foreign tourists still come knocking at India’s door: India, as a favoured destination for foreign tourists, continues to roll. The inflow of the tourists for the period January 2006 to April 2006 has grown by 14.4% as compared to the corresponding period last year. The foreign exchange earnings are also up 16.3% YoY. The last year was a golden era for the hospitality industry with 3.9 m tourists visiting the country. This year we expect around 4.4 m tourists to visit India.

Upmove continues: Ten cities in India continue to play the role of perfect host this year. After ending FY06 at a phenomenal 41% YoY growth, both in terms of revenue per available room (RevPar) and average room rates (ARRs) across 10 key Indian cities, the hospitality industry’s performance in April 2006 shows that growth is here to stay. During April 2006, RevPar in the premium segment in premier cities rose by 34% YoY. The RevPar growth was driven primarily by ARRs, which increased from Rs 5,592 in April 2005 to Rs 7,563 in April 2006, a growth of 35% YoY (Source: Cris Infac). Occupancy rates across these cities are also on the rise. Riding on a wave of unprecedented room rate realisations, even summer occupancies continue to run high, lessening the effect of seasonality on the hotels.

Visible expansion plans: Most of the hotel chains are expanding their room inventory. Indian Hotels along with its group companies is adding 2,000 rooms in the next couple of years. Hotel Leela has also drafted a blue print for expansion by increasing its room inventory by 50% at an estimated cost of Rs 14 bn. EIH’s Mumbai property is also going to start operations by end of 2007. The foreign brands are not far behind. While Shangri-La is targeting 8 to 10 hotels by 2010, Dawnay Day, with an initial US$ 200 m investment, is planning to add 30 three- to four-star hotels in the next three to five years.

Conclusion As we have indicated above, we are buoyant on the prospects of the Indian hospitality industry, both from the international and domestic tourism perspective. On the back of constrained supply, at least in the medium term, we expect occupancy levels and ARRs to remain robust across hotel properties. However, investors need to give adequate consideration to event risks (like economic slowdown and terrorist strikes) that might constrain this growth.

• Markets expected to consolidate: Gul Teckchandani
• Markets seem to be on a sound wicket: VK Sharma
• Stock-splits and bonuses: The affordability and liquidity matrix
• Relief rally or return of bulls?
• Reliance Industries: Venturing into new vistas
• R-ADAG: Banking on the New India
• India arriving in manufacturing: study
• It’s been the best week in nine for the Sensex

• IT Sector - SSKI
• Pharma Sector - SSKI

Posted by toughiee at 5:19 PM | Permalink | Comments | links to this post

Posted by toughiee at 7:39 PM | Permalink | Comments | links to this post

Source: BWI

Most people believe that the stockmarket crashed in May 2006 because the FIIs sold. But that’s part of the picture. Local punters played the highly leveraged stock futures market of early May. They had bid up the futures prices till they quoted at a hefty premium to spot prices.

During this period, the FIIs sold futures and bought in the cash market because of the arbitrage opportunity. They tried to gain by selling higher in the futures segment and buying lower in the cash segment. When the fall started on 12 May and futures became available at a discount, FIIs reversed their strategy.

Between 1 May and 12 May, FIIs sold a net notional amount of Rs 3,644.96 crore in the futures market while buying a net Rs 2,525.8 crore in the cash market. Between 15 May and 31 May, the position was reversed with the FIIs buying a notional amount of Rs 7,046.59 crore in the stock futures market while selling a net Rs 10,772 crore worth of stocks in the spot market. Netting out the cash and stock futures markets, FIIs were sellers, not only after 12 May when the market fell, but also before it.

Since 2 June, however, FIIs have been net buyers both in the cash market and in stock futures. Till 19 June, they bought a net Rs 3,515 crore of futures and Rs 2,422 crore in the cash market. That’s almost as much as they bought into the cash market in early May. So why hasn’t the index gone up? Because mutual funds have become net sellers. In the month to 18 June, they sold a net Rs 2,304 crore, while they had bought a net Rs 2,075 crore between 1 May and 12 May. The FIIs may have started the slide, but the local sellers are continuing it.

Images & Statistics:

• FIIs Net Buy/Sell

Posted by toughiee at 6:49 PM | Permalink | Comments | links to this post

India: pitfalls and possibilities

Is GDP growth destined for double digits?

[This is a wonderful 50-page report which focusses on India's potential to achieve China-like growth rate. A must read for believers in India Growth Story!!]

Click here to download the report

Posted by toughiee at 6:38 PM | Permalink | Comments | links to this post

The legendry investor Warren Buffet in an interview to 'Fortune' once quipped, "In economics, interest rates act as gravity behaves in the physical world". The rate hike triggered liquidity drought has put on hold the banking sector's claims of sustenance of a robust credit cycle. The shift from the falling interest rate scenario (FY01 to FY04) to a rising one (FY05 onwards) is expected to have telling impacts on the banking sector. While the former gave the players in the sector the comfort of lower cost of funds, windfall treasury gains and ability to write-off/settle NPAs, the latter will not be as benign. Here, we look at some of the early signs of the same.

Credit - rate shy: While most banks started hiking their lending rates since 2HFY06 (post IMD redemptions), for players across the sector, it became pertinent to do so once the rise in funding costs became unsustainable. The funding pressure was accentuated in the sub-PLR loan portfolio, which needed an immediate rate revision, leading to most banks raising their PLR rates too. The mortgage loan portfolio witnessed rate hikes to the tune of 200 to 300 basis points as the risk weights on real estate loans were pushed up to 150%. With this, the incremental credit offtake showed a clear sign of deceleration and credit offtake declined by 1% YoY in the first two months of FY07. The decline in credit offtake was also evident from the falling credit to deposit (CD) ratios. The nominal CD ratio is currently at 69.9%. While on the face of it, this ratio may appear comfortable, it must be noted that the incremental CD ratio has sharply dipped. The RBI's latest weekly statistical bulletin shows the incremental CD ratio at 43%, which is a three-year low. The same was over 125% in FY05!

Deposits - hard to come by: The liquidity dry up in the banking system coupled with the RBI's T-Bill auctions has left banks hard-pressed for deposits, more so for low-cost deposits. However, despite the revision in interest rates, the banking sector has witnessed a fall in demand deposits in the current fiscal so far. The term deposits have been better off due to the relative attractiveness of the same due to fiscal benefits.

Margins - lag effect: As can be seen in the adjacent chart, the net interest margins of banks have a clear correlation to movement in interest rates. While in a falling interest rate scenario, banks defer the passing on the rate benefit to customers (leading to sustenance of higher NIMs), in a rising rate scenario the same deferral happens in case pricing the assets higher (leading to early contraction in margins). The NIMs of banks across the sector have witnessed around 20-30 basis point contraction over the last fiscal.

Treasury - at mercy of Bond Street: The banks' treasury portfolio, which saw windfall gains during the falling interest rates scenario, bore the brunt of losses as the rates headed upwards. This was on both counts, provision for shift of investments to the HTM basket as well as booking of mark to market (MTM) losses in the AFS basket. Given this, with the 10-year G-Sec yield now hovering at 7.9%, it will be the banks that have majority of the investments in the HTM portfolio and sufficient floating provisions to meet the rising interest rate risks, which will stand hedged against treasury losses.

Delinquencies - learning from the past: In the previous upturn in interest rate cycle, the adverse impact on banks was the phenomenal rise in delinquency rates (going upto 14% in some cases). This time, however, banks seem to have learnt lessons from the past. Although the possibility of higher NPAs surfacing in the retail credit portfolio cannot be ruled out, banks have better appraisal procedures and provisioning measures in place to keep the same under check.

Investment in banking stocks... While the above caveats should not be construed by investors as a guidance that investment in this sector is a no-no, what we intend to do is make you aware about the changes in the sector's dynamics. It is pertinent that the investment decision in a company in any particular sector is undertaken by considering the fundamentals of the sector. As certain players in the sector may enjoy a competitive edge (for e.g.: banks with above average NIMs, lower NPAs and sufficient floating provisions), investors would be better off keeping their portfolio de-risked by limiting themselves to these.

• Fed may raise rates due to rising inflation: HSBC
• Not optimistic on Asian steel prices: Roger Manser
• Rise in inflation is a matter of concern: FM
• No froth in markets, long term story intact: Enam
• Markets have entered a bearish phase: Morgan Stanley
• Brokers bullish on Cipla, Tata Motors, Mah Gesco
• Bull trend will continue in July: PN Vijay
• Like to see a little more fear before we buy: Hartnett
• Global flows again eyeing emerging mkts: Anand Tandon
• Realty sector to be driven by IT, retail: CLSA
• Hotels: Hot streak continues!
• How Many Stocks Should You Hold?

• Cement Sector - SSKI
• India: a growth model in transition - BNP Paribas
• State Bank of India - Macquarie

• The World's Biggest Public Companies - Fortune

Posted by toughiee at 6:24 PM | Permalink | Comments | links to this post

"Froth cleansed; Start selective long term Buys"

Click here to download the report

Posted by toughiee at 5:45 PM | Permalink | Comments | links to this post

Posted by toughiee at 5:42 PM | Permalink | Comments | links to this post

Source: EM

These are undoubtedly difficult times for investors in the Indian stock markets. The kind of volatility that has characterised the indices over the past month or so has led to numerous participants fleeing the markets altogether. With the 'bearish sentiment' currently prevailing, a number of investors have lost significant amounts of money. There have been horror stories about how people have lost their houses in this fall having over-leveraged their positions. This fall has taught many people valuable lessons (if at all they are willing to learn), and clearly shows the foolhardiness of 'biting off more than one can chew'.

However, for longer-term investors, this seems to be a good opportunity to enter the markets and buy stocks at more reasonable valuations. This is particularly true of the software sector, which appears to be on a strong growth path over the medium-to-long term. The correction in stocks, particularly the top-tier stocks from this sector has, in general, not been as much as that in the benchmark index, the BSE Sensex. This can be seen in the chart below, with all the stocks in question - Satyam, Wipro, Infosys and TCS - having lost less than the Sensex.

We believe that the software sector is in for exciting times ahead. Let us re-examine the fundamentals of the sector to see whether the recent correction is warranted.

• The demand environment for offshoring remains robust. This can be seen by trends that are fast beginning to characterise the global software industry. 'Strategic global sourcing' is one such trend, where the project is broken up by the client into various functions and each function is handed to the best-of-breed vendor in that function, who can combine strong domain knowledge, execution skills, global delivery capabilities and optimize costs. An example is the ABN Amro deal, where the infrastructure management part of the deal went to IBM, while the application maintenance part went to Accenture, Infosys, Patni and TCS.

• A look at the top-tier software companies' client metrics clearly reveals the ever-increasing order book size and revenue visibility, as a greater number of clients have expanded their relationships with Indian software vendors. To give an example, the number of clients giving Wipro revenues in excess of US$ 1 m annually has risen significantly, from 157 at the end of FY05 to 212 at the end of FY06.

• A look at the sheer size of the opportunity ahead for the sector gives a clear indication that one must look at the long-term and view the broader picture, rather than the short term. Just to quote a few figures, the estimated size of the offshoring market in 2005, as per the NASSCOM-McKinsey Report 2005, was US$ 30 bn. This was against an estimated market potential of US$ 330 bn. India, with its low-cost base, good engineering and management talent, natural time zone advantages and global delivery capabilities, is best positioned to take full advantage of this opportunity. To be more specific, in our view, the top-tier firms will benefit more from the offshoring story, given their significantly larger size, scale, global delivery networks and top quality, visionary managements.

• The very fact that IBM is investing as much as US$ 6 bn in building up its India centres is a clear vindication of the global delivery model invented by Indian software majors. Other MNC IT majors also have big plans for India, such as Accenture, which expects to have its total Indian employee headcount at around 50,000 over the medium-term. EDS' latest move to acquire MphasiS BFL in order to get a strong 'India footprint' is yet another proof of this fact.

Therefore, we believe that, given the above fundamental factors, nothing has really changed that significantly in the software sector. We are positive on the sector as a whole. Of course, one must always take into account the risks, which chiefly include currency movements, wage inflation, ever-increasing attrition rates, margin pressures and competitive pressures.

• Brokers bullish on Ashok Leyland, Welspun Guj, RPG life
• Einstein & magic of compounding
• Realty sector to be driven by IT, retail: CLSA
• 2006 to see cautious optimism in primary market: Bhansali
• Mkts to get stable: Oppenheimer
• Bullish on crude: Swiss Asia Cap
• Copper prices to fall 20%: Heap
• The SEZs Rush: Morgan Stanley
• 3 local firms in S&P BRIC index
• 2006 to see cautious optimism in primary market: Bhansali
• Bigger value outside 30-stock Index: ASK Raymond James
• Outlook for refining sector strong: Cholamandalam
• More blood will flow: Jagdish Malkani
• Correction of exuberance

Posted by toughiee at 7:17 PM | Permalink | Comments | links to this post