But the market is obviously not differentiating between plans and their execution. Given growing protests over SEZs, the need for environmental clearance and permission for conversion of agriculture land to non-agriculture use, real estate investment experts do not rule out delays. CLSA estimates that every six months of average delay will change the NPV by Rs 35 per share.

Secondly, any significant increase in interest rates can also dampen demand for homes, which is a large contributor to Unitech’s revenues. Lastly, if real estate prices cool off from their current high levels, it will lead to lower profits for the real estate division, which accounted for 54.6% of total segmental profits in 2005-06. As per CLSA estimates, a 1% change in selling prices will lead to a 2% change in NPV per share. Rising real estate prices (during the last two years) have helped consolidated profit margins for the real estate division jump from 7.7% in 2003-04 to 22% in 2005-06. The construction division’s margins rose from 8.5% to 13% during this period.

Unitech’s plans, which involve completing most of its projects (excluding SEZs) by 2013, translate to construction of an average 66 MSF annually for the next seven years. Contrast this with the fact that the company has developed just over 10 MSF and about 1,000 acres in plots during the last 20 years. Also, compare this with 28 MSF of constructed area (residential, commercial and retail) delivered in Mumbai (including Thane and New Mumbai) and 20 MSF in Pune during 2005-06. Are the markets listening?

Source: DNA Money

Capital goods: Look before you leap!

Growth in user industries like power, construction, refining, textiles, automobiles, and other manufacturing, has led to strong performance by the Indian capital goods and heavy industries companies in the past 2-3 years. Apart from creating sufficient domestic supplies, the growth in capacity expansion and improvement in productivity levels has also led to these companies charting a more confident global route than ever before. In fact, as per the Engineering Exports Promotion Council of India, India's heavy industrial and capital goods exports, which have grown at a compounded rate of 32% during the period FY01 to FY05, are estimated to grow at a rate of 25% per annum during the period FY04 to FY09.

However, do these statistics and growth prospects definitely mean that investors should be blindfolded in their approach to investing in stocks from the sector? Not really!

While we have a positive view on the sector in terms of improving revenue visibility on the back of burgeoning order books of players across the sector, which is a consequence of the huge investment plans from public and private sector enterprises, there are a host of risks that surround these companies' prospects.

Over the past few years, considering the huge opportunity that the sector brings along, there has been a multi-layer increase in the number of participants in the capital goods and heavy engineering sector - multi-layer because the increase has been seen across the spectrum pf projects and heavy equipment segments. This has led to an increase in 'commoditisation' of the industry, whereby companies are fighting for volumes by sacrificing profitability. Even the best and most diverse of the companies have not been able to perk up their margins significantly in the past two years. While higher input prices are definitely a reason for lacklustre margin profile of many of these companies, there is no denying the fact that commoditisation has taken a serious toll across sub-segments, be it infrastructure creation, or power.

Another negative offshoot of the business opportunity has been increasing challenges for companies on the employee acquisition and retention front. Some of the companies have even indicated of attrition levels of 10% to 15%, which, unless clarified, might seem like employee churn in the IT services and BPO industry. Some critical divisions of these companies, like design and project execution, are in fact facing the biggest crunch in terms of talent acquisition and retention. And, apart from rise in employee costs, this has led to a big part of the crucial management time getting diverted to human resource issues.

Finally, as a flip side to the 'high visibility' factor in terms of burgeoning order books, there emerge equally high levels of high execution risks. This is because companies from the sector are increasingly adding contracts that have long gestation periods, or long execution cycles. Among many, this leads to risks from changes in business climate and uncertain movement of commodity prices.

And, what about valuations? Well, this is one of the foremost concerns that we have with the capital goods/heavy engineering stocks. With some of the leading companies trading at price to earnings multiple of as high as 40 times trailing twelve months' earnings, despite factoring in all kinds of positives like visibility and improved execution capabilities, we are uncomfortable with respect to the overall sector valuations.

As indicated above, apart from the 'visibility' part (as seen from big order bookings), investors need to clearly understand the risks associated with the same. While the need to sustain high levels of growth through creation of world-class infrastructure facilities shall continue to provide companies from the sector with multiple growth options, you, as an investor, need to identify whether the price that needs to be paid for the ensuing growth is justifiable or not.

Source: EM

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Please note that wherever possible I mention the original name of author or the website in the post!

The main purpose of this blog is to get all daily interesting information on one page so that people do not have to visit 15-20 sites daily just to read different articles. I have got many feedback from visitors on this issue & they seem happy for the same.

Perhaps, this quote perfectly symbolizes investments into mid-cap stocks. These involve risks - stepping from the known (large caps, for which information is widely available) to the unknown (mid-caps, where information availability is low). While much has been talked about mid-cap stocks and the upside potential, lets understand what mid-caps actually mean and how should one go about investing in such stocks for the long-term?

Midcap or Mid-tier stocks? Market cap (or market capitalisation), put simply, is the product of the stock price and the number of stock shares issued. As such, a Company X with issued shares of 100 m and stock price of Rs 30 will have market cap of Rs 3,000 m (US$ 65 m). There are two factors here:

1. Share capital: The quantum of share capital varies sector-to-sector i.e. a smaller bank is likely to have a significantly larger capital base than a smaller company from the software sector because banks, by nature, need capital to grow. Take the example here. ING Vysya Bank's market capitalisation is Rs 5,999 (based on the market price on June 14th 2006) whereas the market capitalisation of Mangalam Cement is Rs 3,433 m (US$ 76 m). To put things in perspective, Mangalam Cement's turnover is Rs 3,090 m whereas the income from operations for ING Vysya Bank in FY06 was Rs 12,224 m. The nature of the business therefore, has a significant influence on the market capitalisation.

2. Stock price: Perhaps this is the most misunderstood part of the whole midcap hype. Stock markets are hardly 'perfect' and the current stock price of a company may or may not reflect the long-term value and therefore, the market capitalisation may be depressed. Secondly, there is a general perception that a stock trading at Rs 32 is a midcap (Ashok Leyland) as compared to a stock trading at Rs 730 (Tata Motors). What is important to focus in the case of midcap are 'valuations' and not the 'stock price'.

Given this backdrop, what actually is a midcap? Actually, there are no industry standards with respect to the classification of a midcaps per se. Given the NSE's categorization of mid-cap stocks (representing companies with market cap between Rs 750 m and Rs 7,500 m), ING Vysya is not a midcap stock, which in our view, is not true. So, it is in this context that investors should focus on the size of sector and the size of the company in the sector. This, one should compare with the largest in the sector to arrive at a conclusion. This is important because the size of some sectors is very small on a relative basis (like ceramics and paper). For instance, a company like Ballarpur Industries may be among the largest in the paper sector, but when compared with other sectors, it is a mid-tier company. Do not go by hearsay. Some basic level of research will reveal whether a company is really a midcap or not.

How do these differ from large & small caps? The answer to this question lies in understanding what is a large-cap! Take the case of a company like Gujarat Ambuja Cements. A company with a 20 year operating track record, professionally managed, regionally diversified cement manufacturing plants, revenues of over US$ 700 m and one of the most cost competitive producer of cement in the world. Compare this with Chettinad Cement - less than 1% of industry capacity, a regional player, revenues of just over US$ 100 m, just over 500 employees and yet to learn that size is important (capacity at 1.5 MT has been stagnant over the last five years). The table below compares three cement companies, which puts things in perspective.

Mid cap stocks are generally more risky than large cap stocks and less risky than small caps. It has been seen in the past that risk of failure decreases as companies grow in size. As they grow large, they enjoy better bargaining power with suppliers and customers (except companies in a regulated industry like power and fertilisers) and have stronger systems in place with respect to tackling competitive forces. On the contrary, as companies grow large in size, their growth gets saturated (due to a high base effect), thus under performing the much smaller mid-size companies, which have room to grow into large ones. As such, when considering an investment in a mid cap stock, you need to decide if the stock in question has the potential to grow into a larger company. If you are right in your analysis and follow your action of investing into the stock, you will have a successful investment.

When one invests in mid-caps for the long-term, he is participating in companies that will become blockbusters of tomorrow. A few years back, during the initial phase of the post-liberalisation period, there were a very few large cap companies listed on the Indian bourses. Currently, one would find more than 70 with US$ 1 bn and above in market cap (see adjacent chart). It is pertinent to note that the likes of Infosys were once a mid-tier company.

How to select good mid-caps? Unlike large caps, where there is no dearth of information, for mid-cap stocks, investors need to put in greater energies while doing their homework for identifying good long-term investment prospects - companies that will become much larger because of better opportunities, strong progress and robust growth.

As such, we outline some key guiding factors for selection of good companies from the mid-cap space.

1. Management: Unlike many of the larger companies, perhaps one of the major risks is that many of the smaller companies, barring exceptions, are family managed. Before investing, it is pertinent to understand the promoter group as a whole. The other things that we as a research house focus on is on the last five to ten year track record of the company, key accounting policies over the years, private placements of shares and how deep is the top-tier management.

2. Identify the leaders - Current and potential: Investors would do well to identify mid-cap companies that are leaders in their respective business operations. These companies are generally the larger ones from the mid-cap space and have better abilities to tide over volatilities that impact mid-size companies like them. When growth happens, these companies are much better equipped to consolidate their position and grow larger in size.

3. Identify niche and focused businesses: This is a very important consideration while researching mid-cap stocks. Operations in a niche space (like PLM for Geometric Software) help companies to shelve themselves from competition while providing differentiation benefits to customers. There are niche companies in commodity sectors as well (like iron ore manufacturers, cement manufacturers with a strong regional presence, focused manufacturers in textiles, FMCG companies with strong brands, MNC companies with a strong parent support). At the end of the day, the concerned company should have capabilities to tide over business cycles.

4. Liquidity: As we have seen in the past stock market cycles, it is important that a investor is aware of the liquidity situation i.e. what is the free-float (non-promoter holding), the last one year average volume and the last one-year average value of shares traded. The traded value is important because at times, the share price can give a distorted picture of the liquidity situation (in fact, many institutional investors focus more on value traded than volumes traded).

Last but not the least, have a cap for your midcap exposure, no matter how adventurous you are! By cap, we mean, as a percentage of the overall portfolio, midcap should not be more than 30% to 50%. This discipline is very critical for investors in general. Ultimately, Rome was not built in a day!

Source: EM

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• I've often felt there might be more to be gained by studying business failures than business successes. - Warren Buffett

Posted by toughiee at 5:55 PM | Permalink | Comments | links to this post

India Story - A reality check is important: While buying opportunities at these levels have diminished to a certain extent, it is all the more imperative that investors become choosy while putting their money in a stock. Yes, the Indian growth story is a reality. But the GDP growth may not sustain at the current level, considering that there is no major initiatives to solve the great infrastructure hurdle the country is faced with today. Like every other government, the ruling party also talks about the need to grow at over 10%. But since it came into the power, the government is grappling with mundane issues like disinvestments while the actual need is to boost investment.

Financial strength - Look deep inside: At the end of the day, it all boils down to numbers. Whether the company has been consistently delivering good performances year over year can be gauged by its revenue growth and profitability and more importantly its return ratios. Other important criteria would be the extent to which the company is leveraged (a highly leveraged company will see its profitability getting hurt in a rising interest rate scenario) and its history of dividend payouts. In the last three years, the debt to equity ratios of the corporate sector has improved not only because of the restructuring but also due to the fact that many have raised money through equity issues, which has resulted in lowering the debt to equity ratio (needless to say it is not the case with the NSE 50 companies). In our view, over the next two years, the broader return ratios will dent a bit (because these companies are in a expansion phase). We do not see significant upside potential to return ratios from the current level (individual brilliance of course, can exist).

Management depth - Bite what you can chew! The management's vision in anticipating changes in the sector and steering the growth of the company according plays an important role. Also, as we have mentioned in the earlier point about the importance of strong financials, the same also reflect the management's ability to capitalise on growth opportunities and come out stronger in times of adversities. Every other company we meet these days have ambitious growth plans. When asked whether they have the internal resources to execute their business plan in a timely manner, every company is finding it difficult to retain/attract quality manpower. We have serious apprehensions about many mid-tier companies' growth aspirations over the long-term.

Valuations: While the growth prospects of a company may look good, valuations also have to justify the same. Currently, the Sensex is trading at a price-to-earnings (P/E) multiple of around 20.8 times its trailing 12-months' earnings, which is by no means cheap. Irrespective of whether it is a large-cap or a mid-cap, valuations based on one-year forward earnings estimates are expensive in most cases. But on a relative basis, we find many attractive companies in the midcap space with a two to three year investment horizon. We suggest investors not to get carried away by fancy valuation parameters like PEG (price to growth), EV/Sales (enterprise value by sales) and market capitalisation to order book. It is a bull market and market intermediaries will a stock a 'Buy' when it is actually a 'Sell' using fancy names.

To sum up... At these levels, it is time for investors to do some serious thinking.

1. Why am I investing in equities? If it is short-term gains (stay away!). If it is aimed at meeting one's long-term financial goals (then, allocate your assets according to your risk profile). Remember, equities is 'one' of the asset classes and not 'the' answer to all your financial aspirations.

2. Why should I focus on the short-term when I can buy a good story for the long-term and not worry about day-to-day price fluctuations?

3. Do I have the time and the skill-set to monitor my portfolio periodically or should I give my money to a good fund manager?

We cannot answer these questions for you because the risk-return profile of each individual can be different. To sum up, it is time for introspection!

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• Money, to some extent, sometimes lets you be in more interesting environments. But it can't change how many people love you or how healthy you are. - Warren Buffett

Posted by toughiee at 7:04 PM | Permalink | Comments | links to this post

• Participatory Notes to stay for now
• Oil Prices Drop Below $60 a Barrel
• Participation remains on the fence: Amit Dalal
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• I don't try to jump over 7-foot bars. I look around for 1-foot bars that I can step over. - Warren Buffett

Posted by toughiee at 6:54 PM | Permalink | Comments | links to this post

• Click here to download Chart Book 2006 MUST MUST READ!! (pdf file - 1.5 mb)

Posted by toughiee at 6:34 PM | Permalink | Comments | links to this post

The theory of reversion to the mean suggests that the Bombay Stock Exchange Sensex should see some kind of correction soon. According to the hypothesis, the more the moving average of the Sensex shifts away from the index’s closing value as on that date, the sharper will be its drop.

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Four good reasons why the stock market is not a gambling den...by Deena Mehta

In India, stock markets are often associated with gambling. In many cities, the lane where the futures markets—stocks and commodities—are located is called satta bazaar , and those associated with it are labelled as gamblers. So it's not surprising that in a country of nearly 100-crore population, slightly more than 2 million people participate in secondary markets and about 30 million hold shares. Even today, many belonging to the older generation usually offer cautionary words of advice to those in the younger generation who are keen to dabble in stocks and shares.

But is this cautionary advice justified? Before answering the question, let us understand the difference between gambling and speculation.

Some of the popular avenues for gambling are betting on cricket, football or horse racing, on the outcome of an event (such as a lottery, casino games), or a simple toss of a coin. These events, by themselves, do not carry a risk element. For example, cricket is a sport that will be enjoyed irrespective of who wins. At best, if the home team loses, the crowd may get disappointed. A spectator will not lose money, merely watching the game. But if he bets on the result of the game by wagering his money, a risk element gets created. So, there is no risk per se with the event, but betting imputes the risk.

Given below are some typical apprehensions that people have about share investments and my view on why they are thinking wrong .

Apprehension No. 1: RISK

When we have cash, there is always risk—of devaluation due to inflation if we keep the cash idle, of it being stolen or spent by near and dear ones, of investing in low-return options (which we term `loss of opportunity'). Hence, by investing the cash, we are trying to minimise the risk already present and get a higher return by identifying better-income avenues. There is no creation of risk.

Apprehension No. 2: VOLATILITY

The volatility in the markets is also a reason cited for regarding shares as an unreliable form of investment. People point out that markets fluctuate every day, and their ignorance of the market-movement and fear of loss of capital holds them back. But volatility should be looked upon as an opportunity. If the market is not volatile, there would be no opportunity to make money. When the market goes up, it presents the opportunity to sell, and when it comes down, the opportunity to buy.

Apprehension No. 3: LOSS

Investors have another favourite argument: I buy high and sell low and lose money all the time. In order to make money on the market, there has to be a long-term engagement with the stock markets. Typically, people who say that they bought high and sold low are those who enter the market at the peak of a bull run because they feel left out when the momentum is building up. Soon after the market takes a dip (or a plunge), they are left with high-priced stocks. Their patience runs out and they dispose of their scrips at whatever price they get and take sanyas from share investment. Moral: It is necessary to be constantly in touch with the markets to understand their ups and downs and ride the wave to make money.

Apprehension No. 4: UNPREDICTABILITY

Disillusioned investors like to say the markets are unpredictable because of operator activity and price rigging, a characteristic of gambling. But they should understand that there are going to be undesirable elements in every market. We have to define our area of operation and guard ourselves against such risks. This can be done by restricting our activity to A and B1 group stocks only. These are highly liquid stocks and not prone to manipulation. Low capital and T2T category items have a higher probability of price increase, along with the appended risk of them being prone to price manipulation. These shares have a low capital base; hence, it takes very little cash to rig the prices in the desired direction. After every bull run, investors are stranded with stocks that have no liquidity, company addresses that are untraceable and other allied reasons that render the share worthless. This happens because stocks are not bought on merit but on rumours of operator activity. By defining exit levels (in terms of desired returns) and stop loss levels, an investor can guard against steep capital depreciation.

To conclude, financial planning is a must for every family. It involves building up a portfolio of investments in various instruments that not only meet your needs of cash liquidity but also acts as an earning partner. We mistakenly assume that we are the sole earning members of the family while ignoring the contribution that wise investments can make in sharing the load. A little time devoted to financial planning can reduce the burden multifold. Understanding the suitability of each avenue in the right perspective can go a long way in enhancing the returns on your portfolio.

Source: BW

Posted by toughiee at 10:09 PM | Permalink | Comments | links to this post

For this buoyancy to sustain, the country will have to tide over several stumbling blocks.

Inherent flaws... First, the poor state of the physical infrastructure, both in terms of quantity and quality. While with the healthy fundamentals of the domestic financial sector and the enhanced interest of foreign investors, funding should not pose a problem, issues relating to regulatory framework and rapid execution need to be addressed by the government.

Second, fiscal consolidation. The recent budget of the central government targets a gross fiscal deficit of 3% of GDP by 2009. This requires fiscal empowerment, which is possible through two routes (i) elimination of subsidies or (ii) elimination of tax exemptions. While in any economy fiscal consolidation is hard, it is particularly so in our setting

Third, India is set to remain one of the youngest countries in the world in the next few decades. This 'demographic dividend' cannot be used to the economy's advantage unless prerequisites such as skill-upgradation and sound governance to realise it are put in place.

Fourth, there is a need to shift the emphasis from foreign institutional investment to attracting foreign direct investment, which is less volatile. This requires a more favourable investment climate in general both for domestic and foreign capital.

Global Imbalances... As India does not depend on the international capital market for financing the fiscal deficit, the extent of adverse consequences of the global developments would be muted. However, there could be a spillover effect of global developments on domestic interest rates and thus on fiscal position. Also, a faster rise in rates overseas could lead to a shift in investor confidence to the international markets. Further, should there be a reversal of capital flows, asset prices may decline. With this there is a risk that rise in interest rates in general could impact the housing market and expose the balance sheet of the households to interest rate risk, increasing the risk of loan delinquencies for banks. Banks in India have invested significantly in government debt and other fixed income securities. If a rise in international rates gets reflected in domestic interest rates, banks will also have to mark down the value of their investment portfolio.

Multilateral confidence... Finally, there needs to be the confidence of the investor community on multilateral aspects such as political stability, terrorism combating ability and significance at global economic platforms (such as the IMF and World Bank).

While we do not intend to sound pessimistic about the continued resilience of the economy to global and internal shocks, investors investing in the India story should assess these grounds before judging the 'market risk' to be assigned to a stock. Weighing this with the premium expected to be earned over and above the risk free rate (10 year GSec yield), will help you correctly align your portfolio as per your risk profile.

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• It's easier to create money than to spend it. - Warren Buffett

Posted by toughiee at 6:32 PM | Permalink | Comments | links to this post

Aviation Sector's Unreal rally The market may be celebrating the fall of high-priced oil a bit too soon. In the aviation sector, most listed stocks have rebounded from their lows, when in fact falling oil prices may have only a small impact on margins in a scenario of hyper competition. With the domestic sector continuing to attract new players - Indigo Airlines was the latest to launch in August - the new entrants will have no option but to offer steep discounts to build marketshare. This will force the incumbents to continue cutting prices, effectively neutralising the benefits of lower oil prices. Between early 2005 and March, 2006, the total number of airline seats offered in the domestic market has risen 55%, forcing a fare war. But costs have risen faster, which makes any rerating of the sector impossible for now despite lower oil prices. A look at Jet Airways’ last quarter numbers shows why. Even though net revenues grew 25.6%, overall expenditures rose twice as fast at 53.7%. A large part of this was due to fuel (about a third), but the fastest growing cost is not fuel, but employee remuneration, which more than doubled (up 106.5%) due to a ramp-up of operations. The story is likely to be much the same in the rest of the aviation sector, thanks to the induction of new aircraft, investments in ground handling, and higher payments for aircraft rentals. Lease rentals grew at a zippy 70.7% for Jet, even as other operating expenses have risen to account for a quarter of total costs. There is thus a strong possibility that the fall in oil prices will be more than compensated by rising costs of personnel, aircraft lease rentals, and interest costs. Jet, for example, had to shelve its plans to make a $800 million GDR/FCCB issue due to unsettled market conditions, choosing instead to borrow more from domestic banks at higher rates. With more than Rs 2,000 crore stuck in the aborted deal to buy Air Sahara, it is little wonder Edelweiss Securities has a clear sell on Jet. Since mid-July, Deccan Aviation has gained nearly 40%, Jet 19% and SpiceJet 18%, beating the BSE Sensex hollow (15%). The rally in aviation stocks is a bit premature, if not totally unreal.

Posted by toughiee at 6:14 PM | Permalink | Comments | links to this post

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• There's very little money to be made recommending our strategy [buy-and-hold].Your broker would starve to death. Recommending something to be held for 30 years is a level of self-sacrifice you'll rarely see in a monastery, let alone a brokerage house. - Warren Buffett

Posted by toughiee at 10:13 PM | Permalink | Comments | links to this post