Trading with Flair

Market corrections are buying opportunities

2007-02-14T13:46:00.000+05:30

Market corrections are buying opportunities in quality stocks. In the preface to 'The Intelligent Investor' by Benjamin Graham, Warren Buffett says, "To invest successfully over a lifetime does not require a stratospheric IQ, unusual business insights, or inside information.
What's needed is a sound intellectual framework for making decisions and the ability to keep emotions from corroding that framework". If you can strengthen your resolve and stay the course regardless of popular opinion, analyst views and technical targets handed out daily, you will be able to get good returns on your investments.
Markets have seen many ups and downs over the years. These are caused by various macroeconomic factors like inflation, interest rates, recessions and business cycles. India's domestic demand for equities is small compared to the money muscle of the foreign institutional investors (FII). So they are in a position to take the markets to very high levels when buying into Indian stocks or bring down the markets if they sell some of their holdings. So FIIs can be added to the list of factors causing the macroeconomic dance in the Indian stock markets.
In such a volatile, shaky and fragile environment, you have to keep your emotions in check and focus on your investment decision-making. This helps in getting a more objective view of current price fluctuations. If led by emotions you had sold off your entire equity portfolio in May-June 2006 when the Sensex was at 8,799, you would have missed out on the ensuing rally unto 14,035 - a rise of about 60 percent.
The three major emotions that colour investment decisions are fear, greed and hope. Fear makes investors sell very low. When the prices of stocks are nose-diving investors are frightened and sell without checking their investment plans. In such times, it is better to check whether the original reasons for investing in the stock have changed due to the fall in the markets.
The markets can based on a short-term focus and oversell a stock where its price falls well below its fair value. Selling when the price is lower than fair value is meaningless as in the long run the price of the stock recovers.
Hope is the emotion that makes investors purchase a stock based on its price appreciation in the past. Buying on the hope that history will repeat itself regardless of a stock's fundamentals is not a smart move. It is important to look less at the past returns and more into the company's fundamentals to evaluate the investment decisions. Basing your investment decisions purely on hope may leave you with a stock that is already fully valued, with higher chances of losses than gains.
Under the influence of greed investors may hold onto to a stock for too long, hoping for a few extra rupees. When the markets are going up, the euphoria is magnetic and they expect it to continue for long. By doing this investors could end up turning large gains into losses.
Timing your buying price and selling price of any stock is extremely tricky. In early May 2006, investors whose investment goals were already achieved may have lost out if they had held on expecting further increase in the price of their stocks.So, one of the key factors to successful investing is control over emotions.

Small caps worthy of a second look

2007-01-29T15:27:00.000+05:30

Looking for small cap value
In our search for hidden value in lesser-known stocks, we followed a rigorous, purely quantitative analysis:
Step 1. Since the relatively undiscovered stocks are most likely to be those of smaller companies, we looked at all the listed stocks with a market cap below Rs 500 crore (Rs 5 billion), but above Rs 50 crore (Rs 500 million) so as to filter out the least liquid stocks. This process yielded a total of 836 companies.
Step 2. Out of these, we selected those which looked to be the cheapest, namely those with a PE ratio of less than 15. We were now left with 405 companies.
Step 3. We now looked for consistent growth -- those that have seen profit after tax (PAT) grow by at least 15 per cent year-on-year for the last three years. This left us with the 12 companies profiled below.
This exercise is meant only as a starting point for deciding whether to invest in these companies. Small-cap stocks are typically more volatile than large caps, and present both higher risks and higher rewards.
If any of these stocks takes your fancy, we suggest you put only a small amount into it, and stay invested until wider buying interest develops.
1. Aegis Logistics: Incorporated in 1956, the company is in the specialised business of storage and handling of bulk items, especially oils, chemicals and petroleum. It has
consistently given its shareholders dividends, and is currently quoting at about Rs 140, well below its 2005 peak of over Rs 300.
2. Crew B.O.S. Products: A leading leather exporter, the company is also listed on Luxembourg stock exchange and has consistently paid dividends. It recently announced plans to issue preference shares to promoters, which will have the effect of diluting earnings per share (EPS).
3. Dewan Housing Finance Corp: In business since 1984, the share currently quotes at about 30 per cent below its highs in June 2006. It has recently expanded operations into the Gulf area to facilitate NRI investment in Indian housing.
4. Eastern Silk Industries: This Kolkata-based company was started in 1946. Its broad production range includes silk yarn, fabrics, embroidery and accessories.
5. GIC Housing Finance: Promoted in 1993 by General Insurance Corporation, the company is largely held by public sector insurance companies. Business has benefited from the current real estate boom, and as a bonus, the regular dividend of 15 per cent offers a high yield.
6. Jetking Infotrain: Incorporated in 1984, Jetking offers computer education through 60 centres -- company-owned and franchised. It specialises in hardware and networking education and readies students for direct entry into the job market.
7. RTS Power Corp: In operation since 1947, this manufacturer of electrical transformers and related products seems to have benefited from the recent infrastructure boom. It has also made a tentative foray into wind energy, with a 1.25-MW wind power plant at Dhule, Maharashtra.
8. Raj Rayon: In business since 1993, Raj Rayon recently set up a polyester yarn plant at Silvassa. It has paid 10 per cent dividend for the last two years, and currently trades at Rs 43, more than double its June-low of less than Rs 20, but a long way from the earlier high of Rs 81.
9. Shri Dinesh Mills: In operation for 70 years, the composite textile set up has recently entered into a joint venture with US-based company McGean Rohco Inc to produce speciality chemicals.
10. Surya Pharmaceutical: With four units in the tax-exempt areas of Himachal Pradesh, Surya focuses on penicillin and its derivatives. Other products include cephalosporins and anti-histamines. It exports over 50 per cent of its production.
11. Tricom India: Started in 1992, Tricom is an early entrant into the BPO business, specialising in electronic management of business documents for overseas clients. It recently announced a 1:1 bonus.
12. Vivimed Labs: Set up in 1988, Vivimed has a large product offering of healthcare products, including over the counter products. It also partners customers in synthesizing and developing new products.

Stocks good for investing at current levels - MC

2006-07-08T17:13:00.000+05:30

Stocks trading at a discount to their book value
Stocks like MTNL, HPCL, OBC, SCI, Bank of Baroda, Arvind Mills and recently listed companies like GVK Power Infrastructure, and Visa Steel are all available at a steep discount to their book value.
Click here to read full article.

Stocks that hit 52-wk lows since May 11
982 companies, out of the 4475 companies that are actively traded on the BSE, touched their 52-week lows since May 11. Interestingly, a whopping 899 out of these touched their nadir on one single day, June 8, as the Indian benchmark index, the BSE Sensex crashed by 461 to close at 9296 points.
Click here to read full article.

Readings for your weekend

2006-07-07T22:44:00.000+05:30

From rags to riches: Story of a design firm

5 TOP stock market survival tools

You are in financial trouble if...

Have Rs 500? Here's how to get rich

39 GREAT business bargains

Price/Earning ratio

2006-07-07T22:41:00.000+05:30

Every product or service has a value. A host of factors determine this value, which includes amongst others input costs, fixed costs, taxation, cost of capital, demand-supply scenario, etc.
In many cases these factors are readily determinable and accordingly it becomes easier to determine the fair value of the said product/service.
But in some cases like 'art', determining the fair value is difficult as the factors affecting its price are largely qualitative. 'Equity shares' is another such product where fair valuation is difficult.
Equity shares is seeing increasing acceptance amongst the investor class due to its ability to deliver superior post-tax post-inflation returns, good economic growth, improved regulatory framework, and efficient & transparent mutual funds.
In the last couple of years the Sensex has seen exponential growth.
Hence, it is important to understand how various factors affect the price of a stock, which would then enable us to take a view as to whether at current prices the particular stock is overvalued or undervalued.
Valuation of a stock is difficult as its price may fluctuate differently to short-term factors and long-term factors. Secondly, these factors and their effect on the share prices are not easily computable, making the task of valuation more difficult.
The short-term outlook
Liquidity, demand-supply scenario, political uncertainties, budget, corporate announcements etc are some of the factors, which affect the price of a stock in the short-term.
Suppose there is good news flow for the steel industry. Then practically all the steel stock prices will move up even though some of these companies may not be performing too well.
Therefore, buying and selling in the short-term is more of a trading call than an investment call. It is suited more for a person who can invest his time daily to the stock market.
The long-term outlook
The real benefit of investing in equity markets accrues through long-term investing.
Hence it is more pertinent to understand the stock valuation from a long-term perspective.
In the long run, the price of a stock is the reflection of the operational performance of the company. The expected growth and future profits will determine the price. And because we have to take a view on the future prospects of the company, the industry and the economy in general, assessment of the 'right price' becomes difficult, subjective and prone to large volatility depending on how the future unfolds.
The Price/Earning ratio or the PE ratio is the term commonly used to assess the fairness of the stock price.
PE ratio is defined as the ratio of market price to earning per share (EPS).PE ratio = Market price of the share Earning per share (EPS) EPS in turn = Profit After Tax (PAT) Number of shares in the share capital The common sense would dictate that lower P/E ratio means that the price is undervalued and higher P/E ratio means that the price is overvalued. Unfortunately, life is not so simple. If it were so, you would not be reading this article. You would be sitting on the stock market and minting money by buying low P/E ratio stocks and selling high P/E ratio stocks.
In absolute terms there is no 'right' PE. One cannot say that PE of a stock of say 10 or 15 is good or bad.
One can only make sense of a P/E number of a particular stock by
comparing it with P/E of other companies in the same line of business
comparing it with the benchmark indices say Sensex P/E or Mid-cap P/E
assessing the growth potential of the industry
assessing the growth potential of the particular company
Let's look at a couple of cases - Banking & IT - to get a better appreciation of the P/E number. Banking as an industry enjoys an average P/E of around 8-10, vis-�-vis IT, which enjoys PE exceeding 25-30. The reason is simple - growth.
In a normal scenario the profits of a bank are the spread it earns between the interest rates on deposits and lending. And this usually varies between 2-4 per cent.
If the interest rates on deposit go up, the lending rates will also go up and vice versa. Therefore, the profit potential of a bank is limited. And hence the P/E ratio for banks is usually below 10. The only option for a bank to grow is by increasing the asset size.
Banks like HDFC and ICICI are rapidly increasing their asset base every year vis-�-vis the nationalised banks. Hence, they enjoy much higher P/Es of 20-25.
On the contrary most IT companies are growing at 30-40 per cent p.a. Therefore, in anticipation or likelihood of such high growth rates, the P/E ratios of 25-30 are not unreasonable even for average IT companies. The larger and better companies may even enjoy P/E in excess of 30-35.
Therefore, one should keep in mind that:
There no concept of an absolute right PE
It is quite normal to invest in a high growth industry like IT with P/E of say 20, but not so for a low growth industry like bank
A low P/E vis-�-vis the industry average (e.g. Bank A is quoting at 3 PE as compared to the average of 8 PE for the banks) does not necessarily mean it is cheap. The PE may be low because the bank is having some problems and hence may not be expected to do well in the future.The P/E number requires careful analysis. Only then can one assess the over or under-valuation of a stock and decide on the investment worthiness of the stock.

Stocks to watch out for

2006-06-26T12:42:00.000+05:30

1. Man Industries
Man Industries is a major Saw (submerged arc welded) pipe manufacturer with two plants at Anjar (Gujarat) and Pithampur (Madhya Pradesh). Saw pipes are used for cross-country transport of critical inputs, mainly oil and gas.
Over the next 3-4 years, global demand for Longitudinal Saw/Helical Saw pipelines is estimated at 2 lakh km, including 20,000 km in India.
Prospects for the company look good. It has an outstanding order book of Rs 1,250 crore of which Rs 850 crore are for exports and the rest for the domestic market. It has managed a Rs 400 crore export order to supply LSaw pipes and participated in bids amounting to about Rs 2,000 crore. It expects a success rate of around 20 per cent.
Prices of HR plates have not gone up much (about $750 per tonne X-65 grade) and the company has ensured availability for its entire requirements of plates to cover its existing orders.
Its new plant at Anjar commenced full-fledged commercial production in October 2005, benefits of which will accrue going forward. The stock is worth buying with a price target of Rs 250.

2. Era Constructions
Era Constructions India (ECIL) is a fast-growing mid-sized construction company and a beneficiary of large scale construction activity across sectors like roads, railways, ports, airports, power projects and commercial complexes.
ECIL is increasingly focussing on high margin industrial projects, where timely completion and delivery are critical.
ECIL has lined up several other growth drivers over the near and medium term like pre-engineered building materials, export of structural and allied designs and real estate development.
Group company, Era Metal Building Systems makes pre-engineered building material, which are used in non-residential projects such as industrial plants, railway stations and airports.
They form the core of the superstructure and are fabricated separately even as foundation work is going on at the site.
Thus, a project gets completed in half the time, six months instead of a year.
ECIL has also set up a 100 per cent EOU for structural and allied designs. Here it plans to undertake designing assignments for exports.
To begin with, ECIL plans to tap the Middle East and the UK markets for its products. Contribution to revenues from this division in FY07 is likely to be about Rs 40 crore.
ECIL has a 12 per cent stake in Era Infrastructure. This company develops real estate and has about 400 acres of land. The promoters have a target of increasing the land bank to about 1,000 acres. ECIL also has a small stake in Era Financial Services, which plans to operate multiplexes.
In February 2006, ECIL concluded a GDR issue which has strengthened its net worth by Rs 190 crore to bid for big-ticket projects. The stock is recommended with a price target of Rs 400.

3. Mahindra Ugine Steel
There are two main investment arguments for Musco. First, a transformation from a pure alloy steel company to a sheet metal stampings outfit and second, integration into Mahindra & Mahindra's (M&M) ancillarisation initiative MSat (Mahindra Systems & Automotive Technologies).
In FY06, Musco completed its merger with Pranay Sheetmetals (a stamping unit at Nashik), Valueline Hotels & Resorts and Console Estate & Investment.
Operating margins are up from 16 per cent in FY05 to 19 per cent in FY06 and net profit adjusted for extraordinary items is up 26.5 per cent. Following the merger, Musco issued about 15.5 lakh shares to shareholders of Pranay.
As a result, equity is up from Rs 30.93 crore to Rs 32.48 crore. Post preference dividend, EPS stands at Rs 18. For FY07, we expect an EPS of Rs 22. At the current price of Rs 104, the stock is trading at a P/E of 4.7x FY07E. Even the dividend yield is a healthy five per cent. We recommend the stock with a price target of Rs 200.

4. Venus Remedies
This R&D company makes drugs to treat tumours. It has filed five international patents and six domestic patents. Its products, based on combination therapy in the cephalosporin space, have been successful. We are confident that the company will deliver 100 per cent CAGR in topline and bottomline till 2010.
The 100 per cent subsidiary in Germany is close to getting a German GMP certification that would be valid in EU, Japan and Latin American countries.
Exports generated about 17 per cent of the revenues in FY06 and it currently exports to about 13 countries, primarily to the CIS. We believe the company can become an outsourced manufacturing company for foreign multinationals by next year.
In our view, the current P/E of less than 6x FY07E earnings, does not adequately discount the future cash flow.
Venus posted good results for FY06. Sales increased by 170 per cent to Rs 92.1 crore, while net profit shot up by 311 per cent to Rs 8.4 crore. It has also tied up with three more domestic pharma companies, namely Wockhardt, Indoco Remedies and Alembic.
The management has given a guidance of a 50 per cent topline growth in FY07. We recommend a "buy" with a target price of Rs 693, almost 3x its current market price.

5. Asian Electronics
This energy saving company (Esco) manufactures lighting products that save energy. Asian Electronics (AEL) sells T5 retrofit and street lights.
Currently with more than a Rs 350 crore order book, the company will supply CFL lights to households in Maharashtra through MSEB for which payment will be collected on a monthly rental basis. We expect doubling of net profit in FY07 to over Rs 50 crore. The stock is available at less than 7x FY07E earnings.
The government has mandated establishments with power requirements above 500 KW to cut their energy bills by 30 per cent over the next three years and directed companies to install energy efficient equipment.
The management is focussing on both organic and inorganic growth. It has taken over Raymolds Lighting which enjoys a significant market share in the retail malls segment in India. We recommend a "buy" with a target price of Rs 700 for the stock.

6. Lloyd Electric
The company manufactures heat exchanging coil for air-conditioners and has now gone into forward integration to manufacture air-conditioners for Samsung and LG from its Himachal and Uttaranchal plants. It has tied up with an Australian company to manufacture ACs for the Delhi Metro.
In addition, the company will manufacture heat exchanging coils for refrigerators for which technological knowhow will come from a Korean company in the frost-free segment. We believe that the stock has over 150 per cent appreciation potential.
The company has increased its capacity to assemble ACs to 2 lakh units per year in FY06. The company is utilising its Kala-Amb plant primarily for contract manufacturing and has customers like Samsung, Electrolux and Carrier.
It is setting up another manufacturing plant to assemble ACs, with 2 lakh units per year capacity in Dehradun. After commissioning of this plant, we expect revenues and profits to grow significantly, as this plant too will have excise and tax benefits. We recommend a "buy" with a target price of Rs 293.

7. HEG
It is the world's fifth largest company in the graphite sector. The major demand driver for its graphite business is the increase in steel production through the electric furnace route, which accounts for 35 per cent of the total steel produced.
Demand from both, blast and electric furnace, is growing at 4-5 per cent globally per annum. The incremental demand is 40,000-50,000 tonnes and HEG, as well as its Indian peer, Graphite India, have expanded capacities to meet the same.
Moreover, the export prices this year are about 20-22 per cent more than the previous year. The growth in FY07 is expected to be high.
We expect the topline to touch Rs 850 crore in FY07 and the PAT is expected to reach Rs 107 crore. The first two quarters of the year should be good and we see a P/E of 5x on FY07E.
The company has ventured into the steel billets business and is integrating it with its sponge iron business. This has been a drag on the company's numbers. We recommend a "buy" with a target price of Rs 228.

8. Subhash Projects
This mid-sized construction company has a Rs 2,300 crore order book, which is to be executed over the next 24-30 months.
The EBITDA for the industry is growing at 8-10 per cent, while it is a bit lower for this company at about 7.5 per cent. We see a P/E of 9x on FY07E earnings, while it is about 15-17x for its peers FY07E.
Moreover, the government has accelerated infrastructure spending in various sectors like power, airports, transmission & distribution, irrigation and water-related projects.
The BOT model is favoured for highway projects to encourage private sector participation. Total spending by the central government has improved to over $150 billion in the 10th plan from $90 billion in the 9th.
The company has key capabilities in executing water-related projects and electrical T&D projects for renovation & modernisation (R&M) of current power infrastructure and rural electrification (RE) projects.
The current order book is distributed between water-related projects including irrigation (63 per cent) and T&D projects (37 per cent). We recommend a "buy" with a target price of Rs 294.

9. BOC India
The Q4 numbers for this company, engaged in the manufacture of gas cylinders, were good. Moreover, it has recently signed a two-year gas supply contract with JSW Steel for supply of over 3,000 tonnes per day of gaseous oxygen, nitrogen and argon to meet the latter's demand for gases arising from the expansion of their steel making capacity at Bellary.
We expect a P/E of 10x on FY07E earnings, which is cheap considering its MNC credentials. With the takeover process of parent company--BOC Plc--by Linde AG in progress, an open offer is expected.
The focus on India in this business is increasing with the expansions happening in the steel sector. Investors with a long-term horizon of 2-3 years should hold on to the stock as the prospects of BOC India are good.
Short-term investors can exit if the open offer is priced between Rs 230-250. We recommend a "buy" on this stock as it holds potential.

Stocks you can pick up this week - ET

2006-06-19T23:14:00.000+05:30

Cummins India
Research: JM Morgan Stanley
Recommendation: Buy
CMP: Rs 164.25(Face Value Rs 2)
12-Month Price Target: Rs 228

Cipla Research: CLSA
Recommendation : Buy
CMP: Rs 210.35 (Face Value Rs 2)
12-Month Price Target: Rs 280

AIA Engineering Research: Enam Securities
Recommendation: Outperformer
CMP: Rs 528.30 (Face Value Rs 10)
12-Month Price Target: Rs 700

Tata Teleservices (M) Research: IL&FS Investsmart
Recommendation: Buy
CMP: Rs 18.00 (Face Value Rs 10)
12-Month Price Target: Rs 55

12 rules that can save you further losses - MC

2006-06-18T12:36:00.000+05:30

With the markets sliding leaps and bounds, you need to keep your calm and find ways to cushion the free fall. In a book review of Zurich Axioms, our expert Kanu Doshi, talks about 12 strategies that can help you reduce your loss. Reviewer's Note: The author (Max) son of a very wealthy Swiss citizen by name, Franz Heinrich, (whom Americans preferred to call Frank Henry), jotted down all the principles of speculation strategies, particularly in stocks, adopted by his father and his father's several other Swiss friends to make large fortunes on the Wall Street in USA in roaring Eighties. Principles perfected by these Swiss gentlemen have therefore been called "Zurich Axioms" by Max.
Enumerated below are twelve major principles and sixteen minor ones with brief comments by Kanu Doshi on each of them:
First Major Axiom: On Risk “Worry is not a sickness but sign of health. If you are not worried, you are not risking enough.”Adventure is what makes life worth living. Every occupation has its aches and pains. The rich have to worry about their wealth. But, if there is a choice between remaining poor and worry-free, the selection is obvious. It is better to be wealthy and worried than to be worry-free and poor.
Minor Axiom I: “Always play for Meaningful Stakes.”If you invest Rs. 1000 and your investment doubles, you have only Rs. 2000 and are still poor! So if you want to be rich, you must increase your stakes.
Minor Axiom II: “Resist the allure of diversification”. Firstly, diversification negates the earlier principle of playing for meaningful stakes. Secondly, it may keep you where you began so that your gains on few will cancel out the losses on the other few. Thirdly, it entails keeping track of many more items leading to confusion and occasional panic. Second Major Axiom: On Greed “Always take your profit too soon.”Lay investors having made the investment tend to stay too long on it out of greed for higher profits. But, one must conquer this weakness and book profits soon. If one is less greedy for more profits one will take in more. Don't stretch your luck. In effect, it suggests, SELL sooner than later.
Minor Axiom III: "Decide in advance what gain you want from the venture, and when you get it, get out. Decide where the finish line is before you start the race".
This is self explanatory and hence needs no comment.
Third Major Axiom: On Hope “When the ship starts to sink, don't pray, jump”This axiom is about what to do when things go wrong. Learn how to accept a loss. One should accept small losses to protect oneself from big ones. When the market starts falling, sell, take your money and run!
Minor Axiom IV: "Accept small losses cheerfully as a fact of life." Expect to experience several smaller losses while awaiting a large gain.
Fourth Major Axiom: On Forecasts"Human behavior cannot be predicted. Distrust anyone who claims to know the future, however dimly." The story of a monkey throwing darts on the stock exchange page of a newspaper, to select the companies to buy, and coming out a winner is too well known to be recited. Recent news from London, further proves the truth, when an untrained chemist's stock selections, in a widely publicised contest open to all and sundry, registered higher appreciation over several full time highly qualified fund managers' well researched selections. Human events cannot be predicted by any method by anyone and, hence, don't trust anybody's predictions.
Fifth Major Axiom: On Patterns "Chaos is not dangerous until it begins to look orderly." The truth is that the world of money is a world of patternless disorder and utter chaos. This axiom is a commentary on Technical Analysis - a branch of investment strategies based on charts and patterns. The fact is, no formula that ignores own intuition's dominant role can ever be trusted.
Minor Axiom V: "Beware the Historian's Trap". This is based on the age old but entirely unwarranted belief that history repeats itself.
Minor Axiom VI: "Beware the Chartist's Illusion". Life is never a straight line. Let us not be hypnotised by a line on a chart.
Minor Axiom VII: "Beware the Co-relation and Causality Delusions." Don't be taken in by coincidences in the market.
Minor Axiom VIII: "Beware the Gambler's Fallacy." There is a gambling theory which suggests that one should put small stakes initially and test their luck, and if these turn out well one should go for big stakes on the dice table. But this is not correct. It only shows that winning streaks happen. But nothing is orderly about it. You can't know how long it will last or when it will strike. Sixth Major Axiom: On Mobility "Stay away from putting down roots. They impede motion". You may feel socially comforting to have roots. But in financial life, roots can cost a lot of money. Have a flexible approach while investing. This axiom implies a state of mind.
Minor Axiom IX: "Do not become trapped in a souring venture because of sentiments like loyalty and nostalgia." Do not develop emotional attachment to your investment. You should feel free to sell when desired.
Minor Axiom X: "Never hesitate to abandon a venture if something more attractive comes into view." Never get attached to things, but only to people. Otherwise it hits your mobility. Never get rooted in an investment. You should remain footloose, ready to jump away from trouble or into a profitable opportunity as and when circumstances demand.

Seventh Major Axiom: On Intuition 'A hunch can be trusted if it can be explained.' A good hunch is something that you know but you don't know how to recognise it. When a hunch hits you, try to locate some data in your mind for any familiarity. Then only should you act on it.
Minor Axiom XI: 'Never confuse a hunch with a hope'. Be highly skeptical. Examine every hunch with extra care.
Eight Major Axiom: On Religion and The Occult'It is unlikely that god's plan for the universe includes making you rich'. You can't only pray that you should be made rich. You will have to work at becoming rich. Mere prayers will not suffice.
Minor Axiom XII: 'If Astrology worked, all astrologers would be rich.' This is self explanatory. Don't trust predictions.
Minor Axiom XIII: 'As superstition need not be exorcised, it can be enjoyed provided it is kept in its place.' In your day-to-day financial matters, act rationally. But, when buying a lottery ticket, give it a full play to amuse yourself.
Ninth Major Axiom: On Optimism and Pessimism 'Optimism means expecting the best, but confidence means knowing how you will handle the worst. Never make a move if you are merely optimistic.' In poker and a lot of other speculative worlds, things are never as bad as they seem - most of the times they are WORSE.
Confidence comes not from expecting the best but from knowing how you will handle the worst. Optimism can be treacherous because it makes you feel good.
Tenth Major Axiom: On Consensus 'Disregard the majority opinion. It is probably wrong'. It is likely that the Truth has been found out by a few rather than by many.
Minor Axiom XIV: 'Never follow speculative fads. Often, the best time to buy something is when nobody else wants it.' This is the best way to get a good stock cheaply.
Eleventh Major Axiom: On Stubbornness 'If it doesn't pay off the first time, forget it'. If at first you don't succeed, try and try again and you will succeed in the end. This is good advice for spiders and kings but not for ordinary persons with regard to financial matters. Every trial is a costly error.
Minor Axiom XV: 'Never try to save a bad investment by averaging down.' If the price of the stock goes down after your purchase don't buy more to bring down' the average cost of your total holding. Investigate why the price went down rather than put good money in a bad bargain.
Twelfth Major Axiom: On Planning 'Long-range plans engender the dangerous belief that the future is under control. It is important never to take your own long-range plans, or other people's seriously.' This is self explanatory and hence needs no comment.
Minor Axiom XVI: 'Shun long-term investments.' If possible try to stay away fro long-term investments. The author noticed that the Swiss group never took a long-term view of their stock purchases. They always sold out as soon as their targeted profit was achieved.

Stocks tips - ET

2006-06-17T23:55:00.000+05:30

While stock markets have tanked over the past month, the growth trajectory of corporate India seems to be on track. Leading companies in sectors like engineering, automobiles, petroleum and software are expected to bring out numbers that display strong profitability in the coming year. The earnings for the 30 stocks which comprise the sensex are expected to increase by 16-18per cent in FY07.Among the major sectors, capital goods and engineering companies are expected to account for the biggest jumps in earnings during FY07. Earnings growth estimates for power equipment companies such as Bhel range from 25-35per cent for the coming year. Engineering & construction companies are projected to record a 25-30per cent rise in earnings. Companies like Bhel and L&T have substantial order backlogs and, hence, there is a higher degree of visibility in sales and future earnings. The earnings growth is expected to be modest for oil and gas companies. While profitability of oil marketing companies has been hit by high crude oil prices, ONGC and Reliance could post a modest increase in profits during the year. Reliance may benefit from higher gross refining margins in some of its major markets, particularly the US. While Reliance is present in petrochem and petro-retail, refining continues to account for the bulk of its sales and profits. ONGC’s profitability is expected to improve on two accounts, a capped subsidy burden and improved production over the last year. In the auto sector, the commercial vehicle segment is expected to show strong performance on the back of infrastructure spending. The top auto companies, Maruti and Tata Motors, are expected to clock a jump of about 15per cent in profitability. Projections for the first quarter remain robust because the market itself is expanding. Operating margins could flatten as expenses relating to product, brand and distribution all weigh in for the quarter. While the sector has shown strong sales so far during the first quarter, further performance is tied to the monsoons. Earnings growth for the software sector is expected to be in the range of 25-30per cent. The steel sector could also spring up a surprise as prices are on the upswing and have seen a recovery of $100/tonne since the start of this year.

Blind buys - MC

2006-06-13T19:41:00.000+05:30

Jaiprakash Sinha of Kotak PCG said, "We have suggested our investors to be with Reliance Industries, ONGC, GAIL within the oil and energy pack. However, we have recommended them to stay away from others in this pack at this point in time.Some of his blind picks in this market include heavyweights such as SBI, ICICI Bank, M&M, Infosys, and ACC. “However, the caution is not more than 20% at this point,” he said.Sinha is also positive on sugar stocks since the fundamentals of this sector are still intact.

Technical analyst Ashwani Gujral, however, advises caution to investors and recommends staying away from the banking pack. He told CNBC-TV18, “Banks were weak even before the bear market started. In a rising rate situation, banks will go to lower levels.”

He believes that there is still some downside left in the banking stocks.

“ICICI Bank could go to Rs 380 levels. PNB could go as low as Rs 300. So there is no point talking about levels in such kind of market because everything is getting painted with the same kind of brush.

You just need to wait for the market to stop falling, get above at least the 200-day moving average. After that one can buy a bit because one could easily go down another 1,000 points with the valuations getting more and more attractive and one will end up losing money if they invest at these levels.”

Mehraboon Irani of Darashaw and Company is yet another proponent of buying into frontline stocks during the ongoing correction. However, he is not so gung-ho on the midcap space. Says he: In the frontline, I would still look at picks like ACC, L&T, BHEL, Reliance Industries, and Tata Power, which are ultimately expected to rally, because when the market bottoms out and goes up, it is the frontline story which moves up. Over the next three-six months, midcaps will give maximum returns to investors. For the next 1,000 points, I do not see midcaps performing.

That does not, however, keep Irani away from the midcap space. He has identified at least 35 companies with a PE multiple of less than 5. According to him stocks like Indo Asian Fusegear, Hyderabad Industries, Hotel Leela Venture, Birla Corporation, Apar Industries, Aban Loyd Chiles Offshores, Bharat Bijlee are going at valuations of 6-8 times their 2006-07 earnings.
Sharmila Joshi of Asit C Mehta says that investors need to keep a cool head and look at stocks that were missed on the way up and invest partially. Her picks during the correction are a mixed bag comprising stocks in the capital good and construction space and cement sector.
“I think one can look at L&T, BHEL at this level among the frontline stocks. Among secondline stocks, Punj Lloyd and Pratibha Industries in capital good and construction space; in cements it would be ACC, Gujarat Ambuja Cements, and India Cements from the midcap sector.”

How not to lose money in the current volatile scenario

2006-06-11T01:24:00.000+05:30

People lose money and sometimes a lot of money. There is a method of deploying funds into the equity markets. If you follow this method you just cannot go wrong.

Place your hand on your heart and ask yourself, have you really made money? Are you happy with the way your investments have performed? Was something missing? Could things have been better? The stock markets are down about 25% from the peak levels they touched in mid-May. People lose money and sometimes a lot of money. This shakes confidence. Just a couple of months back, every expert on stock market investments was shouting from the top of the roof, that India is on a growth trajectory not witnessed before in our history. India is a growing economy and that every statistic available to us, signals more growth and positive development in years to come. But suddenly, the tide turned and the stock market crashed and now the experts are giving us reasons as to why the stock market fell. As a result, people feel cheated. They lose confidence in the stock market and start believing that the stock market is like a gambling den and it is a place, where you lose money. Hence they decide to cut losses and cash out from the stock market. There is obviously something wrong somewhere. Either the experts were wrong or your investment decisions went wrong somewhere down the line. However, the funny thing is nothing is wrong here. If there is something that is wrong, it is our planning or rather the lack of planning. There is a method of deploying funds into the equity markets. If you follow this method you just cannot go wrong.

Here is the method:One fundamental assumption, always to be kept at the back of your mind is that 'equity investments are assets that will generate the maximum returns over a fairly long period of time.' If you trust this, you will not go wrong, that is certain. Volatility is just part and parcel of investing in the equity market. 20%-30% volatility is implicit for equity investment at any time. If you cannot stomach this, then you should not even look at the stock market. If you do not like the rules of this game, then obviously you should not play it.

Once, you've decided to play the game, then here is a method on how to deploy your funds:
1. What is your surplus? How much can you save from your gross earning after deducting all expenses ie. your taxes, loan installments and all living expenses? If it is above 20%, it is good. 20% is a minimum and if you cannot meet this, you must take serious note and reassess your expenses.
2. From this amount, deduct the amount you require for meeting your basic financial requirements like insurance, medical contingencies etc?
3. The balance amount is what is available for managing long term, medium term and short-term financial goals. For short term goals ie. for goals of less than 3-4 years, it would not be wise to commit any money to the stock market.
4. For goals beyond 4-5 years, you may use equity investments. What you need to control here is your greed and expectations of the future. Expect no more than a return of 12% to 15% or so per annum, but remember you many not get this each year. However, if you were to look at your portfolio after 5 to 7 years, you will see that on an average your wealth has grown by 15% or so. In reality, you may land up getting much more as well. What you must not forget is that you must invest with discipline. You can choose to invest in equity mutual funds or shares as you like. For shares, you have to be sure that you have done extensive research.
5. Finally, how you actually place your investments is also important. A systematic investment plan, SIP, of investing directly into equity mutual funds may be a great idea but is not foolproof. In the intermediate, you could lose significantly in SIP also. Ask your advisor/broker to help you do a bit of asset allocation and thereby risk management.
That is all there is to it. It is not like learning rocket science, it is just simple financial discipline. Forget about IPOs, fancy derivative strategies, futures, options, arbitrage etc., all these big words are nothing but trading instruments and trading is a zero sum game. This essentially makes your broker and advisor, far richer than you will ever be.Here is a figure to chew over: Just Rs 10,000 invested per month for 20 years that earns 12% returns can easily give you your first crore! It's really so simple. And it was just such simple strategies that helped the Bhandaris to amass their fortune.

Cold logic says downturn in the markets isn't over yet

2006-05-23T19:23:00.000+05:30

The market has reacted with a sense of disbelief as the Sensex fell 11% last week. This is true of any market which has seen long periods of singular directional moves (on the way up or on the way down).This is the reason why investors are at 0% weight in equities at Sensex levels of 3000 and 100% weight in equities at Sensex levels of 12,000.
At 3000 Sensex, when the market started moving up, there was a sense of disbelief that the rise can sustain for a period of time.
At 12000 Sensex there is a sense of disbelief that the Sensex can fall. That is the nature of the market and smart investors who understand the markets do invest at 3000 and sell at 12000. However, there are very few smart investors, and that is the reason why the market gives opportunities for smart investors to make money. The Sensex’s current fall from peak levels of 12,600 to 10,900 in a matter of 10 days has prompted comments like “the market will go up again”, “nothing wrong with the economy but the fall is in line with global trends”, “the government will not let the market fall”, “Foreign institutional investors will not pull out of the country as they have nowhere to go” and “corporate performance is healthy and they will continue to perform well”.

These are typical bull market statements and these statements will keep on appearing until the Sensex falls another 25%.Ignoring such statements and looking at cold logic, the Sensex looks to be headed for longer period of downtrend. Let’s look at the cold logic.

1. Foreign institutional investors (FIIs) led the Sensex rally from 3000 to 12000 levels by bringing in over $40 billion of portfolio money. They have yet to take profits from the rally in Indian stocks. The chances of FIIs wanting to take profits are more as rising interest rates globally has increased risk premium on equities, valuations of Indian markets have gone up considerably with one year forward price-earnings of the Sensex going up from 12x to 20x and political risk increasing as the strong Left party opposes reforms and talk about anti FII measures.
2. Domestic demand was the main driver of the Indian economy, taking GDP growth up to 8% and above in the last three years. The demand was driven by excess liquidity in the system brought about by capital flows from abroad leading to current account surpluses. This excess liquidity found its way to the hands of under leveraged consumers who availed of cheap loans to buy cars, property and services. Now, the conditions for fuelling domestic demand has reversed with liquidity drying up as the economy went into current account deficit, loans becoming expensive as interest costs have gone up, asset prices have increased leading to higher leverage for the consumer and the consumer from being under leveraged is now over leveraged.
3. The market usually discounts future earnings. The future earnings is a forecast and by its nature is not a stable figure. Now, when there is a threat to downward revision of future earnings (from interest rates, inflation, high oil and commodity prices, political stability, reforms, asset price bubbles etc) the market tend to react downwards.

However, in bull runs, the market tends to ignore threats to future earnings and veer towards over-optimism. This goes on till the market reaches heights where it is no longer stable and the fall subsequently is dramatic and quick.
The Sensex reached the stage of instability at 12,600 levels and hence the dramatic and quick fall.The three factors mentioned above have irrefutable logic. The market has to counter the logic to continue its bull run. Conditions can and do change quickly and the threats mentioned above can vanish as quickly as they came in. However, unless one sees signs of the threats vanishing, one should play the market on the sell side.

MUST read...

2006-05-20T21:39:00.000+05:30

SELL in these counters

Click here to download the file.

Sensex Wkly Review

2006-05-20T21:23:00.000+05:30

What started off as a global sell-off got accentuated by the crash in global metal prices and severe margin pressuers on brokers. Adding fuel to the fire was the CBDT circular on traders' income, which was interpreted as a move to tax FIIs - a complete negative for the markets. The Sensex, which opened with a negative gap of 13 points at 12,273 on Monday, broke two landmarks (12,000 & 11,000) in a week's time. The index tumbled to a low of 10,799 - down 1,486 points from the previous weekend close. The Sensex finally ended the week with its largest-ever absolute loss of 1,346 points (11%) at 10,939.

Click here to read the full article.

Expert picks for week-starting 22-5-06

2006-05-20T20:32:00.000+05:30

Stay away from F&O market

SP Tulsian, Investment Advisor: Cement, non-ferrous, hotel, sugar are the stocks will look good
Sectors like cement, non-ferrous, hotel, sugar look good. Stocks like
Indian Hotel, Bajaj Hindustan, Reliance Industries, Reliance Petroleum, Hindalco, Sterlite Industries, Century Textiles, Morarjee Realty can be looked at.

Upendra Kulkarni, Fortress Financial:Good opportunities in large caps, but on correction
IT sector and Century Textiles, Infosys, TCS are good picks but once the market settles down.

Sumit Rohra, Antique Stock Broking:Investors should selectively look at buying because the 10,500 will give support to the market.Selectively buy blue chips because they will good returns. Once can look at Reliance, Infosys, TCS, Hinduja TMT, Kernex Microsystem, Micro Technologies, Prime Properties, IndusInd Bank.

Sudarshan Sukhani, Technical analyst: One must hold SBI, RIL, ONGC and Satyam in their portfolio.

Sanjay Dutt, Quantum Securities: SBI worth an investment after a correction.Banking, technology and textiles look positive.

Mihir Vora, ABN AMRO AMC:In terms of pure valuations PSU banks and metals are cheapest at this point in the market. In terms of growth adjusted valuations, I would say IT is a sector that is looking good at this point in time.

The markets that fell and what's to be done now

2006-05-19T22:07:00.000+05:30

Seven days. That's all it took to break down the Long Term Investor. Putting it in other words, it just required a fall of 10 per cent to completely wipe out the tribe of the Long Term Investor. Over night we have been overcome with self-doubt. Is the market too expensive? Are the valuations stretched? Should we book profits and stay in cash? Will this correction be more severe? How do we play this situation?
That in itself is the mistake…

Click here for the full story
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Someone who has spent time in the stock market would know that it is quite normal for the stock market to go up and down in certain time periods.
For those who are not familiar with equity markets, it is important to put volatility in perspective. The fact of the matter is that irrespective of the instrument that you invest in, you still have to contend with volatility. Even if you are a conservative investor and have been investing in traditional instruments, you still have to tackle interest rate fluctuations.
As mentioned earlier, all of us need to develop ways to deal with volatility. Let us analyze various strategies for both existing, as well as new investors to handle volatility.

Click here for the full story
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CLSA has said that the Indian markets were geared for a much steeper fall than what was seen on Thursday.
The international brokerage has also said that it is raising its rating on IT sector to overweight in its model portfolio.
CLSA is saying that Indian markets could have fallen in a much steeper manner than what they fell on Thursday and this is due to the derivative market, which is moving the cash market now. They are saying that the retail open interest, which was at $7 billion in January has risen to $12 billion now and this will lead to volatility.

Click here for the full story

Markets today

2006-05-19T16:48:00.000+05:30

The BSE Sensex is in correction mode as it tanked another 453 points on the back of a whopping 846 point debacle yesterday. The correction on the second consecutive day came about on acute selling pressure as skeptic investors rushed to book profit at every new high.

The sentiment was worsened by a flurry of negative news, which confounded the situation further. Marketmen also attribute today's sharp slump to margin selling.
The Sensex ended 452.82 points (3.98%) lower, at 10,938.61.
The S&P CNX Nifty slipped 142 points (4.19%) to 3,246.90.

The Indian government said late on Wednesday that it planned guidelines that would help distinguish between investors and stock traders, so as to tax them differently. That raised concerns regarding foreign funds being taxed at a much higher rate than those prevailing now.
A clarification from the Finance Minister P Chidambaram that no FIIs have been assessed as traders came as a whiff of fresh air for the benchmark index that was gasping for breath.
It opened with an upward gap of 159 points, surged to hit a high of 11,697.11, as buying continued. However, minutes after hitting the high, it tanked lower. It had plunged to a low of 10,799.01 in the last session of trade as investors became obsessed with selling. The benchmark index wavered 898 points for the day, indicating a high degree of volatility.

The market breadth was strongly bearish on BSE. Only 344 shares advanced, compared to 2,138 that declined. A meagre 33 remained unchanged. The total turnover on BSE amounted to Rs 5,036 crore, which is lower than Thursday’s turnover of Rs 4,863 crore. Among the Sensex pack, 28 were battered while only 2 received a boost.

Sensex today

2006-05-17T20:59:00.000+05:30

It was as if Virender Sehwag had regained his long lost touch as the BSE Sensex today finally overcame the blues that it had suffered due to three consecutive sessions of heavy losses, scoring a triple ton. IT managed to collect runs on the back of a recovery in the base-metal prices as also due to recovery in Asian markets, especially Japan's Nikkei that managed a good show on waning concerns of a strengthening yen. The market was also responding to tame inflation data in the US, which generated hopes of a curb to further interest rate hikes.
The Indian market advanced consistently throughout the day, on broad-based buying witnessed in various strata of stocks.
The BSE Sensex ended with a spurt as buying momentum continued throughout the day for key pivotals.
The BSE Sensex advanced 344.08 points (2.90%), to 12,217.81
The S&P CNX Nifty surged 112 points (3.17%), to 3,635.10
Market breadth was good 27 advanced while only 3 declined
Metal stocks surged after a sharp fall in the past few days as product price firmed on the London Metal Exchange (LME). A host of metal stock plunged in the past few days on worries of softening metal prices.
Also, Mittal Steel’s takeover of world’s second largest steel company–Arcelor, being cleared by regulators from three countries also bolstered metal stocks.
The real estate sector has witnessed tremendous attention over the past two years owing to the booming Indian economy, increasing demand for better quality housing and commercial spaces and, consequently, rising prices of land holdings.
Also, see The Nikkei rose 149.25 points, to 16,307.67 after falling more than 1,100 points during the previous six sessions.

DOW and NASDAQ are a bit down today, so seems like its not the end of correction and we will see more downside from here.

Candlesticks for Trading

2006-05-16T19:38:00.000+05:30

CONSTRUCTING THE CANDLESTICK LINE
The broadest part of the candlestick line is the real body. It represents the range between the session's open and close.If the close is lower than the open the real body is black. The real body is white if the close is higher than the open. The real body is white if the close is higher than the open.
The thin lines above and below the real body are called the shadows. The peak of the upper shadow is the high of the session and the bottom of the lower shadow is the low of the session.
The color and length of the real body reveals whether the bulls or the bears are in charge. Note that the candle lines use the same data as a bar chart (the open, high, low and close). Thus, all Western-charting techniques can be integrated with candle chart analysis.
At Candlecharts.com, we have found the candles are most potent when merged with Western technical analysis. Accordingly, we harness the best charting techniques of the East and West to provide you with uniquely effective trading tools.USING INDIVIDUAL CANDLE LINES
A critical and powerful advantage of candle charts is that the size and color of the real body can send out volumes of information. For example:
a long white real body visually displays the bulls are in charge
a long black real body signifies the bears are in control.
a small real body (white or black) indicates a period in which the bulls and bears are in a "tug of war" and warns the market's trend may be losing momentum. While the real body is often considered the most important segment of the candle, there is also substantial information from the length and position of the shadows. For instance, a tall upper shadow shows the market rejected higher prices while a long lower shadow typifies a market that has tested and rejected lower prices. The slogan of our firm is "Helping Clients Spot Market Turns Before the Competition." This is based on the powerful fact that candle charts will often provide reversal signals earlier, or not even available with traditional bar charting techniques.
Even more valuably, candle charts are an excellent method to help you preserve your trading capital. This benefit alone is incredibly important in today's volatile environment.
L et's look at an example of how a candle chart can help you avoid a potentially losing trade.
Exhibit 1 (below) is a bar chart. In the circled area of Exhibit 1, the stock looks strong since it is making consecutively higher closes. Based on this aspect, it looks like a stock to buy.Exhibit 1 The candle chart, uses the same data as Exhibit 1 (above),( remember, a candle chart uses the same data as a bar chart; open, high, low and close.) Let's now look at the circled area on the candle chart in Exhibit 2 (below). Note the different perspective we get with the candle chart than with the bar chart. On the candle chart, in the same circled area, there are a series of small real bodies which the Japanese nickname spinning tops. Small real bodies hint that the prior trend (i.e. the rally) could be losing its breath. Exhibit 2 As such, while the bar chart makes it look attractive to buy, the candle chart proves there is indeed a reason for caution about going long. The small real bodies illustrate the bulls are losing force. Thus, by using the candle chart, a trader or investor would likely not buy in the circled area. The result -- avoiding a losing trade.
This is but one example of how candles will help you preserve capital.
Candles truly shine at helping you preserve capital!
CONCLUDING COMMENTS
With candle charts, one can use candle charting techniques, or Western techniques, or a combination of both. This union of Eastern and Western techniques provides our clients with uniquely effective tools to help enhance profits and decrease market risk exposure.
A Japanese proverb says, "His potential is that of the fully drawn bow- - - his timing the release of the trigger." The timing of the "release of the trigger" depends on many factors not addressed in this pamphlet. However, while this pamphlet provides only a basic introduction to candle charts we hope you have discovered how candle-charting techniques open new and unique doors of analysis.
As a final note, there have recently been books, articles, and seminars from so-called "candlestick experts" who make no reference to where they found their information about candlesticks. Even more worrying for you as a trader is that they are making up their own candlestick signals without any historical basis.
Conversely, all of the candlestick patterns and signals I've revealed have been confirmed by more than one Japanese source (Japanese traders, Japanese books, etc.). From my vast array of candlestick resources, there is absolutely no mention of many of these "new" patterns I see tossed around by other writers and speakers.
As the Japanese proverb says, "If you wish to know the road, inquire of those who have traveled it."

Pharma: Signs of revival…

2006-05-15T02:36:00.000+05:30

PHARMA

What does the analysis say?
The India story: The five companies posted a robust 29% YoY growth in total revenues during the quarter in question backed by a strong performance in the domestic markets. However, it must be noted that in the same period last year, de-stocking at the retailers’ level in anticipation of VAT had led to a sharp fall in revenues. As a result, part of the robust performance this year is due to the low base effect. That said, strong growth of existing products, especially in the lifestyle segments, and increased contribution from new product launches also contributed to the topline growth.
Exports scenario: Exports for the sector were a mixed bag. The generics market in the US continued to be plagued by increased competition and pricing pressure. Europe painted a mixed picture with Germany logging good growth rates in comparison to the UK, which was also prey to a competitive pricing environment. For example, while Ranbaxy’s US business grew at a double digit pace, this growth was largely attributed to increase in volumes. Companies following the contract manufacturing model like Cipla witnessed superlative growth in exports. In Cipla’s case, while formulations did record healthy growth, the impressive growth in bulk drugs (mainly supplied to the regulated markets) was the real show stealer. The semi regulated markets of Asia, Middle East, Russia and Africa continued to grow and contribute to the revenue streams of these companies.
Operating margins and profitability: Though margins on an overall basis expanded by 110 basis points, if one were to look at the individual snapshot, each had a different story to tell. Nicholas’ margin expansion was considerable, as it had reported a negative EBIDTA margin during the March 2005 quarter. Most of these companies witnessed a significant rise in raw material costs and R&D expenditure. Ranbaxy’s R&D expenditure (as a percentage of sales) declined, as the company has shifted most of its R&D in-house. Nicholas’ R&D expenditure increased after the acquisition of Avecia. The savings in costs for most of these companies was mostly on the ‘other expenditure’ front. Net profits of the sector grew by 30% YoY driven by strong topline growth, rise in other income and a lower tax outgo. Extraordinary items for the period included expenditure incurred by Wockhardt for due diligence of acquisition opportunities in the US.
What lies ahead?
While the fundamentals driving the generics market continue to remain strong, the brutal pricing environment is a cause for concern. It must be noted that the competition has tremendously increased, escalating the extent of price erosion. Having said that, while the competition most probably will show no signs of abating, a considerable rise in the patent expiries of blockbuster drugs in the coming years is likely to provide a breather to generic companies and boost revenues. The ability to manufacture drugs at the cheapest cost and leverage one’s marketing and distributing network to increase reach will be the key to survival.
We believe that partnerships are likely to play a crucial role in driving growth. This could be in generics (contract manufacturing, authorised generics) or research (R&D collaboration, contract research, out-licensing of molecules) or custom manufacturing for innovator companies. In the domestic markets, with the introduction of the patent law and subsequent slowdown of product launches, albeit at a gradual pace, companies entering into in-licensing agreements with innovator companies will have the upper hand. This will ensure a steady flow of product launches in the domestic market.

GLENMARK

Glenmark Pharma announced mixed results for the fourth quarter and year ended March 2006. For the fiscal, topline grew at a healthy double-digit pace led by a strong revenue growth in all the markets in which the company operates. However, operating margins witnessed considerable shrinkage on account of rise in raw material expenses. All these factors, coupled with a significant drop in out-licensing revenues, contributed to the decline in bottomline. That said, the fourth quarter numbers were impressive both at the topline and the bottomline level.

What is the company’s business?
Glenmark Pharma is a mid-sized company with focus on niche therapeutic areas of dermatology, gynecology, pediatrics and diabetics. The domestic formulations business contributed about 56% to the company's revenue in FY06. On the international front, while exports to the semi-regulated markets have been growing at a strong pace, the company is also looking to establish a presence in the US generics market and has entered into alliances with KV Pharma, Interpharm Inc, Konec Labs, InvaGen and Shasun Chemicals. The company is also focusing on R&D and has out licensed its lead compound for asthma to Forest Laboratories, US and Teijin Pharma, Japan in return for milestone payments.
What has driven performance in FY06?
International business is gaining traction: Glenmark’s topline grew by 23% YoY during the year led by a superlative performance of its formulations business in India, the US, Latin America and Rest of the World (ROW). Glenmark has completed its first year of operations in the US, and growth in this market was fuelled by the company’s newly approved generic ANDAs ‘Fluconazole’ and ‘Zonisamide’. During the year, the company filed 11 ANDAs and 16 to 17 products are currently pending US FDA approval.
In the Latin American markets, the Brazilian and Argentinean markets mainly contributed to the topline, resulting in a superlative 221% YoY growth in revenues. In Brazil, the company obtained registrations for 11 products and filed 19 dossiers with ANVISA in FY06. ROW recorded a 25% YoY growth with Glenmark obtaining registrations for 80 products during the year.
India shines: The domestic formulations segment posted a robust 30% YoY growth in revenues. Investors should note that part of this growth was due to the low base effect last year, wherein de-stocking at the stockists’ level in anticipation of VAT led to a considerably lower offtake. Besides this, introduction of 6 new products during the year also played a part in augmenting revenues.
Dismal API picture: While API revenues in the regulated and the semi-regulated markets globally grew by 20% YoY, a 31% YoY decline in the domestic API revenues pared growth, resulting in a 12% YoY decline in overall API revenues. The decline was mainly attributed to the decline in the first two quarters of the year on account of withdrawal of ‘Valdecoxib’ and price reduction of ‘Etoricoxib’.
Out-licensing revenues: Revenues from the out-licensing of the company’s asthma/COPD molecule ‘Oglemilast’ declined significantly in FY06. It must be noted that the completion of the Phase I clinical trials was delayed during the year resulting in non-receipt of the next phase of milestone payments. Having said that, the molecule has now completed Phase I clinical trials (entering Phase II) triggering the next milestone payment, which will now be due in FY07.
Huge margin contraction: A significant 690 basis points rise in raw material costs (as percentage of sales) led to the dip in operating margins, which fell by 750 basis points during the quarter. With staff costs also witnessing an increase, reduction in other expenses could not salvage the sharp contraction in margins.
It boils down to the bottomline: Despite a strong topline growth, bottomline declined by 15% YoY during FY06. This decline is despite a higher other income and lower interest costs. The company has attributed this decline mainly to the drop in the out-licensing income during the year.
What to expect?
At the current price of Rs 375, the stock is trading at a price to earnings multiple of 49.3 times its consolidated FY06 earnings. Glenmark’s presence in the regulated markets of the US and Europe is in its nascent stages. However, it has adopted the strategy of entering into alliances with companies, which is likely to give a boost to its US generics business going forward.
Similarly, the company has embarked on a strategy of increasing its presence in the Latin American and semi-regulated markets as well, which will further drive topline growth. On the R&D front, with ‘Oglemilast’ completing Phase I trials and moving into Phase II, Glenmark is awaiting the receipt of the next milestone payment for the same from Forest Labs (will accrue in FY07). Besides, it is also looking to find out-licensing partners for the same molecule in the European markets. The company also has 6 molecules under various stages of development, which could also turn into in-licensing opportunities going forward.

GSK Pharma

GSK Pharma has announced strong results for the first quarter ended March 2006 (January to December fiscal). For the quarter, the topline has grown by 54% YoY. The bottomline growth has, however, outperformed this growth in topline, backed by significant margin expansion and a rise in other income.

What is the company’s business?
Glaxo is the largest pharma company in the Indian market with a share of 6.5% (December 2004). It is a 49% subsidiary of the US$ 33 bn Glaxo Group, the world's second-largest pharma company with an R&D war chest of US$ 4 bn. Glaxo's product portfolio boasts of some of the leading brands like Augmentin, Zinetac, Betnesol, Cobadex and Zevit in the domestic pharma market. The company underwent a restructuring exercise and effect of the same was evident in 2003 and 2004. It derives its revenues from pharmaceuticals, animal healthcare and fine chemicals. In 2004, it successfully merged Burroughs Wellcome India with itself.
What has driven performance in 1QCY06?
Outpacing its peers: GSK Pharma clocked an impressive 54% YoY growth in topline in 1QCY06 propelled by its key pharmaceuticals business (85% of total sales) and outpacing its peers Pfizer and Aventis. However, investors should note that the topline performance should be viewed in context of VAT related issues, which had plagued the company and had led to a 23% YoY decline in revenues in 1QCY05. Besides this, the growth in revenues can also be attributed to a strong performance by its 30 power brands and contribution from new products launched last year.
As regards other businesses (animal healthcare and fine chemicals), we will not be able to comment on the performance of the same since the details are unavailable. That said, the management has approved the proposal for sale of its animal healthcare business in India (Agrivet Farm Care) to a leading European company for a total consideration of Rs 2 bn. This is subject to the receipt of the requisite approvals.
Sharp margin expansion: Tight wield over costs and an improved product mix contributed to the steep margin improvement by 740 basis points during the quarter.
Bottomline bloats: Bottomline recorded a superlative 116% YoY during the quarter backed by a robust growth in revenues and improvement in operating margins. A rise in other income has also played a part in contributing to the growth in bottomline despite a considerably higher tax outgo.
Over the last few quarters: Glaxo’s performance at the topline and bottomline level has been consistent, with the exception of the blip in 1QCY05, wherein overall performance was affected due to de-stocking by trade in anticipation of the introduction of VAT. The company’s efficiencies at the operating level can be gauged by the fact that on an average it has consistently maintained margins above 25%.

Aventis

Aventis announced strong results for the first quarter ended March 2006 late yesterday. While the topline grew at a healthy double digit pace led by its strategic brands, efficiencies at the operating level contributed to margin expansion during the quarter. Led by this and aided by reduction in depreciation and tax expenses, bottomline growth considerably outpaced growth in topline.

What is the company’s business?
Aventis Pharma, the 50% subsidiary of Aventis SA, France, is the second largest pharma MNC in India with a turnover of over Rs 8.1 bn (CY05). It is the eighth largest player in India with a market share of 2.9%. Aventis has relatively few but very strong brands in the country. Domestic sales constituted 72% of total sales in CY05 and exports constituted the remaining 28%. Over the years, it has progressively transformed itself into a company catering to the chronic (diabetes, cardio vascular) and critical-care therapeutic segments. Apart from catering to the Indian markets, Aventis supplies bulk drugs to its parent. In CY04, the parent merged with another France based pharma company, Sanofi, thus making it part of one of the largest pharma conglomerates in the world.
What has driven performance in 1QCY06?
Strong revenue growth: During the quarter, Aventis clocked a 15% YoY growth in topline, largely propelled by strong performance in the domestic market. Domestic sales (72% of total sales) grew by around 26% YoY on the back of a low base effect last year, wherein VAT related issues had a negative impact on the company (in line with the impact on the entire pharma industry). Besides this, the company’s leading brands such as ‘Amary’l, ‘Cardace’, ‘Clexane’, ‘Frisium’ and ‘Rabipur’ also contributed to the growth in topline. However, exports were the laggard this time, registering a 10% YoY decline in revenues.
Margins under pressure: Wielding a tight control over costs, Aventis’ operating margins expanded by 230 basis points during the quarter. Raw material costs, staff costs and other expenses as a percentage of sales witnessed a decline, thus contributing to the margin expansion.
Bottomline bloats: Bottomline grew at a faster clip than the topline and clocked an impressive 56% YoY growth during the quarter. This was largely due to margin expansion and a significant reduction in tax outgo. It must be noted that the effective tax rate reduced from 44% in 1QCY05 to 32% in 1QCY06. A rise in other income and fall in depreciation charges also played their part in contributing to the strong growth in bottomline.
Over the last few quarters: Barring a couple of quarters, Aventis’ topline has consistently grown by around 15% YoY. On the operational front, the company has managed to maintain margins above the 25% levels due to its focused business interest. We, however, expect Aventis’ margins to be under pressure going forward due to the fact that the company will not benefit anymore from the restructuring exercise that had helped expand margins in CY04.

What to expect?
At the current price of Rs 1,950, the stock is trading at a price to earnings multiple of 28.3 times its trailing twelve months earnings. In the domestic market, Aventis’ strong presence in the fast-growing lifestyle segment along with its focus on its strategic brands is expected to be the key growth driver going forward. Aventis, so far, has also been aggressive in launching new products and is therefore likely to be a major beneficiary in the patent regime when a slew of new products will be unveiled for the Indian markets. The company has undertaken several brand awareness initiatives over the years, which will augur well in terms of increased visibility for its products.

e-books on trading n investing

2006-05-06T11:58:00.000+05:30

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10 key points that affect you in Budget 2006

2006-03-01T12:59:00.000+05:30

Union Budget 2006-07 was largely a non-event. There were no announcements made by the Finance Minister (FM) that would have a telling effect on most of the sectors in any big way. Nonetheless, in this article, we try and bring out 10 key things that would affect you directly/indirectly.

1.Direct taxes: The FM has left the personal income tax and corporate tax rates for FY07 unchanged.

2.Service tax net widened: The FM has brought new services under the tax net, which would increase the costs of operation for an individual. Amongst the new services included are, ATM operations, credit card/debit card/charge card or other payment cards related services, internet telephony service, international air travel excluding economy class passengers and travel on cruise ships.

3.One-by-six scheme: The government has taken a significant step by abolishing the one-by-six scheme. This scheme was in existence so as to bring a larger number of persons under the tax net. It must be noted that under this scheme, any person who satisfies even one of the six indicators (owns or leases a car, occupies an immovable property, travels abroad, annual electricity bill of Rs 50,000 per annum, holds a credit card, has a club membership) is liable to file an income tax return. Since it is relatively easy for the authorities to collect the details of the members or users of these facilities, the authorities can keep a track of the persons and can make them comply with filing of income tax returns. However, the rationale of this step, considering that the number of people of people filing income tax returns in the country is still quite low, continues to elude us.

4.Securities Transaction Tax (STT): If you are buying or selling equity shares, then the STT (transaction tax) burden has gone up from 0.02% to 0.025% (up 25%) of transaction value. In our view, while long-term investors in equities would not be affected by such a move, it is the trader community that stands to lose.

5.Investments in mutual funds: Definition of open-ended equity-oriented schemes of mutual funds in the Income tax Act aligned with the definition adopted by SEBI. Thus, open-ended equity-oriented schemes and close-ended equity-oriented schemes shall be treated at par for exemption from dividend distribution tax.

6.Tax benefits on fixed deposits: Meeting, to a certain extent, the expectations build up on this front, the FM has included investments in fixed deposits (FDs) in scheduled banks for a term of not less than 5 years in Sec 80C of the Income Tax Act, wherein the taxpayer is allowed certain tax relief as a deduction from his/her taxable income.

7.Changes in Sec 80CCC: The limit of Rs 10,000 in pension funds under Section 80CCC has been removed but these investments would be brought under Sec.80C subject to a ceiling of Rs 1 lakh.

8.Bank Cash Transaction Tax (BCTT): This is to continue for some more time until the Annual
Information Returns (AIR) system is able to capture all significant financial transactions.

9.Compact cars to become cheaper: Reduction in excise duty for compact cars would make these more affordable to the extent the auto manufacturer passes on the same to the consumer.

10.Cigarettes to become expensive: With the FM raising the excise duty on cigarettes by 5%, more likely than not, the same would be passed on to the customer, making the pursuance of this habit a tad expensive.

TAXING times

2006-02-28T19:06:00.000+05:30

Taxes: what's in it for you

Finance Minister P Chidambaram has kept both individuals and corporates happy by keeping the tax rates intact and not introducing any new direct tax. He has indirectly hit both the categories by raising the services tax rate to 12 per cent from 10 per cent. So now, you would need to pay a little more if you dine out or buy some luxury good. More services are to be brought under the tax net. If you are a stockmarket investor, you would need to pay a little more as the securities transaction tax (STT) has been raised by 25 per cent. The cash transaction tax has also been retained. However, he has introduced some sops for certain category of people by abolishing the one-by-six scheme under the Income Tax Act for filing returns.
Chidambaram has proposed to include investments in fixed deposits in scheduled banks for a term of not less than five years in Section 80C of the Income Tax Act, thus responding to the demand for tax exemption on FDs of certain tenure. He has also proposed to remove the limit of Rs 10,000 in respect of contribution to certain pension funds in Section 80CC, subject to the overall ceiling of Rs 1 lakh. The Finance Minister has also proposed to remove the exemption under Section 10(23G), which he said, was not relevant when interest rates are moderate. Chidambaram's decision to keep the personal and corporate taxes intact may also have stemmmed from a healthier fiscal situation thann anticipated. The Government sees its revenue deficit for 2005-06 at 2.1 per cent of GDP compared to budgeted 2.6 per cent. The Finance Minister hopes to raise an additional Rs 6000 crore from the tax proposals.
Industry captains lauded the Finance Minister for measures to bring in fiscal discipline and cut deficit but had a mixed view on new tax proposals burdening the capital market. "The industry will be happy as there are no major negatives. It has cut down customs duty and has covered lot of industries as well," CII chief mentor Tarun Das said. JM Morgan Stanley chairman Nimesh Kampani termed the budget as a good development on fiscal side. "I think the Minister has done a great job in fiscal deficit, which will be 3.8 per cent of GDP in 2006-07," he said. Kotak Mahindra Bank vice-chairman Uday Kotak also welcomed the budget saying it was a positive budget at micro-level and was good for long term investors.
However, Ruchir Sharma of Morgan Stanley said it was an "innocuous budget" and there were no policy initiatives to take the market to higher levels. "The market hoped much more than reforms... even the Prime Minister had talked about out of the box thinking," he regretted.

FBT Implications

Agreeing to the persistent demand from industry chambers, the government on Tuesday watered down the Fringe Benefit Tax provisions, introduced last year, a move that will help employers give better perks and facilities including superannuation schemes and tour and travel to employees with less tax burden.
Announcing the changes in the Budget proposals, Finance Minister P Chidambaram doubled the limit to Rs two lakh contributed by an employer to an approved superannuation fund for tax exemption.
Tour and travel expenses will now attract just five per cent as FBT instead of 20 per cent levied last year.
In case of airline companies and shipping industry offering hospitality and hotel boarding and lodging facilities will have to pay five per cent as FBT compared to 20 per cent levied earlier.
Free samples of medicines, medical equipment distributed to doctors and expenses incurred on brand ambassadors and celebity endorsement have been excluded from the ambit of FBT.

RCVL: A different tune & Steel sector

2006-02-23T20:02:00.000+05:30

RCVL

Bharti enjoys a higher operating profit margin compared with RCVL
Reliance Communications Ventures (RCVL) has posted revenues of Rs 3,327 crore in the December 2005 quarter, a growth of 19 per cent over the September quarter.

At Rs 3025 crore, Bharti Tele’s numbers are not too different, though the growth was lower at 11.6 per cent q-o-q.

In the absence of detailed numbers, it is not known how much of RCVL’s top line comes from sales of handsets.

However, the operating profit for Bharti at Rs 1,116 crore is higher than RCVL’s 848 crore. So, currently, Bharti Tele certainly enjoys a higher operating profit margin at 37 per cent compared with RCVL’s 25.48 per cent.

Also in Bharti’s case, approximately 65 per cent of revenues accrue from mobile telephony. For RCVL, the proportion may be slightly lower, given the presence of Flag Telecom, but that is an assumption.

As of January end, RCVL had around 18.3 million subscribers, of which 15.5 million are mobile phone customers. Bharti Tele’s customer base isn’t too different with around 18.94 million subscribers, of which 17.7 million are mobile phone customers.

Thus, the average revenue per user (ARPU), which was Rs 470 for Bharti in the December quarter should not be very much lower for RCVL. RCVL is believed to be increasing its share of pre-paid users.

Since RCVL does not fully own Reliance Infocomm, Reliance Telecom and Reliance Communication Infrastructure, a portion of the profits would go to other shareholders. Bharti’s market capitalisation is approximately Rs 69,394 crore.

Analysts believe that though both companies are similar in size, RCVL today would command a lower market capitalisation given that its margins are lower.

The capex plans of both are likely to be similar—in the region of Rs 4,500-5,000 crore a year though there are industry watchers, who say that operating costs for CDMA are lower owing to the nature of the technology.

Looking ahead, RCVL’ margins should stabilise at around 30 per cent, as it scales up its network and grows other businesses such as broadband. That’s when the stock could get an even better multiple.

- Niraj Bhatt

Steel: Disciplined pricing

Is the worst over for steel companies in terms of price realisations? Prices are once again showing signs of rising, with hot rolled coil (HRC) prices going up by $15-20 a tonne over the last few weeks to about $420 a tonne, say analysts. Strong demand from American and Chinese housing markets is being seen as a trigger for the price hike.

Of equal importance, point out analysts, is the fact that large Chinese players have shown signs of returning to pricing discipline.

With international prices picking up, it does appear inevitable that domestic players could hike prices in March.

In addition, the domestic steel industry could also benefit from inputs such as met coke, which have displayed a definite downtrend in their spot prices over the past few weeks.

This improvement in operating environment helped the SAIL stock gain almost 6.5 per cent over three weeks compared with 3.45 per cent gain in the Sensex. Tata Steel, however, has gained only about 2 per cent during this period.

-Amriteshwar Mathur and Shobhana Subramanian

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2006-02-20T22:06:00.000+05:30

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Budget on everyone's mind

2006-02-19T16:09:00.000+05:30

Historical evidence suggests that the market normally rallies pre-budget (4 times in the past 6 years) and falls postbudget(in each of the last 6 years). Could this time be different? We think there would be three key factors whichwould determine the post-budget direction of the market.This time the bullishness is too much to bog down the mkts there hv been many negative news but never has the mkt tanked

A tip to the small investors

2006-01-19T21:20:00.000+05:30

The reason behind many small investors remaining small is that they have BIG greed. To become a successful investor one has to overcome greed, invest only in fundamentally good stocks, book profits from time to time, retain those profits and wait for another opportunity to re-enter at lower levels.