GOING AGAINST THE NORM - Nirmal Bangbeyondmarket.nirmalbang.com/issue68/Download/magazine.pdf · GOING AGAINST THE NORM For Private Circulation Volume 1 Issue 68 26th Jun ’12. e

Contrarian investors do exactly the opposite of what other investors do, and still reap profits on their investments

GOING AGAINST THE NORM

For Pr ivate Circulat ion Volume 1 Issue 68 26th Jun ’12

e all have future plans, and these usually include education, career, family, financial investments,

retirement, and more. But very rarely do vacations feature in such a list. Which is why, we end up making hurried getaway plans, added to which are worries about ticket and accommodation availability. But what if you got to know that your vacation plans for the next, say, 25 years can be taken care of ‘now’.

That is what Vacation Ownership is all about. Purchasing a Vacation Ownership Plan entitles you to own an annual vacation for a set number of years at a particular network of resorts. You can even choose a room that suits your as well as your family’s needs well from the various types available—studio apartment, one-bedroom, and two-bedroom accommodation. Plans also depend on the kind of vacation you want: charges differ for a vacation at a popular destination during peak season from that of a trip during the off-season.

Regular, economical holidays are what Sterling Holidays were targeting

W when they introduced the Vacation Ownership concept in India. Today, Sterling has a network of 18 resorts within the country, and an affiliation with RCI (Resorts Condominiums International) offers travellers over 4000 resorts in India and abroad to choose from.

If you are still wondering why you should consider purchasing a Vacation Ownership Plan, then think of the one major concern you face each time you plan a holiday. Yes, it is inflation. And thereby, the ever-increasing cost of a single family vacation. This plan lets you save—for, once you have purchased the plan, you continue holidaying at the current price you pay and not worry about hotel room tariffs increasing every year. Now, that should be incentive enough for you to want a secure, future vacation plan.

A LIFETIME VACATION PLAN

It’s simplified...Beyond Market 26th Jun ’124

DB Corner – Page 7

A Lull In The StormAlthough the elections in Greece have brought cheer to the markets, it appears to be a temporary relief as the crisis has only been delayed, not averted – Page 8

Scraped ThroughWhile India Inc ended the year with a decent top line growth, the bottom line growth eroded significantly, resulting in the decline in net profit – Page 11

Going Against The NormContrarian investors do exactly the opposite of what other investors do, and still reap profits on their investments – Page 14

Licensed To SaveCompulsory license will now allow a generic pharma company to make and sell a patented drug, paving the way for affordable healthcare – Page 19

Power PlayWhile there is an obvious need for power exchanges in India, experts feel too much of the same could also be detrimental to the sector – Page 22

A Strategic MoveDiversification into the fabric segment has helped spinning companies to earn good profits – Page 24

Buoyed By PessimismDespite the pessimism in the markets, NRIs can use the opportunity offered by the fall in the rupee to make good of their investments – Page 26

A Timeless CharmWhile more and more people are looking at buying diamond and platinum jewellery, the yellow metal continues to lure buyers despite high prices – Page 29

Reliance Infrastructure Ltd: A Perfect BlendA good mix of stable cash flow from the power distribution business and strong growth potential from infrastructure assets will hold Reliance Infrastructure Ltd in good stead in the coming times - Page 32

NIIT Ltd – Page 36

Technical Outlook For The Fortnight – Page 37

Indebted To Debt FundsDebt mutual funds invest in debt instruments of different maturities and credit quality and thus protect you from the volatility of the equity markets, while offering decent returns - Page 38

Global, Yet Locally RelevantIndian investors can consider investing in global mutual funds as they are mostly theme-based in nature, ranging from investments in commodities, emerging markets and even real estate – Page 42

Changed For GoodWhile revised Schedule VI of the Companies Act seems good from the investors’ point of view, there are a number of implementation challenges for companies while adopting the new format – Page 45

Volume 1 Issue: 68, 26th Jun ’12

Editor-in-Chief & Publisher: Rakesh BhandariEditor: Tushita NigamSenior Sub-Editor: Kiran V Uchil

Art Director: Sachin KambleJunior Designer: Sagar Padwal

Marketing & Operations:Divya Bhurat, Afsana Tamboli

We, at Beyond Market welcome your views, comments and feedback. Do help us to grow better as per your liking. This is our attempt to reach you better while crossing horizons...

Web: www.nirmalbang.com [email protected] No: 022 - 3926 8047

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Research Team: Sunil Jain, Vishal Jajoo, Amit Srivastava,Nitin Arora, Dipesh Mehta, Anand Shendge, Manav Chopra, Vikas Salunkhe


Tushita NigamEditor

The world of investing classifies individuals into different genres. Various factors come into play while classifying such individuals. Among these genres is an individual who picks asset classes like stocks or commodities that are not a favorite amongst the majority of investors and is, therefore, known as a contrarian investor. Unlike herd investing, contrarian investing is the art of making profits by investing in a way that is different from conventional wisdom when the consensus pick seems to be incorrect.

A contrarian investor looks for cheap buying opportunities in out-of-favour investments and then sells them at a higher price when the investment starts becoming popular. A clear understanding of the stock or commodity being explored and the triggers that can drive its price up is required for contrarian investing. Holding a contrarian view is not easy; and at times profits can be earned only over the long haul.

Looking at low valuations and under-pricing of various companies in the current market situation led us to explore the option of contrarian investing for the benefit of our readers. The cover story in the latest issue explains the importance and techniques of contrarian investing.

Among other topics, there is an article on the aftereffects of the re-election in Greece and how the adjudged results are only delaying the occur-rence of a crisis in the region but not averting it. Apart from this there are articles on the annual results of India Inc for the financial year 2012 and the opportunities that lie in the depreciating rupee for Non-Resident Indians (NRIs).

On the sectoral front, the topics that caught our fancy were compulsory licenses in the pharma industry aimed to pave the way for affordable healthcare in the country, the debate over the addition of power exchanges in the power space and the diversification into the fabric segment by spinning companies from the textile sector. Also the jewellery sector, which seems to be gaining favour despite soaring prices of precious metals has been covered in this issue.

Another development that deserved a mention in this issue was the revision of the Schedule VI of Companies Act, 1956 and its implication on companies and investors who would be referring to the balance sheet of the company. Understanding the balance sheet of a company is the first and the most important step to be followed before investing in a company as it reveals the financial health of a companY.

WHERE OTHERS FEAR TO TREAD

It’s simplified...Beyond Market 26th Jun ’12 7

Disclaimer It is safe to assume that my clients and I may have an investment interest in the stocks/sectors discussed. Investors are required to take an independent decision before investing. Investment in equity is subject to market risk. Our research should not be considered as an advertisement or advice, professional or otherwise. The investor is requested to take into consideration all the risk factors including their financial condition, suitability to risk return profile and the like and take professional advice before investing.

Nifty: 5,165Sensex: 17,032.56

(As on 21st Jun’12)

n the previous fortnight, expectations of various policy measures drove the markets in major economies. The Federal

Reserve at its Federal Open Market Committee Meet announced its plan to expand Operation Twist, a programme through which short-term bonds are sold for the same amount as long-term bonds, and extend it up to the year end. The Fed reaffirmed that further action will be taken, if necessary. Moreover, economic recovery continues to be abysmally slow as the weak US data shows.

Although fears of Greece breaking away from the Euro zone were put to rest following the elections, high Spanish bond yields continue to be a cause of concern.

Domestically, the RBI at its monetary policy review kept key rates unchanged, considering inflationary pressures are continuously weighing on the Indian economy.

Also, problems due to the depreciating rupee persist. While a

I correction in the oil prices seems to be a good sign as it will lead to a reduction in the current account deficit, its impact on inflation will only be visible once the rupee shows signs of appreciation.

The Nifty has an upper-side resistance around the 5,230 level. Once it breaches this level, it is likely to touch the 5,520 level, thereafter. It also has support around the 4,950 – 5,000 levels. Investors and traders can look at taking positions either around the support levels or when the resistance level breaks.

Market participants can consider stocks like Century Textiles & Industries Ltd (LTP: ̀ 296.85), Bharat Petroleum Corporation Ltd (LTP: `763.50), Hindustan Petroleum

Corporation Ltd (LTP: `336.15), State Bank of India (LTP: `2,177.95), Dena Bank (LTP: `97), ICICI Bank Ltd (LTP: `850.55), Reliance Infrastructure Ltd (LTP: `535.20), Reliance Power Ltd(LTP: `99.10), Strides Arcolab Ltd (LTP: `759.45) and Larsen & Toubro (LTP: `1,372.75) from trading and investment perspective as they look good on declineS.

Investors and traderscan look at taking

positions either aroundthe support levels orwhen the resistance

level breaks.

term in the recently concluded French presidential elections.

In Greece the two-party system known as bipartisanship, consisting of PASOK and New Democracy parties, failed to gain public confidence and votes after ruling the country for more than 40 years.

In Greece during the first round of elections held in May ’12 the parties failed to form a government.

The sweeping changes in the ruling parties after the elections in France and Greece shook the fundamental belief about austerity and sustainability of the measures that were taken to recover growth in the European region. Austerity measures were aimed at cutting costs and expenses, while increasing the government’s source of revenue through increased taxes. However, these measures did not go down well with the general public.

This was also contradictory to the mandate of support and funding extended by the world agencies like International Monetary Fund (IMF) and Euro zone members who were expecting countries in trouble to successfully implement austerity measures to bail them out.

NEAR END

In this backdrop, a number of managers and investors were expecting Greece to break out from the Euro, which they felt could have had a cascading impact on the global economy on the whole.

In fact, billionaire investor George Soros went to the extent of saying that only three months were left for the Euro to ensure its survival and added that the focus on austerity rather than growth could have been a mistake. He

also said some of the policy measures that could have worked at one point in time are no longer sufficient or helpful as of now.

Also, not just Greece the focus was seen to be shifting towards nations facing similar challenges in terms of meeting debt obligations and managing their economies.

If the debt crisis spreads to other countries in the region, experts fear that implications of the crisis could be far more devastating and also impact the world economy and the markets on the whole. Moreover, there could be widespread stress in the banking sector across the region and it may have a cascading impact on the world banking system.

The early signs were not at all encouraging across the region, particularly Greece, Spain and other stressed nations from the Euro zone, as public and corporates with large deposits in banks and financial institutions started withdrawing money in anticipation of a banking crisis or a crisis similar to that of the Lehman Brothers.

The banking system in the Euro zone and the US are closely interlinked. The default or bad loan of one bank is the bad loan of another bank and is, therefore, considered to be bad news for the depositors.

GREEK RECOVERY

Thankfully if not a complete solution to the structural issues in Greece, the intensity of the crisis has been arrested as the people of Greece have voted for continuous support and austerity, avoiding a Lehman Brothers-like crisis.

Greece’s conservative leader Antonis Samaras has begun seeking support after winning the election over the

T he election in Greece has for now eased fears of an imminent financial crisis in Europe. Many worried

that Greece would abandon the Euro zone and throw the financial markets into turmoil.

However, the success of pro-bailout parties in the elections allayed fears of further default and eventual exit from the euro, which caused the world markets to rally, albeit briefly.

This was the second election in six weeks in Greece after the polls on 6th May failed to produce a government, stirring fears that the political stalemate would paralyze efforts to bring Greece back from the brink.

Reacting to the results, the US congratulated the people of Greece and said it is in every one’s interest that the country remains a part of the Euro zone. A TURNING POINT?

Initially, when member nations of the European Union began taking concerted efforts to pump liquidity into the system, adopt austerity measures and negotiate with creditors, many felt that although they could not find a permanent solution to the sovereign debt crisis, they could at least delay or postpone it.

However, in mid-May ’12 the story took a new turn when the European Union threatened Greece to either agree to the debt rescue plan or leave the Euro zone.

It all started with the elections in France and Greece where people voted against austerity in these two nations. In France, Socialist Francois Hollande defeated centre-right incumbent Nicolas Sarkozy. In fact, this is the first time since 1981 that an incumbent failed to gain a second



radical SYRIZA party, which had threatened to cancel the aid deal in defiance of Greece’s lenders. Samaras has signaled that efforts will be made to form a coalition with the parties, which believes in the Euro zone and its orientation.

This is good news from the markets point of view because of the event risk, which got averted for the time being. However, the other view is that the outcome of the election is merely a sentimental relief instead of an economic solution to the situation.

While the elections have brought the much-needed relief to the people of Greece, structural issues still persist, which investors need to keep an eye on. They should see how the new

government will meet its obligations.Member nations from the Euro zone have made it clear that Greece must stick to its pledge so as to receive continued funding.

However, the underlying economic weakness in Greece remains a matter of concern and if the cut in spending continues, then doubts about its ability to pay will surely keep the markets on the edge.

Also, this is not the end of problems for the euro. The focus is now seen shifting to other nations in the Euro zone from Greece, which dominated the headlines for a very long time. Spain is now facing a sovereign debt crisis and problems in its banking sector too.

Spanish 10-year bond yields hit a record high recently, above the 7% mark, which has previously led to sovereign bailouts for Greece, Ireland and Portugal. Bank of Spain, the central bank of the country, released data recently showing that “doubtful” loans had risen to €152.7 billion in April, equal to 8.7% of all the loans held by the nation’s banks.

To conclude, the developments suggest that the worst in terms of event risk has been postponed for the moment, if not averted. While this spells good news for investors and the markets across the globe in the near-term, problems in the region persist and must, therefore, be watched closely for the changes that take place in the regioN.


RESULT ANALYSIS

Raw Material

The erosion in profitability came from all expense items. There was an all-round increase in every line item. The cost of raw material, which accounts for a little more than half of the total operating expenses, rose by almost one-fourth during the year.

This was the steepest rise in raw material expenses in the last three years. It may not be surprising considering factors like rise in commodity prices world-wide, weakness in the rupee and high inflation in the country.

Basic metals like steel, aluminum and copper, which have wide industrial usage, witnessed a 5% to 10% increase in their prices. Similarly, rubber, another major raw material, saw a jump of one-fifth during financial year 2011-12. All these factors led to high raw material costs during financial year 2011-12.

Power And Fuel And Staff Cost

Power and fuel account for little more than one-tenth of the total operating expenses of companies considered in this sample. Power and fuel cost increased by one-fifth (20%) on a y-o-y basis. And this is one of the steepest rises we have seen in the last three years.

This may not be surprising going by the rally in international crude oil prices. Brent crude oil prices have been hovering above the $100/barrel mark during most part of the year. The weakening of the rupee further burdened the companies.

The Centre repeatedly increased the prices of petrol and diesel. For example, petrol prices have increased by around `15 during the last one

year. Similarly, coal prices jumped by 10% during the same period. All these inputs are used in the production of power and fuel.

While the economic outlook for India has declined during the year, it appears to have little impact on the salary of the employees. The staff cost has risen by around 18% during the financial year 2012. Staff cost constitutes a significant component, around one-fourth of the total operating expenses. And any increase in wages and salary is likely to reduce the companies’ bottom line.

Higher operating expenses resulted in lower operating profits and operating margins shrank by little more than 150 basis points, reckoned on a y-o-y basis. It appears that with the slowdown in demand, even big companies failed to pass the rising input costs to end consumers. The situation is likely to have worsened for smaller companies, which are anyway price takers and have less economies of scale. Interest Expenses

The interest burden has increased more than expenditure for the Nifty 50 companies considered in this sample. The rise of 36% in interest expenses appears to be very high and has further rubbed salt to the injury.

The benchmark interest rate in India has risen by 200 basis points to around 8.5% during FY11-12. The rise of 200 basis points is high enough to bleed smaller companies with high debt and reduce profitability of large companies. Interest cost as a percentage of profit before interest and tax expanded by 300 basis points.

Overall Result

Overall it was not a very good show for the Nifty companies. The result

the purchasing power of end consumers stood at 9% to 10% during most part of the year. Higher inflation reduces the purchasing power of consumers. With such high inflationary figures, the end demand for goods and services fell and companies had to somehow maintain prices to keep the demand constant.

IIP And GDP Growth

IIP (Index of Industrial Production), which shows the industrial demand and production activity, remained at 5% during the year. Towards the end of the financial year, the IIP growth rate fell below 4% and in March’12 it slid by 3.5%, suggesting a near collapse of industrial activity.

Due to the faltering IIP, the GDP for the year remained muted at 6.5%. Going forward, the GDP is likely to grow below 6% for financial year 2012-13, with some foreign brokerage firms even estimating it to be below the 5% level. If the central government does not take any significant step to boost industrial activity, then GDP growth for the current financial year is bound to fall below 6%.

Interest Rate And Exchange Rate

Interest rates remained at a relatively higher level and the benchmark rate touched a high of 8.5%. Similarly, the rupee-dollar exchange rate was above the `50/$ mark and even more recently it touched the `56/$ mark, thanks to high fiscal deficit and lower growth forecasts.

Owing to weakness in the rupee, those companies which borrowed money from abroad in the form of external commercial borrowings (ECBs) had to shell out more for their regular interest payments. All these factors increased the interest burden on the companies.


would have been worse had Tata Motors not posted good numbers. The net profit available to investors for dividend distribution and other purposes, fell marginally by 0.5%. When compared on a y-o-y basis, the net profit margin contracted by 200 basis points at 10.7%, the lowest in the last five years.

Net profit is highly correlated to the stock price of a company. The decline in net profits is viewed quite negatively by investors. No surprise then that the benchmark equity indices like Nifty retracted sharply from the level of 5,700 to 5,000 after all the results were out. Considering the current economic outlook, there is little hope that earnings will improve in financial year 2012-13.

telecom, metals and power were sectors that pulled down the earnings figures. Following are companies from this outlier list which have deviated in terms of growth numbers.

WINNERS

Mahindra & Mahindra (M&M)M&M reported a revenue growth of little more than one-third, mainly led by sales growth in its automotive business. The operating margin, however, contracted by more than 200 basis points due to cost pressures primarily on account of increase in raw material costs, lower contribution from tractors and merger of the loss-making Verito business.

Still M&M was able to maintain its profits due to good volume performance by utility vehicles (UVs) and a tight control on expenses. For FY12, volumes grew by 24.3% to 7,06,557 units. Going forward, M&M has good growth prospects and continues to dominate the tractor industry and UVs. Though the company witnessed some slowdown in the tractor segment, strong demand still exists in the UV segment. With good monsoon, the tractor segment is also likely to see a strong demand.

Hindustan Unilever Ltd (HUL)FMCG companies logged a robust revenue growth in FY12, largely value-driven due to price rise. The companies did not face much of a hit on volume growth despite these price hikes. The company saw a 17% rise in its revenue for FY11-12. Since the last nine quarters, HUL has seen single/double digit volume growth.

The net profit grew by 21%, a testimony of its strategic success followed by last five quarters’ double-digit earnings growth. HUL is likely to maintain this momentum due to its brand strength, R&D support from the parent company, financial

muscle to spend heavily on ads and marketing, especially on skin creams and shampoos.

LOSERS

Steel Authority of India (SAIL)The steel industry saw sluggish demand during the year and SAIL is no exception. Its net sales grew by a mere 5% on a y-o-y basis. The net profit, however, fell significantly, more than one-fourth during the same period. Higher raw material costs badly hit SAIL’s profitability. Raw material costs rose by 27%. Though price realization was higher this year, sales volumes fell. As a result, the top line remained muted. Had it not been for a forex gain of `725 crore, its profit margin would have fallen further. Going forward, with current macroeconomic headwinds, this year may be tough for steel companies.

Bharti AirtelRegulatory uncertainties, scandals and demand slowdown continued to haunt the telecom sector in FY11-12. Bharti Airtel, the lone representative of the telecom sector in the Nifty pack, shows these concerns to some extent; it may be better positioned than its peers though.

A 20% y-o-y jump in revenue seems to be average. The bottom line has been badly eroded by high finance costs and tax rates. The net profit fell by almost one-third as compared to the previous year.

While regulatorly uncertainty persists, operating performance of GSM incumbents, especially Bharti, may remain strong. Good volume traction, stable pricing and steady African business are some positives for Bharti. But, the risk of significant demand from the government for spectrum and proposals like farming remain significant overhangs due to lack of strength in the balance sheeT.

Net SalesNet Profit

25.17.8

2009

8.9-2.5

2010

15.735.0

2011

19.0-0.5

2012

Source: Company Results, Bloomberg*Results for Nifty 50 companies except those from the petroleum, banking and �nancial services sectors

Net Sales And Net Profits*

Operating Profit MarginNet Profit Margin

20.9

14.2

2008

18.5

12.3

2009

17.0

11.0

2010

19.5

12.9

2011

17.4

10.8

2012Profit Margins*

SECTORAL PERFORMERS

While the overall results were muted, there were clear outperformers. Without them it would have been worse. Similarly, underperformers have also pulled down the results. It would be worthwhile to look at these outliers, which may offer some investment opportunity.

Among sectors, the top performers were auto, FMCG (fast moving consumer goods), software services, pharmaceuticals and capital goods which contributed significantly to the Nifty pack. On the other hand,

Contrarian investors do exactly the opposite of what other investors do, and

still reap profits on their investments

GOING AGAINST THE NORM



Basically, contrarian investing means buying stocks when everybody else is selling and selling when everyone is buying. During a bull phase or a bear phase in the market, the majority tends to become overly pessimistic or overly optimistic on a stock and, hence, the stock either rises or falls more than it is warranted or justified.

A contrarian investor primarily looks to capitalize on these overreactions of the markets with regards to a stock because he/she knows that the inherent strength of the stock is still intact and once the market sentiment reverses, the stocks will reap huge gains. A contrarian investor buys stocks when everybody is selling and takes advantage of excessive pessimism, very low hopes and extremely attractive prices.

Some of the greatest contrarian investors like the legendary Warren Buffett have immensely benefitted from contrarian investing. In fact, Warren Buffett says: “Be greedy when others are fearful and fearful when others are greedy.”

Buffett’s words should bring the attention of retail investors who are always blamed for selling equities rather than buying them at lower levels and buying when the markets peak or when the investors on the street start selling them.

In Buffett’s own words, the best time to invest in a stock is when short-sightedness of the market has beaten down the price of a stock. This is when short-term issues or views about the markets have led to hammering down of share prices to a level that the economy and company will cease to exist in the future.

Let us try and understand this concept with an example of the recently concluded IPL. Most of the teams (franchisees) bought high-ranking,

sought-after and expensive players to play for their respective teams. But there were a few shrewd teams who picked out relative newcomers and out-of-flavour players. And since these players were on nobody’s buying list, the teams got them for very cheap prices. And what transpired in the matches was for everyone to see. These so-called underrated and second-rung players turned out to be the real heroes and match winners. These teams followed the contrarian principle of investing.

What they did was a thorough analysis of individual players and found that fundamentally these players were hidden gems but were being ignored by everyone just because they either didn’t have the record books to prove their worth or they had not got adequate opportunities. When given the right platform, they made the most of it and gave more than what their owners had paid for them.

This same strategy can be applied to stocks. The only parameter that one needs to consider is whether the fundamentals of the company are strong enough. If that is in place, then any price level is a potential buying opportunity for the investor.

WHAT ARE MARKETS WORRYING ABOUT?

Domestic Issues

Governance Corruption and poor corporate governance in both private as well as government sector have led to a significant de-rating over the past few months. Moreover, anti-corruption activist Anna Hazare’s movement threw light on the number of scams involving the UPA government. The corruption cases revolve around

e are going through some really turbulent times as far as the financial world is

concerned. Every news from every corner of the globe is spelling doom.

Rupee is at an all time high, inflation is rising with each passing day, Gross Domestic Product (GDP) numbers are falling, Foreign Institutional Investors (FIIs) are pumping money out of the country, the European crises has raised its ugly head once again and analysts all around the globe are painting a grim picture of the stock markets for the days to come.

But don’t you feel there is a sense of déjà-vu in all this? Most of those who have been in the markets for long have seen such scenarios many a times and on each occasion the markets have overcome the challenges and have given fantastic returns. However, a majority of them have never been able to benefit from the recoveries in the stock markets.

This is because they were either too scared to enter during turbulent times due to the fear of it falling even more or were too greedy and were waiting for some more time for the prices to fall further and trying to catch the proverbial ‘bottom’.

Alas, a lot of them missed the bus many a times. There is a famous saying: “Fortune favours the brave.” So does anyone have the courage to be the brave guy who swims against the tide and reaches the shore where a treasure chest awaits him? If yes, then the person can surely be called a ‘contrarian investor’. CONTRARIAN INVESTING

Contrarian (contra) investing is an investment strategy which aims to do the exact opposite of what the majority or the crowd is doing.

W


illegal allocation of mines, investigations into telecom licensing; issues in oil and gas sector and coal mining too have caused shrinkage in the confidence of foreign investors.

Despite the huge value of most stocks and as share prices of a number of group companies trade at multi-year lows, investors have preferred to stay away from such investments.

Reforms And Policies

Lack of direction and slow progress in key reforms and policy decisions like implementation of GST/DTC and Foreign Direct Investment (FDI) in retail have had a major impact on sentiments as investors felt this could hamper the progress of the country and add to the uncertainties.

Many felt that coalition politics, lack of political will and differences among ministries and regulators within the government were the key hurdles. These events collectively have taken a toll on the investment cycle and the attractiveness of India as a destination for foreign capital.

GAAR And The Case Of Vodafone

The issue of Vodafone and General Anti-Avoidance Rules (GAAR) added fuel to fire as investors felt that the policies of the government are not investor-friendly.

India has been able to attract money whenever there was a weakness in the developed markets but this time around foreign investors took money out of India, fearing that implications of GAAR and government policies could lead to poor results.

Interest Rates

The RBI made a 50-basis points reduction in the Repo rate. But looking at the fact that inflation still

remains at elevated levels, the market took a cue that the RBI might pause rate cuts as against the anticipated early cut in rates to revive the economy. Inflation continues to be a big worry especially food inflation which is hitting the consumers.

The expected extension of the time line for further cut in rates did not excite the markets and gave another reason to sell equities, which is why most of the interest rate-sensitive stocks fell significantly as hopes of their revival were extended and the general belief that pain could increase for these companies and stocks.

Rupee

In the light of the outflow of foreign money and weakening external trade, the worry over growth both from the export and the domestic market point of view increased. The government’s balance sheet or its fiscal deficit which is already at high levels, looked vulnerable. If the economy slows down, tax collection could fall short of targets.

Disinvestment is already not helping the government in the current environment and any further fall in the rupee means that oil companies will have to import oil at higher prices, which again means that the government will have to provide for more subsidies, leading to increased worries on fiscal deficit.

Fiscal deficit is important both from the economy point of view as well as outlook on the currency.

These issues collectively, along with the sudden rise of the US dollar, led to a significant fall in the rupee rate, which is not at all good news for Indian companies, especially those which have huge foreign borrowings in the books, and are heavily dependent on imports.

Corporate Earnings

It was logical for a large number of investors and analysts to re-look growth assumption for corporate earnings. Early signs of the same are already visible in industrial production numbers and Purchasing Managers’ Index (PMI) numbers, which are trending down to reflect the ground reality, importantly in the manufacturing sector.

Keeping these things in mind, investors and analysts have already lowered their earnings growth expectations. The pressure on earnings, which was supposed to be easing in the first quarter of calendar year 2012 now seems to have extended. This again has given reason to sell equities.

Global Issues

Global issues have further added fuel to the fire. The engines of world economic growth primarily the US, Europe, Japan and China are all facing clouds of uncertainties. However in terms of magnitude and implications on the global economy, Europe is at the center stage as hopes of revival in the region seem to be washed out going by the election results in two of its main member countries - France and Greece. Worries are that the newly elected government which has supposedly won elections because of the anti-austerity agenda could create new hurdles to Euro’s path to revival. And in this light the co-operation among members in the Euro zone, which was established with lots of efforts could go for a toss and renegotiations and new policies with difference in opinions could derail the entire process. There are growing talks of a break up of the Euro and a possible detachment


of Greece from the Euro zone. These could have devastating effects on the Euro zone because the banking system is not only interlinked but also linked to the world economy, especially the US. In this situation, money is again going under the pillow instead of chasing risky assets. In the Euro region, especially Greece, people are withdrawing money from banks as a measure of safety as they fear banks may go bankrupt.

PROS OF CONTRA INVESTING

valuations because they are oversold by the markets. Hence, one can buy huge quantities and the returns too would be multifold.

above-normal gains since reversals are generally quite sharp and extended.

catch the bottom is done away with. One just has to focus on the amount of pessimism surrounding a stock. That is greater the pessimism, greater is the chance for a rebound.

levels of a successful contrarian trade are unparalleled. Not only does it make one bolder but, it also tremendously boosts ones faith in his/her own stock-picking ability.

CONS OF CONTRA INVESTING

normal investing. This is because most of the times, the market may be badgering down or pushing a stock up for a genuine reason, which you may not be aware of and, hence, your contrarian play may backfire.

favour with the markets for a long time and you might be stuck with a dead investment.

beaten down stock, the markets may punish it further to even lower levels and, hence, even when the stock rebounds, you may still incur a loss because your purchase price may not be reached.

contrarian stocks is very thin, exits can be quite problematic.

high interest rates, political or economic uncertainty as well as global concerns can play spoilsports even after the pessimism surrounding the stock has abated.

INDICATORS TO IDENTIFY CONTRA OPPURTUNITIES

Just as every event in the market is preceded by certain events or signals which help predict future moves, there are certain indicators or tools, which aid a contra investor to initiate a confident trade. Most of these indicators help to identify the overreactions in the markets, that is, whether a stock is overbought or whether it is oversold.

� Put-Call Ratio Put-call ratio is a very easy-to-understand but equally effective option for a contrarian indicator. A Put is an option to sell

underlying. So, if a put-call ratio (number of puts divided by the number of calls) is greater than 1, it means that the number of Puts is more

indicates bearishness.

Alternatively, if the put-call ratio is lesser than 1, it means that the number of Puts is less than the number of

bullish about the market.

Now, if the put-call ratio is higher than 1, it means that the markets are oversold and, hence, there is a good

chance of a reversal and is an indicator for contrarian buying. Similarly, if the put-call ratio is low, it means that the markets are over -bought and is an indicator for selling.

� Volatility Index

The VIX (Volatility Index) is a very good indicator of the extremeness of the market sentiment. Volatility in simple words is the amount of fluctuations or the amplitude of movement in the stock or the markets.

Higher the volatility, higher is the VIX and vice versa. Basically during periods of fear or uncertainty in the market, the VIX moves up and during times of greed and confidence, the

investors should buy when VIX is high and sell when VIX is low.

� Relative Strength Index (RSI)

It is a very good contrarian indicator. RSI helps to identify the overbought and oversold zones for a stock or a market. We shall not delve deeper into the calculation of RSI. It basically compares the magnitude of the recent gains to the magnitude of the recent losses and using a formula converts it into a number between 0 and 100.

Interpretation: If the RSI is greater than 70, then a stock is considered to be in an overbought zone and if the RSI is below 30, then the stock is considered to be in an oversold zone. If the stock is coming out of an overbought or an oversold zone, it should be either sold into or bought into, respectively.

� Technical Indicators

This requires a bit of understanding of the technical or chart analysis. But once understood, these serve as great tools to predict reversals or rebounds in the markets.


Some of the reversal patterns that are helpful for a contra investor are double top or double bottom, triple top, triple bottom, rounding bottom, head and shoulder, inverted head and shoulder, island reversals patterns, a wedge pattern, hook reverse pattern, San-Ku (three gaps) as well as the Kicker pattern.

� P/E Ratio

The price to earnings ratio (P/E ratio) is a good comparative tool, which aids in contrarian trading. A stock with a higher P/E ratio in comparison with other stocks in the same sector means that it is overvalued and a stock with a lower P/E ratio as compared to its peers means that it is undervalued. Thus, a contrarian call can be taken accordingly.

� The Tip-Attack

When every Tom, Dick, and Harry starts giving you recommendations or tips on stocks, be on your guard. This is the time when there is maximum froth and very little substance in the market or the stock.

The level of optimism or pessimism in the market is at its peak and it is only a matter of time before the fizz disappears and you find that the glass was not even half full. Hence, greater the noise, the more confident one can be about his/her contra trades.

� Volume

This is a very good indicator to spot reversals. The final stages of bullishness or bearishness are marked with huge spurts in volume because the majority rush is to get a piece of the action or are trying to barge out. Immediately following this spike, the volumes may dip due to investor indecision or paralysis. Contrarian investors should always keep an eye on volumes before initiating a trade.

� NewsFollow the age-old adage of buy on rumours and sell on news and chances are you will make money. This is because there are smarter and knowledgeable investors in the market than you can imagine.

Hence, most of the times before the news is out, the stock prices have factored in the news and once the news is out, when the majority of the crowd rushes in to take advantage of it, the smart money (investors) will actually be selling their holdings. Be on the side of the smart money.

A SIMPLE YET EFFECTIVE CONTRARIAN STRATEGY

Dogs Of The Dow

Although it is a strategy involving stocks of the Dow Jones Industrial Average of the US, it can be employed equally successfully in our markets as well using stocks that comprise of our Indices. Pick out the top 10 ‘dividend-yielding’ companies in an Index and invest an equal amount in each of these 10 stocks. Since the dividend yield is high, it is an indication that the stock is underpriced. Hold the stocks for a year. Now at the beginning of the next year, sell the stock that do not find a place in the list of the top 10 dividend yields and buy the stocks that are new entrants in the top 10 list.

The basic premise is to own the temporarily out-of-favour stocks but because they are included in the Index they are considered to be fundamentally sound companies.

Now at the end of the first year, the strategy aims to get rid of the companies that have risen in price and, hence, their dividend yield has gone down. This shows that the

out-of-favour stocks one-year back have now been rightly valued by the market and, hence, should be sold out.

These stocks will now be replaced by other stocks that are currently out-of-favour stocks, which find place in the top 10 dividend yield. Thus, the Dogs of the Dow aims to follow the contrarian strategy of buying undervalued shares and selling the overvalued shares by constantly getting rid of the leaders and buying the laggards.

Contra Mutual Funds

If you are still not able to initiate a contrarian trade on your own, take a contrarian call on the markets through Contra Mutual Funds.

As the name suggests, these are equity-diversified mutual funds that take a contrarian view on the stocks. These funds predominantly invest in fundamentally strong but beaten down stocks, which are not on the radar of most investors, but are likely to perform well in the long run.

Just tick this checklist before investing in any contra mutual fund1. Do not invest in new fund offer since they do not have any performance history.2. Study the past track record of the fund and the fund manager.3. Since the stocks are out-of-favour, the time horizon for returns will be longer. Invest with a long-term view.4. Check out the portfolio holding and weightages per sector before investing.5. Look for any additional charges.6. Your risk appetite should be high since these funds are riskier than normal equity funds.

So, the key to successful contra investing is the ability to differentiate between market intelligence and market madnesS.


should not be blocked from benefiting from new products by excessive prices,” said Michelle Childs, Director of Policy/Advocacy at the MSF Access Campaign. “If more compulsory licenses are granted in this vein, the answer to the question of how to ensure affordable access to new medicines could radically shift,” she added.

Today’s system is one where new medicines are patented and drug companies aggressively defend their monopolies at the expense of patients who cannot afford the high prices charged. Instead, they could move to a more equitable system where new medicines have multiple producers, and each pays royalties to the patent holder, helping them not only to

recoup their development costs but ensuring that people in developing countries have access to those drugs.

This move marks the first time India’s patent law has been used to allow generic production when a drug is unaffordable. “More generic companies should now come forward to apply for compulsory licenses, including HIV medicines, if they cannot get appropriate voluntary licenses,” said Dr Tido von Schoen-Angerer, Director of the Médecins Sans Frontières (MSF) Access Campaign.

FOLLOW UP CASE STUDY

When the Indian Patent Office issued the first-ever compulsory license in

India Natco Pharma, which effectively ended Bayer’s monopoly in the Indian market on the drug Nexavar or sorafenib tosylate, another domestic company, Cipla also recently announced a price reduction on its select cancer drugs such as lung cancer, Hepatocellular carcinoma (HCC), a form of liver cancer, Renal Cellular Carcinoma, a form of kidney cancer and Glioma, a deadly form of brain cancer. Cipla’s brand ‘Soranib’ (Sorafenib) used to treat HCC and RCC will now be offered to cancer patients at `6,840 for a month’s therapy. This comes as a boon for patients with a 76% reduction from the current cost of `28,000. The revised prices for the selected products are as stated below:

DAGGERS DRAWN

Following the compulsory license, Bayer said the company will vigorously defend its patent within the available legal framework. So, it is not a cakewalk to award compulsory licensing for other molecules to many more companies at this point in time.

MNCs and governments will vigorously defend their respective stand on this issue at multiple forums. There are grey areas in the Doha accord too. Balancing intellectual property on one hand and access to drugs on the other hand will be open to challenge.

The Delhi High Court is already dealing with a patent infringement suit filed by Bayer against the Indian company on 15 Mar ’10, in response to a decision of the Drug Controller General of India (DCGI) to grant Cipla the marketing authorization for a generic version of Nexavar. This becomes a triangular legal battle before the Court.

If any order of injunction is passed by the Court, all cost advantages to the patient will turn notional. If not, then the cost advantage will be glaringly obvious. If only the drug, Nexavar is considered, then the number of beneficiaries will not be very high. Nor will the drug add a long lease of life to its user patients.

Lung Cancer

Kidney CancerBrain Cancer

GeftinibGeftinibSorafenibTemozolamideTemozolamideTemozolamide

Therapy Molecule

Gefticip 250 MgGefticip 250 MgSoranibTemoside 100 MgTemoside 20 MgTemoside 250 Mg

Brand Name

10 tablets30 tablets30 tablets5 capsules5 capsules5 capsules

Pack

3,40010,2006,9908,9001,875

20,250

Old Price(in `)

1,5554,2501,7102,400

4805,000

Revised Price(in `)

59%59%76%73%75%75%

Reduction (%)

Source: Industry Data

Revised Prices Of Cancer Drugs


However, the MNC will continue to invest in research and development anyways. And it will also continue to file patents/applications regardless of what happens to one MNC or the other. This will encourage other MNCs to provide affordable drugs to the masses.

It is time now that everybody realizes that the blockbuster model which used to produce patented drugs needs to produce drugs for specific indications in a shorter time span, for shorter life cycle and at a lesser price. This is a challenge for innovators.

As generics grow, anti-counterfeiting trade agreement will definitely be a reality to reckon with as once again

from a patient’s point of view it is important that he/she does not receive any counterfeit products.

The Indian pharma industry will shape and grow due to a host of factors such as demographic dividend, health consciousness, availability and affordability of products, quality and drug development, drug delivery platforms, which are happening at a faster pace.

The end result will certainly give some relief to Indian patients as they will no longer need to spend fat sums of money. Instead, they will only have to be more informed about the type of treatment they will opt foR.

But, it is apparent that many more costly drugs will be granted compulsory licenses if the government action in the interest of ‘Access to Drugs’ is vindicated. Also, there will be a price war between local manufacturers. Thus, the patient could be a beneficiary in the transition period till the dust settles.

Compulsory license is conditional as the applicant has to prove that the patent has not worked in India even after three years from the time it was granted to them. Therefore, the patent holder by right has the opportunity to work on the patent in India, that is manufacture and sell the drug at a reasonable price and still reserve its monopoly over the drug.

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POWERPLAY

here is some amount of action in the power exchanges space in India. If things go as planned, we

may have two more power exchanges apart from the existing ones - Indian Energy Exchange (IEX) and Power Exchange India Ltd (PXIL).

The two new entrants in this space are National Power Exchange Ltd (NPEX) and Ahmedabad-based Marquis Power Exchange. Though Marquis Power Exchange is yet to get the regulatory approval, power sector grapevine is rife with rumours that NPEX has been getting feelers from the two existing power exchanges to come in as a partner and start doing business jointly.

A THIRD EXCHANGE IN THE FRAY?

NPEX is a joint venture that is promoted by National Hydroelectric

T

Power Corporation (NHPC), National Thermal Power Corporation (NTPC), Power Finance Corporation (PFC) and Tata Consultancy Services (TCS). While NPEX already has had the approval from the Central Electricity Regulatory Commission (CERC) since the last three years, it has been treading with caution and weighing its options and even mulling over chances of the survival of the third exchange in the country.

On the other hand, the two existing

power exchanges are gunning for a joint venture because as per power sector regulations, once a third exchange comes into existence, existing bourses that have a market share of less than 20% within two years of its operation, have to either shut down or merge with another power exchange.

Between the two existing power exchanges, only IEX has 93% share, while PXIL has barely 7% share. Therefore, if NPEX decides to come on its own, then PXIL will find itself in a spot.

The state of power trading in India is anything but robust, despite the growing demand for power generation and distribution in the country. As the need for power generation increases, the need for depth in trading in the power exchange market also grows at the same time.

While there is an obvious need for power exchanges in India, experts feel too much of the same could also be detri-mental to the sector



A power exchange created within the regulatory framework is an institution that is responsible for conducting auctions in a non-discriminatory fashion. This is to ensure that electric supply is at current market prices for different participants (power companies) who can trade energy according to their requirements.

THE ORIGIN OF POWER EXCHANGES

The concept of a power exchange was introduced to make life easier for power companies who found it impossible to project in advance how much electricity would be consumed in a particular year.

Annual contracts were thus going haywire and some companies were being allotted more electricity than they would actually utilize while others were being deprived of the electricity they needed.

Authorities, therefore, felt the crying need for a platform where companies would be able to buy electricity in a day ahead of the market as it was definitely easier to project how much electricity would be consumed by them in the next day.

It was perceived that the setting up of power exchanges in the country would bring about efficiency as well as liquidity as power companies bought and sold electricity. Thus, at the behest of the central government that had been receiving a lot of flak for the widespread power deficit for the year 2004-05, guidelines pertaining to the setting up of power exchanges in India were stipulated in the year 2007.

A year later, two power exchanges in India, Indian Energy Exchange or IEX (that is promoted by Financial Technologies) and Power Exchange India or PXIL (promoted jointly by

the National Stock Exchange and the National Commodity and Derivative Exchange) came into being.

However, this initiative has not had the desired effect as power trading still remains shallow even though the two functioning power exchanges in India have been in operation for over four years.

SHALLOW TRADING

The development of the product portfolio has been abysmally poor and there are neither mid-term nor long-term products.

The action is limited to the trading in the day ahead market. Here the day is divided into “n” periods each of which consists of “x” minutes. The participants bid for every unit generated for the whole day. Recently, however, some action was seen in Renewable Energy Contracts (RECs).

M and B Switchgears Ltd became the first company in the country to be issued 249 Solar RECs. These are certificates that are tradeable on the exchanges. They are bought by ‘obligated entities’ who can either be specified consumers or electricity distribution companies (under RPO - Renewable Purchase Obligation).

But this is evidently not enough. The spot electricity market remains volatile, just like any other mandi in the commodity space. The regulatory constraints pose a lot of challenges.

Firstly, there is a ceiling on the prices set by the regulatory authority, which means that there is a cap on the returns as well.

Additionally, the lack of a well-developed futures trading market is the reason why there is no way of hedging their immediate risks,

which makes them shaky and nervous too. Liquidity is another major problem as only one percent of the total electricity in India is traded on the power exchanges.

ROOM FOR MORE POWER EXCHANGES

Theoretically at least the idea of more power exchanges sounds good and will benefit millions of Indians, half of who do not have any power and half of who have to make do without it for most of the time. A robust spot market has the ability of transmitting power to the most needed areas, as power distribution companies do not need to be tied down by annual contracts, and can make bids or sales in a day ahead of the market or even the hourly market. But the reality is something else.

Market analysts feel too many power exchanges will actually make things worse as they will just be superfluous and not offer anything new or novel. Plus, there is a lot of turmoil involved in the delivery of electricity.

There are congested lines in one area while in others there is no queue at all, and bids are only from people who want to get electricity at dirt cheap prices, just to make profit. These are bidders that get knocked off from the bidding process automatically.

So in conclusion, while there remains a need for more power exchanges, in theory the reality seems to suggest that consolidation of the existing exchanges with the new entrants makes much more sense in order to provide depth to power trading throughout the country.

However, what ultimately happens remains to be seen. Clarity on this issue is expected by the end of the current financial yeaR.


margin and lower dependence on raw materials and the government.

THE STUDY

In the last three years, there has been a marked change in the business strategies of spinning companies as high operational costs have pulled down earnings of these companies. Many a spinning company is moving up the value chain in the textile industry in a bid to become a vertically integrated textile player.

Spinning companies like Vardhman Textiles, Loyal Textiles, KPR Mills, Suryajyoti Mills and Nahar Spinning Mills have diversified from the capital-intensive spinning business into the business of manufacturing fabrics in recent years.

Two factors have contributed to the shift in the business of spinning to the business of fabrics. One, high cost of power, and two, high interest rates. In states such as Tamil Nadu and Andhra Pradesh where 50% of India’s spinning capacity is produced, only 30% power is supplied to spinning companies by the state electricity boards. Hence, spinning companies from these states have to buy the remaining 70% electricity at market rates, which can be as high as `18 per unit for spinning companies.

This is the reason why power cost forms 15% of the total expenditure of spinning companies. Apart from this, high interest burden has also eroded revenues of the companies in the last five years. These companies made losses on huge production, boosted by the Technology Upgradation Fund Scheme in times of subdued demand, putting pressure on the margins of spinning companies.

In the last five years, the average net profit margin of spinning companies has showed a meagre growth of 140

basis points, while that of vertically integrated textile companies almost doubled in the same period.

A comparative analysis of the financial performance of standalone spinning companies pitted against vertically integrated (healthy mix of fabrics and garment) textile companies showed that the net profit of vertically integrated companies has grown at a compounded annual growth rate (CAGR) of 35%, while standalone spinning companies have a CAGR of 28% in their net profits in the last five years.

This clearly shows that concentrated focus in the higher end of the value chain of a textile business is a lucrative strategy even in times of slowdown in the business. Hence, a conscious strategy to diversify into the fabric segment in the last three years has helped the spinning companies to increase their earnings.

Take for instance Vardhman Textiles. In the last three years, the contribution of the fabrics segment to its total revenues has grown at a CAGR of 35%, while its revenues from the yarn segment has grown at a CAGR of 20%. This shows that the company is expanding its capacity in the fabrics segment. Also, the company’s net profit in the last three years has grown at a CAGR of 56% as against a CAGR of 42% in the preceding three years. This shows that the shift in the fabric segment has also improved the financial performance of Vardhman Textiles.

Garmenting and fabric segments by their very nature of business demand require less capital in comparison with pure spinning businesses. Going ahead, increasing focus on fabrics and garments would help spinning companies to retain their margins and thus help them groW.

FY12. This subsidy is expected to leverage an investment of `46,900 crore, with sectoral investment shares of 26% for spinning, 13% for weaving, 21% for processing, 8% for garmenting and 32% for others.

According to the National Fiber Policy Report, India would require around `1,88,000 crore of capital expenditure in textiles to keep up with the demand during 2011-2020. Hence, it is important to understand that this investment would boost capacity addition across the value chain of the textile industry. It will also enhance cash flows.

Recently, the textile ministry said it would restructure textile loans worth `35,000 crore in consultation with the Reserve Bank of India (RBI). The finance ministry is also mulling over the possibility of providing a two-year moratorium on textile loans. The ministry is expected to consult the RBI on special provision in non-performing asset (NPA) norms for textile loans. The government is also going to instruct banks about debt restructuring of textile loans. For this, the government is considering of setting up a panel.

Despite this, many experts believe that business obstacles for textile companies, especially the ones in the lower end of the value chain would hardly be removed. It is estimated that the total outstanding debt in the textile sector is `1,55,809 crore. A substantial part of this debt is of companies in the lower end.. This is because of the natural dependence on raw materials such as cotton and yarn, which are regulated by the government of India.

Besides, there is also cost of machinery. These are the reasons why many textile companies are shifting their focus to the high-end of the value chain, where there is higher


Despite the pessimism

in the markets, NRIs

can use the opportunity

offered by the fall in

the rupee to make good

of their investments

26


But for his investments in assets in the emerging markets, he would be more concerned about the return on capital (that is recovering the principal investment). Many Indians who have settled abroad also believed this till the first half of the first decade of the 21st century.

By 2007, India turned out to be one of the ‘good’ investment destinations. But over the last three years, tables have turned. The Indian stock markets are no longer the preferred destination and other emerging markets too have faltered on performance.

Ramin Toloui, emerging market expert at PIMCO, one of the leading money managers worldwide, recently said, “Though emerging markets account for about 36% of the global output and 68% of the global GDP growth, it only represents about 4% of equity portfolios of the US investors.” He further believes that the representation of bond portfolios has been even lower.

This observation is more of a representative nature. The weakening of the Indian rupee against the US dollar is a litmus test that certifies money is moving out of India as global investors opt for ‘risk off’ mode. The US dollar now commands around `56/$. The RBI is doing its best to contain the fall in the value of rupee against the US dollar and has, in turn, opened doors to investors abroad. It is probably the best time for non resident Indians to invest in India in fixed income or equities.

A DOOR LEFT AJAR

For global investors, emerging market debt – which includes India – warrants high credit risk. But for the Indian diaspora worldwide, investing in Indian bonds or fixed deposits is not a taboo as such.

Especially names such as Tata and HDFC offer comfort to most Indians and money lent to these organizations is treated at par with sovereign debt. HDFC offers 9.75% rate of interest on 33 months Platinum FDs. If an investor is looking for more returns and is comfortable with additional credit risk, he/she can look at AA-rated non-convertible debentures listed on the stock exchanges.

There are many non-convertible debentures available with three year residual maturity at a yield of 14% to 15%. Keeping the corporate debt aside, even rates offered by Indian banks on NRI deposits are attractive. After the deregulation of interest rates on NRI deposits, the interest rates offered by nationalized banks are in the range of 8% to 9% for one to three years, much higher than almost zero rate of interest in developed markets such as the US.

For example, State Bank of India offers 9% rate of interest on Non-Resident External (NRE) deposits for a tenure of one to ten years. If one is not keen on any such specific deposit or is keen to come through mutual funds, there are ample options. It pays to invest in short-term

T hey say every adversity presents an opportunity. And this wisdom cannot be more apt than now

when the Indian stock market is in the grips of investment inertia, investors are weary of finding suitable, lucrative and convincing investment avenues, which assure them of worry-free investments.

But does the Indian stock market comprise of Indians alone? A simple and sweet answer is no. A study shows that only 4% of household incomes out of a population of over 100 crore find their way into the stock markets. This means that there is a significant portion of investors who are from outside India. And these are not merely institutions, but individuals (Non-Resident Indians or NRIs) too. The NRIs are also referred to by experts as global investors.

Through this article we present a picture of how depreciation in the rupee offers an investment opportunity to the NRIs.

THE BASICS

A global investor can invest in asset classes such as equity, gold, fixed income, real estate, alternative investment options and yes, emerging markets. In emerging markets, equities appear to be very volatile and bonds seem to carry a very high credit risk. In simple words, a global fund manager will be worried about the return on capital when he invests in assets in developed countries.


fixed income fund schemes too at a time when interest rates are close to the peak and may soften over the next one year. All these options in the fixed income space should therefore seem attractive enough to most conservative investors.

Equities are no less attractive. Over the last five years, the markets have not gone anywhere. The market benchmark – S&P CNX Nifty – has delivered 2% returns over five years. Foreign institutional investors (FIIs) are taking their money back. Political stability is a question to ponder over. Policy paralysis too haunts the equity markets. Inflation is yet to come down and has left little scope for the RBI to cut interest rates in the near term. The quarterly GDP growth for January-March ’12 is recorded at 5.3%, which is the lowest number in the last nine years.

But the deteriorating investment situation is in the price. Forward price earnings ratio of the BSE Sensex stands at 14. A point to note is that the market was quoting at 15 forward P/E in March ’09 amidst pessimism.

Compared to the 21,000-mark that the BSE Sensex saw in early 2008, the

markets are down 22% while it quotes around the 15,000 level. And this cut is seen on the back of nominal growth in the GDP at a compounded annual growth of 15% over the same period of time. The market is ignoring the inherent strength of the Indian economy and corporate entities.

THE OTHER SIDE

Though both Indian fixed income and equities look good, NRI investors have to keep in mind one more important factor, which is cross currency movement. For the time being, the INR is falling in sync with other currencies in comparison with the USD. This is an outcome of the USD exodus owing to the debt crisis in Europe.

In the long run, the currencies of fast growing economies tend to be preferred to the currencies of slow growth economies. In the context of the US and India, it is the INR that should appreciate in comparison with the US dollar in the long term.

Most experts agree that the expected growth of the Indian economy is higher than the expected growth of the US. That should arrest the fall in INR in USD terms in the long run and

the INR should gain in comparison with the USD.

A hypothetical example can help understand the implications of investment in the Indian markets by NRI investors. Now, one USD commands 56 INR. A remittance of USD 1 million should be INR 56 million. This money is invested in a mix of equity and fixed income instruments for a term of three years.

If the investor realizes 8% compounded rate of return over this period, the investment grows to INR 70.54 million. If at the end of three years, the INR appreciates to 45 INR against the US dollar, then the investor takes home USD 1.56 million. In USD terms, the investor earned 16.17% pre tax returns. Hence, weak INR should add to the returns.

In the above case, portfolio returns are assumed at 8%, which is achievable using high quality fixed income instruments. Exposure to equity is at the discretion of the investor. Even if cross currency rates improve to 1USD = 50 INR, pre-tax return stands at 12.16%. It is time for NRI investors to take advantage of the adverse investment climate and reap benefits as the tide turnS.

Micro analysis. Mega gains.Trading at Nirmal Bang is based on extensive research and in-depth analysis, where we focus on the smallest of details

and turn them into an advantage for you.

Over the years, the analytical approach coupled with decades of experience has helped us maximize returns for our

investors and thereby inspire con�dence in them.

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Disclaimer: Insurance is a subject matter of solicitation. Mutual Fund investments are subject to market risk. Please read the scheme related document carefully before investing. Please read the Do’s and Don’ts prescribed by Commodity Exchange before trading. The PMS Service is not o�ering for commodity segment. *Through Nirmal Bang Securities Pvt. Ltd. ^Distributors #Prepared by Research Analyst of Nirmal Bang Commodities Pvt. Ltd.

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ATimelessCharm

he jewellery sector has been in the news for several reasons since some time now. It began

with consistent increase in prices of gold. And was followed by the initial public offering (IPO) of Tribhuvandas Bhimji Zaveri. Subsequently, the dollar appreciated strongly against the rupee, which resulted in a fall in the price of the yellow metal, gold.

These series of news pertaining to the jewellery sector points to the innate tendency among investors to secure investment in times of uncertainty in

TWhile more and more

people are looking at buying diamond and

platinum jewellery, the yellow metal continues to lure buyers despite

high prices



GOLD JEWELLERY In the past few decades India has been one of the few countries that is consuming and importing gold consistently as well as copiously. One of the prime reasons for the demand for gold goes beyond its role as an ornament of adornment during rituals and special occasions. It has an emotional value too. Buyers attach a high sense of security to it for the fact that it is a tangible asset just like land. However in recent times, gold jewellery is facing stiff competition from diamond-studded jewellery because of the increased branding and fashion consciousness. But the section of people who buy diamond-studded jewellery is very small. Purists still believe in the power of gold. Besides, the government is putting lots of efforts in increasing awareness about buying hallmarked gold. This has led to increased branding and organized retailing of gold.

According to an estimate by rating agency Credit Analysis and Research Ltd (CARE), the rise in the overall household income with several members earning, the demand for gold in India is bound to remain robust despite higher prices in the last two years. DIAMOND JEWELLERY Diamond jewellery is acting as a substitute for gold in recent times. With gold prices hitting the roof, there has been a steady rise in demand for diamond-studded jewellery in India for weddings, engagements, and also for the purpose of gifting.

The growing demand for diamond-studded jewellery is due to the perception of luxury and value attached to it. The introduction of certified diamonds has also resulted

in increase in trust among buyers and made diamond more amiable and a value-generating commodity. With a gradual recovery for diamonds from developed markets, especially the US, Indian manufacturers have now zeroed in on the ever-growing demand for diamond-studded jewellery from the domestic market. Many big and small diamond companies have launched aggressive marketing campaigns to attract customers by offering them high-end branded diamond jewellery with future buyback and also exchange schemes on their jewellery. Awareness about brands in the diamond industry among Indian consumers would help in increasing the demand for diamond jewellery. PLATINUM JEWELLERY The recent rise in gold prices has brought platinum jewellery at par with gold in terms of pricing. Prices of platinum jewllery grew tremendously and this demand was triggered by the fall in the commodity’s price during the financial crisis of 2008-09. This is one the chief reasons why platinum has emerged as an able substitute for gold. Apart from this, the very fact that platinum has the same characteristics and aesthetic appearance and goes well with diamond-studded jewellery, makes buyers prefer platinum. In organized retailing of jewellery, Tata-owned Tanishq, Tribhovandas Bhimji Zaveri, Gitanjali Group, Swarovski and Reliance Jewels are the major players. This shows growing competition in retail jewellery. For investors, this competition brings in parity in prices, while for experts from the sector, it is interesting to know the cost analysis of these retailers and their mutual

the markets and personal financial difficulties. In the coming months, as uncertainties in global as well as domestic markets remain unsolved, the interest in the jewellery market is likely to remain strong and thick. At such a juncture it makes all the more sense to understand the factors that impact the demand and supply in the jewellery sector. It is also important to know if gold alone forms an integral part of the jewellery sector or there are other components too that define the vast scope of this sector.

Let us, therefore, explore the various components of the jewellery sector and delve into the factors that impact the demand and supply of these numerous components. According to the World Gold Council (WGC), the Indian gold jewellery sector forms 63% of the total domestic gold demand in the first nine months of 2011. In the last few years, organized retail jewellery has demonstrated the same potential as retail stores of consumer goods.

And this mushrooming of jewellery stores can be attributed to the different ways jewellery can be adorned by buyers. At present there are two major segments within the jewellery sector. These are gold - 22 carat and above, and diamonds. Gold - 22 carat and above constitutes around 80% of the total jewellery consumption and the remaining 20% demand is in the form of diamonds and gemstone jewellery. It is estimated that the overall size of the domestic gems and jewellery sector is pegged at ̀ 87,000 crore as of 2008-09 according to a FICCI-Technopak study and is expected to grow up to `1,83,200 crore by 2014-15. Here is a brief information on the two segments in the jewellery sector:


co-existence in the market. BUSINESS ANALYSIS Though the jewellery industry seems to be all about shine and glitter, one of the ironic realities of the industry is its low margin due to high cost of raw materials. It has been observed that typically jewellery retailers charge raw material cost, which includes making charges as a fixed rupee amount per unit of raw material for jewellery to consumers. This often discourages a lot of consumers.

To attract a strong consumer base, some large branded jewellery retailers

started charging ‘making charges’ on ‘per piece’ basis. Some retailers have also begun linking ‘making charges’ to the raw material price by quoting a fixed percentage on the cost of the raw material. This has enabled retailers to earn higher margins even when raw material prices increase. Despite the presence of diamond and platinum, gold still occupies a mammoth share in retail consumption and forms a significant portion of the revenue of retailers. According to Credit Rating and Information Services of India Ltd (CRISIL), on the whole, gold jewellery accounts for 80% of the overall sales in the

industry. As for diamond jewellery, it has been observed that its contribution to the overall industry’s sales varies from 25% to 30% in large cities to as low as 5% in small cities. The single largest constituent of cost for jewellery retailers is the cost of raw material. It has been estimated that gross margins on gold are in the range of 8% to 10%, while for diamond jewellery these margins can be as high as 40% to 45%. This is the reason why many retailers keep a product mix of these commodities. In terms of cost, an organized jewellery retailer would have a 70:30 share of gold and diamond jewellerY.

Registered O�ce: Nirmal Bang Securities Private Limited. 38-B, Khatau Building, 2nd Floor, Alkesh Dinesh Mody Marg, Fort, Mumbai - 400001. Tel: 3926 8600 / 01; Fax: 3926 8610Disclaimer: Insurance is a subject matter of solicitation. Mutual Fund investments are subject to market risk. Please read the scheme related document carefully before investing. Please read the Do’s and Don’ts prescribed by Commodity Exchange before trading. Through Nirmal Bang Securities Pvt. Ltd. *Through Nirmal Bang Commodities Pvt. Ltd. #Distributors investment in securities is subject to market risk. investment in securities is subject to market risk

EQUITIES | DERIVATIVES | COMMODITIES* | CURRENC Y | MUTUAL FUNDS# | IPOs# | INSURANCE# | DP

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A good mix of stable cash �ow from the

power distribution business and strong

growth potential from infrastructure

assets will hold Reliance Infrastructure

Ltd in good stead in the coming times

eliance Infrastructure Ltd (R-Infra) is one of the largest infrastructure companies that has been developing projects in several high growth areas in the infrastructure space.

These include 11 road projects, three metro projects, five airports in Maharashtra and five transmission lines.

The company is also a leading utility company having presence across the value chain of power businesses like generation, transmission, distribution, and trading. The company generates 940 MW of electricity through its five power stations and distributes power to over 5.6 million consumers in Mumbai and Delhi.

R

APerfectBlend



The company also provides EPC to develop power and road projects and has an order-book of `173 billion. The company holds a 38% stake in Reliance Power, which plans to have a portfolio of 32 GW of generating assets. ELECTRICITY BUSINESS IN RECOVERY MODE

The company’s electricity business includes Mumbai discom (generation, transmission and distribution) and Delhi distribution, which earns a regulated return on equity. The Maharashtra Electricity Regulatory

DistributionTransmissionGenerationTotal (Mumbai Discom)Delhi Discoms (BRPL & BYPL)

Regulated EquitySegment

14,9001,5005,500

21,90022,000

RoE(%)

161523

-16

Regulated Equity(` mn)

RoE (%)

Source: Company Data, Nirmal Bang Research

Regulatory Assets (FY05-FY09)Incremental Revenue Gap Of FY09Incremental Revenue Gap Of FY10 & 11Impact Of ATE OrderCapitalisationTotal Gap

Regulatory Assets Approved Revenue Gap

7.320.96

13.740.910.23

23.16

Remarks

Already Approved In Past Tariff Orders But Recovery Was Deferred - Impact Of Tariff Stay And Subsidy ATE Allowed Carrying Cost At SBI PLR (Against 6% Considered By MERC)Recognizing Past Year’s Capitalization -

(` bn)


Commission (MERC) has extended the company’s power distribution licence period in suburban Mumbai for the next 25 years and allowed charging cross-subsidy for migrated customers.

The company has submitted a plan for recovery of regulatory assets worth `48 billion over a period of six years, of which assets worth `23 billion have been approved. Cross-subsidy charge will reduce the migration of high-end customers and recovery of regulated assets will reduce debt and improve cash flow.

TARIFF REVISION AT DELHI DISCOMS IS UNDER PROCESS

The company has a combined stake of 49% in BSES Rajdhani Power Ltd (BRPL) and BSES Yamuna Power Ltd (BYPL) units of Delhi power distribution business, which have regulated equity of around `22 billion. The Delhi Electricity Regulatory Commission (DERC) has hiked the tariff by 21.7% after six years during FY12, which comes as a big respite for Delhi power distribution units as they were facing a severe liquidity crunch due to the rising gap between power cost and tariff charged to consumers.

The company has also invested `5.2 billion in Delhi discom as equity, which has enabled a financial package of `51 billion from the IDBI Bank. There was a steep increase in debt level in order to fund capex and power procurement costs. The tariff hike is a major positive towards improving the deteriorated financials of Delhi discoms. Further, tariff hikes is under process and regulatory approval for the same is expected shortly, in order to recover accumulated revenue deficit and ease the company’s liquidity position.

EARNINGS OF INFRASTRUCTURE PROJECTS HAVE STARTED PICKING UP

The company has a strong infrastructure portfolio that consists of 11 road projects, three metro rail lines and five power transmission projects worth `346 billion. The execution of key infrastructure projects is on track and revenue from the infrastructure business has shown robust growth in FY12, driven by commencement of operations of Delhi metro rail project and three road projects during FY12.


RoadMetro RailTransmissionTotal

Infrastructure Project PortfolioBusiness

1135

19

Cost (` bn)

120160

66346

Projects


Namakkal KarurDindigul SamyanalloreTrichy KarurTrichy DindigulSalem UlenderpetGurgaon FaridabadJaipur ReengusPune SataraKandla MundraHosur KrishnagiriDelhi AgraTotal

Road Project Portfolio

Road Projects

44538088

1366652

1407160

180970

Length(kms)

2020303025171824252426

-

ConcessionPeriod (yrs)

3.454.15

7.35.37

10.617.795.56

19.8511.289.24

29.44119.04

Project Cost(` bn)

2.463.32

5.13.226.375.843.8910.9

7.96.47

20.6176.08

Debt(` bn)

0.240.31

1.51.072.12

(1.50)1.03

(0.91)(0.42)(0.67)

1.8-

Grant/(Premium)(` bn)

0.450.52

0.71.082.121.950.64

8.93.38

3.68.5

29.54

Equity(` bn)

OperationalOperationalFY13OperationalFY13FY13FY13OperationalQ4FY13OperationalFY13 -

Revenuestart


The company is expected to complete five more road projects in FY13. Of these, three road projects would be commissioned in the next three months. It has witnessed healthy traffic at the Delhi metro rail project and closed retail deals of 60,000 sq ft.

As much as 90% of civil works for the Mumbai metro rail project has been completed, which is expected to be operational by the end of FY13. In FY12, the company commissioned five out of nine transmission lines of the WRSS project and expects it to be fully operational by FY13. The company’s infrastructure portfolio is now turning from the development stage to the revenue generation mode.

ROBUST GROWTH IN EPC SEGMENT IN FY12:

In FY12, the EPC revenue rose 3.7x to `110 billion year-on-year (y-o-y), driven by the execution of power projects like Butobori, WRSS transmission project (commissioned five out of nine lines) and road projects (out of the five ongoing projects, three projects to be operational within the next three months). The company has maintained the same level of revenue and EBITDA margin guidance of 8% to 9% for the EPC segment in financial year 2013.

Its current order book stands at `173 billion (1.56x FY12 EPC revenue), comprising power generation projects (9,900 MW), power transmission projects (1,500 km) and six road projects (570 km). The company expects to win some EPC projects from outside players, mostly power

projects, which will keep its revenue momentum intact.

FINANCIAL PERFORMANCE

During FY12, net sales of the company increased by 60% to `242 billion, driven by 3.7x growth in revenue from the EPC segment. The EPC segment is expected to report flat revenue in FY13. Hence, we expect net sales to show a CAGR of 3% over FY12-14, to `239 billion and `255 billion, respectively.

During FY12, EBITDA rose by 85% to `27.8 billion and the EBITDA margin improved 160 bps to 11.5%. We expect EBITDA to show a CAGR of 20% to `34.4 billion and ̀ 40 billion for FY13 and FY14, respectively, driven by rising contribution of high margin infrastructure projects and revision in power tariff.


Net Sales


EBIDTA Margins


RPAT


However, the net profit is expected to be subdued and show a CAGR of 11.6% over FY12-13 due to the increase in capitalization costs and lower other income.

STOCK TRADING BELOW STRESS CASE VALUATION LEVEL

Reliance Infrastructure Ltd is currently trading at a P/BV of 0.5x and if we adjust the value of its stake in Reliance Power and cash on the books, the market appears to be assigning just 15% value to infrastructure, electricity and EPC projects, which we believe is unjustified and below stress case valuation.

We believe that the company is a good blend of stable cash flow from the power distribution business and has strong growth potential from infrastructure assets. Positive developments like expected recovery of regulatory assets, power tariff hike, coupled with commissioning of infrastructure projects like five road projects, Mumbai metro rail phase I and one transmission project in FY13E would re-rate the stock’s valuatioN.

13.5 15.2 15.5 16

18 20

-

2

4

6

8

10

12

14

16

0

5

10

15

20

25

FY09 FY10 FY11 FY12 FY13E FY14E

RPAT (` bn) % YoY

(Rs bn) (%)

6.3

12.3 15

27.8

34.5

40.4

0

10

20

30

40

50

60

70

80

90

0

5

10

15

20

25

30

35

40

45


EBIDTA (` bn) EBIDTAM%(Rs bn) (%)

126 146 151

242 239255

-10

0

10

20

30

40

50

60

70

0

50

100

150

200

250

300


Net sales (` bn) % YoY(Rs bn) (%)

100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100

100 100 100 100 100 100 100 100 100 ncorporated in the year 1981 and founded by Rajendra Pawar, Vijay Thadani and Rajendran

under the name of Pace Education Private Ltd, NIIT Ltd has more than 30% market-share in the IT training industry in India. The company caters to the computer education market through its key verticals.

BACK ON THE GROWTH TRAJECTORY

NIIT Ltd is back on the growth trajec-tory with focus on the core business of imparting computer education through its key verticals, namely: Individual Learning Solutions, Corporate Learning Solutions, School Learning Solutions as well as Skill Building Solutions.

1. Individual Learning Solutions: NIIT is one of the largest providers of vocational and professional skills worldwide across various service sectors. The company has been acknowledged as the market leader in India. It has nurtured over 2,000 entrepreneurs till date and the company has enhanced income for more than 75,000 BPL families.

2. Corporate Learning Solutions: The company is one of the leading players of corporate training in the world. It is uniquely positioned to

I take maximum advantage of the growing training outsourcing trend. The company has trained more than 30,000 IT professionals for the Chinese economy per annum and helped over four million individuals perform better at their jobs.

3. School Learning Solutions: The company is a leading player in the school education segment in India. It is positioned to take strong advantage of the emerging environment and has trained close to four lakh school teachers to leverage IT culture in schools. At the school level, the company has trained more than 10 million school children.

In addition to this, the company has done IT enablement for Bhutan and Maldives and developed over two lakh hours of learning content.

4. Skill Building Solutions (Nascent Stage): This segment is in equity partnership and funding support from NSDC. The main aim is to establish over 1,500 centers in 1,000 cities over the next 10 years. It expects to transform over seven million unskilled youth into readily employ-able professionals.

STRONG BALANCE SHEET

NIIT Ltd has a strong balance sheet

with the recent sell-off of its non-core business - Element K. The size of the balance sheet has reduced from `925.3 crore in FY’11 to `774.6 crore in FY’12. The cost of acquisition of the same for NIIT Ltd was USD35 million but the company sold it for USD110 million. The debt in the books of the company has reduced by 2/3rd to `108.7 crore as on 31st Mar ’12 as compared to `356.8 crore as on 31st Mar ’11.

At the net level, the company is almost debt-free if one takes the corresponding cash of `102 crore it has into consideration. CONTRIBUTION FROM GROUP COMPANY

A 25% stake in group company, NIIT Technologies is contributing to more than 1/3rd of the present price of the company. Through its 100% subsidi-ary, Scantech Evaluation, NIIT Ltd has 25% stake in the group company, NIIT Technologies Ltd.

At the present price even if one applies a holding company discount of 50%, the contribution of holding in NIIT Technologies to the present market capitalization of NIIT Ltd is `216 crore, translating into more than 1/3rd of the present market capitaliza-tion of the companY.

NIIT LTDNIIT LTD

Present Market-cap Of Niit TechnologiesValue Of Stake Held By NIIT LtdHolding Company Discount @ 50%Present Market-cap Of NIIT LtdValue Of Niit Technologies In NIIT Ltd

1728.4432

216.05642.734%

NIIT Particulars (` in Cr)

Financials

Net RevenuesEBITDAEBITDA MarginPBTPATEPS (`)

864.2126.915%31.267.74.1

993.5119.812%25.373.54.5

Particulars (` in Cr) FY11 FY12

15.%-5.60%

decline of 263 bps-18.90%8.60%9.80%

% Change

Source: Nirmal Bang Research


Source: Company, Nirmal Bang Research

Note: The market price of NIIT Ltd as on 21st Jun’12 is `42.25


n the previous fortnight, the markets were driven by key global and domestic events. Globally, Greece went to

polls while in India, the Reserve Bank of India (RBI) announced the mid-quarter monetary policy review.

In Greece, the conservative New Democracy party came first in a critical election and pro-bailout parties won enough seats to form a joint government. The election result prevented Greece from exiting the Euro zone.

But this event failed to provide positive cues to world equity markets as various other concerns such as problems in Spain continues to dampen investor sentiments. The yield on Spanish 10-year bonds rose above 7%, the highest level since the euro was launched in 1999.

Domestically, despite growing expectations of a rate cut owing to a 5.3% GDP growth of India in Q4 2011-12, the weakest quarterly growth in the last nine years and a mere rise of 0.1% in the Index of Industrial Production (IIP), the RBI disappointed the equity markets by keeping the indicative short-term policy rate (repo rate) and the Cash Reserve Ratio (CRR) unchanged.

After touching a low of 4,824 on the first day of the June expiry, the markets rallied 6% in the first half of the June expiry. The India Volatility Index (VIX) which measures the immediate 30-day volatility in the markets has seen a continuous decrease since the start of the June the expiry from the level of 27 (as on 1st June this year).

It recently cooled off the most after

I the elections in Greece, the FOMC meeting and the RBI announcement. Going forward, we expect VIX to further cool off and come down near the levels of 18-20 after the outcome of the EU meeting is known.

On the Nifty Options side for the July series, additions were witnessed in 5,000 Put followed by 4,700 Put whereas 5,200 and 5,300 Calls have the maximum Open Interest standings with ATM IVs near 19 levels.

Hence, the Nifty is hovering around the immediate resistance level of 5,200 and a further up-move will force the 5,200CE writers to square off their positions and shift upwards to the levels of 5,300-5,400 or on the downside we may again test the levels of 5,000 and 4,800.

The index rallied from the lows of 4,770 and the advance halted at the 5,200 level on 16 Jun ’12. The Nifty corrected from the resistance level and found support at the 5,080 and 5,040 levels and turned sideways from then onwards.

Currently, the range for the index is at 5,200-5,040 and any move on either side would call for a trending action. A bearish engulfing pattern was formed on 16 Jun ’12 on most index stocks and closing above this is essential for a positive bias, which has to be triggered by strong buying across Index stocks.

Until the index trades below the 5,200 level, one should maintain a cautious approach in the near term. Any move beyond that may trigger a further upside till 5,300 and 5,350, which is a possibility over the next few weeks.

However for the uptrend to remain

TECHNICAL OUTLOOK FOR THE FORTNIGHT

intact, the Nifty should sustain above the level of 5,040 in case of further correction in the next few days. Any move below the 5,030 level would negate the bullish view and open further downside, which may take the Nifty well below the levels of 4,940 and 4,830.

The Bank Nifty has managed to sustain above the 9,600 level despite the bearish engulfing pattern, which was formed on 16 Jun ’12. The Index faces resistance around the 10,160 and 10,200 levels on the upside, which pose crucial hurdles to be crossed immediately and the support resides at the 9,730 and 9,620 levels on the downside.

As the market struggles with the trend, seemingly undecided whether to move up or down, we find that the evidence for some continuation of the ranging action has built up yet again. Traders should maintain a bullish bias in the Bank Nifty only on a decisive close above the 10,200 level for an upside potential of 10,600 and 11,200 levels; till then they can expect the selling pressure to continue.

STRATEGYLooking at the current levels of the India Volatility Index (19.5 as on 21st June), we recommend the construction of a Bull Call Spread (July expiry) to the traders at a strike of 5,200 and 5,400. It can simply be initiated by buying 5,200 Call (at `110) and selling 5,400 Call (at `40) (Kindly note the net spread cost should not be more than `70). The maximum profit that the initiator can earn is `130 at or above the 5,400 level where the loss remains limited to the tune of the spread cost (`70) if the June contract expires below the 5,200 leveL.


Income funds are for those investors who intend to have steady income and present better returns to investors when interest rates come down. Investors should invest in these funds with an investment horizon of over two years.

Lastly, gilt short-term funds invest in medium to long-term securities. A gilt short-term fund is recommended to investors who play safe as it entails no big risk. Investors should invest in gilt short-term funds if they are looking for investing with a horizon of two to three years.

Hence, there are debt mutual funds for every period and for all kinds of investors. It is estimated that income from debt funds are in the range of 8% to 10%.

It must be noted that debt mutual funds like debt instruments are taxed higher than equity mutual funds. Investors are expected to pay short-term capital gains tax of 20%, and long-term capital gains tax is at the rate of 10%.

INTEREST RATES

Interest rates play a crucial role when it comes to yields of debt funds. Technically, interest rates and bond prices are inversely proportional to each other. When interest rates increase, bond prices fall. In such a situation, deposit rates offered by banks become attractive than interest rates on bonds.

As a result, many investors sell bonds in the secondary market and opt for risk-free bank deposits, resulting in a fall in bond prices.

Take for instance, a bond issued by AAA corporation with a face value of `100. For hypothetical analysis, consider that the bond promises 5% annual interest, which is termed as the

n the markets as well as in life, individuals can cash in on several unnoticed things by being quick and long-sighted.

In the present market situation where interest rates have peaked out, it makes all the more sense to invest in debt funds.

It is interesting to know how people can make money by investing in different types of debt funds in different market conditions. Let us explore the various strategies used by debt funds to make money in varying market conditions.

IN SUM

Debt mutual funds invest in debt instruments like government bonds, fixed deposits and approved private deposits. Depending upon the maturity period, debt funds are classified into liquid, ultra short-term, short-term, gilt short-term and income funds.

Liquid funds invest in debt instruments that have a maturity of 91 days and give better returns than savings accounts. These funds help investors to work best against market volatility. Hence, investors should keep their investments restricted to three to six months.

Ultra short-term funds invest in securities having a maturity of one year. These funds give better returns than liquid funds and are advised to those investors who are willing to play during volatility in the markets. Investors having an investment horizon of one day to three months invest in these funds.

Short-term funds invest in securities having a maturity of over a year. It has low to moderate interest rate risk. Investors should invest in these funds with an investment horizon of 18 months to two years.

IDebt mutual funds invest

in debt instruments of

di�erent maturities and

credit quality and thus

protect you from the

volatility of the equity

markets, while o�ering

decent returns



coupon rate till maturity. Now, in the secondary market, the bond is available for `101. For someone who buys the bond from the secondary market, the current yield on the bond will be 4.95% ((`5/`101) X 100 = 4.95%), where `5 is the coupon amount that he will receive if he holds the bond till maturity; `101 is the price at which the bond is trading in the secondary market.

Suppose interest rates increase and the price of the bond in the market drops to around `99, the current yield would be 5.05% ((`5/`99) X 100 = 5.05%).

Hence, in the first case when the coupon rate was 5%, the yield turned out to be around 4.95%, while in the latter it turned out to be around 5.05%. This shows the relationship between interest rates and the prices of bonds and, therefore, the yield on the bonds.

In any case, an investor who purchased the bond at `101 can either hold it till it matures and make 4.95% annual interest or wait for the bond price to go beyond `101 to gain from capital appreciation.

On the other hand, the investor who invested `99 can either wait for the bond price to go up and gain from capital appreciation or hold till maturity and earn 5.05% interest on his investment.

Due to such dynamics in the debt markets, debt fund managers employ various strategies to ensure reasonably good returns.

STRATEGIES

There are several strategies that can be used to make decent returns on the investment. The strategies are buy and hold, manage the duration, and

credit selection, among others.

This is one of the simplest ways of investing in debt funds. It involves investing in high-yielding debt securities and aims at holding them till maturity.

The fund manager cashes in on regular coupon payments and it is estimated that the returns generated in such a manner are reasonably good for investors.

A factor that works in this strategy is the stability in interest rates. Hence, this works in the markets when interest rates remain stable. Because any increase in interest rates would result in a capital loss to the portfolio on the whole, which in turn, would impact the Net Asset Value (NAV) of the fund.

Such a strategy works due to the active involvement of the fund manager in changing the average duration of the bonds.

Duration is a measure of susceptibility of a debt instrument to fluctuations in interest rates. It is observed that longer the duration, higher is the susceptibility of the debt instrument and vice versa.

The fund manager of a mutual fund changes the average duration of the bonds according to his estimation of the direction the interest rates could take in the future.

If interest rates are estimated to come down, the fund manager buys bonds with longer duration and sells those with shorter duration. This process continues until the fund’s average duration rises above the market’s average duration.

Market experts draw a parallel between this strategy and the timing strategy, which is often followed in the equity markets.

This strategy involves an investment in a debt instrument in anticipation of changes in the credit rating of the underlying instrument.

An increase in the credit rating of a debt instrument would lead to an increase in its price, which would ultimately enhance the returns of debt mutual funds.

Typically, a fund manager evaluates the credit quality of the underlying debt instrument and accordingly follows a strategy. A credit selection strategy would entail frequent trading as debt instruments are bought and sold regularly in the expectation of a change in credit ratings.

Few bonds permit the issuers the choice of opting for redemption before the maturity of the bond. This call option has a prepayment risk to the mutual funds that are holding high-yielding debt.

Normally, it has been observed that high-yielding bonds with call option can be called back by the issuer when the interest rates fall.

In this strategy, the fund manager works to hold bonds with a low prepayment risk or plans to predict the future course of interest rates and determine the possibility of the prepayment risk.

The fund manager increases or decreases the exposure of high-yielding bonds in the portfolio after taking into account the prepayment amounT.

for the purpose of investment.

COMMODITIES

The first thing that comes to people’s mind when we mention about commodities is gold or silver. However, there is much to be explored beyond gold and silver. A number of commodity schemes are available to investors at the moment and should, therefore, take full opportunity of the same.

Funds houses in India offer schemes such as agriculture, a number of commodity stocks, precious metals as well as mining funds to investors. They can choose from the host of options based on their risk appetites.

Most funds are FOFs that invest in schemes of their parent company that has a global fund on a similar theme. To cite an example, DSP BlackRock Mining funds invest in BlackRock Global Funds - World Mining Fund, while DWS Global agribusiness offshore fund invests in DWS Invest Global Agribusiness funds.

Fund managers who actively manage certain mutual funds also at times invest in foreign companies. These funds invest in commodities either directly or through the stocks of commodity companies.

Since some commodity funds invest in stocks instead of commodities, their returns may not be in line with the underlying commodities.

While commodity prices depend on demand and supply, share prices of companies on the other hand depend upon a host of factors such as performance of the equity market, macro-economic factors and even labour and environmental issues in mining funds. Such issues make returns on commodity stocks and funds quite volatile.

If we look at returns of commodities funds, we find that most funds have underperformed in the last one year and have given negative returns of 12% to 16%. However, if we take a closer look at the numbers, we see that it has managed to give positive returns for the three year horizon.

As mentioned earlier these theme-based funds are relatively new to India and most of these funds were launched during the commodity rally of 2008-09. Therefore, they do not have an established history. However, given that these are theme-based funds, some risk is attached to them and, therefore, investors must not invest more than 5% to 10% of their investable corpus in such funds.

EMERGING AND DEVELOPED MARKETS

While gold funds have done well in the last one year, a closer look shows that Motilal Oswal Most Shares NASDAQ-100 ETF has given returns of around 35%, which is the highest among all funds in the last one year. Such diversification comes as a huge relief to investors when most of the funds in India are down as they can sometimes reduce investment risks.

More and more fund houses are not only looking at investing through international funds in developed markets like the US and Europe, but also considering developing or emerging markets like Brazil, China and the Middle East.

Therefore, investors wanting to benefit from the growth story in China can look at investing in a China-based fund. Supposing certain investors feel that Brazil is likely to lead the pack among the emerging markets due to its vast cache of natural resources, they can invest in HDFC Brazil Fund.

t goes without saying that diversification is an important principle of investment. And so investors should not put all

eggs in one basket. Instead, they should consider equity, debt or fixed products for investment purposes.

Now, they get to invest even in international funds with different categories, such as agriculture mining or any other theme. Some others can even choose a global real estate fund or even a country-specific fund.

A number of options are available to investors when it comes to investing in foreign assets through mutual funds as there is a lot of investment opportunity outside India for investors with long-term investment plans. There are 25 to 30 international funds of various categories that are available to Indian investors and several more country-based funds are likely to be launched soon.

Investments in most international funds from India are routed through the fund of fund (FOF) route, which invests either fully or partly in the international markets.

This fund, like most others, is not without its risks since it may be affected by the current risk or it may underperform due to country specific problems too.

In the Indian context the problem that could arise is that the concept of theme-based funds is relatively new here as most of these funds do not have much of a historic track record. While investors can certainly look at investing in such mutual funds, they should not put their entire money into such funds.

Investors can consider international mutual funds that invest in avenues like commodities, real estate as well as developing and emerging markets,

I



However, it must be known that currency risks affect international funds greatly. Therefore, in the present environment a weaker rupee against US dollar since the past few months bodes well for international funds. But if the value of rupee rises against the dollar, investors’ returns could be hampered.

Another thing to note while investing in international funds is that although it might diversify yours risks, it may not enhance your returns.

Currently most international funds are either country-specific or theme-based in nature. Hence, a number of investors who find it complicated think twice before entering into such schemes.

REAL ESTATE

The ongoing recovery in the real estate sector in most developed economies has benefitted real estate

funds. Real estate funds in India are limited in number. Most of them are FOFs that invest in their parent company’s fund. These FOFs do not directly invest in real estate but get into companies that help the real estate sector such as energy, utilities, construction and industrial properties. Global studies indicate that cities like Munich, London and New York are likely to remain frontrunners in real estate investments.

However, lack of understanding and legal issues makes it impossible to invest in real estate outside India. Therefore, investors can look at investing in such real estate funds which offer them the chance to invest in global real estate companies.

ING Real Estate Fund invests in ING Global Real Estate Securities Fund that seeks to provide investors with diversified returns consisting of income and capital appreciation over time. When it was launched in 2007,

it was the first Indian open-ended real estate fund and also the first fund to offer Indian investors access to global property markets.

Real estate mutual funds have not yet been launched in India despite the fact that markets regulator, Securities and Exchange Board of India (SEBI) has come out with regulations regarding the same.

Though we have infrastructure funds that invest in real estate companies, we do not have proper real estate mutual funds like those available in other countries.

Till the time real estate fund are launched in India investors can certainly look at investing in global real estate funds. However, before getting in global real estate funds, investors should know their risk- taking ability as real estate is cyclical in nature and could give minimal or negative returnS.

EQUITIES | DERIVATIVES | COMMODITIES* | CURRENC Y | MUTUAL FUNDS # | IPOs # | INSURANCE # | DPDisclaimer: Insurance is a subject matter of solicitation. Mutual Fund investments are subject to market risk. Please read the scheme related document carefully before investing. Please read the Do’s and Don’ts prescribed by Commodity Exchange before trading. The PMS Service is not o�ering for commodity segment. *Through Nirmal Bang Commodities Pvt. Ltd. #Distributors

SMS ‘BANG’ to 54646Contact at: 022-3926 9404, E-mail: [email protected]

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changeD for Good

While revised Schedule VI of the

Companies Act seems good from

the investors’ point of view, there

are a number of implementation

challenges for companies while

adopting the new format

nnual financial accounts of companies for financial year ending 31st Mar ’12 will now

have a different look.

Not only the format and the content of the financial statements will undergo a change, but also the primary and secondary information derived from the financial statements of companies would differ accordingly.

All this is because of the revision of the over five-decade-old schedule of

A



This article attempts to explain the key takeaways of revised schedule VI. For basics of financial statement, readers can go through Issue 61 of Beyond Market.

BROADER CHANGES

The broader changes mandated by the revised schedule VI can be summarized as legible, transparent and user friendly as it prescribes a detailed disclosure requirement and pertinent presentations of the financial statements.

Following are the broad changes to the formats in which financial statements will be reported according to the revised schedule VI of the Companies Act.

- To start with, the new format gives full freedom to companies whereby they can add or substitute any line item on the face of the balance sheet or the profit and loss account or the notes to accounts in order to give suitable information to the reader.

Hence, a balance is maintained in fetching more information that may not be of any help to the reader without concealing important information from the users of financial statements.

Therefore, companies from different sectors and even companies from the same sector can have different -looking financial statements. Companies now can go a step ahead to convey the exact message they want to share with the investors.

For instance, Earnings Before Interest, Tax, Depreciation and Amortisation (EBITDA) is often an important measure of financial performance of a company and is relevant to the various users of financial statements and stakeholders of the company.

Hence, a company may choose to present the same as an additional line item on the face of the profit and loss statement. However, a company has to maintain uniformity in presentation of the financial statements.

- The term ‘profit & loss account’ in the old format of reporting has now been changed to ‘statement of profit and loss.’ Though the term ‘balance sheet’ is kept unchanged, the items under it are changed; ‘sources of funds’ will now be termed ‘equity and liability’ and ‘application of sources’ will now be called ‘assets’.

- The concept of ‘schedule’ in the old format of presentation of financial statements has been done away with. The schedule to accounts used to give a break-up of amounts disclosed in the main balance sheet and the profit and loss account. Henceforth, such information will be furnished in an explanatory manner in the notes to accounts of the annual report.

- The revised format mandates companies to use a uniform unit of measurement throughout the financial statement of the company.

- A particular format of cash flow statement has not been prescribed by the revised schedule VI. Hence, companies which are required to present this statement can do so as per the old schedule VI.

Few of the important changes mandated by the new format have been mentioned below.

CHANGES TO THE BALANCE SHEET ITEMS

The revised schedule VI strictly prescribes a vertical format of presentation of the company balance sheet. Till now companies had the option of using horizontal or vertical format of presentation.

the Companies Act. Schedule VI of the Companies Act,1956, which lays down the format and presentation of the financial statements for Indian corporates stands revised after a circular was issued by the Ministry of Corporate Affairs (MCA) in February last year.

It is applicable to companies preparing their financial reports from April ’11 onwards. Hence, companies coming out with their annual reports for fiscal year 2011-12 will have to be in accordance with the ‘revised schedule VI’.

The revised schedule is applicable to all companies, except for companies from the banking, insurance and electricity sectors for whom the format of the financial statements has already been specified by the MCA.

The new format is also mandatory for companies planning to come out with initial public offerings (IPOs). The new format has been mandated for both standalone financial statements and consolidated financial statements.

The intention behind the revision is to harmonize and synchronize the financial reporting of Indian companies with those prescribed in International Financial Reporting Standards (IFRS).

While the changes are good from investor’s point of view as it increases transparency, there are a lot of implementation challenges for companies in adopting the new and revised format.

In addition to this, investors who are relying on the financial statements of companies for their information will have to tune themselves with the revised format as tweaking of some items of the financial statement will alter financial ratios as well as other important parameters.


The term ‘sources of funds’ will now be replaced by ‘equity and liabilities’, while the term ‘application of funds’ will be replaced by ‘assets’.

The revised format has put more emphasis on detailed disclosure than those in the pre-revised schedule VI.

Following are some of the important changes laid down for different items - line or sub-line - under the balance sheet of a company.

Share Capital

In the Indian context, there are two kinds of share capital namely - equity and preference. Within equity or preference share capital, there could be different classes of shares, say, equity shares with or without voting rights, compulsorily convertible preference shares, optionally convertible preference shares, etc. With the new change, a disclosure is required on the face of the balance sheet as a line item for share warrants. No separate disclosure was required on the face of the balance sheet earlier. Also, the company needs to disclose all shareholdings above five percent of any class of shares along with their names.

Additionally, disclosure of shares (equity or preference) held by associates and subsidiaries are also needed to be made. The disclosure of shares bought back or redeemed, including defaults will be required to be disclosed at a consolidated level. Currently such disclosures are made at the standalone level only. The disclosures need to be put in the notes to accounts.

Hence, with the availability of additional information, current ownership and ownership changes in the future due to share warrants can be easily estimated, thereby helping

in the estimation of dilution in earnings, if any. Further, the company’s economic interest in the subsidiaries will also be clear from the disclosures.

Reserve & Surpluses

A company deals with its profits in two ways. It either distributes them to the shareholders or retains them in the business. The retained profits are transferred to the balance sheet after all appropriations like dividends, transfer to reserve account, etc are accounted for.

As assets are owned by the company and liabilities are owed by the company to the outside parties, the profits would come under liabilities and losses would be classified on the asset side of the balance sheet.

Thus, if the profit figure is positive after deductions for dividends and reserve accounts, then it goes to the liability side under the heading reserve and surplus. But, what if there is a loss?

As per the existing practice, a debit balance or a loss is shown as the last item on the assets side of the Balance Sheet. The revised format prescribes the loss to be mentioned in the ‘reserve and surplus’ category under the liability side as a negative figure. Thus, if the company makes a loss of `10 crore and after deducting ̀ 8 crore for general reserves, the amount of (-) `2 crore will be put in the reserve and surplus item of the balance sheet. Thus, reserves and surplus can show a negative balance and would present an accurate picture under the revised schedule VI.

Money Received Against Share Warrants

Generally, in the case of listed

companies, share warrants are issued to promoters and others. Share warrants are nothing but the amount which would ultimately form the part of shareholders’ funds.

Now, since shares are yet to be allotted against the same, a need was felt to disclose these as a separate line item and, hence, in the new format it is reflected as a separate line item. This will help estimate the future ownership of the company.

Share Application Money Pending Allotment

As per the old format there was no clarity regarding the period till which the share application money could remain idle beyond the period of allotment of the same.

At present, the share application money remains idle for many years. To take care of this anomaly, the revised schedule mandates companies to give reasons for non allotment and a time line as to how the company will use the share application money and when conversion to shares will take place.

Assets & Liabilities

For both assets and liabilities, many line and sub-line items have undergone a change as compared to the old format. In addition to this, the new format recommends narrative disclosure to various items in the notes to accounts.

- From the definition of current and non-current items, the current maturities of all long-term borrowings will be disclosed under the heading ‘other current liabilities’. This gives a clearer picture of what the short- and long-term obligations for companies are. This will help investors of the company to calculate debt accurately.


I. EQUITY & LIABILITIES

(1) Shareholder’s Funds (a) Share Capital (b)Reserves & Surplus (c)Money Received Against Share Warrants(2) Share Application Money Pending Allotment (3) Non-current Liabilities (a) Long Term Borrowings (b) Differed Tax Liabilities (Net) (c) Other Long Term Liabilities (d) Long Term Provisions(4) Current Liabilities (a) Short Term Borrowings (b) Trade Payables (c) Other Current Liabilities (d) Short Term ProvisionsTotal

II. ASSETS

(1) Non-current Assets (a) Fixed Assets (i) Tangible Assets (ii) Intangible Assets (iii) Capital Work-in-progress (iv) Intangible Assets Under Development (b) Non-current Investments (c) Deferred Tax Assets (d) Long Term Loans And Advances (e) Other Non-current Assets(2) Current Assets (a) Current Investments (b) Inventories (c) Trade Receivables (d) Cash & Cash Equivalents (e) Short Term Loans And Advances (f) Other Current AssetsTotal

ParticularsNote No. Figures As On

The End OfThe Current

Reporting Period

Figures As OnThe End Of The

PreviousReporting Period

Format Of Balance Sheet: Balance Sheet As On 31st Mar ’12


- According to the revised schedule that has been suggested, all assets and liabilities will have to be classified as current and non-current.

For any item to be classified as current it has to be a part of the normal operating cycle of the company or should be realized in the next 12 months. A point to be remembered is that the operating cycle of some businesses would be longer than 12 months.

For instance, the operating cycle of a real estate company is more than 18 months. Hence, all items (assets or liability) within 18 months would be classified as current and beyond 18 months as non-current.

The classification as current and non-current will help investors to keep tab on any asset-liability mis-matches in the company. - Liability toward bonus, etc, that is payable within one year from the date mentioned on the balance sheet is classified as ‘current’.

- The revised schedule VI requires investments to be classified as current and non-current investments. Hence investments likely to be disposed off in the next 12 months will be classified as current.

Also, investments will have to be disclosed under broader heads like investments in equity, property, investments in mutual funds, subsidiaries, etc. This disclosure will bring significant transparency in inter-corporate investments.

- The term ‘sundry debtors’ in the old format of presentation has been replaced with the term ‘trade receivables’ in the revised format.

The new format defines ‘trade receivables’ as dues arising only from

goods sold or services rendered in the normal course of business.

Hence, amounts due on account of other contractual obligations can no longer be included under the ‘trade receivables’ heading. With this disclosure, investors would be able to gauge the defaults by debtors. - The old format required a separate presentation of debtors outstanding for a period exceeding six months based on the date on which the invoice was raised.

However, the new format will require them to be disclosed based on the due dates of realization and not based on the invoice date.

This is a grey area for companies and poses a bigger challenge for companies while preparing their financial reports for the said period as per the revised schedule as it is difficult to estimate the realization period for all types of bills.

- ‘Capital advances’ are specifically required to be presented separately under the head ‘loans & advances’ rather than including them in the fixed assets that was followed in the old format.

- Tangible assets under lease are required to be separately specified under each class of asset. For instance, lease of real estate will have to be accordingly specified in the non-current asset.

- Intangible items like patents or copy right, which are in the process of being achieved (over a period of time) need to be disclosed under the new format in the notes to accounts section of the annual report.

- Loans guaranteed by the directors and others will have to be disclosed in the notes to accounts.

- Disclosure of all defaults in repayment of loans and interest is to be specified in each case by the management according to the new schedule VI. No such disclosure was required in the financial statements. However, it finds a mention in the auditor’s report according to the old format.

- Bank deposits (cash and cash equivalents) with more than 12 months maturity will have to be disclosed separately.

- Repayment of long-term loans will be adequately disclosed as per the revised schedule VI.

- All commitments like capital, operating etc, need to be disclosed in the new format as against only capital commitment, which used to be disclosed in the old format. Profit & Loss Account

The name has been changed to ‘Statement of Profit and Loss’ as against ‘Profit and Loss Account’ as contained in the old schedule VI.

- The revised format of the statement of profit and loss does not mention any kind of appropriation item on its face. It is mentioned in the notes to accounts of the report.

- The revised schedule VI has removed a number of disclosure requirements that were not considered relevant in the present day context like managerial remuneration and computation of net profits for calculation of commission; information relating to licensed capacity, installed capacity and actual production; commission, brokerage and non-trade discounts.

- Any item of income or expense which exceeds one percent of the


Revenue From Operations Other Income Total Revenue (I + II)Expenses Costs Of Material Consumed Purchases Of Stock In Trade Changes In Inventories Of Finished Goods , Work-In-Progress And Stock In Trade Employee Benefits Expense Finance Costs Depreciation And Amortisation Expenses Other Expenses Total Expenses Profit Before Exceptional And ExtraordinaryItems And Tax (III - IV)Exceptional ItemsProfit Before Extraordinary Items And Tax (V-VI)Extraordinary ItemsProfit Before Tax (VII - VIII)Tax Expense: 1. Current Tax 2. Deferred Tax Profit/Loss For The Period From Continuing Operations (VII - VIII)Profit/Loss From Discontinuing OperationsTax Expense Of Discontinuing OperationsProfit/loss From Discontinuing Operations (After Tax) (XII - XIII)Profit/Loss For The Period (XI + XIV)Earnings Per Equity Share: (1) Basic (2) Diluted

III

IIIIV

V

VIVII

VIIIIXX

XI

XIIXIIIXIV

XVXVI

ParticularsNoteNo.

Figures As On The End OfThe Current

Reporting Period

Figures As OnThe End Of The

PreviousReporting Period

Profit & Loss Statement For The Year Ended 31st Mar ’12

revenue from operations or `1,00,000 (earlier 1% of total revenue or `5,000), whichever is higher, needs to be disclosed separately in the notes to accounts as per the revised format for the profit & loss account.

- As per the revised format, the classification of income or expense

will depend on the nature of the item rather than the function.

- In respect to companies other than finance companies, revenue from operations needs to be disclosed separately as revenue from (a) sale of products, (b) sale of services and (c) other operating revenues.

- Expense incurred in realising the non-operating income needs to be disclosed as per the new norm for companies while preparing their account statements.. - Finance cost will also include net exchange gain or loss on foreign currency borrowingS.

Date: 26th April.Venue: LuLu International Convention Centre and

Garden Hotels, Thrissur.

LEARN THE ART OFCOMMODITY INVESTING

LEARN THE ART OFCOMMODITY INVESTING

Exchange Partner

BeyondPresent

&



BEYOND MANDIVISITS THRISSUR

Expert guidance and timely advice help

market participants to take informed

decisions about the commodities market

The Beyond Mani camp was organized by Nirmal Bang, one of the leading broking houses in India, in association with Zee Business and National Spot Exchange Ltd (NSEL), at LuLu International Convention Centre and Garden Hotel in Thrissur on 26th April.

The camp was held with the aim to educate traders and investors in the art of investing in commodities by inviting industry experts to give sharp insights into the commodity markets, helping market participants to take right investment decisions.

The event was addressed by eminent panelists comprising Anjani Sinha, MD & CEO at NSEL, Kunal Shah, Head of Commodity Research at Nirmal Bang, K Ajay Kumar, Managing Director, Harley Carmbel (India) Pvt Ltd and Antony Thottan, Director, Trichur Assay and Hallmarking Center Pvt Ltd who discussed the opportunities in the commodities market and its future with Amish Devgan, Commodity Editor and Anchor at Zee Business.

Amish Devgan started the event by introducing the panelists and explaining the objective of the commodity camp.

Anjani Sinha, the first speaker at the event spoke about the various investment products available to investors and traders in the commodity market. He dwelt on three major topics, namely: gold as an investment avenue, new products for invest-ment in gold and instruments launched by NSEL.

He informed the audience about the various commodities available in e-series like e-gold, e-silver, e-platinum that were launched by NSEL and how they are benefitting small and retail investors. Elaborating on the same, he said, “These commodities can be bought in the demat form in both small as well as large denominations. Also, these can be held for as long as the investor wishes without paying the storage or holding cost.” He added, “This mechanism provides a very simple process for investment in gold, silver, platinum, etc.”

Referring to the advantages of e-gold, he mentioned the love for gold among Keral-ites and said: “E-gold is best for the purpose of investment as no making charges are levied on them. Also, the returns are as high as 27% as compared to gold ETF returns of 23%.” He informed investors about the availability of seven commodities in the e-series, that is, e-gold, e-silver, e-platinum, e-copper, e-nickel, e-zinc and e-lead and said NSEL was planning to take this number to 20 commodities in the future.

Anjani Sinha,MD & CEO of NSEL

Amish Devgan, Commodity Editor andAnchor at Zee Business

Anjani Sinha is the MD & CEO of National Spot Exchange Ltd (NSEL). He has over two decades of experience and deep knowledge of commodity derivatives and spot markets. His previous stint was with the Ahmed-abad Stock Exchange. Prior to that, he was associated with the Bombay Commodity Exchange Ltd, Interconnected Stock Exchange of India Ltd (ISEI) as well as Magadh Stock Exchange.


Kunal Shah, Head of CommodityResearch at Nirmal BangKunal Shah serves as the Head of Commodity Research at Nirmal Bang. He closely tracks precious metals, base metals, energy and agricultural commodities. He addresses seminars on the outlook of commodities across the country. He appears regularly on business channels. He is also sought by the print media and wire services, on a regular basis. Prior to Nirmal Bang, he was associated with Motilal Oswal Commodities Pvt Ltd, where he managed the research desk.

K Ajay Kumar,Managing Director at Harley Carmbel (India) Pvt Ltd

The next speaker, Kunal Shah spoke about the state of the commodity market, the European crisis and the Chinese slowdown and their impact on the commodity market.

Lamenting about the current situation in the commodity markets, Shah said, “There is a huge rally in commodities since the last 10-12 years but volumes have dropped this year, domestically as well as internationally. Also, there is lack of clarity on the movement of prices of commodities.”

Speaking about the sovereign debt crisis in Europe, Shah said that in the last two quarters of 2011 many European countries were on the verge of defaulting and, therefore, banks started infusing money, which stabilized the situation for some time. On the other hand, this caused bond yields to go down. However, according to Kunal, “This is a temporary relief and not a permanent solution to the crisis.”

“Although China is a major consumer of commodities, it is facing several problems like high inflation, slowdown in GDP growth and decline in exports to the US and Europe. Therefore, there is a sharp decline in the prices of commodities,” emphasized Shah. He also gave a brief outlook on gold, crude oil, copper and agricultural commodities like mustard seed, chana and pepper.

He ended his speech with certain dos and don’ts for the investors and urged them to refrain from doing intra-day trading and also advised them to trade at limit orders.

K Ajay Kumar on the other hand gave the outlook on various spices like pepper, turmeric, jeera, cardamom and nutmeg. He informed that the year 2011 was a golden year for spices as a lot of spices broke the barometer of all records. Black pepper and nutmeg are examples of the same.

Giving an outlook on spices, Kumar said that pepper prices were at an all-time high and they are expected to be stable in the future. However, turmeric prices are likely to be lower due to huge production. As far as cumin seeds or jeera are concerned, the prices were a little weaker in the beginning of this year, but they are expected to remain stable by the second half of the year. Cardamom prices are low at the moment but due to increased use during the festival of Ramzan, which falls in July/August, its prices are expected to shoot up. Also, nutmeg is likely to see heavy demand from South America. The production in Indonesia, which is the highest producer of this spice, was affected due to bad weather conditions in that country.

Explaining the process of investing in e-series, Sinha said, “An investor needs to first open a demat account and then start trading in the commodity of his choice from those offered by NSEL. Systematic Investment Plans (SIPs) are also available on these instruments,” he added.

Antony Thottan, Director at Trichur Assay and Hallmarking Center Pvt Ltd.

Antony Thottan, the final speaker of the day spoke mainly about gold as an asset class and an investment tool. He emphasized on how more and more Keralities are investing in gold coins and bars as against only gold jewellery earlier. “The demand for gold coins and bars is very high now,” said Thottan adding that Kerala was the first state in India where the government started hallmarking gold in the year 2000.

China is the biggest producer and consumer of gold. It is followed by Australia. Earlier the top slot was held by South Africa, which has now fallen to the fourth position in terms of production.

As people are hedging with gold, bullish trend in gold is likely to continue, he said. But the returns will depend on the value of the rupee in the international market.

He advised investors and traders to wait for small drop in the prices of gold for the purpose of investment and also asked them to keep an eye on the Indian rupee.

The commodity camp ended with a discussion between the panelists and the members of the audience.

The next Beyond Mandi camp was held in Surat on 25th May this yeaR.


Documents

GOING AGAINST THE NORM - Nirmal Bangbeyondmarket.nirmalbang.com/issue68/Download/magazine.pdf · GOING AGAINST THE NORM For Private Circulation Volume 1 Issue 68 26th Jun ’12. e