Whoever coined the phrase “you can’t judge a book by its cover” was certainly out of touch. Although the intent of the phrase holds true, the reality of it is that we all make judgments of one another based on presentation. In fact, we make statements all the time without uttering a single word, and rest assured, others will certainly take note of what we have to say. You want to be sure that your look is making the right statement about you.
Women usually have a greater range of fashion choices for interviews than do men, but they should keep in mind the following wardrobe rules:
DO's
1) Consider the suit as the major mode of dress for interviews.
2) Solids, pinstripes and muted plaids are acceptable colors.
3) Cotton-polyester, wool, and natural synthetic blends work well.
4) Err on the conservative side when choosing skirt length.
5) Choose a blouse with long sleeves that will allow the cuff to show about a quarter or half-inch beyond the jacket sleeve. Colors such as white, gray, or blue are most acceptable. Stick with natural fibers.
6) Wear conservative shoes with a closed toe. The heel should be about 1 ½ inches high. Black, brown or navy are standard colors that should compliment most suits.
7) Hose should also be neutral or skin tone.
DONT'S
1) Wear a shirt and blouse or casual dress.
2) Choose attire that will cause undue attention such as fluorescents or animal prints.
3) Wear natural fibers that wrinkle easily. You may arrive at the interview looking as if you just rolled out of bed!
4) Choose a skirt length that may be uncomfortable to you as well as those around you. A short skirt may send the wrong message and be a distraction during the interview.
5) Pair a suit with a sleeveless blouse. You never know when you may need to remove your jacket and bare arms are not appropriate for an interview.
6) Wear those three-inch heels you wear to the club. They’re not considered conservative and may not be comfortable for walking should you be asked to visit other offices during your interview.
7) Even think about wearing hose that incorporate wild patterns or colors.
Now, let’s not forget the Men. What types of things should a guy consider when dressing for an interview?
DO's
1) Consider a two-piece suit for your interview.
2) Choose suits made of wool or polyester-wool blends. 100% wool, however, is always the best bet for men.
3) Most clothing consultants agree that conservative is best: shades of blue, gray, beige and brown. Solid colors are most appropriate, however pinstripes, herringbone, tweed and some plaids are acceptable.
4) Stick to standard colors when choosing a shirt: white or blue. Other hues are acceptable, but it is a good rule of thumb to make sure that your shirt is lighter than your suit and your tie is darker than your shirt. Preferably, the shirt should be long-sleeve. Ties should come to your belt buckle.
5) Select either black or brown shoes for the interview. Socks should also compliment your shoe color. Make sure your shoes are polished well.
DONT's
Show up for the interview in your dad’s old leisure suit or a three-piece borrowed from a friend. These looks are dated and can lead one to believe you don’t have an eye for detail.
1) Bet on a synthetic suit to exude success. Synthetics have a tendency to shine and look cheap. Linen or cotton may be acceptable in hotter climates, but beware of the wrinkle factor!
2) Even consider the electric blue number. It’s strictly for fun and should not be worn in a conservative business setting.
3) Wear shirts that are busy and incorporate loud colors or patterns. It may cause the interviewer to focus more on your shirt instead of you.
4) Pull out the alligator or snakeskin shoes for the interview. Also, avoid colors for both shoes and socks that may take away from the appearance of your suit.
Men and women should also consider minimizing their jewelry during the interview. Current styles in jewelry incorporate thumb and toe rings, along with multiple bracelets and ringlets worn not only in the ears, but various other places on the body. Although appropriate outside of work, it should not be part of your corporate interview wardrobe. If you have an opportunity, visit a corporation near you and note how the employees dress. You’re likely not to see many nose rings or other piercings on display. Shaved heads, dreads and other non-traditional hairstyles are not advised in a corporate setting.These styles may send a message about you that may not be accurate, but will be based on the interviewer’s perception of you .
Here're some other words of advice as you begin the interview process:
1) Contact the company in advance of the interview to get information on dress code and try to have the most conservative version of that.
2) Stick to that train of thought and once you’ve gotten a job and established yourself, you can be a bit more liberal with your clothing choices.
3) Get to the interview early and duck into a restroom to spruce yourself up. It’s easy to become slightly disshelved as you travel to the interview site. If you are carrying an overcoat, check with the receptionist for a place to hang it. Better yet, try not to take it to the interview. Go to the waiting area and be polite, even if the interviewer is late.
4) Check out Mark Dorio’s book, The Complete Idiot’s Guide to Getting the Job You Want. It has a very informative section on “cracking the corporate dress codes and looking your best.”
5) Don’t hesitate to get advice from experienced sales associates, whose job it is to dress corporate professionals and executives. They can help you choose a conservative look that works well for you.
Thursday, October 25, 2007
POWER DRESSING FOR PROFESSIONAL MEN
MEN’S CLOTHING
When looking at men’s formal wear you need to follow some simple basic guidelines to get an instant classic look which projects a sense of style.
Getting the right look with men’s formal wear is not difficult, if you follow the image guidelines below.
Your suit
In men’s formal wear let’s start with choosing a formal suit.
1. Style
Changes, but you can't go wrong with a single-breasted, solid color suit in black, grey or navy blue and always remember a single-breasted suit will make you look slimmer and sleeker in appearance.
In men’s formal wear a stylish suit can conjure up a number of images, all of them positive.
A suit can make you look powerful, mature, conservative, or sexy. Remember, most women love men in suits!
2. Fabrics and Patterns
Wool is always a safe option when buying a suit. It looks good and wears well.
Worsted wools are lightweight for spring and summer. Gabardine wools are heavier for winter. Wool Crepes are lightweight with softer finishes. Flannel wools are heaviest. Patterns for interview suits are limited to solids, stripes (pinstripe, chalk stripe, beaded-stripe, multistripe), Glen plaids, and checks (hounds-tooth, windowpane, and herringbone).
Picking The Right Shirt
Generally men with narrow faces can choose collars that are wider, to help broaden their faces; conversely, men with wider faces should choose collars that are narrower, to help lengthen their faces.
Ties
Suits come in basic styles and colors, but ties let you show your individuality within a formal look.
If you want to make a bold statement wear a patterned tie with a patterned shirt, make sure that the color schemes are the same and that the patterns go in the same direction.
Finally, don’t forget the Length: It should hit the top of your belt buckle and the deal width of ties is between 3 and 4 inches.
Men’s Formal Wear Combining Tie’s Shirts & Suits
When choosing a jacket-shirt-and-tie trio, match its level of color contrast to your personal colouring.
Your colouring consists of your complexion and hair color.
If you're coloring is high-contrast i.e. dark hair and light skin, or vice versa--your jacket, tie, and shirt combo should be high contrast, too. But if your hair-hide contrast is softer and lighter i.e. you're blond or gray-haired with pale skin, or dark-skinned with dark hair--you should go for lower-contrast clothes.
Two different scales For Balance When you're combining two like patterns in the jacket-shirt-tie triangle, they should be of different gauges.
If your suit has pinstripes 3/4 inch apart, your tie should have significantly broader or thinner bands. If your suit is a striped one (with lines more than an inch apart), your shirt's stripes should be narrower and closer together.
If you wear two different designs within the lapel triangle--say, a checked shirt and a striped tie, or a striped suit and repeating-medallion tie--they should be different scales in size If your shirt has a narrow stripe, your tie needs a wider stripe i.e. pair large with small.
De Emphasize
Choose clothes that de-emphasize your extremes.
If you're short, look for strong vertical elements: pinstriped suits, two-button jackets. If you're very thin, choose a jacket with wider shoulders. If you have a heavier build then Wear darker colors and go monotone from top to bottom.
Watches
The first thing to look for in a man's watch is a large face, as these designs are generally accepted by everyone as looking stylish.
Get a nice belt
Don't forget your belt you want quality, a good quality belt doesn’t have to be expensive and is money well spent.
Your belt color should be coordinated with your footwear - black with black, brown with brown.
Shoes
Black is the traditional safe color for work but Brown or ox blood colors can also look stylish.
You can also use a variety of styles including loafers, wingtips, round-toe, or the trendier pointy-tipped shoe.
Shoes are no place to economize on quality. For men, shoes are the final detail and are one of the areas all women notice.
When looking at men’s formal wear you need to follow some simple basic guidelines to get an instant classic look which projects a sense of style.
Getting the right look with men’s formal wear is not difficult, if you follow the image guidelines below.
Your suit
In men’s formal wear let’s start with choosing a formal suit.
1. Style
Changes, but you can't go wrong with a single-breasted, solid color suit in black, grey or navy blue and always remember a single-breasted suit will make you look slimmer and sleeker in appearance.
In men’s formal wear a stylish suit can conjure up a number of images, all of them positive.
A suit can make you look powerful, mature, conservative, or sexy. Remember, most women love men in suits!
2. Fabrics and Patterns
Wool is always a safe option when buying a suit. It looks good and wears well.
Worsted wools are lightweight for spring and summer. Gabardine wools are heavier for winter. Wool Crepes are lightweight with softer finishes. Flannel wools are heaviest. Patterns for interview suits are limited to solids, stripes (pinstripe, chalk stripe, beaded-stripe, multistripe), Glen plaids, and checks (hounds-tooth, windowpane, and herringbone).
Picking The Right Shirt
Generally men with narrow faces can choose collars that are wider, to help broaden their faces; conversely, men with wider faces should choose collars that are narrower, to help lengthen their faces.
Ties
Suits come in basic styles and colors, but ties let you show your individuality within a formal look.
If you want to make a bold statement wear a patterned tie with a patterned shirt, make sure that the color schemes are the same and that the patterns go in the same direction.
Finally, don’t forget the Length: It should hit the top of your belt buckle and the deal width of ties is between 3 and 4 inches.
Men’s Formal Wear Combining Tie’s Shirts & Suits
When choosing a jacket-shirt-and-tie trio, match its level of color contrast to your personal colouring.
Your colouring consists of your complexion and hair color.
If you're coloring is high-contrast i.e. dark hair and light skin, or vice versa--your jacket, tie, and shirt combo should be high contrast, too. But if your hair-hide contrast is softer and lighter i.e. you're blond or gray-haired with pale skin, or dark-skinned with dark hair--you should go for lower-contrast clothes.
Two different scales For Balance When you're combining two like patterns in the jacket-shirt-tie triangle, they should be of different gauges.
If your suit has pinstripes 3/4 inch apart, your tie should have significantly broader or thinner bands. If your suit is a striped one (with lines more than an inch apart), your shirt's stripes should be narrower and closer together.
If you wear two different designs within the lapel triangle--say, a checked shirt and a striped tie, or a striped suit and repeating-medallion tie--they should be different scales in size If your shirt has a narrow stripe, your tie needs a wider stripe i.e. pair large with small.
De Emphasize
Choose clothes that de-emphasize your extremes.
If you're short, look for strong vertical elements: pinstriped suits, two-button jackets. If you're very thin, choose a jacket with wider shoulders. If you have a heavier build then Wear darker colors and go monotone from top to bottom.
Watches
The first thing to look for in a man's watch is a large face, as these designs are generally accepted by everyone as looking stylish.
Get a nice belt
Don't forget your belt you want quality, a good quality belt doesn’t have to be expensive and is money well spent.
Your belt color should be coordinated with your footwear - black with black, brown with brown.
Shoes
Black is the traditional safe color for work but Brown or ox blood colors can also look stylish.
You can also use a variety of styles including loafers, wingtips, round-toe, or the trendier pointy-tipped shoe.
Shoes are no place to economize on quality. For men, shoes are the final detail and are one of the areas all women notice.
POWER DRESSING FOR PROFESSIONAL WOMEN
Power-dressing for professionals: corporate, casual and chic
POWER-dressing isn't what it used to be. In years past, professional women were trapped in dull business attire, even while attending after-work events. But in today's more colorful corporate world, as the accompanying photographs indicate, you shouldn't feel trapped by a basic-black-and-pearls dress code. New options, fashion experts say, include colorful leather blazers, must-have bags and briefcases, and gorgeous scarves and accessories.Power-dressing for professionals: corporate, casual and chic.
THE RULES: Corporate Attire
There are two levels of business attire: Business professional (the most conservative corporate dress) and informal business professional (a more relaxed version of the business professional look).
The business professional look includes a conservative suit in a solid or pinstriped pattern. Preferred colors are navy, dark brown, gray and black. White and pastel-colored blouses are acceptable. Pumps with a closed heel and toe accessorize your suit.
The informal professional look incorporates more pizzazz and color--in jackets, sweaters and blouse styles--and even dresses and skirts in silky prints combined with tailored jackets and sweaters.
When selecting your workday wardrobe, be aware that every company has its own work environment and often unwritten dress codes. To evaluate the dress code of your office, take a look at the movers and shakers around you. Look at those Sisters who are in the big offices, those who are making decisions in the boardrooms and presented as the "ideal face" of the company. What are they wearing? How are they dressed day in and day out?
These are your fashion templates, the Sisters who have set the pace for what is deemed acceptable attire in your workplace. And more often than not, these power players know that a sophisticated professional look is important to success.
THE RULES: Casual and Chic
Casual attire has been called the most relaxed corporate dress code, and subsequently, the most abused and misunderstood dress code in the nation. A professional woman's goal is to blend the casual with the chic. Steer clear of your favorite sandals, disco boots, jungle prints, leather miniskirts, tattered blue jeans, and other items that may be in your current rotation of party clothes.
Casual and chic business attire includes incorporating colorful sweaters and leather blazers, and your favorite accessories into your professional look. When done right, your casual chic wardrobe can take you from "Casual Friday" at the office to "First Fridays" social events.
STRICTLY BUSINESS: Dress Code For Job Hunters
There is no casual chic look for those pounding the pavement for a new job; strictly business professional is the best way to go. Your interview attire should send the message that you can fit into the work environment. Here are some tips for looking your best on that job interview:
Suit: The most appropriate suit colors are black, navy and charcoal. Your buttoned-up blouse or shell should not be sheer; silk and cotton impress best. Employment experts say a skirt suit should be worn on a first interview, and can be exchanged with pants on the second or third interview. Your suit skirt should not be too short or form-fitting; that could send the wrong message to your future employer.
Shoes: Shoes with 1- to 2-inch heels are appropriate, and the should be polished and in good condition. Flesh-toned hosiery or hosiery that is compatible with your attire is ideal; stockings or tights in fishnet or wild designs are not appropriate in most office settings. (Tip: Always keep an extra pair of hosiery in your bag because runs occur at the most inopportune time.)
Accessories: Jazz up your suit with a tasteful (and trendy) brooch or classic jewelry. But jewelry should be kept to a minimum. Body piercing (in nose, tongue, eyebrows) is generally unacceptable in a corporate environment.
Hair: Your hairstyle should be neat and your hair color should be natural-looking and complementary to your complexion. Wild colors (blue, pink, platinum streaks, etc.) and hair glitter are a no-no.
Nails: Short, well-manicured nails in one tone, including French manicures, are ideal. Long exotic and colorfully designed nails send the wrong message to a potential employer: that you are more concerned about pretty nails than you are about producing quality work.
POWER-dressing isn't what it used to be. In years past, professional women were trapped in dull business attire, even while attending after-work events. But in today's more colorful corporate world, as the accompanying photographs indicate, you shouldn't feel trapped by a basic-black-and-pearls dress code. New options, fashion experts say, include colorful leather blazers, must-have bags and briefcases, and gorgeous scarves and accessories.Power-dressing for professionals: corporate, casual and chic.
THE RULES: Corporate Attire
There are two levels of business attire: Business professional (the most conservative corporate dress) and informal business professional (a more relaxed version of the business professional look).
The business professional look includes a conservative suit in a solid or pinstriped pattern. Preferred colors are navy, dark brown, gray and black. White and pastel-colored blouses are acceptable. Pumps with a closed heel and toe accessorize your suit.
The informal professional look incorporates more pizzazz and color--in jackets, sweaters and blouse styles--and even dresses and skirts in silky prints combined with tailored jackets and sweaters.
When selecting your workday wardrobe, be aware that every company has its own work environment and often unwritten dress codes. To evaluate the dress code of your office, take a look at the movers and shakers around you. Look at those Sisters who are in the big offices, those who are making decisions in the boardrooms and presented as the "ideal face" of the company. What are they wearing? How are they dressed day in and day out?
These are your fashion templates, the Sisters who have set the pace for what is deemed acceptable attire in your workplace. And more often than not, these power players know that a sophisticated professional look is important to success.
THE RULES: Casual and Chic
Casual attire has been called the most relaxed corporate dress code, and subsequently, the most abused and misunderstood dress code in the nation. A professional woman's goal is to blend the casual with the chic. Steer clear of your favorite sandals, disco boots, jungle prints, leather miniskirts, tattered blue jeans, and other items that may be in your current rotation of party clothes.
Casual and chic business attire includes incorporating colorful sweaters and leather blazers, and your favorite accessories into your professional look. When done right, your casual chic wardrobe can take you from "Casual Friday" at the office to "First Fridays" social events.
STRICTLY BUSINESS: Dress Code For Job Hunters
There is no casual chic look for those pounding the pavement for a new job; strictly business professional is the best way to go. Your interview attire should send the message that you can fit into the work environment. Here are some tips for looking your best on that job interview:
Suit: The most appropriate suit colors are black, navy and charcoal. Your buttoned-up blouse or shell should not be sheer; silk and cotton impress best. Employment experts say a skirt suit should be worn on a first interview, and can be exchanged with pants on the second or third interview. Your suit skirt should not be too short or form-fitting; that could send the wrong message to your future employer.
Shoes: Shoes with 1- to 2-inch heels are appropriate, and the should be polished and in good condition. Flesh-toned hosiery or hosiery that is compatible with your attire is ideal; stockings or tights in fishnet or wild designs are not appropriate in most office settings. (Tip: Always keep an extra pair of hosiery in your bag because runs occur at the most inopportune time.)
Accessories: Jazz up your suit with a tasteful (and trendy) brooch or classic jewelry. But jewelry should be kept to a minimum. Body piercing (in nose, tongue, eyebrows) is generally unacceptable in a corporate environment.
Hair: Your hairstyle should be neat and your hair color should be natural-looking and complementary to your complexion. Wild colors (blue, pink, platinum streaks, etc.) and hair glitter are a no-no.
Nails: Short, well-manicured nails in one tone, including French manicures, are ideal. Long exotic and colorfully designed nails send the wrong message to a potential employer: that you are more concerned about pretty nails than you are about producing quality work.
Wednesday, October 24, 2007
SENSEX STORY
The Sensex Story IPO’s: 'Long-term' holds true!
VIVEK MANI
With the foreign investors injecting hundreds of billions of dollars into the Indian markets, the benchmark indices had been left with no time to even catch up their breath during the marathon run on the bourses over the past few weeks. While making new records are the order of the day and invariably catch the fancy of the pink papers, retail investors are left wondering whether they have missed the bus or are losing out by not riding on the short-term momentum.
Among the many records created by the Indian stock markets during the year so far, the lead contributors were the Initial Public Offerings (IPOs). It was a record as the Indian capital markets saw over Rs 250 bn being raised from the primary market, the highest ever. This achievement gets further magnified when compared to the fact that this amount was almost 11 times higher than that of 2003 (Rs 22 bn) and just a tad lower to the near Rs 320 bn raised by IPOs in the period 1995-2003 i.e. 9 years!
With the markets having been in a jubilant mood since the last couple of months, one of the key reasons why the IPO activity has heightened significantly in recent times is the investors' anticipation of short-term supernormal returns in IPOs. It must be noted that during such times, an unlisted company is not only able to realise a good valuation for its offering but would also be rather sure that its issue would be 'over-subscribed' considering the high appetite amongst investors - both domestic and foreign - to invest in equities. However, what is more pertinent to keep in mind is that stocks with strong fundamentals have the potential to deliver superior returns over a longer time frame as compared to the listing gains.
We have so far been advising investors to invest with a long term and stock specific approach and stick to the fundamentals irrespective of the shot term sanguinity or mayhem. This principle applies to primary market issuances (IPOs) as much as it does to the secondary market. And, if one is to judge the two-year performance of the IPOs of 2005, it only manifests our view!
The ones that delivered...
Company
Month of issue
Upper price band
Listing price
Listing gains
Current price
Long term gain
Rs per share
Point to point
Rs per share
CAGR (%)
UTV
Feb-05
130
165
26.9%
680
93.8%
3i Infotech*
Mar-05
50
53
5.2%
145
53.1%
India Infoline
Apr-05
80
87
8.7%
1,018
176.6%
Shopper's Stop
Apr-05
250
373
49.2%
488
30.7%
Provogue
Jun-05
150
250
66.7%
971
111.1%
Yes Bank
Jun-05
45
65
44.4%
210
85.2%
IL&FS Investmart
Jul-05
125
183
46.4%
187
17.5%
IDFC
Jul-05
34
50
47.1%
180
94.8%
Suzlon Energy
Sep-05
510
640
25.5%
1,780
81.3%
ABG Shipyard
Nov-05
185
280
51.4%
639
85.9%
Punj Lloyd*
Dec-05
140
198
41.4%
395
63.9%
Tulip IT Services
Dec-05
120
180
50.0%
825
175.8%
*Prices adjusted for bonus, stock split, mergersPrices as on 13th October 2007
With the kind of gains most of these IPOs have returned, investors seemingly have a good enough reason to invest in the upcoming IPOs. However, before jumping to any conclusion it is worthwhile to remember that in a little over a decade, as per the numbers available from the Ministry of Company Affairs website, 114 companies have vanished after raising money from equity markets! The aggregate size of all these issues combined stand at approximately Rs 7.9 bn! What also proves our point is the fact that even the IPOs that delivered 'listing gains' to investors in 2005, grossly lagged behind and proved to be the sour grapes in the longer term.
The ones that failed...
Company
Month of issue
Price Band
Listing price
Listing gains (%)
Current price
Long term
Rs per share
Rs per share
gain (%)
Jet Airways
Feb-05
1125
1211
7.6%
925
-8.9%
Emami Ltd.*
Mar-05
210
279
32.9%
259
8.8%
Shringar Cinema
Apr-05
53
54
1.7%
62
6.5%
Prithvi Information Solution
Oct-05
270
324
20.0%
254
-2.9%
Piramyd Retail
Nov-05
140
135
-3.6%
57
-34.8%
PVR Cinema
Dec-05
240
266
10.8%
199
-8.5%
*Prices adjusted for bonus, stock split, mergersPrices as on 13th October 2007
Thus, all the factors that are considered while investing in an already listed company would be applicable while choosing to invest in an IPO. In fact, much more caution is advised in IPOs considering the fact that most of them do not provide their financial history beyond what is made mandatory by the regulators. And as such, investors must do their homework and bear in mind certain key parameters while investing in an IPO.
To conclude, while an investor would always get lured by the astounding returns IPOs have offered in the recent past, our stand is to invest in an IPO only if the business model, prospects and valuations justify the price, and not just because it is an 'IPO'. It is apt to bring out at this point what the legendary investor, Warren Buffet, believes, "...we miss a lot of very big winners but it also means we have very few big losers.... We are perfectly willing to trade away a 'big' payoff for a 'certain' payoff."
SEBI and RBI: Wishing and hoping
Money that has flowed into the Indian stock markets over the last few months, and more particularly over the last few weeks has origins which India as a nation has neither any clue about nor any control on. But, at the same time, the Reserve Bank of India has had to scramble around in the forex markets to keep the Rupee from wildly appreciating thanks to these huge inflows. On the flip side, it added to the domestic money supply that spurs inflationary tendencies (look at the Consumer Price Index if not the cost of fruits and veggies in the open markets). To stem inflation, domestic interest rates had to be higher which is slowly strangling the domestic economy. While all this is happening in India, the original anonymous operator is sitting pretty overseas getting fatter margins as his call on the currency is further validated by the Rupee strengthening.
The SEBI discussion paper on Offshore Derivate Instruments (ODI, also popularly called participatory notes or its diminutive ‘p-notes’) is yet another committee making its recommendations on a subject on which others have been doggedly asking for some sense to prevail. The Reserve Bank of India and the R. H. Patil Committee among many others have been open in their uneasiness about the flow of money into India that cannot be traced back to particular firms or individuals.
The numbers are mind-boggling
§ Among the 1,056 (as on July 2007) Foreign Institutional Investors (FIIs) registered with the SEBI, just a handful few, 34 FIIs/sub accounts to be exact, have issued these p-notes.
Notional value of p-notes outstanding as a percent of Assets Under Custody (AUC) has more than doubled from 20% in March 2004 to 52% by August 2007 - Of the total AUC of all the registered FIIs that numbers US$ 172 bn (marked to market), about 52% or US$ 89 bn has flowed in through the p-note route as of August 2007.
§ Almost 30% of the total p-notes issued (US$ 30 bn) are derivatives based.
The SEBI paper has asked the Ministry of Finance to:
Ban derivative-based p-notes completely while giving eighteen months to wind down existing issuance.
§ Has asked it to disallow FIIs from issuing p-notes through sub accounts with immediate effect.
§ FIIs, whose p-note issuance has already exceeded 40% of their AUC, should stop issuing p-notes of all kinds altogether. Those who are yet to reach the 40% limit can issue p-notes only up to 5% of their incremental assets.
Impact on the economyThe RBI has purchased US$ 12 bn of inflows in the five weeks beginning September 2007. This added Rs 4,818 bn or 14% to the money supply. Since then, the total FII purchases in the stock markets have released another Rs 215 bn into the Indian system. With a majority of the inflows coming in through the p-note route, if the recommendations are taken seriously, we should see FII inflows reducing to levels manageable for the economy.
Frankly speaking India’s image will not tarnish if the punters are kept away. If anything, the kudos that the RBI has won for its monetary policy from the MD of the International Monetary Fund, Mr. Rodrigo de Rato, will be spread to the Ministry of Finance too. The loss of face in diplomatic circles thanks to the nuclear deal fiasco of the UPA government will be glossed over by its tough and correct economic stance if it flows these recommendations. And we see no party opposing these. With retail participation in the Indian stock markets at an all time low of 10% of market capitalization (as at the end of June 2007), any re-rating following the flight of the p-note money will at least allow Indians to participate in their own country’s rags to riches story.
The most visible and immediate impact will be on the exchange rate. We have always maintained that with a yawning current account deficit of 2% of GDP, the Indian Rupee is not intrinsically strong yet. We hold on to our existing view of 7% to 8% depreciation in the Rupee’s value from here onwards especially as the crude oil prices keep testing the skies. The impact on money supply and interest rates will be more gradual and should take at least six months to filter through. There will be further increase in the pressure on domestic petroleum product prices with crude oil imports becoming a tad more expensive.
What to expect?Well, you would have been an underperformer since the Sensex took off from 13,800 till its journey to 19,000, if you have not been into the Reliance pack of stocks. These stocks, which have accounted for nearly 23% of the total turnover in the last 7 trading days, seem to have evoked much interest owing to some sudden reasons (which experts give) like “being undervalued", "unlocking value" and "having tremendous growth potenial." Well, all that is fine. But what makes a stock from an old economy sector like power deliver almost 4 times in a span of less than 3 months? The company is merely “talking” about its 10-year plans and people have sort of factored in everything to be executed successfully!
Anyways, moving on from the "R" sector to some of the other ones like pharma, technology and hospitality, which have not really performed during this period, largely due to one micro factor that impacts their financial performance – the Rupee’s appreciation against the US dollar. Nothing else seems to have changed for companies from these sectors. For technology, it is not really the rupee’s appreciation against the US dollar but the pace of it is what seems to have unnerved investors.
As a matter of fact, the rupee appreciated from Rs 49 to a dollar in 2002 to Rs 43 to a dollar in 2006 but that appreciation was much more anticipated and companies were prepared to deal with it. But the appreciation from Rs 43 to Rs under Rs 40 has been faster than anticipated. Apart from this, nothing much has changed for these companies in terms of business fundamentals – volumes continue to rise and pricing environment remains stable with an upward bias. There seems to be no reason for investors to worry about the performance of these companies over a 3 to 5 years period and we remain positive on their stock performance for a similar time frame.
As for the pharma sector, we believe that the pressure on the governments across the world to reduce healthcare costs, the rise in the aged population in the developed markets and the increase in the number of drugs going off patent are the cornerstones of the India generics story. Pricing pressure due to rising competition is expected to continue and we believe that this concern has already been factored in the stock prices.
Some other sectors where we maintain our long-term positive stance are hospitality and FMCG, where increased consumption and higher levels of discretionary spending will aid the growth process. We, however, remain concerned on valuations of stocks from sectors like power, realty and capital goods. Though we like selective stocks from each of these sectors, the overall view is that of caution.
On an overall basis, what you, as an investor, can do is take this market volatility as a way to build a long-term portfolio of solid companies with credible managements. Try not following a herd mentality into buying anything that others are 'relying' on. Rather make your choice by way of doing your own groundwork, follow the same with conviction and discipline, and leave aside greed and fear. There is probably no other way of generating wealth from stock market investing. In the meanwhile, we shall continue to wonder if we are getting too arrogant about the sustainability of the 'India story'!
Markets: So far, eventful indeed!
Markets so far have been subject to a number of events that have had a telling impact (both positive and negative). The latest in chronology is the SEBI's proposed restriction on the issue of fresh participatory notes (P Notes) by FIIs. Both domestic and international events have influenced the movement of the stockmarket. In this article, we shall recapitulate the major events this year, which have impacted the Indian stockmarket to a considerable degree.
Global events...Subprime crisis: This was perhaps the biggest event that marred both the international and the domestic stockmarkets. Most of the world's well-known financial giants like Bear Sterns, Lehman Brothers and Merrill Lynch created complex derivatives based on sub prime loans, which were marked to market and sold. The crisis arose when defaults on these sub prime loans surfaced having a dampening effect on other forms of credit as well. While big hedge funds such as Bear Stearns amongst others had to report bankruptcy, global banks were not spared either and the largest of the lot i.e. Citigroup reported a massive 60% drop in its third quarter earnings for the year. UBS was also at the receiving end and ended up posting losses. Since complex financial instruments were created around these sub prime loans, valuing the same proved to be a difficult task, as a result of which the extent of the crisis could not be gauged.
While the India does not have a significant exposure to the mortgage market and thus is relatively insulated in that sense from the developed markets, the subprime rout nevertheless had a huge impact on the Indian stockmarket. This can be largely attributed to one word - FIIs. The sub-prime crisis saw the FIIs book profits on the Indian stock markets to pare their losses in the other global markets, thus highlighting the vulnerability of India to external shocks.
Fed rate cut: A fallout of the subprime crisis, the Fed chief Ben Bernanke announced a 50 basis points cut in the Fed rate. The rate cut, being more than what the markets expected, spearheaded a rally in the US, European and Asian markets and India was part of the action too. For India, what the fed rate cut meant was that with the RBI not lowering the interest rates in India, the interest rate differential between India and the US increased. This sparked a renewed interest by the FIIs into India and led them to pump in money to the tune of US$ 7.2 bn since the rate cut was announced on September 18. The fact that the Indian economy has been chugging along at a robust pace has also been the icing on the cake.
Domestic events...CRR hike: In a move to contain inflation, the RBI undertook raising the cash reserve ratio (CRR) twice during the year. The first was in Feb 2007 wherein the RBI increased the CRR by 50 basis points to 6%. The next was in April 2007 when the RBI raised the CRR by another 50 basis points to 6.5%, which was made effective in two tranches. Besides this, it also raised the 'repo' rate from 7.5% to 7.75%. The move behind the same was to curb the excess liquidity in the banking system to check inflation. Now with liquidity once again flooding the Indian markets, the possibility of the RBI once again resorting to a hike in the CRR cannot be ruled out.
Sharp rupee appreciation: The surge in FII inflows and the not so active intervening by the RBI in the forex market (to curb liquidity and thereby inflation) has had a scathing impact on the exchange rate causing the rupee to appreciate by around 7% against the dollar this year. No surprises for guessing that the major sectors at the receiving end have been the software, textile and pharma sectors. FII inflows showed no signs of abating this year and the recent move by the US Fed to cut interest rates have further fuelled inflows into the country largely due to the robust growth in the Indian economy and the widening differential between the Indian and the US interest rates. The fact that the dollar has weakened against the major global currencies has also contributed to the appreciation of the rupee.
While the RBI has come out with guidelines encouraging investments abroad, this move may not be that effective given the strong pace in the growth of the Indian economy and the attractive interest rate scenario.
To sum up... While there is general euphoria in the markets with the Sensex reaching 19,000, what needs to be noted is that valuations at the current levels appear stretched. Investors need to ensure that they do not get carried away by the hype and hoopla surrounding the various milestones reached by the Sensex. What's more, these times of all times, will test the mettle of the investors who will have to exercise considerable discipline in researching and investing in stocks, which have good managements, earnings visibility and are available at reasonable prices.
Concerns at 19k
The markets are hitting new highs everyday. Strong GDP growth, stronger rupee, and lower inflation numbers are some of the positive factors that have supported this momentum. But the question is, will this euphoria last forever? There are the negatives that could hamper the upward journey.
Political Instability: This is one of the prime concerns. Politics is the art of the impossible, and even more so, figuring the impact of politics on the stock market. Political instability creates doubts in the minds of the foreign investors and may lead to the fall in the markets. Though the recent concerns over mid-term polls has not led to the stock market correction, cautiousness on this front is needed. The present political imbroglio over Indo-US civil nuclear cooperation deal presents a big event risk. History suggests that in this kind of situation Indian markets have reacted sharply.
Huge inflow- RBI stand: Capital inflows have increased dramatically over the past few weeks. During the fortnight ended September 28, foreign exchange (FX) reserves increased by US$ 15.6 bn. 12-month trailing capital inflows as of September 2007 increased to an all-time high of US$ 75 to 80 bn as compared with US$ 27 bn during the 12 months ended September 2006. The key driver of the recent rise in capital inflows has been foreign loans and portfolio equity inflows. This
has led to the intervening of the RBI to prevent sharp appreciation in the rupee and in the money market to ensure that short-term interest rates do not decline.
US economy: The US economy is facing the pressure of the credit and mortgage sectors. Though the Fed has reduced the interest rates, negative impact on the long term on credit crisis still exist. The temporary cure would further aggravate it, leading to inflationary pressures. With US being a major source of exports from India, this may create problems for our economy. Also, the risk of a reversal in capital inflows due to risk aversion to recent problems in the credit markets in the US and Europe may cause a fall.
Crude prices: The crude prices have gone up by 34% YoY. India imports around 75% of its crude requirements. With higher crude prices, the trade balance would get affected. Also, it would cause inflationary pressure across all products and services, which could slacken the demand growth pace.
Input pressure: Though the data released every Friday on inflation shows a decline in inflation on YoY basis, the real picture faced in routine life is harsh. Not only crude but also the other raw materials have become expensive. As per ASSOCHAM's recent report, prices of major commodities have shown maximum price fluctuations to the extent of 23% to 25% over the last one year. Not only the consumers but also the companies are facing the brunt of higher input prices, which would affect their operating margins. While, headline inflation is at 4%, core inflation is at 4.8%. Although both core and headline inflation is within the RBI's comfort zone of 5%, the recent rise in oil and foodstuff prices has raised concerns.
Trade deficit: India's April-August 2007 trade deficit climbed to US$ 32.5 bn, 63.3% higher than that of US$ 19.9 bn last year led by stronger rupee and higher crude prices. The widening trade deficit would also pressurise the current account deficit. Further, as per the RBI, the shortfall in the current account was US$ 4.7 bn in the three months ended June 30 2007, as compared with a surplus of US$ 2.6 bn in the previous quarter. The rising rupee would hurt export-oriented industries and their competitiveness and any slowdown in these industries may affect overall growth outlook.
Higher valuations: After the recent fall in the global markets due to the sub-prime crisis, India has been one of the few emerging markets to see strong rise in the sensex. On a trailing 12 month basis, while Shangai A share is 54.66, Sensex is 25.47 as compared to Russia's RTS index value of 13.49 and Thailand's 17.99. The valuations are on the higher side ignoring factors like relatively lower IIP growth, high crude oil prices and the continued political clash on Indo-US nuclear treaty and stretched valuations.
To conclude...While we continue to remain bullish on long-term growth prospects of the economy, we believe that valuations become little stretched at this point and markets are running ahead of fundamentals. With valuations taking a backseat in this mad rush of capital inflow, we advise investors to concentrate on the fundamental aspect and not get carried away by the one-way movements in the indices.
Of P-Notes and Bird Hits
While all the media is playing up the hype of the recent surge in the Index from 18k to 19k, a step back indicates that:
1. Every 1,000 point is now a LOWER percentage number, so should be easier to achieve. An Index moving from 1,000 to 2,000 is a 1,000 point move but, more importantly, is a 100% move! While a move from 18,000 to 19,000 is also a 1,000 point move, it depicts an increase of 4.3 % (see the Table below).
BSE-30 Index
Date
Days
Points
%
Gain per day, points
Gain per day %
13,989
21-Aug
-
-
-
-
-
15,121
30-Aug
7
1,132
8.1%
162
1.2%
16,322
19-Sep
14
1,201
7.9%
86
0.6%
17,150
27-Sep
6
828
5.1%
138
0.8%
18,280
9-Oct
7
1,130
6.6%
161
0.9%
19,058
15-Oct
4
778
4.3%
195
1.1%
2.
3. The pace of this 1,000 point move to the 19k levels in 4 days sounds impressive (indeed it is the second strongest!) but, on further analysis the move from 14,000 to 15,000 was not only more in terms of the percentage gain ( 8.1 %) but was also a stronger move. See the column on the extreme right that indicates the average % change per day.
Index levels, needless to say, are representative of a basket of stocks and your portfolio may or may not have moved with the same intensity. The Index is a number, don't break your head over it. But do analyse the underlying valuations of the companies that comprise the Index - and of the companies outside the Index. (click here for our Research Reports).
So, while the Finance Minister and SEBI are now worried about the monster they have helped create due to their willingness to allow short-term flows via P-Notes, sit back and enjoy the ride.
Of course, you may need to fasten your seat belts.
Really tight.If the entire Australian cricket team and the remnants of a ramshackle Indian team was brought down to Nagpur airport by a bird-hit, imagine what could happen if those P-Note owners took a break and stopped buying India for one day.
Ouch....
Volatility reigns…
Markets movements during the week ended 12th October 2007 were marked by significant volatility as curt crashes and swift recoveries became the order of the week. Although bears made their presence felt during the week, with indices closing in the red for two out of five trading sessions, the bulls were not complaining as the domestic indices closed the week with gains of around 4%.
The week began on a negative note with the BSE Sensex losing more than 300 points on Monday after opening with a positive gap of 129 points. The sell-off was led by metal and power stocks as the BSE Metal Index shed more than 4% for the day. However, the bulls were back with a vengeance on Tuesday, as the Sensex closed the day with its biggest-ever single day gain – up 789 points from its previous close. Markets continued their northbound journey in the next two trading sessions with BSE Sensex gaining 378 and 151 points on Wednesday and Thursday respectively. Bears made a comeback on Friday, with the BSE Sensex losing close to 400 points. On the sectoral indices front, the BSE Capital Goods Index and the BSE Bankex (each down 2.7%) emerged as the key losers. For the week, while BSE Sensex advanced by 3.6%, NSE Nifty closed with gains of 4.7%.
On the institutional activity front, between 5th and 10th October, while FIIs emerged as net buyers to the tune of Rs 77 bn, mutual funds sold equities worth Rs 13 bn.
(Rs m)
MFs
FIIs
Total
5-Oct
(2,749)
5,750
3,001
8-Oct
(3,312)
34,199
30,887
9-Oct
(3,409)
19,511
16,102
10-Oct
(3,549)
17,479
13,930
Total
(13,019)
76,939
63,920
On the sectoral indices front, the BSE Metal Index and the BSE Oil & Gas Index featured among the key gainers with gains of 5.1% and 4.6% respectively, while the BSE Infotech Index lost 1.1%.
Index
As on October 5
As on October 12
% Change
BSE IT
4,740
4,688
-1.1%
BSE SMLCAP
9,102
9,099
0.0%
BSE OIL AND GAS
10,110
10,576
4.6%
BSE HEALTHCARE
3,826
3,806
-0.5%
BSE AUTO
5,366
5,515
2.8%
BSE PSU
8,341
8,673
4.0%
BSE MIDCAP
7,486
7,529
0.6%
BSE FMCG
2,107
2,142
1.7%
BSE BANKEX
9,225
9,311
0.9%
BSE METAL
14,122
14,841
5.1%
Now let us have a look at some of the key stock/sector specific developments during the week:
Software major, Infosys announced its 2QFY08 results today. The topline grew by 9% QoQ on the back of 1.9% QoQ growth in blended billing rates and 7.6% QoQ growth in volumes. The operating margins expanded by 2.6% QoQ, aided by higher utilisation. Other income dropped sharply due to change in hedging policy in the previous quarter. Higher taxes, largely due to MAT, restricted the PAT growth to 2% QoQ for the quarter. While 48 new clients were added during the quarter, attrition rose to over 14%. Software stocks closed weak with I-flex (down 5%) and Infosys (down 3%) leading the pack of losers.
The government has announced a slew of measures to help the sugar industry. Subsidised loans would be given to sugar mills to help them clear dues of farmers and making mandatory the blending of 5% ethanol in petrol with immediate effect across the country, barring the North East, Jammu and Kashmir and the island territories. It has also allowed sugar factories to produce ethanol directly from sugarcane juice to augment its availability and reduce the oversupply of sugar. Further, 10% blending has been made optional from this year, but this would become mandatory from next October. A uniform nationwide purchase price of Rs 21.5 per litre (ex-factory) for supply of ethanol for the next three years was also decided at a meeting of the Cabinet Committee on Economic Affairs. The CCEA has also extended export subsidy by one more year from April 19, 2008 to April 18, 2009, to target an additional export of 3 million tonnes of sugar. The Indian sugar industry is facing its worst crisis, due to higher supply of sugar. Most companies have incurred losses in the last two quarters. The decision would bring some relief to the industry. Sugar stocks closed in the red with Balrampur Chini (down 3%) and Bajaj Hindusthan (down 2%) leading the pack of losers.
Top gainers during the week (BSE A)
Company
Price on October 5 (Rs)
Price on October 12 (Rs)
% Change
52-WeekH/L (Rs)
BSE SENSEX
17,773
18,419
3.6%
18,845 / 12,315
S&P CNX NIFTY
5,186
5,428
4.7%
5,549 / 3,546
IGATE GLOBAL
241
374
55.3%
432 / 208
GMDC
1,262
1,851
46.7%
1,851 / 333
VSNL
451
526
16.6%
559 / 342
BOI
275
312
13.5%
324 / 132
RELIANCE ENERGY
1,447
1,636
13.1%
1726 / 448
Pharma stocks closed mixed for the week with Nicholas Piramal (up 6%) and Glenmark Pharma (up 5%) leading the pack of gainers, while Dr. Reddy’s (down 6%), Novartis and Aurobindo (each down 5%) were out of favour. As per a leading business daily, pharma majors Aurobindo, Cadila and Lupin are set to hive off their R&D units to reduce cost pressures and improve valuations of their other businesses. As a matter of fact, R&D is heavy on costs. Domestic pharma companies find it prudent to de-merge R&D into a separate unit to reduce the cost burden of other businesses. This, in turn, improves the valuation of the other businesses. The practice is, however, confined to the Indian space where R&D is not really the core activity. Global companies such as Pfizer or Merck have not adopted such a model because their core business activity is R&D. Such companies are instead divesting their manufacturing units or entering into contract manufacturing tie ups in low-cost locations such as India and South Africa. Big companies like Nicholas Piramal and Sun Pharma have already hived off their R&D units into separate businesses.
Top losers during the week (BSE A)
Company
Price onOctober 5 (Rs)
Price onOctober 12 (Rs)
% Change
52-Week H/L (Rs)
FACT
28
24
-11.8%
30 / 19
IOC
503
454
-9.9%
585 / 370
CHAMBAL FERT
56
51
-9.6%
63 / 30
NATIONAL FERT
50
46
-8.9%
53 / 26
MRPL
68
62
-8.5%
83 / 32
FIIs continued their obsession with emerging markets. As expected, markets during the week were primarily driven by the liquidity factor as the FIIs went on a buying binge, counting on a further appreciation in the rupee vis-Ã -vis dollar. Though investors might find this as a reason to cheer, they need to be cautioned about the short-term nature of this ‘hot’ money. With valuations taking a backseat in this mad rush of capital inflow, we advise investors to concentrate on the fundamental aspect and not get carried away by the one-way movements in the indices. The fundamentals will get manifested in the upcoming results season.
The current markets remind us of Warren Buffett’s remark that bull markets make the investors think “I can’t miss the party”. While the India story has roots in strong fundamentals, the valuations are running ahead of themselves on the back of overenthusiastic FII money. We urge you dear investor to be fearful when others are greedy. No stock is good at “any” price. Stock prices sooner or later revert to intrinsic value of the underlying business and the current upward run in prices contain a fair amount of euphoria in addition to business value. And, euphoria never lasts forever! Happy investing.
Follow the rules!
The Indian stock market made historic moves this week, breaking the old records and making some new ones. The Sensex hit the 18,000 mark. Not only the blue chips but also the small caps have been scaling higher. However, one should not get carried away by the hype. Investment Guru, Warren Buffet has suggested some rules before making an investment. These rules fall into 4 groups, which are as follows:
Business Rules: This includes the basic characteristics of the business itself. The business tenets focus on understanding how the business operates.
The first rule to be followed before buying a stock is never to invest in a business you cannot understand. This means that time needs to be spent on understanding the business. One can make short-term gains through stock tips, but in the long run, this will not help. "Poker players are not gamblers". The good players win on their skill, temperament, and intimate knowledge of the game and do not rely on luck to win the game.
The firm should also have a stable operating history. One should know whether the company has stood the test of time. The company, which has experienced different economic cycles and competition and has survived, is a safe bet. A company can have lower profit periods and still have a consistent operating history. These low profit periods can provide a good opportunity to purchase a good business at a low price. Further, knowing the long-term prospects of the business is also necessary. Technological aspects, competition, government rules, bargaining power, raw material supplies should be considered before making an investment.
Hence, in order to achieve this high level of competency, it is necessary to limit the scope of investigation and investment to a small number of companies. This necessitates a focused portfolio instead of a diversified one.
Management Rules: This refers to the quality of management. It is essential to have a strong management as the fate of the ship i.e. whether it would float or sink would depend on their competence. The management of the company should be high on corporate governance and ethics. The decisions taken by the management should be in the best interest of the shareholders. Inspite of the happenings in the economy or the market, a company with a strong management that knows how to make money, can make money, and will keep making money.
Financial Rules: This refers to the various financial parameters that should be considered for evaluating a stock.
Profit margins: According to Warren Buffet, the companies, which are able to earn higher margins along with high volumes, are a better bet. Falling volumes may indicate higher competition or the fact that the company has responded late to market changes. Further care should also be taken on the leverage factor. Higher interest costs reduce the margins.
ROE: Mr. Buffet considers return on equity (ROE) as a better measure of annual performance as it takes into consideration the company's capital base. By looking at ROE, one is able to determine how efficient the company is at using both shareholder's capital and debt to produce income. He uses the modified version of what he called owner earnings. This is the cash flow available to shareholders, or the free cash flow to equity. It is defined as net income plus depreciation and amortization (i.e. adding back non-cash charges) minus capital expenditures minus additional working capital needs. This indicates the company's ability to generate cash for shareholders.
One-dollar premise is also an important measure. Buffet's goal is to select companies in which each rupee of retained earning is translated into at least one rupee of market value. If retained earnings are invested in the company and produce above average return, there would be a rise in the company's market value. It is far better to buy a wonderful company at a fair price than a fair company at a wonderful price. Buying a stock on basis of the price that is well below its book value; but without considering its margin, return-on-equity, owner earnings and profitability history may prove to be a bad choice.
Market rules: This is from the market perspective.
Value of a business: Buffet's rule is to purchase the business only when its price is at a significant discount to its value. The value of the business is determined by the estimated cash flows expected to occur over the life of the business discounted at an appropriate interest rate. Use of conservative estimates of earnings and the riskless rate, as the discount rate is always a safe bet. Though calculating the value of the business is not difficult, estimating the cash flows may create problems. Hence selecting businesses, which are simple to understand and stable would help. Further, having margin of safety would minimize risks.
One should stop trying to predict the direction of the stock market. Mr. Market is unpredictable and moody. If shares of good businesses are owned, market action on a day-to-day basis becomes inconsequential. What matters is the big picture trend of the company's operations, management and culture.
Markets: Of liquidity, and madness
You should have seen the smile on the anchor's face on a leading business news channel when the BSE Sensex crossed the 18,000 mark yesterday. People who looked the grimmest when the markets crashed recently were found screaming that the "great Indian bull market remains alive and kicking" and that "there is no looking back now" and were raising the toast to FIIs who bring in all those P-Note funds, the origin of which we are not sure of! People who believed that what happened in Delhi's power corridors impacted sentiment on Mumbai's Dalal Street claimed that the "markets have divorced from political uncertainty to a large extent."
So, are we going to 20,000 next on the Sensex, the figure that is mathematically less than 10% away? Considering the madness and liquidity, maybe! Considering the rush to buy those top 5-6 stocks that have contributed to nearly 60% of the latest rally, maybe! Considering that the US Federal Reserve might be lenient enough to cut interest rates further and thus lower the cost of borrowings for making emerging market investments, maybe!
Stock market history suggests that the actions of those who control the vast bulk of investments (institutional investors) guide the overall belief of where the markets are headed in the future - up or down. You do not know what they are up to. Neither do you know what Mr. Market has under his sleeves. In that case, the only choice we have is to guard ourselves if 'all hell were to break loose'! And the mantra is - Whatever Mr. Market does today, we need not follow suit.
Coming back to the current times, with the September quarter result season already underway, expectations have built up for them to be 'good' considering that there have been no real hiccups in economic growth numbers in the recent past and that the advance tax numbers have been pretty decent. The 'expectations' game will continue to lead the way stocks behave in the short to medium term.
What you, as an investor, can do is take this market volatility as a way to build a long-term portfolio of solid companies with credible managements. Try not following a herd mentality into buying anything that others are 'relying' on. Rather make your choice by way of doing your own groundwork, follow the same with conviction and discipline, and leave aside greed and fear. There is probably no other way of generating wealth from stock market investing. In the meanwhile, we shall continue to wonder if we are getting too arrogant about the sustainability of the 'India story'!
The rise & rise of Sensex: Journey from 7000 to 19000!
We bring to you the ET coverage on the milestones that the Sensex crossed, right from the day it touched the 7000 mark in 2005, till date. October 15, 2007
Amidst heavy buying by investors, the bull roared to breach the 19000 mark.
October 09, 2007
TERRIFIC TEENS: BSE MARKET CAP ZOOMS TO $1.4 TRILLION
At 18, you can blame it on the raging libido. Boys may have to make way for men as Sensex hits a record high of 18,280 on the back of eye-popping rallies in Reliance & Reliance. From here on, it’s no longer for the faint of heart. At the height of the dotcom mania in 1999-00, the easiest way to maximise returns was to buy into any stock with the suffix ‘Software’ or ‘Technologies’. Eight years on, the same seems to hold true for any stock with the prefix ‘Reliance’, given their baffling run-up over the past one month. As the benchmark logged its highest single-day gains in absolute terms on Tuesday to race past the 18,000-mark, factors like politics, valuations and earnings appear to have become non-issues overnight. The only thing that matters for now is liquidity and there is nothing to suggest the tide could reverse. In less than three weeks since the US Federal Reserve cut rates, FIIs have pumped in a net of $5.4 billion into Indian equities. According to provisional data, foreign funds bought over Rs 1,400 crore worth of shares on Tuesday. The euphoria was not restricted to India. Benchmarks in China, Australia, Hong Kong, South Korea, Singapore, Indonesia and Pakistan hit new peaks. The Morgan Stanley Capital International Asia-Pacific index rose 0.5% to 166.69, and appeared set to close at a new high. Eye-popping rallies in Reliance Industries, Reliance Energy and Reliance Communications lifted the 30-share Sensex to a record high of 18,327.42 intra-day. The index finally settled at 18,280.24, a gain of 788.85 points or 4.5% over the previous close. All three stocks hit new highs and have been the top gainers in the major indices over the past one month. RIL and Reliance Communications have gained around 30% each, while Reliance Energy has risen an astounding 80%. The three stocks have together contributed 42% to the latest 1,000-point rally in the Sensex. Bharti Airtel was the only other stock in the Sensex to touch a new high. In all, 60 stocks on the BSE hit fresh peaks.
The 50-share Nifty hit a peak of 5,348.70, before finishing the day at 5,327.25, up 242.15 points or 4.6% over the previous close. Market capitalisation of the BSE rose 4% to Rs 54.52 lakh crore, while those of the Mukesh Ambani group and Anil Ambani group stood at Rs 4.37 lakh crore and Rs 2.38 lakh crore respectively. “The pace of the rally has clearly taken everybody by surprise, and it is tough to take a call as the rise has been led by a handful of stocks,” says A Balasubramanian, CIO of Birla Sunlife Mutual Fund.
POLL THEATRICS Political developments have not dampened spirits on hopes the growth story will continue irrespective of the govt in power MONEY BAGS The market boom has made the Ambani brothers arguably the richest in the world with the clubbed fortune totalling $170b STORY IN NUMBERS Companies may report a 15-17% growth for the quarter. Capital goods, cement and telcos are expected to lead the story
Midcaps fail to keep pace with Sensex “There is too much money pouring in, and investors are chasing stocks which are showing high growth momentum right now. One can debate about valuations; nothing has really changed over the past one month,” he says, adding there were likely to be very few earnings surprises for the latest quarters. Second line shares were overlooked in favour of their frontline counterparts, with the BSE Midcap and BSE Smallcap indices rising 2.6% and 2% respectively. Investors in mid cap and small cap shares have not really benefited from the recent rally, point out market watchers. This could also be explained by the fact that the BSE Midcap and BSE Smallcap have risen 7% and 6% respectively over the last one month, compared with a 14% rise in the Sensex. Back home, there was high drama before the Sensex finally managed to cross the coveted 18,000-mark, as the index had come tantalisingly close to that level and then retreated by about 50-odd points. This happened a few times and one thought bears would be able to halt the marauding bulls at the doorstep of the psychological mark, as they had done twice last week. But once the index crossed 18,000, there was frantic short covering, which then powered the rally further. Real estate shares were the star performers of the day, with the BSE Realty Index climbing over 5%.With the exception of Wipro, which rose around 4% on talk of an earnings surprise, there was little excitement in the IT sector. Bellwether Infosys Technologies will be announcing its quarterly numbers on Thursday. “Given the current economic uncertainty (in the US), we believe it is unrealistic to expect Infy/Satyam to tweak up annual USD (US dollar) revenue guidance by more than 1-3%,” a Merrill Lynch preview note on the sector said. “Over 2% INR (Indian rupee)/USD appreciation since last quarter poses a risk to EPS. We see limited downside on beaten down valuations, but see a few triggers,” the note added. Traded turnover on both exchanges combined was around Rs 1.08 trillion.
September 26, 2007
THIS ONE’S LIKE YUVI’S SIXES
IT’S THE FASTEST 1000 The frenzy of the VICTORY march of DHONI’S DEVILS in Mumbai spilled over to the Street as the SENSEX kissed 17k
The festive spirit did not end with the immersion of Ganapati. On Wednesday, it boiled over to the streets of Mumbai and its financial district. A few hours after Dhoni's Devils stepped out of Sahar Airport, the Sensex touched the magical 17,000 number. It took Dalal Street just 5 days to travel 1,000 points—its fastest rally ever. And just as jubilant spectators cheer every scoring stroke, investors latched onto whatever good news came their way. Sceptics may call it an excuse to push the index to a new high ahead of Thursday's derivatives expiry, but they were in a minority. Suddenly, tech stocks, which were the whipping boys till Tuesday, became hot favourites. Why? Hopes that the rupee will soften as a result of RBI's latest announcements to allow more outflow sparked a rally in tech stocks, pushing the Sensex to a new high of 17,073.87 during the day. At the end of the day, RBI's measures may not be enough to rein in the rupee. But there were no takers for this. The bellwether index finally settled at 16,921.39. THE SENSEX WAS UP 21.85 POINTS OVER THE PREVIOUS CLOSE . Dealers attributed the volatility mainly to squaring up of positions in the derivative segment, ahead of the expiry of contracts on Thursday. The Nifty hit a new peak of 4,980.85, before ending the day at 4,940.50, up 1.65 points over the previous close. Market watchers say a correction is long overdue. But one reason why the market could still be rising is that renewed foreign fund flows are prompting many domestic investors to defer their decision to book profits.
Infosys, Satyam, TCS and Wipro were the flag-bearers of the IT sector, climbing 3-5%. But for the rally in key technology shares, the main indices would have closed in the negative, as index heavyweight Reliance Industries fell by over 3%, after an inexplicable surge over the last few weeks. Will the tech party go on? Wednesday’s rise is mainly attributed to short covering of positions in software stocks. The rupee closed a tad higher at 39.70. "We expect RBI to take a middle road approach: allowing some rupee appreciation but managing its pace, continuing to mop up liquidity and further encouraging capital outflows," said a Lehman Brothers note to clients.
July 6, 2007 GOING ON SIXTEEN
Two years ago when the Sensex touched 8,000 for the first time, Sebi whole-time member Madhukar had made an innocuous remark about the index touching 16,000. You said it: The comment drew widespread censure and ridicule.Censure because it is inappropriate for a regulator to crystal gaze the market and ridicule because 16,000 seemed an improbable level for the index anytime in the near future. In fact, the doomsayers (not ET) didn’t give it a chance-10,000 seemed realistic, but nobody quite imagined the Sensex vaulting to 15,000 in just two years. As the BSE benchmark crossed yet another historic mark on Friday, nothing seems impossible-20,000 and 25,000 levels roll off the tongue even before you can say Peter Lynch. Nobody who’s anybody in the market thinks of these as impossible milestones-the only question is how soon. The 30-share index on Friday hit an all-time high of 15,007 after starting the day on a weak note. It ended the day at 14,964, its highest closing level, and a gain of 102 points or 0.7% higher than the previous close. The 50-share Nifty ended at a new closing high of 4384.85, up 30.9 points over the previous close, after having peaked at 4,411 for the day. “It is different this time” is the usual refrain one hears during every bull run, which rarely is the case. But what sets the current bull run apart from the previous ones-other than the duration-is that a wider section of players have been sceptical of the rally. The lack of breadth in the market since May 2006 signals the lack of conviction among market participants. Still, the bulls have managed to surmount barriers like high valuations, rising interest rates and tightening liquidity. So far, the shareholders of blue chips never had it so good-nor did the promoters for that matter. Reliance Industries (RIL) topped the list with a market cap of $58.8 billion, followed by ONGC and Bharti Airtel with $46.5 billion and $40 billion (try converting that into crores!). NTPC, Reliance Communications, Infosys Technologies, TCS, DLF and ICICI Bank are few other top-rung companies which find place in the Hall of Fame. Of these, DLF and ICICI Bank recently completed their mega IPOs which received decent response from investors. Here’s a note of caution for the small investor looking to make a quick buck: there are indications that the bulls may be on a rampage again, but running out of breath this time. The Sensex took 146 sessions to cover the 1,000 point distance from 14,000 till 15,000. This is the highest since the index took 371 trading sessions to move up from 6,000 to 7,000. The market has adjusted to the steady rise in outstanding positions in the derivatives segment over the last few months. But brokers caution that the huge leveraged positions worth around Rs 60,000-65,000 crore has the potential to send the market into a tailspin. Fortune favours the brave-and to those who have the stomach to hang in there, not the brains to simply rake it in. For the time being, market players are not speculating as much on the upside from current levels. Everybody’s wondering when the correction, if at all, may set in.
Global factors hold key HDFC Bank country head, equities and private banking, Abhay Aima sums it up well: “At these peak levels, a pessimist would term the market overvalued while an optimist would at the best call it fairly valued. Results are around the corner. With interest rates at their peak and rupee rising so quickly, companies are likely to throw up different numbers than what we saw over the past few quarters. Let the market absorb these changes for a few days. Investors can wait for a 10 to 15 days before taking a call on their investments. Sound advise, if you ask us. The future’s not ours to see, as Doris Day sang in Que Sera Sera, but marketmen feel that global factors, rather than local, hold the key in the next few weeks. As the market heads into the quarterly earnings season, the mood appears to be cautious. “Upside of the Sensex remains capped due to expensive valuations and further interest rate rises,” brokerage house Merrill Lynch said in a note to its clients earlier this week. “A rising crude oil price could weigh on India’s ability to finance its current account deficit, particularly in light of an additional slowdown in global liquidity growth. FY08 (estimated) earning per share growth is set to slow further we approach a peak in commodity prices,” the note added. Another global investment powerhouse Morgan Stanley has estimated the fair value of the Sensex at 12,067, and is cautious on midcap stocks though these have been the drivers of the rally in the last couple of months. “We think smaller companies could suffer from negative operating leverage in the coming months as growth slows and, since the stocks of these companies trade on par with those of large companies, we continue to prefer stocks up the cap curve and remain very selective about midcaps. We are underweight cyclicals and (interest) rate sensitives, and overweight healthcare, energy, consumer staples, utilities and telecom,” the Morgan Stanley note to clients said. Listen to India Infoline CMD Nirmal Jain: “15,000 is just a high psychological mark. While the market looks good, it is accident-prone too. One should now invest for longer term and in liquid stocks. Stay away from sectors like technology, FMCG and pharma. On the other hand, sectors like power equipment, construction and capital goods look attractive. One can also place a contrarian bet on cement.” For the moment, take a deep breath and reflect on what you’ve made and where you’ve lost in the recent bull run. Enjoy your weekend, stay tuned to ET and Investor’s Guide and always remember: Greed ain’t good.
Dec 5, 2006: Sensex touched 14,000 mark The benchmark 30-share sensex briefly crossed the psychological 14,000-mark on Tuesday, while the 50-share Nifty continued to hold above the 4000-mark. But for most investors who have held on to their investments through the market meltdown in May and June, the returns may not be significant unless they happened to be in an 'elite' set of stocks that have performed over the last seven months, report Gaurie Mishra & Santosh Nair from New Delhi.
Here are some cold statistics. Of the 50 Nifty stocks, only 19 have given returns of 10% and above since May 11, 2006 (when the market had first peaked), while investors in 24 stocks have lost anywhere between 1% and 34%. Among the 50 stocks in the Nifty Junior index, investors lost between 1% and 40% in 26 while only 15 returned 10% or more. The situation gets worse as one moves into mid-cap and small-cap horizon. Of the 270 stocks in BSE Mid-Cap index, 68 - one-fourth the stocks in the index - have given 10% or more returns while on 164 stocks, investors lost between 1% and 64%. Investors have been hardest hit in the small-cap segment. Of the 484 stocks in BSE Small-Cap Index, only 80 have risen over 10% while 352 have fallen between 1% and 78%. "Mid- and small-caps are the stocks where most retail investors flock and they are yet to recover. This also explains why there is no euphoria over the landmark as retail investors have not participated in the rally," said ValueResearch CEO Dhirendra Kumar. Response of domestic MFs guarded While foreign institutional investors have been aggressive buying stocks over the past few months, the response of domestic mutual funds has been guarded. In the last two months alone, FIIs bought net stocks worth Rs 17,001 crore while local mutual funds have pumped in a net Rs 638.07 crore. “FIIs have been the biggest driver in strengthening the market. FII inflows have been around $8.5 billion YTD, which is an encouraging figure. Their participation has been far higher than the local participation. The only regret in the current market is that the local investors kept selling the equities and did not participate in the upturn,” said Nilesh Shah, CIO, Prudential ICICI Mutual Fund. Since fund houses offer a portfolio of schemes that tap various segments of the market and with most of the rally being concentrated on a few blue-chip stocks, the recent rally has brought little cheer. “The rally has been concentrated on a select few large-caps and therefore it depends a lot on stock selection,” said UTI CIO AK Sridhar. Worries about redemption pressures are also beginning to hit fund houses, which have increased their liquidity positions. “With Sensex touching such highs, there will be some redemption coming up, and to ease that, we have raised our liquidity position from 4-6% to 8-10%,” added Mr Sridhar.
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Oct 30, 2006: Sensex touched 13K Who said it’s an unlucky number?
A sense of having been left out, rather than of euphoria, is what one gets on the street as the 30-share Sensex crossed yet another milestone - the psychological 13,000-mark - on Monday. On paper, the index has rallied 47% from its low in June this year. But most brokers will tell you that barring a handful of foreign fund houses and some prominent traders, few investors have been able to capitalise on the rebound, which has been led by a handful of frontline stocks. Benchmark stock indices vaulted to new highs on Monday, driven by a heady cocktail of strong corporate earnings, a rapidly growing economy and relatively stable crude oil prices. The Sensex ended at its highest closing level of 13024.26, a gain of 117.45 points or 0.9%. The 50-share Nifty hit a new high of 3776.05, eclipsing the previous record of 3774.15 touched on May 11. It finally settled at 3769.10. Marauding bulls defied the weak trend globally, which was sparked off by weak US GDP growth figure, pointing to a slowdown. Back home, the mood is upbeat even as some expect that the RBI may raise interest rates by 25 basis points in its mid-term credit policy on Tuesday. Market watchers said sentiment could be affected only if the hike is more than 25 basis points, which is unlikely. Higher interest rates drive up borrowing costs for corporates as well as the retail consumer, who could then cut back on their investments and spending, in turn causing a slack in domestic demand. Even as the major indices are moving into newer orbits, the market is sorely lacking in breadth. On Monday also, 1,406 stocks ended lower, compared with 1,133 gainers. The BSE Mid cap index closed at 5,422.63, up 0.49%, while the BSE Small Cap index shed 0.6% to close at 6,483.80. These indices - an indicator of retail interest in the market - are still 11% and 18% away from their alltime highs touched in May. Among frontline shares too, it is a handful of stocks that have made money for investors over the last five and a half months. In the Nifty, 27 out of 50 stocks, including heavyweights like HLL and ONGC, have delivered negative returns since mid-May. Market capitalisation on the BSE inched up to Rs 33.80 lakh crore from Rs 33.60 lakh crore on Friday. But it is still lower than Rs 34.35 lakh crore achieved on May 11. But not everyone is worried. “India is a bottom up story now, the companies that are performing are being rewarded by investors,” said S Mukherjee, CEO and MD, ICICI Securities. On the lack of breadth in the market, Mr Mukherjee said, “The fact that only selective stocks are doing well shows the maturity of the market. I would have been worried if each and every stock were rising.” Some other players are sceptical of the market sustaining at these levels. Including provisional figures for Monday, foreign funds have net pumped in around Rs 29,000 crore since the beginning of ‘06, of which around Rs 7,000 crore has come in October alone. Merrill Lynch expects the Sensex to slip to 11500 by December ‘07.
April 20, 2006: Sensex touches the 12K mark M-cap equals GDP level at 32,00,000 cr
India Inc may be tearing its hair out over quotas and oil prices may have breached the $74 mark, but Indian markets continue to defy gravity. In the current week, a clutch of better-than-expected results has further boosted the animal spirits. In what is rapidly becoming a routine affair, the 131-year-old BSE on Thursday crossed yet another milestone - the fastest so far -when it breached the 12,000-point mark, backed by strong corporate earnings, higher liquidity and robust economic growth. Sensex leapfrogged from 11,000 to 12,000 points in just 16 trading sessions, to end 1.2% up at 12,039.55. The number of trading sessions are based on the closing value of the index. Sensex had earlier taken 29 sessions to travel from 10,000 to 11,000 points. NSE Nifty also surged 1% to end at 3,573.50 points. The reasons are not hard to find, say market participants. “The index has been driven by the strong flow of liquidity,” said Rahul Rege, senior VP at Mumbai-based brokerage SSKI. “Earlier, it was based on the expectations that (corporate) results would be great...and by the first few that we’ve seen, companies are more than matching those expectations,” he added. Although, Sensex has been beaten to the 12,000 mark by various global indices, the time it took to breach this milestone has been one of the fastest. Traders point to the fact that foreign investors, buoyed by a booming economy, have chosen India as one of their top investment destinations.
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March 21, 2006: 11K: Ride the bullet train There is increasingly an overwhelming aura of inevitability about the onward march of the Indian bourses. Sensex these days breaks records with the same casual nonchalance with which Michael Schumacher used to win races. Sensex’s surge on Monday and part of Tuesday may have been prompted by PM Manmohan Singh’s announcements on capital account convertibility. On Saturday, Prime Minister Manmohan Singh hinted at moving toward a free float of the rupee and on Tuesday, the BSE responded by crossing the 11,000 mark in a lifetime intraday high. The new trading high was reached 29 days after Sensex entered the elite 10,000 club on February 6. Only Nikkei, Hang Seng and Dow Jones can boast of being above 10,000.
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Since full convertibility is expected to attract more foreign money and also allow local companies to tap foreign debt markets more easily, it is evident that the move will encourage investors and boost the confidence of the markets. At present, India’s overseas corporate borrowing for the current fiscal year is limited to $15 billion with foreigners restricted from holding more than $1.5 billion in debt and $2 billion in central government bonds. They also cannot own more than 5% in a bank without prior permission from RBI. On Monday, RBI said it was constituting a panel to thrash out the contours for full convertibility. Although the index later ended lower with investors wanting to book gains, participants said it was evident the markets had sent out a message - that the growth story of Asia’s third largest economy is intact and that liquidity flows into the bourses would continue to remain firm. After hitting a high of 11,017.25 points in mid-afternoon trade, Sensex lost 35.91 points to close at 10,905.20, fluctuating 153 points, with most of the volatility coming in the last hour of trading. The rise in share prices was partly attributed to a fall in oil price. The US April crude oil prices plunged 3.7% or $2.35, to settle at $60.42 a barrel, on the New York Mercantile Exchange due to ample US inventories. “It’s (the rise) is a reflection that the underlying strength of the economy will sustain the current momentum (in equities),” said Prudential ICICI MD Pankaj Razdan. “The liquidity looks good and there are various sectors that mutual funds would be interested in, such as cement, IT and auto.” Foreign portfolio investors have invested $1.01 billion in March alone, and $3.5 billion in 2006, compared with $10.7 billion in calendar 2005. India received $4.34 billion in foreign direct investment between last April and January 2006 with government ministers putting the figure at $10 billion for the fiscal year that ends on March 31 2006.
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Feb 7 th 2006: Sensex crosses the 10K barrier Global investment guru Marc Faber was at Dalal Street today, interacting with the market fraternity on prospects of the Indian stock market. His word of caution, however, could not dampen the spirits, as investors continued to celebrate, lifting the sensex to close above the 10K mark for the first time in history.
According to brokers, mood remained bullish on the back of strong FII inflows and robust data. The government, today, forecast a GDP growth of 8.1% in current year, with manufacturing and the agriculture sectors estimated to grow at 9.4% and 2.3% respectively. Brokers say there will see be short term momentum with fund flows expected to continue in the next few days. Brokers, however, are cautious over the sharp uptrend in the market, which, they fear will drive valuations to expensive levels. They also said yesterday’s 238-point rally was contrary to expectations as it came despite negative news flow about a fresh tussle between Ambani brothers over transfer of ownership of the four companies demerged from erstwhile RIL. Dec 10, 2005: Closes at 9K Dalal Street celebrated Sonia Gandhi’s birthday with a bang. After coming close many times and breaching it once intraday, the sensex on today finally closed above the 9,000-mark, led mainly by a general enthusiasm after a court approval to Reliance Industries’ de-merger proposal.
While market players traded theories on reasons for the sensex’s rise, most of them credited it to the Bombay High Court approval for the Reliance demerger. “Although the market opened strong, news of the demerger approval led the sensex to rise sharply,” said Pioneer Intermediaries’ Sandip Shenoy. “After that it was all-round buying that boosted the market to beyond the 9,000 mark. I am of the view that there is an underlying bullish trend and this will sustain,” he added. The delay in approving the demerger had in fact led the market to fall last week. Although Reliance shareholders had already cleared the demerger plan, objection by one shareholder. Ahmedabad-based chartered accountant Kalpesh Bharatkumar Mankad contended that the demerger was a family arrangement rather than a business separation. Under the demerger plan, Mukesh Ambani would be responsible for Reliance Industries and IPCL, while sibling Anil Ambani would look after Reliance Energy, Reliance Infocomm and Reliance Capital. The news led the 30-share sensex to rise 161 points or 1.8% to end at a lifetime high of 9,067.28 points. It hit a high of 9,080.76. the Nifty index spurted 50 points to close at 2,756.45. “The index has crossed the threshold level of 9,000 and while the trend remains bullish, we’ll have to watch closely the global liquidity and the emerging markets positions,” said IL&FS Investsmart research head R Sreesankar. Indian equities market has seen an unprecedented bull run in the past one year, mainly due to a surge in foreign portfolio investment which has so far totalled $8.91 billion, compared to $8.4 billion in the last year. The Reliance group companies were in the forefront, with Reliance Industries rising 2.1% to Rs 863.85.
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Sept 8, 2005: Mt Everest 8848; Sensex 8053 What’s gravity? Dunno. What’s vertigo? Don’t care. Bulls, did you say? More like mountain goats. We’re running out of historic metaphors, but the sensex just doesn’t seem to notice that it’s doing a death-defying trapeze act. Call it the day of the Indian tiger, if you will. Vaulting over hurricanes, skipping on boiling oil, the BSE benchmark index triumphantly waved to the world from top of the global skyline at 8,000.
The sensex vaulted past the 8,000 mark today as local and foreign investors pinned hopes on India Inc’s strong growth prospects and shrugged off concerns about surging crude oil and the global economic uncertainty wrought by Hurricane Katrina. The benchmark index, Asia’s secondbest performer so far in 2005, soared 105 points to 8,052.56 in the course of its history-making performance and capped a year of spectacular successes for the 19-year-old index. The NSE’s Nifty rose 1.06% to a new high of 2,454.45 led by BPCL, Bajaj Auto and HDFC. In July last year, the sensex had just limped past 5,000 still smarting from the battering it received on May 17 after the general election. Investor confidence was low and dark whispers about the Left parties’ influence on economic reforms kept the bulls at bay and the bears all charged up.
But in a series of stunning rallies that has confounded ordinary investors and pundits alike, the sensex added nearly 3,000 points since then with the last 1,000 points coming in just 55 days, the third fastest 1,000 point gain in its history. “The fact that the sensex has reached 8,000 shows the economy’s strong fundamentals. The key is to ensure that this is sustainable and the reform process continues on track,” said Kumar Mangalam Birla, chairman, Aditya Birla group. Investor wealth today soared to Rs 21,77,216 crore, up Rs 3,68,083 crore since June when the sensex crossed 7,000. “We are in a long bull phase and could see the market moving higher. The fact is India is getting re-rated and is becoming an important part of the emerging markets portfolio,” says Hemendra Kothari, chairman of DSP Merrill Lynch. "I personally feel that results for most corporates will be excellent this quarter. The PEs are not exceptionally high compared to other Asian markets. While there is no need for concern, one has to be careful about mid-cap stocks which can't be sold easily. Otherwise, I don't see any downside," adds HDFC chairman Deepak Parekh. The biggest drivers of the rally include Reliance Industries, which ended 1.29% up at Rs 738.45 on Thursday. It touched a 52-week high of Rs 760 on August 3.
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Bears rule the world RIL contributed about 113.62 points to the rally. ICICI Bank chipped in with 105.86 points followed by Bharti Tele-Ventures with 99.07 points. While ICICI rose 3.7% to Rs 505.95 on Thursday, Bharti climbed 1.62% to Rs 330. The sensex has climbed 52% since September last year. It has risen 20.56% beating the MSCI emerging markets index’s gain of about 11.8%. A look at the performance of leading indices around the world in the same period put things in perspective. China’s stock markets have fallen about 8.1% in local currency terms in 2005 so far, according to figures available with The Economist. Egypt has climbed 72%, South Korea has risen 20.9% while Taiwan has fallen 1.7%. Among developed markets, the UK’s FTSE has risen 10.0%, the Dow Jones Industrial Average (DJIA) has fallen 2.8%, while the S&P 500 has eked out a 0.7% gain. The World MSCI index has risen by about 2.2% since January this year. Surging foreign fund flows have been a major driver of sentiment. FIIs pumped in more than Rs 12,000 crore in July and August and their total investment so far this year is about Rs 34,091 crore or about $7.8 bn. The total inflow into equities for the whole of 2004 was about $8.5 bn. Experts say that number would be surpassed and the inflows could rise to about $10 by the end of this year.
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Again, a comparison can put things in perspective. Taiwan has so far received about $12 bn, Indonesia has got about $4bn, while South Korea has received about $4 bn. India’s booming economy, rapid industrial growth and robust corporate earnings means that offshore funds looking for growth and capital appreciation make a beeline to the country. For instance, the number of FIIs registering to do business in the country has risen to 764 at the end of August from 685 at the end of 2004/05. The economy is slated to grow 6-7% in 2005/06 after rising 6.9% in 2004/05 and 8.5% in 2003/04. This would still make India one of the fastest growing economies of the world. Industrial production for June 2005 rose 11.7% the second highest in emerging markets behind China’s 16.1%. Not everybody who’s anybody in the market is so sanguine. Rampant crude prices remain a concern especially as experts fear India along with other Asian markets could be more vulnerable because oil usage intensity is very high.
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June 21, 2005: D-Street Volley Clears 7k Bar The sensex soared past the 7,000 mark today defying widespread expectations of a downside, as gains by big cap companies, such as ONGC and HLL, boosted sentiment and Reliance Industries continued to shine. Propelled by strong inflows from new FIIs, who placed orders for a basket of frontline shares, the sensex rose 1.3% to close at a record 7,077 after rising as high as 7,084.
If yesterday was the day of the Reliance Group on bourses, today belonged to large caps - Reliance Industries, ONGC, Gujarat Ambuja, Infosys Technologies, Hindustan Lever, Maruti Udyog and ICICI Bank among others. The trading volume was brisk at 223 million shares but the market breadth stayed negative as losers at 1,359 edged out gainers at 1,137. A pointer to things ahead perhaps. The NSE Nifty rose 1.2% to 2,170. The CNX Midcap 200 index rose 0.3%. It has underperformed the frontline indices for a week now. The Nifty June futures closed at Rs 2,148, a 22 point discount to the underlying index. The gap was 25 points yesterday. This means that a few players cut their short positions in the futures market after booking profits in the cash market. Market players say that despite rising oil prices to around $60 per barrel, and a scanty monsoon so far, there is no fear of a dramatic fall on the Street. “There is caution but very little fear,” a CEO at a leading institutional brokerage said. The confidence on the Street is largely driven by the set of new investors taking a fresh exposure to India. Prospects of a strong domestic demand growth and consistently high return on equity by leading companies, India is fast emerging as a favoured destination for foreign investors from the US to East Asia. Japanese investors have injected over $1 billion in Indian equities and new India funds by Nomura Asset Management and Nikko Cordial are keeping the order flow on from the East. As if this is not enough, retail investors in Taiwan and South Korea are also subscribing to new India funds in their markets. The Comprehensive Economic Cooperation Treaty with Singapore is expected to bring further new money. The presence of the central bank of Norway, Norges Bank, as an FII is also a key development, according to players.
VIVEK MANI
With the foreign investors injecting hundreds of billions of dollars into the Indian markets, the benchmark indices had been left with no time to even catch up their breath during the marathon run on the bourses over the past few weeks. While making new records are the order of the day and invariably catch the fancy of the pink papers, retail investors are left wondering whether they have missed the bus or are losing out by not riding on the short-term momentum.
Among the many records created by the Indian stock markets during the year so far, the lead contributors were the Initial Public Offerings (IPOs). It was a record as the Indian capital markets saw over Rs 250 bn being raised from the primary market, the highest ever. This achievement gets further magnified when compared to the fact that this amount was almost 11 times higher than that of 2003 (Rs 22 bn) and just a tad lower to the near Rs 320 bn raised by IPOs in the period 1995-2003 i.e. 9 years!
With the markets having been in a jubilant mood since the last couple of months, one of the key reasons why the IPO activity has heightened significantly in recent times is the investors' anticipation of short-term supernormal returns in IPOs. It must be noted that during such times, an unlisted company is not only able to realise a good valuation for its offering but would also be rather sure that its issue would be 'over-subscribed' considering the high appetite amongst investors - both domestic and foreign - to invest in equities. However, what is more pertinent to keep in mind is that stocks with strong fundamentals have the potential to deliver superior returns over a longer time frame as compared to the listing gains.
We have so far been advising investors to invest with a long term and stock specific approach and stick to the fundamentals irrespective of the shot term sanguinity or mayhem. This principle applies to primary market issuances (IPOs) as much as it does to the secondary market. And, if one is to judge the two-year performance of the IPOs of 2005, it only manifests our view!
The ones that delivered...
Company
Month of issue
Upper price band
Listing price
Listing gains
Current price
Long term gain
Rs per share
Point to point
Rs per share
CAGR (%)
UTV
Feb-05
130
165
26.9%
680
93.8%
3i Infotech*
Mar-05
50
53
5.2%
145
53.1%
India Infoline
Apr-05
80
87
8.7%
1,018
176.6%
Shopper's Stop
Apr-05
250
373
49.2%
488
30.7%
Provogue
Jun-05
150
250
66.7%
971
111.1%
Yes Bank
Jun-05
45
65
44.4%
210
85.2%
IL&FS Investmart
Jul-05
125
183
46.4%
187
17.5%
IDFC
Jul-05
34
50
47.1%
180
94.8%
Suzlon Energy
Sep-05
510
640
25.5%
1,780
81.3%
ABG Shipyard
Nov-05
185
280
51.4%
639
85.9%
Punj Lloyd*
Dec-05
140
198
41.4%
395
63.9%
Tulip IT Services
Dec-05
120
180
50.0%
825
175.8%
*Prices adjusted for bonus, stock split, mergersPrices as on 13th October 2007
With the kind of gains most of these IPOs have returned, investors seemingly have a good enough reason to invest in the upcoming IPOs. However, before jumping to any conclusion it is worthwhile to remember that in a little over a decade, as per the numbers available from the Ministry of Company Affairs website, 114 companies have vanished after raising money from equity markets! The aggregate size of all these issues combined stand at approximately Rs 7.9 bn! What also proves our point is the fact that even the IPOs that delivered 'listing gains' to investors in 2005, grossly lagged behind and proved to be the sour grapes in the longer term.
The ones that failed...
Company
Month of issue
Price Band
Listing price
Listing gains (%)
Current price
Long term
Rs per share
Rs per share
gain (%)
Jet Airways
Feb-05
1125
1211
7.6%
925
-8.9%
Emami Ltd.*
Mar-05
210
279
32.9%
259
8.8%
Shringar Cinema
Apr-05
53
54
1.7%
62
6.5%
Prithvi Information Solution
Oct-05
270
324
20.0%
254
-2.9%
Piramyd Retail
Nov-05
140
135
-3.6%
57
-34.8%
PVR Cinema
Dec-05
240
266
10.8%
199
-8.5%
*Prices adjusted for bonus, stock split, mergersPrices as on 13th October 2007
Thus, all the factors that are considered while investing in an already listed company would be applicable while choosing to invest in an IPO. In fact, much more caution is advised in IPOs considering the fact that most of them do not provide their financial history beyond what is made mandatory by the regulators. And as such, investors must do their homework and bear in mind certain key parameters while investing in an IPO.
To conclude, while an investor would always get lured by the astounding returns IPOs have offered in the recent past, our stand is to invest in an IPO only if the business model, prospects and valuations justify the price, and not just because it is an 'IPO'. It is apt to bring out at this point what the legendary investor, Warren Buffet, believes, "...we miss a lot of very big winners but it also means we have very few big losers.... We are perfectly willing to trade away a 'big' payoff for a 'certain' payoff."
SEBI and RBI: Wishing and hoping
Money that has flowed into the Indian stock markets over the last few months, and more particularly over the last few weeks has origins which India as a nation has neither any clue about nor any control on. But, at the same time, the Reserve Bank of India has had to scramble around in the forex markets to keep the Rupee from wildly appreciating thanks to these huge inflows. On the flip side, it added to the domestic money supply that spurs inflationary tendencies (look at the Consumer Price Index if not the cost of fruits and veggies in the open markets). To stem inflation, domestic interest rates had to be higher which is slowly strangling the domestic economy. While all this is happening in India, the original anonymous operator is sitting pretty overseas getting fatter margins as his call on the currency is further validated by the Rupee strengthening.
The SEBI discussion paper on Offshore Derivate Instruments (ODI, also popularly called participatory notes or its diminutive ‘p-notes’) is yet another committee making its recommendations on a subject on which others have been doggedly asking for some sense to prevail. The Reserve Bank of India and the R. H. Patil Committee among many others have been open in their uneasiness about the flow of money into India that cannot be traced back to particular firms or individuals.
The numbers are mind-boggling
§ Among the 1,056 (as on July 2007) Foreign Institutional Investors (FIIs) registered with the SEBI, just a handful few, 34 FIIs/sub accounts to be exact, have issued these p-notes.
Notional value of p-notes outstanding as a percent of Assets Under Custody (AUC) has more than doubled from 20% in March 2004 to 52% by August 2007 - Of the total AUC of all the registered FIIs that numbers US$ 172 bn (marked to market), about 52% or US$ 89 bn has flowed in through the p-note route as of August 2007.
§ Almost 30% of the total p-notes issued (US$ 30 bn) are derivatives based.
The SEBI paper has asked the Ministry of Finance to:
Ban derivative-based p-notes completely while giving eighteen months to wind down existing issuance.
§ Has asked it to disallow FIIs from issuing p-notes through sub accounts with immediate effect.
§ FIIs, whose p-note issuance has already exceeded 40% of their AUC, should stop issuing p-notes of all kinds altogether. Those who are yet to reach the 40% limit can issue p-notes only up to 5% of their incremental assets.
Impact on the economyThe RBI has purchased US$ 12 bn of inflows in the five weeks beginning September 2007. This added Rs 4,818 bn or 14% to the money supply. Since then, the total FII purchases in the stock markets have released another Rs 215 bn into the Indian system. With a majority of the inflows coming in through the p-note route, if the recommendations are taken seriously, we should see FII inflows reducing to levels manageable for the economy.
Frankly speaking India’s image will not tarnish if the punters are kept away. If anything, the kudos that the RBI has won for its monetary policy from the MD of the International Monetary Fund, Mr. Rodrigo de Rato, will be spread to the Ministry of Finance too. The loss of face in diplomatic circles thanks to the nuclear deal fiasco of the UPA government will be glossed over by its tough and correct economic stance if it flows these recommendations. And we see no party opposing these. With retail participation in the Indian stock markets at an all time low of 10% of market capitalization (as at the end of June 2007), any re-rating following the flight of the p-note money will at least allow Indians to participate in their own country’s rags to riches story.
The most visible and immediate impact will be on the exchange rate. We have always maintained that with a yawning current account deficit of 2% of GDP, the Indian Rupee is not intrinsically strong yet. We hold on to our existing view of 7% to 8% depreciation in the Rupee’s value from here onwards especially as the crude oil prices keep testing the skies. The impact on money supply and interest rates will be more gradual and should take at least six months to filter through. There will be further increase in the pressure on domestic petroleum product prices with crude oil imports becoming a tad more expensive.
What to expect?Well, you would have been an underperformer since the Sensex took off from 13,800 till its journey to 19,000, if you have not been into the Reliance pack of stocks. These stocks, which have accounted for nearly 23% of the total turnover in the last 7 trading days, seem to have evoked much interest owing to some sudden reasons (which experts give) like “being undervalued", "unlocking value" and "having tremendous growth potenial." Well, all that is fine. But what makes a stock from an old economy sector like power deliver almost 4 times in a span of less than 3 months? The company is merely “talking” about its 10-year plans and people have sort of factored in everything to be executed successfully!
Anyways, moving on from the "R" sector to some of the other ones like pharma, technology and hospitality, which have not really performed during this period, largely due to one micro factor that impacts their financial performance – the Rupee’s appreciation against the US dollar. Nothing else seems to have changed for companies from these sectors. For technology, it is not really the rupee’s appreciation against the US dollar but the pace of it is what seems to have unnerved investors.
As a matter of fact, the rupee appreciated from Rs 49 to a dollar in 2002 to Rs 43 to a dollar in 2006 but that appreciation was much more anticipated and companies were prepared to deal with it. But the appreciation from Rs 43 to Rs under Rs 40 has been faster than anticipated. Apart from this, nothing much has changed for these companies in terms of business fundamentals – volumes continue to rise and pricing environment remains stable with an upward bias. There seems to be no reason for investors to worry about the performance of these companies over a 3 to 5 years period and we remain positive on their stock performance for a similar time frame.
As for the pharma sector, we believe that the pressure on the governments across the world to reduce healthcare costs, the rise in the aged population in the developed markets and the increase in the number of drugs going off patent are the cornerstones of the India generics story. Pricing pressure due to rising competition is expected to continue and we believe that this concern has already been factored in the stock prices.
Some other sectors where we maintain our long-term positive stance are hospitality and FMCG, where increased consumption and higher levels of discretionary spending will aid the growth process. We, however, remain concerned on valuations of stocks from sectors like power, realty and capital goods. Though we like selective stocks from each of these sectors, the overall view is that of caution.
On an overall basis, what you, as an investor, can do is take this market volatility as a way to build a long-term portfolio of solid companies with credible managements. Try not following a herd mentality into buying anything that others are 'relying' on. Rather make your choice by way of doing your own groundwork, follow the same with conviction and discipline, and leave aside greed and fear. There is probably no other way of generating wealth from stock market investing. In the meanwhile, we shall continue to wonder if we are getting too arrogant about the sustainability of the 'India story'!
Markets: So far, eventful indeed!
Markets so far have been subject to a number of events that have had a telling impact (both positive and negative). The latest in chronology is the SEBI's proposed restriction on the issue of fresh participatory notes (P Notes) by FIIs. Both domestic and international events have influenced the movement of the stockmarket. In this article, we shall recapitulate the major events this year, which have impacted the Indian stockmarket to a considerable degree.
Global events...Subprime crisis: This was perhaps the biggest event that marred both the international and the domestic stockmarkets. Most of the world's well-known financial giants like Bear Sterns, Lehman Brothers and Merrill Lynch created complex derivatives based on sub prime loans, which were marked to market and sold. The crisis arose when defaults on these sub prime loans surfaced having a dampening effect on other forms of credit as well. While big hedge funds such as Bear Stearns amongst others had to report bankruptcy, global banks were not spared either and the largest of the lot i.e. Citigroup reported a massive 60% drop in its third quarter earnings for the year. UBS was also at the receiving end and ended up posting losses. Since complex financial instruments were created around these sub prime loans, valuing the same proved to be a difficult task, as a result of which the extent of the crisis could not be gauged.
While the India does not have a significant exposure to the mortgage market and thus is relatively insulated in that sense from the developed markets, the subprime rout nevertheless had a huge impact on the Indian stockmarket. This can be largely attributed to one word - FIIs. The sub-prime crisis saw the FIIs book profits on the Indian stock markets to pare their losses in the other global markets, thus highlighting the vulnerability of India to external shocks.
Fed rate cut: A fallout of the subprime crisis, the Fed chief Ben Bernanke announced a 50 basis points cut in the Fed rate. The rate cut, being more than what the markets expected, spearheaded a rally in the US, European and Asian markets and India was part of the action too. For India, what the fed rate cut meant was that with the RBI not lowering the interest rates in India, the interest rate differential between India and the US increased. This sparked a renewed interest by the FIIs into India and led them to pump in money to the tune of US$ 7.2 bn since the rate cut was announced on September 18. The fact that the Indian economy has been chugging along at a robust pace has also been the icing on the cake.
Domestic events...CRR hike: In a move to contain inflation, the RBI undertook raising the cash reserve ratio (CRR) twice during the year. The first was in Feb 2007 wherein the RBI increased the CRR by 50 basis points to 6%. The next was in April 2007 when the RBI raised the CRR by another 50 basis points to 6.5%, which was made effective in two tranches. Besides this, it also raised the 'repo' rate from 7.5% to 7.75%. The move behind the same was to curb the excess liquidity in the banking system to check inflation. Now with liquidity once again flooding the Indian markets, the possibility of the RBI once again resorting to a hike in the CRR cannot be ruled out.
Sharp rupee appreciation: The surge in FII inflows and the not so active intervening by the RBI in the forex market (to curb liquidity and thereby inflation) has had a scathing impact on the exchange rate causing the rupee to appreciate by around 7% against the dollar this year. No surprises for guessing that the major sectors at the receiving end have been the software, textile and pharma sectors. FII inflows showed no signs of abating this year and the recent move by the US Fed to cut interest rates have further fuelled inflows into the country largely due to the robust growth in the Indian economy and the widening differential between the Indian and the US interest rates. The fact that the dollar has weakened against the major global currencies has also contributed to the appreciation of the rupee.
While the RBI has come out with guidelines encouraging investments abroad, this move may not be that effective given the strong pace in the growth of the Indian economy and the attractive interest rate scenario.
To sum up... While there is general euphoria in the markets with the Sensex reaching 19,000, what needs to be noted is that valuations at the current levels appear stretched. Investors need to ensure that they do not get carried away by the hype and hoopla surrounding the various milestones reached by the Sensex. What's more, these times of all times, will test the mettle of the investors who will have to exercise considerable discipline in researching and investing in stocks, which have good managements, earnings visibility and are available at reasonable prices.
Concerns at 19k
The markets are hitting new highs everyday. Strong GDP growth, stronger rupee, and lower inflation numbers are some of the positive factors that have supported this momentum. But the question is, will this euphoria last forever? There are the negatives that could hamper the upward journey.
Political Instability: This is one of the prime concerns. Politics is the art of the impossible, and even more so, figuring the impact of politics on the stock market. Political instability creates doubts in the minds of the foreign investors and may lead to the fall in the markets. Though the recent concerns over mid-term polls has not led to the stock market correction, cautiousness on this front is needed. The present political imbroglio over Indo-US civil nuclear cooperation deal presents a big event risk. History suggests that in this kind of situation Indian markets have reacted sharply.
Huge inflow- RBI stand: Capital inflows have increased dramatically over the past few weeks. During the fortnight ended September 28, foreign exchange (FX) reserves increased by US$ 15.6 bn. 12-month trailing capital inflows as of September 2007 increased to an all-time high of US$ 75 to 80 bn as compared with US$ 27 bn during the 12 months ended September 2006. The key driver of the recent rise in capital inflows has been foreign loans and portfolio equity inflows. This
has led to the intervening of the RBI to prevent sharp appreciation in the rupee and in the money market to ensure that short-term interest rates do not decline.
US economy: The US economy is facing the pressure of the credit and mortgage sectors. Though the Fed has reduced the interest rates, negative impact on the long term on credit crisis still exist. The temporary cure would further aggravate it, leading to inflationary pressures. With US being a major source of exports from India, this may create problems for our economy. Also, the risk of a reversal in capital inflows due to risk aversion to recent problems in the credit markets in the US and Europe may cause a fall.
Crude prices: The crude prices have gone up by 34% YoY. India imports around 75% of its crude requirements. With higher crude prices, the trade balance would get affected. Also, it would cause inflationary pressure across all products and services, which could slacken the demand growth pace.
Input pressure: Though the data released every Friday on inflation shows a decline in inflation on YoY basis, the real picture faced in routine life is harsh. Not only crude but also the other raw materials have become expensive. As per ASSOCHAM's recent report, prices of major commodities have shown maximum price fluctuations to the extent of 23% to 25% over the last one year. Not only the consumers but also the companies are facing the brunt of higher input prices, which would affect their operating margins. While, headline inflation is at 4%, core inflation is at 4.8%. Although both core and headline inflation is within the RBI's comfort zone of 5%, the recent rise in oil and foodstuff prices has raised concerns.
Trade deficit: India's April-August 2007 trade deficit climbed to US$ 32.5 bn, 63.3% higher than that of US$ 19.9 bn last year led by stronger rupee and higher crude prices. The widening trade deficit would also pressurise the current account deficit. Further, as per the RBI, the shortfall in the current account was US$ 4.7 bn in the three months ended June 30 2007, as compared with a surplus of US$ 2.6 bn in the previous quarter. The rising rupee would hurt export-oriented industries and their competitiveness and any slowdown in these industries may affect overall growth outlook.
Higher valuations: After the recent fall in the global markets due to the sub-prime crisis, India has been one of the few emerging markets to see strong rise in the sensex. On a trailing 12 month basis, while Shangai A share is 54.66, Sensex is 25.47 as compared to Russia's RTS index value of 13.49 and Thailand's 17.99. The valuations are on the higher side ignoring factors like relatively lower IIP growth, high crude oil prices and the continued political clash on Indo-US nuclear treaty and stretched valuations.
To conclude...While we continue to remain bullish on long-term growth prospects of the economy, we believe that valuations become little stretched at this point and markets are running ahead of fundamentals. With valuations taking a backseat in this mad rush of capital inflow, we advise investors to concentrate on the fundamental aspect and not get carried away by the one-way movements in the indices.
Of P-Notes and Bird Hits
While all the media is playing up the hype of the recent surge in the Index from 18k to 19k, a step back indicates that:
1. Every 1,000 point is now a LOWER percentage number, so should be easier to achieve. An Index moving from 1,000 to 2,000 is a 1,000 point move but, more importantly, is a 100% move! While a move from 18,000 to 19,000 is also a 1,000 point move, it depicts an increase of 4.3 % (see the Table below).
BSE-30 Index
Date
Days
Points
%
Gain per day, points
Gain per day %
13,989
21-Aug
-
-
-
-
-
15,121
30-Aug
7
1,132
8.1%
162
1.2%
16,322
19-Sep
14
1,201
7.9%
86
0.6%
17,150
27-Sep
6
828
5.1%
138
0.8%
18,280
9-Oct
7
1,130
6.6%
161
0.9%
19,058
15-Oct
4
778
4.3%
195
1.1%
2.
3. The pace of this 1,000 point move to the 19k levels in 4 days sounds impressive (indeed it is the second strongest!) but, on further analysis the move from 14,000 to 15,000 was not only more in terms of the percentage gain ( 8.1 %) but was also a stronger move. See the column on the extreme right that indicates the average % change per day.
Index levels, needless to say, are representative of a basket of stocks and your portfolio may or may not have moved with the same intensity. The Index is a number, don't break your head over it. But do analyse the underlying valuations of the companies that comprise the Index - and of the companies outside the Index. (click here for our Research Reports).
So, while the Finance Minister and SEBI are now worried about the monster they have helped create due to their willingness to allow short-term flows via P-Notes, sit back and enjoy the ride.
Of course, you may need to fasten your seat belts.
Really tight.If the entire Australian cricket team and the remnants of a ramshackle Indian team was brought down to Nagpur airport by a bird-hit, imagine what could happen if those P-Note owners took a break and stopped buying India for one day.
Ouch....
Volatility reigns…
Markets movements during the week ended 12th October 2007 were marked by significant volatility as curt crashes and swift recoveries became the order of the week. Although bears made their presence felt during the week, with indices closing in the red for two out of five trading sessions, the bulls were not complaining as the domestic indices closed the week with gains of around 4%.
The week began on a negative note with the BSE Sensex losing more than 300 points on Monday after opening with a positive gap of 129 points. The sell-off was led by metal and power stocks as the BSE Metal Index shed more than 4% for the day. However, the bulls were back with a vengeance on Tuesday, as the Sensex closed the day with its biggest-ever single day gain – up 789 points from its previous close. Markets continued their northbound journey in the next two trading sessions with BSE Sensex gaining 378 and 151 points on Wednesday and Thursday respectively. Bears made a comeback on Friday, with the BSE Sensex losing close to 400 points. On the sectoral indices front, the BSE Capital Goods Index and the BSE Bankex (each down 2.7%) emerged as the key losers. For the week, while BSE Sensex advanced by 3.6%, NSE Nifty closed with gains of 4.7%.
On the institutional activity front, between 5th and 10th October, while FIIs emerged as net buyers to the tune of Rs 77 bn, mutual funds sold equities worth Rs 13 bn.
(Rs m)
MFs
FIIs
Total
5-Oct
(2,749)
5,750
3,001
8-Oct
(3,312)
34,199
30,887
9-Oct
(3,409)
19,511
16,102
10-Oct
(3,549)
17,479
13,930
Total
(13,019)
76,939
63,920
On the sectoral indices front, the BSE Metal Index and the BSE Oil & Gas Index featured among the key gainers with gains of 5.1% and 4.6% respectively, while the BSE Infotech Index lost 1.1%.
Index
As on October 5
As on October 12
% Change
BSE IT
4,740
4,688
-1.1%
BSE SMLCAP
9,102
9,099
0.0%
BSE OIL AND GAS
10,110
10,576
4.6%
BSE HEALTHCARE
3,826
3,806
-0.5%
BSE AUTO
5,366
5,515
2.8%
BSE PSU
8,341
8,673
4.0%
BSE MIDCAP
7,486
7,529
0.6%
BSE FMCG
2,107
2,142
1.7%
BSE BANKEX
9,225
9,311
0.9%
BSE METAL
14,122
14,841
5.1%
Now let us have a look at some of the key stock/sector specific developments during the week:
Software major, Infosys announced its 2QFY08 results today. The topline grew by 9% QoQ on the back of 1.9% QoQ growth in blended billing rates and 7.6% QoQ growth in volumes. The operating margins expanded by 2.6% QoQ, aided by higher utilisation. Other income dropped sharply due to change in hedging policy in the previous quarter. Higher taxes, largely due to MAT, restricted the PAT growth to 2% QoQ for the quarter. While 48 new clients were added during the quarter, attrition rose to over 14%. Software stocks closed weak with I-flex (down 5%) and Infosys (down 3%) leading the pack of losers.
The government has announced a slew of measures to help the sugar industry. Subsidised loans would be given to sugar mills to help them clear dues of farmers and making mandatory the blending of 5% ethanol in petrol with immediate effect across the country, barring the North East, Jammu and Kashmir and the island territories. It has also allowed sugar factories to produce ethanol directly from sugarcane juice to augment its availability and reduce the oversupply of sugar. Further, 10% blending has been made optional from this year, but this would become mandatory from next October. A uniform nationwide purchase price of Rs 21.5 per litre (ex-factory) for supply of ethanol for the next three years was also decided at a meeting of the Cabinet Committee on Economic Affairs. The CCEA has also extended export subsidy by one more year from April 19, 2008 to April 18, 2009, to target an additional export of 3 million tonnes of sugar. The Indian sugar industry is facing its worst crisis, due to higher supply of sugar. Most companies have incurred losses in the last two quarters. The decision would bring some relief to the industry. Sugar stocks closed in the red with Balrampur Chini (down 3%) and Bajaj Hindusthan (down 2%) leading the pack of losers.
Top gainers during the week (BSE A)
Company
Price on October 5 (Rs)
Price on October 12 (Rs)
% Change
52-WeekH/L (Rs)
BSE SENSEX
17,773
18,419
3.6%
18,845 / 12,315
S&P CNX NIFTY
5,186
5,428
4.7%
5,549 / 3,546
IGATE GLOBAL
241
374
55.3%
432 / 208
GMDC
1,262
1,851
46.7%
1,851 / 333
VSNL
451
526
16.6%
559 / 342
BOI
275
312
13.5%
324 / 132
RELIANCE ENERGY
1,447
1,636
13.1%
1726 / 448
Pharma stocks closed mixed for the week with Nicholas Piramal (up 6%) and Glenmark Pharma (up 5%) leading the pack of gainers, while Dr. Reddy’s (down 6%), Novartis and Aurobindo (each down 5%) were out of favour. As per a leading business daily, pharma majors Aurobindo, Cadila and Lupin are set to hive off their R&D units to reduce cost pressures and improve valuations of their other businesses. As a matter of fact, R&D is heavy on costs. Domestic pharma companies find it prudent to de-merge R&D into a separate unit to reduce the cost burden of other businesses. This, in turn, improves the valuation of the other businesses. The practice is, however, confined to the Indian space where R&D is not really the core activity. Global companies such as Pfizer or Merck have not adopted such a model because their core business activity is R&D. Such companies are instead divesting their manufacturing units or entering into contract manufacturing tie ups in low-cost locations such as India and South Africa. Big companies like Nicholas Piramal and Sun Pharma have already hived off their R&D units into separate businesses.
Top losers during the week (BSE A)
Company
Price onOctober 5 (Rs)
Price onOctober 12 (Rs)
% Change
52-Week H/L (Rs)
FACT
28
24
-11.8%
30 / 19
IOC
503
454
-9.9%
585 / 370
CHAMBAL FERT
56
51
-9.6%
63 / 30
NATIONAL FERT
50
46
-8.9%
53 / 26
MRPL
68
62
-8.5%
83 / 32
FIIs continued their obsession with emerging markets. As expected, markets during the week were primarily driven by the liquidity factor as the FIIs went on a buying binge, counting on a further appreciation in the rupee vis-Ã -vis dollar. Though investors might find this as a reason to cheer, they need to be cautioned about the short-term nature of this ‘hot’ money. With valuations taking a backseat in this mad rush of capital inflow, we advise investors to concentrate on the fundamental aspect and not get carried away by the one-way movements in the indices. The fundamentals will get manifested in the upcoming results season.
The current markets remind us of Warren Buffett’s remark that bull markets make the investors think “I can’t miss the party”. While the India story has roots in strong fundamentals, the valuations are running ahead of themselves on the back of overenthusiastic FII money. We urge you dear investor to be fearful when others are greedy. No stock is good at “any” price. Stock prices sooner or later revert to intrinsic value of the underlying business and the current upward run in prices contain a fair amount of euphoria in addition to business value. And, euphoria never lasts forever! Happy investing.
Follow the rules!
The Indian stock market made historic moves this week, breaking the old records and making some new ones. The Sensex hit the 18,000 mark. Not only the blue chips but also the small caps have been scaling higher. However, one should not get carried away by the hype. Investment Guru, Warren Buffet has suggested some rules before making an investment. These rules fall into 4 groups, which are as follows:
Business Rules: This includes the basic characteristics of the business itself. The business tenets focus on understanding how the business operates.
The first rule to be followed before buying a stock is never to invest in a business you cannot understand. This means that time needs to be spent on understanding the business. One can make short-term gains through stock tips, but in the long run, this will not help. "Poker players are not gamblers". The good players win on their skill, temperament, and intimate knowledge of the game and do not rely on luck to win the game.
The firm should also have a stable operating history. One should know whether the company has stood the test of time. The company, which has experienced different economic cycles and competition and has survived, is a safe bet. A company can have lower profit periods and still have a consistent operating history. These low profit periods can provide a good opportunity to purchase a good business at a low price. Further, knowing the long-term prospects of the business is also necessary. Technological aspects, competition, government rules, bargaining power, raw material supplies should be considered before making an investment.
Hence, in order to achieve this high level of competency, it is necessary to limit the scope of investigation and investment to a small number of companies. This necessitates a focused portfolio instead of a diversified one.
Management Rules: This refers to the quality of management. It is essential to have a strong management as the fate of the ship i.e. whether it would float or sink would depend on their competence. The management of the company should be high on corporate governance and ethics. The decisions taken by the management should be in the best interest of the shareholders. Inspite of the happenings in the economy or the market, a company with a strong management that knows how to make money, can make money, and will keep making money.
Financial Rules: This refers to the various financial parameters that should be considered for evaluating a stock.
Profit margins: According to Warren Buffet, the companies, which are able to earn higher margins along with high volumes, are a better bet. Falling volumes may indicate higher competition or the fact that the company has responded late to market changes. Further care should also be taken on the leverage factor. Higher interest costs reduce the margins.
ROE: Mr. Buffet considers return on equity (ROE) as a better measure of annual performance as it takes into consideration the company's capital base. By looking at ROE, one is able to determine how efficient the company is at using both shareholder's capital and debt to produce income. He uses the modified version of what he called owner earnings. This is the cash flow available to shareholders, or the free cash flow to equity. It is defined as net income plus depreciation and amortization (i.e. adding back non-cash charges) minus capital expenditures minus additional working capital needs. This indicates the company's ability to generate cash for shareholders.
One-dollar premise is also an important measure. Buffet's goal is to select companies in which each rupee of retained earning is translated into at least one rupee of market value. If retained earnings are invested in the company and produce above average return, there would be a rise in the company's market value. It is far better to buy a wonderful company at a fair price than a fair company at a wonderful price. Buying a stock on basis of the price that is well below its book value; but without considering its margin, return-on-equity, owner earnings and profitability history may prove to be a bad choice.
Market rules: This is from the market perspective.
Value of a business: Buffet's rule is to purchase the business only when its price is at a significant discount to its value. The value of the business is determined by the estimated cash flows expected to occur over the life of the business discounted at an appropriate interest rate. Use of conservative estimates of earnings and the riskless rate, as the discount rate is always a safe bet. Though calculating the value of the business is not difficult, estimating the cash flows may create problems. Hence selecting businesses, which are simple to understand and stable would help. Further, having margin of safety would minimize risks.
One should stop trying to predict the direction of the stock market. Mr. Market is unpredictable and moody. If shares of good businesses are owned, market action on a day-to-day basis becomes inconsequential. What matters is the big picture trend of the company's operations, management and culture.
Markets: Of liquidity, and madness
You should have seen the smile on the anchor's face on a leading business news channel when the BSE Sensex crossed the 18,000 mark yesterday. People who looked the grimmest when the markets crashed recently were found screaming that the "great Indian bull market remains alive and kicking" and that "there is no looking back now" and were raising the toast to FIIs who bring in all those P-Note funds, the origin of which we are not sure of! People who believed that what happened in Delhi's power corridors impacted sentiment on Mumbai's Dalal Street claimed that the "markets have divorced from political uncertainty to a large extent."
So, are we going to 20,000 next on the Sensex, the figure that is mathematically less than 10% away? Considering the madness and liquidity, maybe! Considering the rush to buy those top 5-6 stocks that have contributed to nearly 60% of the latest rally, maybe! Considering that the US Federal Reserve might be lenient enough to cut interest rates further and thus lower the cost of borrowings for making emerging market investments, maybe!
Stock market history suggests that the actions of those who control the vast bulk of investments (institutional investors) guide the overall belief of where the markets are headed in the future - up or down. You do not know what they are up to. Neither do you know what Mr. Market has under his sleeves. In that case, the only choice we have is to guard ourselves if 'all hell were to break loose'! And the mantra is - Whatever Mr. Market does today, we need not follow suit.
Coming back to the current times, with the September quarter result season already underway, expectations have built up for them to be 'good' considering that there have been no real hiccups in economic growth numbers in the recent past and that the advance tax numbers have been pretty decent. The 'expectations' game will continue to lead the way stocks behave in the short to medium term.
What you, as an investor, can do is take this market volatility as a way to build a long-term portfolio of solid companies with credible managements. Try not following a herd mentality into buying anything that others are 'relying' on. Rather make your choice by way of doing your own groundwork, follow the same with conviction and discipline, and leave aside greed and fear. There is probably no other way of generating wealth from stock market investing. In the meanwhile, we shall continue to wonder if we are getting too arrogant about the sustainability of the 'India story'!
The rise & rise of Sensex: Journey from 7000 to 19000!
We bring to you the ET coverage on the milestones that the Sensex crossed, right from the day it touched the 7000 mark in 2005, till date. October 15, 2007
Amidst heavy buying by investors, the bull roared to breach the 19000 mark.
October 09, 2007
TERRIFIC TEENS: BSE MARKET CAP ZOOMS TO $1.4 TRILLION
At 18, you can blame it on the raging libido. Boys may have to make way for men as Sensex hits a record high of 18,280 on the back of eye-popping rallies in Reliance & Reliance. From here on, it’s no longer for the faint of heart. At the height of the dotcom mania in 1999-00, the easiest way to maximise returns was to buy into any stock with the suffix ‘Software’ or ‘Technologies’. Eight years on, the same seems to hold true for any stock with the prefix ‘Reliance’, given their baffling run-up over the past one month. As the benchmark logged its highest single-day gains in absolute terms on Tuesday to race past the 18,000-mark, factors like politics, valuations and earnings appear to have become non-issues overnight. The only thing that matters for now is liquidity and there is nothing to suggest the tide could reverse. In less than three weeks since the US Federal Reserve cut rates, FIIs have pumped in a net of $5.4 billion into Indian equities. According to provisional data, foreign funds bought over Rs 1,400 crore worth of shares on Tuesday. The euphoria was not restricted to India. Benchmarks in China, Australia, Hong Kong, South Korea, Singapore, Indonesia and Pakistan hit new peaks. The Morgan Stanley Capital International Asia-Pacific index rose 0.5% to 166.69, and appeared set to close at a new high. Eye-popping rallies in Reliance Industries, Reliance Energy and Reliance Communications lifted the 30-share Sensex to a record high of 18,327.42 intra-day. The index finally settled at 18,280.24, a gain of 788.85 points or 4.5% over the previous close. All three stocks hit new highs and have been the top gainers in the major indices over the past one month. RIL and Reliance Communications have gained around 30% each, while Reliance Energy has risen an astounding 80%. The three stocks have together contributed 42% to the latest 1,000-point rally in the Sensex. Bharti Airtel was the only other stock in the Sensex to touch a new high. In all, 60 stocks on the BSE hit fresh peaks.
The 50-share Nifty hit a peak of 5,348.70, before finishing the day at 5,327.25, up 242.15 points or 4.6% over the previous close. Market capitalisation of the BSE rose 4% to Rs 54.52 lakh crore, while those of the Mukesh Ambani group and Anil Ambani group stood at Rs 4.37 lakh crore and Rs 2.38 lakh crore respectively. “The pace of the rally has clearly taken everybody by surprise, and it is tough to take a call as the rise has been led by a handful of stocks,” says A Balasubramanian, CIO of Birla Sunlife Mutual Fund.
POLL THEATRICS Political developments have not dampened spirits on hopes the growth story will continue irrespective of the govt in power MONEY BAGS The market boom has made the Ambani brothers arguably the richest in the world with the clubbed fortune totalling $170b STORY IN NUMBERS Companies may report a 15-17% growth for the quarter. Capital goods, cement and telcos are expected to lead the story
Midcaps fail to keep pace with Sensex “There is too much money pouring in, and investors are chasing stocks which are showing high growth momentum right now. One can debate about valuations; nothing has really changed over the past one month,” he says, adding there were likely to be very few earnings surprises for the latest quarters. Second line shares were overlooked in favour of their frontline counterparts, with the BSE Midcap and BSE Smallcap indices rising 2.6% and 2% respectively. Investors in mid cap and small cap shares have not really benefited from the recent rally, point out market watchers. This could also be explained by the fact that the BSE Midcap and BSE Smallcap have risen 7% and 6% respectively over the last one month, compared with a 14% rise in the Sensex. Back home, there was high drama before the Sensex finally managed to cross the coveted 18,000-mark, as the index had come tantalisingly close to that level and then retreated by about 50-odd points. This happened a few times and one thought bears would be able to halt the marauding bulls at the doorstep of the psychological mark, as they had done twice last week. But once the index crossed 18,000, there was frantic short covering, which then powered the rally further. Real estate shares were the star performers of the day, with the BSE Realty Index climbing over 5%.With the exception of Wipro, which rose around 4% on talk of an earnings surprise, there was little excitement in the IT sector. Bellwether Infosys Technologies will be announcing its quarterly numbers on Thursday. “Given the current economic uncertainty (in the US), we believe it is unrealistic to expect Infy/Satyam to tweak up annual USD (US dollar) revenue guidance by more than 1-3%,” a Merrill Lynch preview note on the sector said. “Over 2% INR (Indian rupee)/USD appreciation since last quarter poses a risk to EPS. We see limited downside on beaten down valuations, but see a few triggers,” the note added. Traded turnover on both exchanges combined was around Rs 1.08 trillion.
September 26, 2007
THIS ONE’S LIKE YUVI’S SIXES
IT’S THE FASTEST 1000 The frenzy of the VICTORY march of DHONI’S DEVILS in Mumbai spilled over to the Street as the SENSEX kissed 17k
The festive spirit did not end with the immersion of Ganapati. On Wednesday, it boiled over to the streets of Mumbai and its financial district. A few hours after Dhoni's Devils stepped out of Sahar Airport, the Sensex touched the magical 17,000 number. It took Dalal Street just 5 days to travel 1,000 points—its fastest rally ever. And just as jubilant spectators cheer every scoring stroke, investors latched onto whatever good news came their way. Sceptics may call it an excuse to push the index to a new high ahead of Thursday's derivatives expiry, but they were in a minority. Suddenly, tech stocks, which were the whipping boys till Tuesday, became hot favourites. Why? Hopes that the rupee will soften as a result of RBI's latest announcements to allow more outflow sparked a rally in tech stocks, pushing the Sensex to a new high of 17,073.87 during the day. At the end of the day, RBI's measures may not be enough to rein in the rupee. But there were no takers for this. The bellwether index finally settled at 16,921.39. THE SENSEX WAS UP 21.85 POINTS OVER THE PREVIOUS CLOSE . Dealers attributed the volatility mainly to squaring up of positions in the derivative segment, ahead of the expiry of contracts on Thursday. The Nifty hit a new peak of 4,980.85, before ending the day at 4,940.50, up 1.65 points over the previous close. Market watchers say a correction is long overdue. But one reason why the market could still be rising is that renewed foreign fund flows are prompting many domestic investors to defer their decision to book profits.
Infosys, Satyam, TCS and Wipro were the flag-bearers of the IT sector, climbing 3-5%. But for the rally in key technology shares, the main indices would have closed in the negative, as index heavyweight Reliance Industries fell by over 3%, after an inexplicable surge over the last few weeks. Will the tech party go on? Wednesday’s rise is mainly attributed to short covering of positions in software stocks. The rupee closed a tad higher at 39.70. "We expect RBI to take a middle road approach: allowing some rupee appreciation but managing its pace, continuing to mop up liquidity and further encouraging capital outflows," said a Lehman Brothers note to clients.
July 6, 2007 GOING ON SIXTEEN
Two years ago when the Sensex touched 8,000 for the first time, Sebi whole-time member Madhukar had made an innocuous remark about the index touching 16,000. You said it: The comment drew widespread censure and ridicule.Censure because it is inappropriate for a regulator to crystal gaze the market and ridicule because 16,000 seemed an improbable level for the index anytime in the near future. In fact, the doomsayers (not ET) didn’t give it a chance-10,000 seemed realistic, but nobody quite imagined the Sensex vaulting to 15,000 in just two years. As the BSE benchmark crossed yet another historic mark on Friday, nothing seems impossible-20,000 and 25,000 levels roll off the tongue even before you can say Peter Lynch. Nobody who’s anybody in the market thinks of these as impossible milestones-the only question is how soon. The 30-share index on Friday hit an all-time high of 15,007 after starting the day on a weak note. It ended the day at 14,964, its highest closing level, and a gain of 102 points or 0.7% higher than the previous close. The 50-share Nifty ended at a new closing high of 4384.85, up 30.9 points over the previous close, after having peaked at 4,411 for the day. “It is different this time” is the usual refrain one hears during every bull run, which rarely is the case. But what sets the current bull run apart from the previous ones-other than the duration-is that a wider section of players have been sceptical of the rally. The lack of breadth in the market since May 2006 signals the lack of conviction among market participants. Still, the bulls have managed to surmount barriers like high valuations, rising interest rates and tightening liquidity. So far, the shareholders of blue chips never had it so good-nor did the promoters for that matter. Reliance Industries (RIL) topped the list with a market cap of $58.8 billion, followed by ONGC and Bharti Airtel with $46.5 billion and $40 billion (try converting that into crores!). NTPC, Reliance Communications, Infosys Technologies, TCS, DLF and ICICI Bank are few other top-rung companies which find place in the Hall of Fame. Of these, DLF and ICICI Bank recently completed their mega IPOs which received decent response from investors. Here’s a note of caution for the small investor looking to make a quick buck: there are indications that the bulls may be on a rampage again, but running out of breath this time. The Sensex took 146 sessions to cover the 1,000 point distance from 14,000 till 15,000. This is the highest since the index took 371 trading sessions to move up from 6,000 to 7,000. The market has adjusted to the steady rise in outstanding positions in the derivatives segment over the last few months. But brokers caution that the huge leveraged positions worth around Rs 60,000-65,000 crore has the potential to send the market into a tailspin. Fortune favours the brave-and to those who have the stomach to hang in there, not the brains to simply rake it in. For the time being, market players are not speculating as much on the upside from current levels. Everybody’s wondering when the correction, if at all, may set in.
Global factors hold key HDFC Bank country head, equities and private banking, Abhay Aima sums it up well: “At these peak levels, a pessimist would term the market overvalued while an optimist would at the best call it fairly valued. Results are around the corner. With interest rates at their peak and rupee rising so quickly, companies are likely to throw up different numbers than what we saw over the past few quarters. Let the market absorb these changes for a few days. Investors can wait for a 10 to 15 days before taking a call on their investments. Sound advise, if you ask us. The future’s not ours to see, as Doris Day sang in Que Sera Sera, but marketmen feel that global factors, rather than local, hold the key in the next few weeks. As the market heads into the quarterly earnings season, the mood appears to be cautious. “Upside of the Sensex remains capped due to expensive valuations and further interest rate rises,” brokerage house Merrill Lynch said in a note to its clients earlier this week. “A rising crude oil price could weigh on India’s ability to finance its current account deficit, particularly in light of an additional slowdown in global liquidity growth. FY08 (estimated) earning per share growth is set to slow further we approach a peak in commodity prices,” the note added. Another global investment powerhouse Morgan Stanley has estimated the fair value of the Sensex at 12,067, and is cautious on midcap stocks though these have been the drivers of the rally in the last couple of months. “We think smaller companies could suffer from negative operating leverage in the coming months as growth slows and, since the stocks of these companies trade on par with those of large companies, we continue to prefer stocks up the cap curve and remain very selective about midcaps. We are underweight cyclicals and (interest) rate sensitives, and overweight healthcare, energy, consumer staples, utilities and telecom,” the Morgan Stanley note to clients said. Listen to India Infoline CMD Nirmal Jain: “15,000 is just a high psychological mark. While the market looks good, it is accident-prone too. One should now invest for longer term and in liquid stocks. Stay away from sectors like technology, FMCG and pharma. On the other hand, sectors like power equipment, construction and capital goods look attractive. One can also place a contrarian bet on cement.” For the moment, take a deep breath and reflect on what you’ve made and where you’ve lost in the recent bull run. Enjoy your weekend, stay tuned to ET and Investor’s Guide and always remember: Greed ain’t good.
Dec 5, 2006: Sensex touched 14,000 mark The benchmark 30-share sensex briefly crossed the psychological 14,000-mark on Tuesday, while the 50-share Nifty continued to hold above the 4000-mark. But for most investors who have held on to their investments through the market meltdown in May and June, the returns may not be significant unless they happened to be in an 'elite' set of stocks that have performed over the last seven months, report Gaurie Mishra & Santosh Nair from New Delhi.
Here are some cold statistics. Of the 50 Nifty stocks, only 19 have given returns of 10% and above since May 11, 2006 (when the market had first peaked), while investors in 24 stocks have lost anywhere between 1% and 34%. Among the 50 stocks in the Nifty Junior index, investors lost between 1% and 40% in 26 while only 15 returned 10% or more. The situation gets worse as one moves into mid-cap and small-cap horizon. Of the 270 stocks in BSE Mid-Cap index, 68 - one-fourth the stocks in the index - have given 10% or more returns while on 164 stocks, investors lost between 1% and 64%. Investors have been hardest hit in the small-cap segment. Of the 484 stocks in BSE Small-Cap Index, only 80 have risen over 10% while 352 have fallen between 1% and 78%. "Mid- and small-caps are the stocks where most retail investors flock and they are yet to recover. This also explains why there is no euphoria over the landmark as retail investors have not participated in the rally," said ValueResearch CEO Dhirendra Kumar. Response of domestic MFs guarded While foreign institutional investors have been aggressive buying stocks over the past few months, the response of domestic mutual funds has been guarded. In the last two months alone, FIIs bought net stocks worth Rs 17,001 crore while local mutual funds have pumped in a net Rs 638.07 crore. “FIIs have been the biggest driver in strengthening the market. FII inflows have been around $8.5 billion YTD, which is an encouraging figure. Their participation has been far higher than the local participation. The only regret in the current market is that the local investors kept selling the equities and did not participate in the upturn,” said Nilesh Shah, CIO, Prudential ICICI Mutual Fund. Since fund houses offer a portfolio of schemes that tap various segments of the market and with most of the rally being concentrated on a few blue-chip stocks, the recent rally has brought little cheer. “The rally has been concentrated on a select few large-caps and therefore it depends a lot on stock selection,” said UTI CIO AK Sridhar. Worries about redemption pressures are also beginning to hit fund houses, which have increased their liquidity positions. “With Sensex touching such highs, there will be some redemption coming up, and to ease that, we have raised our liquidity position from 4-6% to 8-10%,” added Mr Sridhar.
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Oct 30, 2006: Sensex touched 13K Who said it’s an unlucky number?
A sense of having been left out, rather than of euphoria, is what one gets on the street as the 30-share Sensex crossed yet another milestone - the psychological 13,000-mark - on Monday. On paper, the index has rallied 47% from its low in June this year. But most brokers will tell you that barring a handful of foreign fund houses and some prominent traders, few investors have been able to capitalise on the rebound, which has been led by a handful of frontline stocks. Benchmark stock indices vaulted to new highs on Monday, driven by a heady cocktail of strong corporate earnings, a rapidly growing economy and relatively stable crude oil prices. The Sensex ended at its highest closing level of 13024.26, a gain of 117.45 points or 0.9%. The 50-share Nifty hit a new high of 3776.05, eclipsing the previous record of 3774.15 touched on May 11. It finally settled at 3769.10. Marauding bulls defied the weak trend globally, which was sparked off by weak US GDP growth figure, pointing to a slowdown. Back home, the mood is upbeat even as some expect that the RBI may raise interest rates by 25 basis points in its mid-term credit policy on Tuesday. Market watchers said sentiment could be affected only if the hike is more than 25 basis points, which is unlikely. Higher interest rates drive up borrowing costs for corporates as well as the retail consumer, who could then cut back on their investments and spending, in turn causing a slack in domestic demand. Even as the major indices are moving into newer orbits, the market is sorely lacking in breadth. On Monday also, 1,406 stocks ended lower, compared with 1,133 gainers. The BSE Mid cap index closed at 5,422.63, up 0.49%, while the BSE Small Cap index shed 0.6% to close at 6,483.80. These indices - an indicator of retail interest in the market - are still 11% and 18% away from their alltime highs touched in May. Among frontline shares too, it is a handful of stocks that have made money for investors over the last five and a half months. In the Nifty, 27 out of 50 stocks, including heavyweights like HLL and ONGC, have delivered negative returns since mid-May. Market capitalisation on the BSE inched up to Rs 33.80 lakh crore from Rs 33.60 lakh crore on Friday. But it is still lower than Rs 34.35 lakh crore achieved on May 11. But not everyone is worried. “India is a bottom up story now, the companies that are performing are being rewarded by investors,” said S Mukherjee, CEO and MD, ICICI Securities. On the lack of breadth in the market, Mr Mukherjee said, “The fact that only selective stocks are doing well shows the maturity of the market. I would have been worried if each and every stock were rising.” Some other players are sceptical of the market sustaining at these levels. Including provisional figures for Monday, foreign funds have net pumped in around Rs 29,000 crore since the beginning of ‘06, of which around Rs 7,000 crore has come in October alone. Merrill Lynch expects the Sensex to slip to 11500 by December ‘07.
April 20, 2006: Sensex touches the 12K mark M-cap equals GDP level at 32,00,000 cr
India Inc may be tearing its hair out over quotas and oil prices may have breached the $74 mark, but Indian markets continue to defy gravity. In the current week, a clutch of better-than-expected results has further boosted the animal spirits. In what is rapidly becoming a routine affair, the 131-year-old BSE on Thursday crossed yet another milestone - the fastest so far -when it breached the 12,000-point mark, backed by strong corporate earnings, higher liquidity and robust economic growth. Sensex leapfrogged from 11,000 to 12,000 points in just 16 trading sessions, to end 1.2% up at 12,039.55. The number of trading sessions are based on the closing value of the index. Sensex had earlier taken 29 sessions to travel from 10,000 to 11,000 points. NSE Nifty also surged 1% to end at 3,573.50 points. The reasons are not hard to find, say market participants. “The index has been driven by the strong flow of liquidity,” said Rahul Rege, senior VP at Mumbai-based brokerage SSKI. “Earlier, it was based on the expectations that (corporate) results would be great...and by the first few that we’ve seen, companies are more than matching those expectations,” he added. Although, Sensex has been beaten to the 12,000 mark by various global indices, the time it took to breach this milestone has been one of the fastest. Traders point to the fact that foreign investors, buoyed by a booming economy, have chosen India as one of their top investment destinations.
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March 21, 2006: 11K: Ride the bullet train There is increasingly an overwhelming aura of inevitability about the onward march of the Indian bourses. Sensex these days breaks records with the same casual nonchalance with which Michael Schumacher used to win races. Sensex’s surge on Monday and part of Tuesday may have been prompted by PM Manmohan Singh’s announcements on capital account convertibility. On Saturday, Prime Minister Manmohan Singh hinted at moving toward a free float of the rupee and on Tuesday, the BSE responded by crossing the 11,000 mark in a lifetime intraday high. The new trading high was reached 29 days after Sensex entered the elite 10,000 club on February 6. Only Nikkei, Hang Seng and Dow Jones can boast of being above 10,000.
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Since full convertibility is expected to attract more foreign money and also allow local companies to tap foreign debt markets more easily, it is evident that the move will encourage investors and boost the confidence of the markets. At present, India’s overseas corporate borrowing for the current fiscal year is limited to $15 billion with foreigners restricted from holding more than $1.5 billion in debt and $2 billion in central government bonds. They also cannot own more than 5% in a bank without prior permission from RBI. On Monday, RBI said it was constituting a panel to thrash out the contours for full convertibility. Although the index later ended lower with investors wanting to book gains, participants said it was evident the markets had sent out a message - that the growth story of Asia’s third largest economy is intact and that liquidity flows into the bourses would continue to remain firm. After hitting a high of 11,017.25 points in mid-afternoon trade, Sensex lost 35.91 points to close at 10,905.20, fluctuating 153 points, with most of the volatility coming in the last hour of trading. The rise in share prices was partly attributed to a fall in oil price. The US April crude oil prices plunged 3.7% or $2.35, to settle at $60.42 a barrel, on the New York Mercantile Exchange due to ample US inventories. “It’s (the rise) is a reflection that the underlying strength of the economy will sustain the current momentum (in equities),” said Prudential ICICI MD Pankaj Razdan. “The liquidity looks good and there are various sectors that mutual funds would be interested in, such as cement, IT and auto.” Foreign portfolio investors have invested $1.01 billion in March alone, and $3.5 billion in 2006, compared with $10.7 billion in calendar 2005. India received $4.34 billion in foreign direct investment between last April and January 2006 with government ministers putting the figure at $10 billion for the fiscal year that ends on March 31 2006.
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Feb 7 th 2006: Sensex crosses the 10K barrier Global investment guru Marc Faber was at Dalal Street today, interacting with the market fraternity on prospects of the Indian stock market. His word of caution, however, could not dampen the spirits, as investors continued to celebrate, lifting the sensex to close above the 10K mark for the first time in history.
According to brokers, mood remained bullish on the back of strong FII inflows and robust data. The government, today, forecast a GDP growth of 8.1% in current year, with manufacturing and the agriculture sectors estimated to grow at 9.4% and 2.3% respectively. Brokers say there will see be short term momentum with fund flows expected to continue in the next few days. Brokers, however, are cautious over the sharp uptrend in the market, which, they fear will drive valuations to expensive levels. They also said yesterday’s 238-point rally was contrary to expectations as it came despite negative news flow about a fresh tussle between Ambani brothers over transfer of ownership of the four companies demerged from erstwhile RIL. Dec 10, 2005: Closes at 9K Dalal Street celebrated Sonia Gandhi’s birthday with a bang. After coming close many times and breaching it once intraday, the sensex on today finally closed above the 9,000-mark, led mainly by a general enthusiasm after a court approval to Reliance Industries’ de-merger proposal.
While market players traded theories on reasons for the sensex’s rise, most of them credited it to the Bombay High Court approval for the Reliance demerger. “Although the market opened strong, news of the demerger approval led the sensex to rise sharply,” said Pioneer Intermediaries’ Sandip Shenoy. “After that it was all-round buying that boosted the market to beyond the 9,000 mark. I am of the view that there is an underlying bullish trend and this will sustain,” he added. The delay in approving the demerger had in fact led the market to fall last week. Although Reliance shareholders had already cleared the demerger plan, objection by one shareholder. Ahmedabad-based chartered accountant Kalpesh Bharatkumar Mankad contended that the demerger was a family arrangement rather than a business separation. Under the demerger plan, Mukesh Ambani would be responsible for Reliance Industries and IPCL, while sibling Anil Ambani would look after Reliance Energy, Reliance Infocomm and Reliance Capital. The news led the 30-share sensex to rise 161 points or 1.8% to end at a lifetime high of 9,067.28 points. It hit a high of 9,080.76. the Nifty index spurted 50 points to close at 2,756.45. “The index has crossed the threshold level of 9,000 and while the trend remains bullish, we’ll have to watch closely the global liquidity and the emerging markets positions,” said IL&FS Investsmart research head R Sreesankar. Indian equities market has seen an unprecedented bull run in the past one year, mainly due to a surge in foreign portfolio investment which has so far totalled $8.91 billion, compared to $8.4 billion in the last year. The Reliance group companies were in the forefront, with Reliance Industries rising 2.1% to Rs 863.85.
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Sept 8, 2005: Mt Everest 8848; Sensex 8053 What’s gravity? Dunno. What’s vertigo? Don’t care. Bulls, did you say? More like mountain goats. We’re running out of historic metaphors, but the sensex just doesn’t seem to notice that it’s doing a death-defying trapeze act. Call it the day of the Indian tiger, if you will. Vaulting over hurricanes, skipping on boiling oil, the BSE benchmark index triumphantly waved to the world from top of the global skyline at 8,000.
The sensex vaulted past the 8,000 mark today as local and foreign investors pinned hopes on India Inc’s strong growth prospects and shrugged off concerns about surging crude oil and the global economic uncertainty wrought by Hurricane Katrina. The benchmark index, Asia’s secondbest performer so far in 2005, soared 105 points to 8,052.56 in the course of its history-making performance and capped a year of spectacular successes for the 19-year-old index. The NSE’s Nifty rose 1.06% to a new high of 2,454.45 led by BPCL, Bajaj Auto and HDFC. In July last year, the sensex had just limped past 5,000 still smarting from the battering it received on May 17 after the general election. Investor confidence was low and dark whispers about the Left parties’ influence on economic reforms kept the bulls at bay and the bears all charged up.
But in a series of stunning rallies that has confounded ordinary investors and pundits alike, the sensex added nearly 3,000 points since then with the last 1,000 points coming in just 55 days, the third fastest 1,000 point gain in its history. “The fact that the sensex has reached 8,000 shows the economy’s strong fundamentals. The key is to ensure that this is sustainable and the reform process continues on track,” said Kumar Mangalam Birla, chairman, Aditya Birla group. Investor wealth today soared to Rs 21,77,216 crore, up Rs 3,68,083 crore since June when the sensex crossed 7,000. “We are in a long bull phase and could see the market moving higher. The fact is India is getting re-rated and is becoming an important part of the emerging markets portfolio,” says Hemendra Kothari, chairman of DSP Merrill Lynch. "I personally feel that results for most corporates will be excellent this quarter. The PEs are not exceptionally high compared to other Asian markets. While there is no need for concern, one has to be careful about mid-cap stocks which can't be sold easily. Otherwise, I don't see any downside," adds HDFC chairman Deepak Parekh. The biggest drivers of the rally include Reliance Industries, which ended 1.29% up at Rs 738.45 on Thursday. It touched a 52-week high of Rs 760 on August 3.
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Bears rule the world RIL contributed about 113.62 points to the rally. ICICI Bank chipped in with 105.86 points followed by Bharti Tele-Ventures with 99.07 points. While ICICI rose 3.7% to Rs 505.95 on Thursday, Bharti climbed 1.62% to Rs 330. The sensex has climbed 52% since September last year. It has risen 20.56% beating the MSCI emerging markets index’s gain of about 11.8%. A look at the performance of leading indices around the world in the same period put things in perspective. China’s stock markets have fallen about 8.1% in local currency terms in 2005 so far, according to figures available with The Economist. Egypt has climbed 72%, South Korea has risen 20.9% while Taiwan has fallen 1.7%. Among developed markets, the UK’s FTSE has risen 10.0%, the Dow Jones Industrial Average (DJIA) has fallen 2.8%, while the S&P 500 has eked out a 0.7% gain. The World MSCI index has risen by about 2.2% since January this year. Surging foreign fund flows have been a major driver of sentiment. FIIs pumped in more than Rs 12,000 crore in July and August and their total investment so far this year is about Rs 34,091 crore or about $7.8 bn. The total inflow into equities for the whole of 2004 was about $8.5 bn. Experts say that number would be surpassed and the inflows could rise to about $10 by the end of this year.
doweshowbellyad = 0;
Again, a comparison can put things in perspective. Taiwan has so far received about $12 bn, Indonesia has got about $4bn, while South Korea has received about $4 bn. India’s booming economy, rapid industrial growth and robust corporate earnings means that offshore funds looking for growth and capital appreciation make a beeline to the country. For instance, the number of FIIs registering to do business in the country has risen to 764 at the end of August from 685 at the end of 2004/05. The economy is slated to grow 6-7% in 2005/06 after rising 6.9% in 2004/05 and 8.5% in 2003/04. This would still make India one of the fastest growing economies of the world. Industrial production for June 2005 rose 11.7% the second highest in emerging markets behind China’s 16.1%. Not everybody who’s anybody in the market is so sanguine. Rampant crude prices remain a concern especially as experts fear India along with other Asian markets could be more vulnerable because oil usage intensity is very high.
doweshowbellyad = 0;
June 21, 2005: D-Street Volley Clears 7k Bar The sensex soared past the 7,000 mark today defying widespread expectations of a downside, as gains by big cap companies, such as ONGC and HLL, boosted sentiment and Reliance Industries continued to shine. Propelled by strong inflows from new FIIs, who placed orders for a basket of frontline shares, the sensex rose 1.3% to close at a record 7,077 after rising as high as 7,084.
If yesterday was the day of the Reliance Group on bourses, today belonged to large caps - Reliance Industries, ONGC, Gujarat Ambuja, Infosys Technologies, Hindustan Lever, Maruti Udyog and ICICI Bank among others. The trading volume was brisk at 223 million shares but the market breadth stayed negative as losers at 1,359 edged out gainers at 1,137. A pointer to things ahead perhaps. The NSE Nifty rose 1.2% to 2,170. The CNX Midcap 200 index rose 0.3%. It has underperformed the frontline indices for a week now. The Nifty June futures closed at Rs 2,148, a 22 point discount to the underlying index. The gap was 25 points yesterday. This means that a few players cut their short positions in the futures market after booking profits in the cash market. Market players say that despite rising oil prices to around $60 per barrel, and a scanty monsoon so far, there is no fear of a dramatic fall on the Street. “There is caution but very little fear,” a CEO at a leading institutional brokerage said. The confidence on the Street is largely driven by the set of new investors taking a fresh exposure to India. Prospects of a strong domestic demand growth and consistently high return on equity by leading companies, India is fast emerging as a favoured destination for foreign investors from the US to East Asia. Japanese investors have injected over $1 billion in Indian equities and new India funds by Nomura Asset Management and Nikko Cordial are keeping the order flow on from the East. As if this is not enough, retail investors in Taiwan and South Korea are also subscribing to new India funds in their markets. The Comprehensive Economic Cooperation Treaty with Singapore is expected to bring further new money. The presence of the central bank of Norway, Norges Bank, as an FII is also a key development, according to players.
P-NOTES
Participatory notes and the individual investor
VIVEK MANI
In the first four days of the week gone by, foreign institutional investors pumped in Rs 8108 crores (over $2 billion) into Indian stockmarkets, driving the BSE Sensex up from last week's closing level of 17,773, to 18,814 and almost touching the 19K mark. On October 9 alone the Sensex vied with the proverbial cow that jumped over the moon, to vault a phenomenal 788 points! At the end of the week, it paused for breath and, thankfully, lost 395 points, to end the week at 18,419, up 646.
The top 5 contributors were L&T, Reliance Industries, ONGC, Reliance Communication and Bharti, which, combined, added 428 points. Infosys was the major drag, pulling down the Sensex 43. Given the weakness of the dollar, in which about 60 per cent of its billing happens, the increase in Q2 topline by 8.8 per cent and bottomline by 1.9 per cent, in rupee terms, was commendable, but not enough for investors wishing to see 6 sixes in an over from it!
Whilst FIIs were pumping in over $ 2billion, domestic mutual funds were net sellers. The RBI for one, and this columnist, for another, is a bit skeptical about the true identity of money behind the FII figures. Using Participatory Notes (PNs) it is possible for individuals to route funds through registered FIIs as scrutiny and verification are more benign than for domestic investors. Given, also, the fact that gains can be virtually free of tax, it is not surprising that the PN route becomes an attractive conduit for investment into favoured markets. The RBI is, rightly, worried, and wishes for a stop on fresh PNs, but the Finance Ministry is unwilling to do that.
Investors are also blasé about political crises, one that could lead to early elections and the sort of uncertainty that investors dread. The rally, of course, could have been a wonderful source of funding for such. It is only at the end of the week that the knees of
Congress leaders grew weaker than unformed jelly in confronting the Left. It gave higher weightage to political survival than to the long term energy security for the country. In the case of Indian politicians, long term is up to the tip of their nose!
This myopic view hits companies, and thus the economy. Oil marketing companies are first made to suffer losses by being forced to price petro products below what the market would pay. They are later partially compensated (42 per cent in this case) by issuance of oil bonds, which the Government did last week to the extent of Rs 23,500 crore. This is done with a view to artificially containing the fiscal deficit. Oil marketing companies such as IOC, HPCL and BPCL suffer the losses with practical silence; the government is, after all, the majority owner. Their stocks represent intrinsic value at beaten down prices, though when that value will be realised is anybody's guess. Political wimps will not be able to change such foolish policies.
In other news, the government is likely to formally approve the pricing for the KG gas. Yet, legal issues still remain to be sorted.
Reliance Industries has sought a 3-year drilling holiday in view of the severe shortage of oil rigs, which it ought to get. It, alongwith other exploration companies, have committed to conduct oil and gas recoveries at a certain pace which the shortage of rigs prohibits.
The market has been moving up on increased liquidity, part of it also liquidity diverted from lending in the sub-prime mortgage market to earn higher returns. The sectors that have driven the market are also facing different sets of problems. The IT sector is coping with a weakening dollar. The telecom sector is hampered by spectrum shortage. The auto sector faces higher interest costs on EMIs and tougher emission standards (rightly so). In the petroleum sector prices are controlled. The capital goods sector has little spare capacity.
Yes, the weekend correction was necessary and yes, should there be a continuation of it next week, as one hopes, it would make the market a healthier place. And yes, RBI is right and if, indeed, PNs are a source of concern, it is better to tackle the problem sooner rather than wait for the markets to reach such heights the fall from which would be far more damaging. RBI Governor YV Reddy is right to sound a caution. Is Chidambaram ready to look into it? Or will politics again prevent sensible action?
What are (Participatory Notes) P-Notes?
P-Notes are financial instruments or contracts that are issued by FII’s to investors and hedge funds who wish to invest in India stock markets, but who are not registered with SEBI (Securities and Exchange Board of India).
This is similar to American Depository Receipt; Though the US investor buys the Indian stock by paying US dollars, he never gets the stock credited into his demat account. Instead it remains as depository share, which can be traded like a stock.
How are P-Notes regulated?
According to the statistics available at the SEBI web site, there are 109 registered FII’s as on today, of which 34 Issue P-Notes. FII’s who issue/renew/cancel/redeem P-Notes need to report details about the P-Notes on a monthly basis not later than 7 th of the following month. FII’s investing/subscribing to the P-Notes -- are required to report on quarterly basis.
SEBI has given some guidelines as to who can invest in P-Notes:
• Company incorporated according to the local laws in the country of registration
• Financial institution, such as bank which is monitored by a central bank
• Securities or futures commission
• Member of a recognized stock exchange
According to SEBI Chairman M Damodaran, 25 to 30 per cent of the foreign investment is through issuance of participatory notes.
Proposal by SEBI:
On October 16, the SEBI made a proposal to tighten the regulations for P-Notes. On October 17, trading at the Indian stock markets were halted few minutes after opening as the Nifty plunged to hit the 10% lower circuit limit. This was only the third time trading was halted for one hour in the last 3 years. After resumption, the Nifty gradually recovered from the day’s low and closed at 5559, losing about 1.92%. For those who are interested in candlestick patterns, a “hammer” was formed today at the top of an uptrend.
The Finance Minister, Palaniappan Chidambaram clarified on television channels that SEBI would attempt to moderate foreign fund inflows. The SEBI Chairman said later that “the proposal to bar sub-accounts from issuing participatory notes will help make the system more efficient and transparent.” He was also of the opinion that if an entity has exposure in stocks, the pressure on the market would be less in the event of a downtrend since stocks need not necessarily be sold; but exposure in derivatives, with stocks or indices as underlying assets would be critical in case the market falls, more selling may take place to minimize the losses.
Business Standard has reported that HDFC has the highest P-Notes holding (14.2 per cent) followed by ICICI Bank (9.1 per cent).
The P-Notes will not be banned, however. The FII’s do some proprietary trading and they issue the P-Notes within themselves. By moderating the P-Notes, FII’s will be required to register with SEBI so that their underlying assets can be estimated.
Are the P-Notes being discussed for the first time?
No. The SEBI investigated P-Notes in 2001 stock scam and based on the recommendations of a joint parliamentary committee on the stocks scam, the government banned few overseas corporate bodies from operating in the primary and secondary markets.
In 2003, a technical committee with representatives from SEBI, Reserve Bank of India and Finance Ministry was set up to look into the P-Notes issue.
The Hindu Businessline reported in 2005 that the RBI was concerned about the FII fund inflow through P-Notes.
Is this really a crisis to Indian stock markets?
No. FII money is certainly needed for the Indian stock markets. Without FII’s one could not have thought about the Sensex reaching 19000. With more FII’s certainly the indices are poised to reach higher levels.
However, the regulators’ concern about the genuiness of such inflows is certainly a valid one. SEBI has all the interest and authority to add, amend or modify regulations to the investing and trading procedures at Indian stock markets. So, their action too, should be welcomed, since this will protect the interests of the investors.
Where does the Indian retail investor stand?
The Finance Minister said, “Do your homework or trust someone who can do it for you”. In a market that has been rallying non-stop, definitely retail investors are at a risk since their money is hard earned and they don’t possess the flexibility the FII’s have.
We have mentioned in our weekly and monthly reviews that the market appears to violate the technicals and hence the investors need to be cautious. Though the P-Notes issue is an old one, the market has overreacted to it.
SEBI justifiably nervous of Participatory Notes
Markets have pronounced their judgment. After the mayhem in the stock markets last week, there’s no doubt they’ve condemned the Securities and Exchange Board of India’s (SEBI) move to regulate participatory notes (PNs). And they’ve done it in the way they know best, by voting with their feet to pull the Sensex down 7.83% (1,492 points) in just three trading sessions after the regulator made its draft proposal on regulating participatory notes public. But markets are fickle creatures. So while market reaction is important, it is seldom a good measure of long-term policy soundness. Hence it would be inadvisable to pay undue attention to it.
The more important question is how posterity will judge the regulator. And here the consensus opinion, once the hullabaloo has died down, will be far more forgiving. The reason is that SEBi's proposals are in the long-term interests of the market. To understand why it is necessary to look beyond and see why is the Indian stock market out of bounds to PN-holding investors. Is it cussedness on the part of the authorities? Red tape? No. Because if that were so, we would not have more than 1,500 FIIs and close to 3,500 sub accounts registered with FIIs. Rather, the reason why some investors resort to the PN route is because they are unwilling to comply with simple regulatory requirements.
Today, any entity regulated overseas can register as an FII in India. There are no onerous obligations. All it entails is some minimal disclosures about track record, top five investors and other such details that investors should normally not have any problems disclosing. The basic distinction between funds that come through the PN route and through FIIs, therefore, is that there is no audit trail in the case of the former. There is no knowing either the quality of the money or the ultimate beneficial interest. Which is why when FIIs and PNs come to dominate the market—75% of the floating stock is reportedly now in FII hands, with as much as 52% of the assets under custody of FIIs being in the form of PNs—there is reason for concern.
Like the dog that did not bark in Silver Blaze, Sherlock Holmes’ story of the racehorse that disappeared, the existence of a class of investors unwilling to comply with simple disclosure requirements is reason to doubt its motives. More so when the rise in the number and amount of PNs outstanding has gone in tandem with the ‘excessive’ rise in the Sensex. Admittedly, it is always difficult to say at what point a market is over-valued. But there’s no denying the Sensex has run up faster than warranted by historical trends.
In such a scenario, any regulator would have reason to be anxious and want to know more about the players in the market that is all. In this, SEBI is not unique. The US Securities and Exchange Commission is just as nervous of hedge funds. And if it has not acted as yet, it is only because US markets are highly developed and can deal with the large capital flows.
But as the subprime crisis has shown, even deep, well-developed markets can be laid low, especially when there is lack of transparency. So imagine how much more havoc could be caused by lack of transparency in the Indian context. Merely saying the market reflects underlying fundamentals does not make it so. The reality is that the best of markets is not immune to sudden surges of capital, inflows or outflows. Each extracts a price—inflows, in terms of a sharp appreciation of the domestic currency or if that is a no-no, of a surge in liquidity that can be as damaging. Sudden outflows, however, are far more destabilising. They can set economies back by years, as the East Asia experience showed. Do we want to go the same way? The answer must be an unequivocal ‘no’.
Sebi clamps down on participatory notes
BS Reporter in Mumbai BS October 17, 2007 08:53 IST
The Securities and Exchange Board of India (Sebi) on Tuesday proposed to tighten the rules for purchase of shares and bonds in Indian companies through the participatory note (PN) route.
The move is aimed at arresting the surge in foreign inflows through PNs, which are offshore derivative instruments that allow foreign investors to invest indirectly in a country's stock market (see table), which has seen the benchmark BSE Sensex zoom more than 5,000 points in two months.
The market regulator has proposed that foreign institutional investors (FIIs) and their sub-accounts cannot issue or renew PNs with underlying as derivatives with immediate effect. They have to unwind their current position within 18 months.
Sebi Chairman M Damodaran told Business Standard that the proposals were against PNs but not against FIIs. The procedures for registering FIIs were in fact being simplified, he said.
Sebi has also proposed a ban on all PN issuances by sub-accounts of FIIs with immediate effect. They also will be required to wind up the current position over 18 months, during which period the capital markets regulator will review the position from time to time.
PiNned down
The problem What Sebi proposes
* 34 FIIs/sub-accounts issue participatory notes (PNs) now against 14 in March 2004. * FIIs & sub-accounts will not issue/renew PNs issued against derivatives. They have to wind up their current positions over 18 months
* The notional value of PNs has zoomed from 20% of FII/sub-account assets in March 2004 to 51.6% in August 2007 ?? Rs 31,875 crore to Rs 3,53,484 crore * Sub-accounts can't issue PNs; have to wind up their current positions over 18 months
* The value of PNs with underlying shares as derivatives is Rs 1,17,071 crore, around 30% of total PNs. * An incremental rate of 5% for issue of PNs for FIIs with less than 40% of assets in PNs
* The notional value of PNs, excluding derivatives as underlying shares, as a percentage of total FII/sub-account assets, stood at 34.5% at the end of August 2007. * FIIs with more than 40% of assets in PNs will issue PNs only against redemption/cancellation
Source: SEBI
Sebi has also proposed an incremental rate of 5 per cent for issue of PNs for FIIs with less than 40 per cent of assets in PNs. Those with over 40 per cent of assets in PNs can issue PNs only against redemptions or cancellations.
PNs are issued by Sebi-registered FIIs that do not want to disclose their identity, or those who are in a rush to buy stocks and derivatives without waiting for Sebi registration.
The proposals, which have been framed in consultation with the government, will be "implemented urgently", after receiving comments from market participants within four days. The Sebi board is meeting on October 25 to take a final decision.
The big five FIIs - Morgan Stanley, Merrill Lynch Capital Markets Espana, Citigroup Global Markets, Goldman Sachs and CLSA Merchant Bankers - account for 60 per cent of PNs issued in India.
The Sebi release, issued late this evening said, "The year-on-year increase in PNs, the anonymity that they provide to investors and the copious inflows into the country from foreign investors have been engaging the attention of the government."
"There is an unprecedented surge of liquidity in the emerging markets. And apart from Brazil, the Indian equity markets are favoured the most by foreign institutional investors. However, it would be too premature to make any judgments now," said head of Korean mutual fund Mirae Asset Management Arindam Ghosh.
The proposed restrictions on participatory notes (PNs) are expected to trigger a sell-off by hedge funds, and other short-term players, experts said. As a result, the Sensex, which has risen nearly 35 per cent in the last two months, may also feel the heat when the markets open on Wednesday morning.
Indications from the kerb (unofficial deals) and the fall in Indian share prices in the US markets suggest that the NSE's Nifty Index may open at a discount of at least 150 points from Tuesday's closing of 5,668.05, said dealers.
At 9.45 pm, Dr Reddy's Lab ADR was down 5 per cent to $15.25, HDFC Bank was down 6 per cent to $111.34, ICICI Bank nearly 4 per cent to $53.32 and Infosys was down 5.8 per cent to $48.02.
Hedge funds, which account for at least 30 per cent of PN issuance, may be the first ones to exit, said dealers.
When restrictions were proposed on PNs on January 22, 2004, the Nifty closed 3 per cent lower to 1,770.
Former NSE Chairman R H Patil said, "The market is being manipulated right now and a bubble was growing rapidly. Although the Sebi proposals are late, they would help avoid a greater disaster. It is very important to know the identity of foreign investors, who have been manipulating this market."
VIVEK MANI
In the first four days of the week gone by, foreign institutional investors pumped in Rs 8108 crores (over $2 billion) into Indian stockmarkets, driving the BSE Sensex up from last week's closing level of 17,773, to 18,814 and almost touching the 19K mark. On October 9 alone the Sensex vied with the proverbial cow that jumped over the moon, to vault a phenomenal 788 points! At the end of the week, it paused for breath and, thankfully, lost 395 points, to end the week at 18,419, up 646.
The top 5 contributors were L&T, Reliance Industries, ONGC, Reliance Communication and Bharti, which, combined, added 428 points. Infosys was the major drag, pulling down the Sensex 43. Given the weakness of the dollar, in which about 60 per cent of its billing happens, the increase in Q2 topline by 8.8 per cent and bottomline by 1.9 per cent, in rupee terms, was commendable, but not enough for investors wishing to see 6 sixes in an over from it!
Whilst FIIs were pumping in over $ 2billion, domestic mutual funds were net sellers. The RBI for one, and this columnist, for another, is a bit skeptical about the true identity of money behind the FII figures. Using Participatory Notes (PNs) it is possible for individuals to route funds through registered FIIs as scrutiny and verification are more benign than for domestic investors. Given, also, the fact that gains can be virtually free of tax, it is not surprising that the PN route becomes an attractive conduit for investment into favoured markets. The RBI is, rightly, worried, and wishes for a stop on fresh PNs, but the Finance Ministry is unwilling to do that.
Investors are also blasé about political crises, one that could lead to early elections and the sort of uncertainty that investors dread. The rally, of course, could have been a wonderful source of funding for such. It is only at the end of the week that the knees of
Congress leaders grew weaker than unformed jelly in confronting the Left. It gave higher weightage to political survival than to the long term energy security for the country. In the case of Indian politicians, long term is up to the tip of their nose!
This myopic view hits companies, and thus the economy. Oil marketing companies are first made to suffer losses by being forced to price petro products below what the market would pay. They are later partially compensated (42 per cent in this case) by issuance of oil bonds, which the Government did last week to the extent of Rs 23,500 crore. This is done with a view to artificially containing the fiscal deficit. Oil marketing companies such as IOC, HPCL and BPCL suffer the losses with practical silence; the government is, after all, the majority owner. Their stocks represent intrinsic value at beaten down prices, though when that value will be realised is anybody's guess. Political wimps will not be able to change such foolish policies.
In other news, the government is likely to formally approve the pricing for the KG gas. Yet, legal issues still remain to be sorted.
Reliance Industries has sought a 3-year drilling holiday in view of the severe shortage of oil rigs, which it ought to get. It, alongwith other exploration companies, have committed to conduct oil and gas recoveries at a certain pace which the shortage of rigs prohibits.
The market has been moving up on increased liquidity, part of it also liquidity diverted from lending in the sub-prime mortgage market to earn higher returns. The sectors that have driven the market are also facing different sets of problems. The IT sector is coping with a weakening dollar. The telecom sector is hampered by spectrum shortage. The auto sector faces higher interest costs on EMIs and tougher emission standards (rightly so). In the petroleum sector prices are controlled. The capital goods sector has little spare capacity.
Yes, the weekend correction was necessary and yes, should there be a continuation of it next week, as one hopes, it would make the market a healthier place. And yes, RBI is right and if, indeed, PNs are a source of concern, it is better to tackle the problem sooner rather than wait for the markets to reach such heights the fall from which would be far more damaging. RBI Governor YV Reddy is right to sound a caution. Is Chidambaram ready to look into it? Or will politics again prevent sensible action?
What are (Participatory Notes) P-Notes?
P-Notes are financial instruments or contracts that are issued by FII’s to investors and hedge funds who wish to invest in India stock markets, but who are not registered with SEBI (Securities and Exchange Board of India).
This is similar to American Depository Receipt; Though the US investor buys the Indian stock by paying US dollars, he never gets the stock credited into his demat account. Instead it remains as depository share, which can be traded like a stock.
How are P-Notes regulated?
According to the statistics available at the SEBI web site, there are 109 registered FII’s as on today, of which 34 Issue P-Notes. FII’s who issue/renew/cancel/redeem P-Notes need to report details about the P-Notes on a monthly basis not later than 7 th of the following month. FII’s investing/subscribing to the P-Notes -- are required to report on quarterly basis.
SEBI has given some guidelines as to who can invest in P-Notes:
• Company incorporated according to the local laws in the country of registration
• Financial institution, such as bank which is monitored by a central bank
• Securities or futures commission
• Member of a recognized stock exchange
According to SEBI Chairman M Damodaran, 25 to 30 per cent of the foreign investment is through issuance of participatory notes.
Proposal by SEBI:
On October 16, the SEBI made a proposal to tighten the regulations for P-Notes. On October 17, trading at the Indian stock markets were halted few minutes after opening as the Nifty plunged to hit the 10% lower circuit limit. This was only the third time trading was halted for one hour in the last 3 years. After resumption, the Nifty gradually recovered from the day’s low and closed at 5559, losing about 1.92%. For those who are interested in candlestick patterns, a “hammer” was formed today at the top of an uptrend.
The Finance Minister, Palaniappan Chidambaram clarified on television channels that SEBI would attempt to moderate foreign fund inflows. The SEBI Chairman said later that “the proposal to bar sub-accounts from issuing participatory notes will help make the system more efficient and transparent.” He was also of the opinion that if an entity has exposure in stocks, the pressure on the market would be less in the event of a downtrend since stocks need not necessarily be sold; but exposure in derivatives, with stocks or indices as underlying assets would be critical in case the market falls, more selling may take place to minimize the losses.
Business Standard has reported that HDFC has the highest P-Notes holding (14.2 per cent) followed by ICICI Bank (9.1 per cent).
The P-Notes will not be banned, however. The FII’s do some proprietary trading and they issue the P-Notes within themselves. By moderating the P-Notes, FII’s will be required to register with SEBI so that their underlying assets can be estimated.
Are the P-Notes being discussed for the first time?
No. The SEBI investigated P-Notes in 2001 stock scam and based on the recommendations of a joint parliamentary committee on the stocks scam, the government banned few overseas corporate bodies from operating in the primary and secondary markets.
In 2003, a technical committee with representatives from SEBI, Reserve Bank of India and Finance Ministry was set up to look into the P-Notes issue.
The Hindu Businessline reported in 2005 that the RBI was concerned about the FII fund inflow through P-Notes.
Is this really a crisis to Indian stock markets?
No. FII money is certainly needed for the Indian stock markets. Without FII’s one could not have thought about the Sensex reaching 19000. With more FII’s certainly the indices are poised to reach higher levels.
However, the regulators’ concern about the genuiness of such inflows is certainly a valid one. SEBI has all the interest and authority to add, amend or modify regulations to the investing and trading procedures at Indian stock markets. So, their action too, should be welcomed, since this will protect the interests of the investors.
Where does the Indian retail investor stand?
The Finance Minister said, “Do your homework or trust someone who can do it for you”. In a market that has been rallying non-stop, definitely retail investors are at a risk since their money is hard earned and they don’t possess the flexibility the FII’s have.
We have mentioned in our weekly and monthly reviews that the market appears to violate the technicals and hence the investors need to be cautious. Though the P-Notes issue is an old one, the market has overreacted to it.
SEBI justifiably nervous of Participatory Notes
Markets have pronounced their judgment. After the mayhem in the stock markets last week, there’s no doubt they’ve condemned the Securities and Exchange Board of India’s (SEBI) move to regulate participatory notes (PNs). And they’ve done it in the way they know best, by voting with their feet to pull the Sensex down 7.83% (1,492 points) in just three trading sessions after the regulator made its draft proposal on regulating participatory notes public. But markets are fickle creatures. So while market reaction is important, it is seldom a good measure of long-term policy soundness. Hence it would be inadvisable to pay undue attention to it.
The more important question is how posterity will judge the regulator. And here the consensus opinion, once the hullabaloo has died down, will be far more forgiving. The reason is that SEBi's proposals are in the long-term interests of the market. To understand why it is necessary to look beyond and see why is the Indian stock market out of bounds to PN-holding investors. Is it cussedness on the part of the authorities? Red tape? No. Because if that were so, we would not have more than 1,500 FIIs and close to 3,500 sub accounts registered with FIIs. Rather, the reason why some investors resort to the PN route is because they are unwilling to comply with simple regulatory requirements.
Today, any entity regulated overseas can register as an FII in India. There are no onerous obligations. All it entails is some minimal disclosures about track record, top five investors and other such details that investors should normally not have any problems disclosing. The basic distinction between funds that come through the PN route and through FIIs, therefore, is that there is no audit trail in the case of the former. There is no knowing either the quality of the money or the ultimate beneficial interest. Which is why when FIIs and PNs come to dominate the market—75% of the floating stock is reportedly now in FII hands, with as much as 52% of the assets under custody of FIIs being in the form of PNs—there is reason for concern.
Like the dog that did not bark in Silver Blaze, Sherlock Holmes’ story of the racehorse that disappeared, the existence of a class of investors unwilling to comply with simple disclosure requirements is reason to doubt its motives. More so when the rise in the number and amount of PNs outstanding has gone in tandem with the ‘excessive’ rise in the Sensex. Admittedly, it is always difficult to say at what point a market is over-valued. But there’s no denying the Sensex has run up faster than warranted by historical trends.
In such a scenario, any regulator would have reason to be anxious and want to know more about the players in the market that is all. In this, SEBI is not unique. The US Securities and Exchange Commission is just as nervous of hedge funds. And if it has not acted as yet, it is only because US markets are highly developed and can deal with the large capital flows.
But as the subprime crisis has shown, even deep, well-developed markets can be laid low, especially when there is lack of transparency. So imagine how much more havoc could be caused by lack of transparency in the Indian context. Merely saying the market reflects underlying fundamentals does not make it so. The reality is that the best of markets is not immune to sudden surges of capital, inflows or outflows. Each extracts a price—inflows, in terms of a sharp appreciation of the domestic currency or if that is a no-no, of a surge in liquidity that can be as damaging. Sudden outflows, however, are far more destabilising. They can set economies back by years, as the East Asia experience showed. Do we want to go the same way? The answer must be an unequivocal ‘no’.
Sebi clamps down on participatory notes
BS Reporter in Mumbai BS October 17, 2007 08:53 IST
The Securities and Exchange Board of India (Sebi) on Tuesday proposed to tighten the rules for purchase of shares and bonds in Indian companies through the participatory note (PN) route.
The move is aimed at arresting the surge in foreign inflows through PNs, which are offshore derivative instruments that allow foreign investors to invest indirectly in a country's stock market (see table), which has seen the benchmark BSE Sensex zoom more than 5,000 points in two months.
The market regulator has proposed that foreign institutional investors (FIIs) and their sub-accounts cannot issue or renew PNs with underlying as derivatives with immediate effect. They have to unwind their current position within 18 months.
Sebi Chairman M Damodaran told Business Standard that the proposals were against PNs but not against FIIs. The procedures for registering FIIs were in fact being simplified, he said.
Sebi has also proposed a ban on all PN issuances by sub-accounts of FIIs with immediate effect. They also will be required to wind up the current position over 18 months, during which period the capital markets regulator will review the position from time to time.
PiNned down
The problem What Sebi proposes
* 34 FIIs/sub-accounts issue participatory notes (PNs) now against 14 in March 2004. * FIIs & sub-accounts will not issue/renew PNs issued against derivatives. They have to wind up their current positions over 18 months
* The notional value of PNs has zoomed from 20% of FII/sub-account assets in March 2004 to 51.6% in August 2007 ?? Rs 31,875 crore to Rs 3,53,484 crore * Sub-accounts can't issue PNs; have to wind up their current positions over 18 months
* The value of PNs with underlying shares as derivatives is Rs 1,17,071 crore, around 30% of total PNs. * An incremental rate of 5% for issue of PNs for FIIs with less than 40% of assets in PNs
* The notional value of PNs, excluding derivatives as underlying shares, as a percentage of total FII/sub-account assets, stood at 34.5% at the end of August 2007. * FIIs with more than 40% of assets in PNs will issue PNs only against redemption/cancellation
Source: SEBI
Sebi has also proposed an incremental rate of 5 per cent for issue of PNs for FIIs with less than 40 per cent of assets in PNs. Those with over 40 per cent of assets in PNs can issue PNs only against redemptions or cancellations.
PNs are issued by Sebi-registered FIIs that do not want to disclose their identity, or those who are in a rush to buy stocks and derivatives without waiting for Sebi registration.
The proposals, which have been framed in consultation with the government, will be "implemented urgently", after receiving comments from market participants within four days. The Sebi board is meeting on October 25 to take a final decision.
The big five FIIs - Morgan Stanley, Merrill Lynch Capital Markets Espana, Citigroup Global Markets, Goldman Sachs and CLSA Merchant Bankers - account for 60 per cent of PNs issued in India.
The Sebi release, issued late this evening said, "The year-on-year increase in PNs, the anonymity that they provide to investors and the copious inflows into the country from foreign investors have been engaging the attention of the government."
"There is an unprecedented surge of liquidity in the emerging markets. And apart from Brazil, the Indian equity markets are favoured the most by foreign institutional investors. However, it would be too premature to make any judgments now," said head of Korean mutual fund Mirae Asset Management Arindam Ghosh.
The proposed restrictions on participatory notes (PNs) are expected to trigger a sell-off by hedge funds, and other short-term players, experts said. As a result, the Sensex, which has risen nearly 35 per cent in the last two months, may also feel the heat when the markets open on Wednesday morning.
Indications from the kerb (unofficial deals) and the fall in Indian share prices in the US markets suggest that the NSE's Nifty Index may open at a discount of at least 150 points from Tuesday's closing of 5,668.05, said dealers.
At 9.45 pm, Dr Reddy's Lab ADR was down 5 per cent to $15.25, HDFC Bank was down 6 per cent to $111.34, ICICI Bank nearly 4 per cent to $53.32 and Infosys was down 5.8 per cent to $48.02.
Hedge funds, which account for at least 30 per cent of PN issuance, may be the first ones to exit, said dealers.
When restrictions were proposed on PNs on January 22, 2004, the Nifty closed 3 per cent lower to 1,770.
Former NSE Chairman R H Patil said, "The market is being manipulated right now and a bubble was growing rapidly. Although the Sebi proposals are late, they would help avoid a greater disaster. It is very important to know the identity of foreign investors, who have been manipulating this market."
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