Stock Market Survival Tools - Part 2

Today I'll be covering the 2nd survival tool which is Invest in expensive oars: Wealth Creators

Good for low-risk investors or the retired, is the strategy of buying wealth creators. These are companies, who on a long-term basis, continue to generate high levels of return on capital employed, require the least amount of capital, pay high dividends, have significant competitive advantages, completely write-off expenses, pay huge taxes and still manage to consistently grow revenues and profits year-after-year.

Not just dividends, the share price too grows year on year, though maybe at rates that are more mature than a pure growth play. Over the long term, these companies are real wealth creators, having thrown off income and given capital appreciation too.

And over a period of time, a small investment emerges as a pot of gold. For example, Gillette has a huge untapped market in India. The company has significant technological advantages, healthy margins and returns and, needs little money to keep its business growing, which is why it can continuously grow for many years to come.

But such companies don't come cheap. You need to pay a high price to be a part of this business as valuations are typically high for wealth creators. Companies with a consistent performance track record and capable of rewarding shareholders through handsome returns can be classified as wealth creators.

Not many manage to stay afloat on the stock market rapids. If we look at some 4,700 listed companies, less than a dozen will stay afloat on these parameters. Companies like Gillette, Proctor & Gamble, and GlaxoSmithkline, among a few others make it to this list.
However, it is not that once a wealth-creator will always be so. The company could do badly or some external factor could change the rules of the game. For example, Hindustan Lever went out of favour of the market for no fault of its own. The company was and continues to be efficient, but the big change that has happened is that its competitors have learnt the tricks of the trade and have become equally competitive.

They have managed to become negative in working capital, generate high return on capital employed, expand their distribution and supply chain in an efficient manner using the latest technology, and can now be said to be on par with Lever.

So, don't buy and forget. It is important to continuously monitor the company to ensure that its inherent strengths and competitive advantages remain in place, which in turn will enable it to consistently grow your money.

Stock Market Survival Tools

With stock market riding at all time high , people are really nervous about the market. When should a investor actually start pumping in money? Well its difficult to time the market. People who have tried to time the market have mostly incurred losses. So rather than timing the market lets look at some of the strategies which an investor should adopt to reduce risk involved as well as reduce losses.I'll be discussing 1 survival tool daily. For the day its value investing

Get a good boat and hold on tight: Value Investing

If Benjamin Graham in 1954 coined the term 'value investing', other investment gurus like Warren Buffet, Irvin Kahn and Charles Munger took it forward. Although value investing means different things to different people, the core of this strategy is to follow quantitative or fundamental analysis.

Thumbs Rules
Investigate before you invest and not vice versa.

Buy companies doing business that you understand.

In times of panic, be greedy and buy good companies.

Control your emotions -- greed and fear.

Be honest with yourself -- book a loss if you think you have gone wrong.

Avoid momentum investing.

Do not fall prey to herd mentality and take tips with a pinch of salt.

Buy more of a stock if it falls, provided you have confidence in the company.

Don't gamble -- no day-trading, no leveraged deals and no loan against shares. Follow your stocks periodically and see that all conditions (such as entry barriers and basic investment ingredients) continue to be in place.

Hold a company for 3-5 years.

Always look for bargains.

Look for businesses that are in potential growth areas.

Avoid companies that are in a dying business segment, even if they offer value.

Invest in businesses which have a sustainable competitive advantage.

It believes that all clues that are relevant to identifying a stock market winner are present in the balance sheet of a company. The company's annual report and share price data, it believes, gives enough pointers to arrive at whether a stock is expensive or cheap. So, apart from looking at how fast and consistently the net profit figure is growing, other clues are the debt-equity ratio that needs to be low, the dividend track record uninterrupted and the price-to-earnings and price-to-book-value ratio be low.

The trick is to identify and buy stocks that are cheaper than the intrinsic value of the company. The key determinant of the decision is value and not price. And just like white-water rafting needs you to hold on confidently, whatever the size of the drop, do the same with value picks: invest with conviction and hold on patiently.

Another approach to value investing looks at picking up high dividend yield stocks that throw off regular income, apart from gaining weight in price. Finally, as Manish Sonthalia, vice-president, equity strategy, Motilal Oswal, says: 'Don't take a short-term approach to value investing. If you believe the value will be much higher in future, you should not get out when the stock appreciates by 20-30 per cent.'

One way to get to these stocks is to check the value of cash, liquid or business assets a company owns and buy only those companies that are quoting much below their intrinsic value. This value at some point of time should get unlocked, though the ways in which it is done could differ.
For instance, we have seen in the past, and even recently, how demerger of different businesses owned by a company into separate companies results in the unlocking of value for its shareholders. Some examples include Godrej Consumer, Dabur India and Reliance Industries.
Also, many a times, the stock market tends to ignore companies that are largely under-performing in their respective businesses, and treats them with poor valuations. That's a perfect time to buy such stocks.

For example, Raymond was once (in April 2000) quoting at Rs 75, when it had reported Rs 32.6 crore (Rs 32.6 million) net profit for 1999-2000. Then, its enterprise value (market capitalisation plus debt of Rs 764 crore, or Rs 7.64 billion) stood at Rs 1,327 crore (Rs 13.27 billion). But, if one were to analyse the value of its net liquid assets (cash and investments of about Rs 100 crore, or Rs 1 billion), and its steel, cement and textile businesses, the company's worth was much more.In fact, excluding the steel and cement business, which Raymond sold for a consideration of Rs 1,126.9 crore (Rs 11.269 billion) a year later (resulting in profit on sale of assets of Rs 455 crore, or Rs 4.55 billion)), the company's value (mainly the textile business) in terms of value per share worked out to less than Rs 30. Today the stock is quoting at Rs 404.
However, in such situations, investors need to take a call on how soon and successfully the management can turn the business around. This last call -- will the management turn the company around or utilise the undervalued assets -- is where pure number crunching fails to work.

Vikram Pandit

Vikram Pandit is the current CEO of Citigroup.

Pandit worked for Morgan Stanley for two decades and was the President and Chief Operating Officer of the Institutional Securities and Investment Banking Group at Morgan Stanley where he was responsible for the overall management of the group and focused on the trading, sales and infrastructure aspects of the business (2000-2005). Before that, he served as the managing director and head of the Worldwide Institutional Equities Division (1994-2000), and as the managing director and head of the US Equity Syndicate (1990-1994) for Morgan Stanley. Pandit left Morgan Stanley with a few colleagues to start a hedge fund Old Lane Partners, which

Citigroup bought in 2007 for $800 million.
Pandit serves on the boards of Columbia University, Columbia Business School, the Indian School of Business and The Trinity School. He is a former board member of NASDAQ (2000-2003), the New York City Investment Fund, and the American India Foundation.
On December 11, 2007, Pandit was named the new CEO of Citigroup, replacing interim-CEO Sir Winfried Bischoff. Pandit is the effective successor to Chuck Prince who resigned in November 2007 due to unexpectedly poor 3rd quarter performance, mainly due to CDO and MBS related losses.

50-year-old Pandit was born in Nagpur, Maharashtra, India to a moderately affluent Marathi Karhade Brahmin family. At the age of 16, he moved to the United States to attend college at Columbia University. He received B.S. and M.S. degrees in electrical engineering in 1976 and 1977 respectively, and later earned a Ph.D. in Finance in 1986.

Going in for a home loan? Read this

For most people a home loan will be the biggest and most important loan they will ever go for in their entire life. It is something that will affect their personal finances for decades. While competition is making banks jump over each other to lend you that much-needed home loan, it is always better on your part to know a few basic things before you sign on the dotted lines.
Hence, it's important to make the right decisions when you approach a bank for a home loan to buy your dream house. Here are some important things to watch out for:

Look carefully and bargain hard
In today's environment there are many banks competing hard in the home loan business. Make sure you use the competition to your benefit. Investigate at least five banks carefully before making your final decision. Remember that a little bit of effort today could save you many thousands of rupees over the next few decades. Imagine how happy you will feel when the same money will come in handy for your child's education. When you do make your final decision make sure you bargain hard. In addition to bargaining on interest rates and processing fees see if you can obtain free extras like property insurance. Finally make sure you read the fine print on the loan agreement and if necessary consult a lawyer to explain some of the details.

Loan eligibility
One of the biggest issues when taking a loan is the size of the loan you are eligible for. Loan eligibility is calculated based on your ability to pay and the cost of the house. There are a number of ways you can increase your loan eligibility. For instance you may choose longer loan tenure in return for higher eligibility. You may request the bank to club the incomes of close relatives like your spouse or parents. Or perhaps you may be able to persuade the bank/s to increase eligibility by showing your track record on a previous loan or your credit card payment history.

Home loans and insurance
Home loans increase the financial risk to the family in case the main earner passes away. They will be forced to bear the burden of repaying the rest of the loan. It's a good idea to increase your life insurance cover to protect your family from the additional risk. It is possible to buy policies where the cover reduces as the outstanding loan goes down. You may also want to buy disability cover to protect against accidents or critical illness.

Documentation
Make sure you get a receipt for any property documents that you keep with the bank. This is important if you switch your loan to another bank and will also prove useful if your bank misplaces any of your documents. Also make sure that your bank provides a detailed statement of account; this will be useful in documenting your repayment record, which will help you while negotiating for future loans.

Fixed and variable rates
With a fixed rate you should check whether the rate is fixed for the entire tenure of the loan or just the first few years. Check whether there are any loopholes that would allow banks to change 'fixed' rates when interest rates in general start moving up. Many banks insert a 'reset clause' in your home loan agreement that allows them to increase interest rates at a given point in time.
With variable rates you should understand whether the variable rate is clearly linked to some specific index. You should also clearly understand how changing interest rates would affect your payments: whether the bank will change EMI or the remaining tenure of your loan.

Will BoJ rate hike hit yen-carry-trade?

In March, there was a huge depreciation in the yen. Around the same time, interest rates in India were also on an uptrend. This prompted companies in India to raise at least USD 5 billion via the external commercial borrowing, or ECB, route.

Reliance Ports, Reliance Utilities and some other group companies raised USD 1.2 billion in March alone. While ADAG entities like Reliance Energy, Reliance Telecom, and Reliance Communications raised USD 640 million. Bharti raised around USD 3 million, JP Associates around USD 250 million, Rural Electrification Corporation USD 200 million, IRFC USD 125 million, among others.

All these companies had one thing in common they tied up loans when the yen was depreciating, which was to be settled in dollars. Now, the tide is set to turn. Rising interest rates of the yen may push costs of yen-carry-trade, which is a swap cost for borrowing in the yen and converting into the dollars to invest and take advantage of low interest rates on the Japanese currency. The Bank of Japan, or BoJ, may raise interest rates in its August 23 meeting. Could this move hit the yen-carry-trade?

Tohru Sasaki, Chief Forex Strategist, JP Morgan Chase Bank, expects a 25 bps rate hike by BoJ. He feels that the move may not hurt the yen-carry-trade much.

Mark Tan Keng Yew, Director at UOB Asset Management, is not bothered with the yen-carry-trade situation. On whether he sees some kind of unwinding in the yen-carry-trade, as the yen went back to 118, he said, “Looking at the yen, it doesn’t seem to me to be a leading indicator of what is happening in the markets. It seems to be a coincidental indicator of the market situation. What I will be looking at more closely is the extent of lending that is coming through from the US and whether there is going to be any tightening of credit in other parts of the world.”

Chin Loo, Senior Currency Strategist, BNP Paribas, feels that US payrolls will be the near-term trigger for the dollar-yen movement. She has pegged the yen's base to be around 117.5 to the dollar, while the upside will be capped at 120.5.

What Sectors & Stocks to look at now

In a market that is falling like nine pins, which stocks or sectors should you look at?

Ajay Srivastava of Dimensions Consulting likes Maruti Udyog, Tata Motors and Bajaj Auto in the auto sector. “I believe that Maruti Udyog is one standout performer which is there. A totally contrarian play would be Tata Motors, which will eventually come around into giving value. In two-wheelers, Bajaj Auto is a good play at this price, purely on account of the company’s demerger. We believe that the demerger, given Bajaj Auto’s price at Rs 2,000-2,100, should give substantial value to shareholders in the next six-nine months. These are the three plays that we are looking at quite closely at this time.”
In the cement space, Srivastava likes companies, which got capacity expansion running right through or almost peaking at capacity. In this space, he likes JP Associates. Speaking on the sector, he said, “Wherever we are seeing capacity coming up, it’s a strong play; wherever capacity has peaked out, there is nothing more going to happen there in terms of earnings surprises.”
According to Srivastava, with the kind of order book that it’s carrying on its books, there is no reason to worry about BHEL as a stock, for the next three years. He feels that it will outperform the rest of the pack.
On Bharti, he said, “If you look at Bharti it is reaching an inflection point, where the capex that they have done in the past is reaching capacity utilization. The new capex, which is almost USD 3 billion, is still to give revenues for the next two-three years. So, one can easily see and compare the valuation of China Mobile with Bharti, there is a way to go for the values.”

Neppolian Pillai of Modern Shares & Stock Brokers feels that the capital goods sector will hold on its own. “I think the capital goods sector is one of the strongest, the second strongest is banking, which looks like it is loosing steam and that could be the key.”
On capital good stocks, he said, “Most of them are near about their highs. It is still going to be a momentum play rather than a buying opportunity. At every fall one could trade but investing at these levels has not yet come in. One need to wait for some more correction in the sector to get in, but the sector is going to give only shallow falls. One needs to be a quick trader in that by trying to buy bottom and then try to sell the resultant high after that bottom. For investing, I think one needs to wait for sometime.”
On metals, he said, “One needs to continuously look at that sector when it comes down, to get into. One could play it as a momentum; you could play as an accumulation. The stock that catches the eye is Hindalco. If it falls up to Rs 165-160 levels, one can buy into it. One can trade Sterlite Industries as a momentum play for a rough target of about Rs 680 and Rs 727 that looks good as a momentum pick.”
According to Pillai, investors could look at Allahabad Bank and Bank of India in the banking space.
In the auto space, he feels the smaller auto ancillary stocks looks good from an investment perspective. “One can look Asahi India with a target of about Rs 130, which could be a return of about 30%. Another stock, which I like within the sector, is Tube Investments. I think Rs 63 to Rs 53 could be a buy zone. We should get a price target of about Rs 80 on the reversal, so that’s again an 20-25% return. One can look at Cummins India, a great stock with great momentum. This stock can do a target of about Rs 430. In auto ancillary, one can still invest on the downside,” he added.

Will RBI extend the pause on benchmark rates?

Reserve Bank of India (RBI) will be unveiling the much awaited first quarter review of annual monetary and credit policy on July 31, 2007. The market seems to be unanimously agreeing that the central bank will maintain status quo as far as benchmark rates (reverse repo and repo rates) are concerned. RBI is likely to shift its focus from inflation management to liquidity and exchange rate management in the review.

Stock broking firm, Sharekhan is of the view that with inflation down below 4.5% and the annual credit growth moderating to 24%, the RBI is much more comfortably placed than it was in the previous couple of quarters and consequently it will hold policy rates at the current level. Thus they feel that the monetary policy's focus is likely to shift from inflation management to liquidity and exchange rate management, as the current high annual growth of above 21% in the money supply continues to be above the central bank's comfort zone. However, they further added that market estimates suggest that there exists a 10% chance of the cash reserve ratio (CRR) being increased by 50 basis points in the upcoming policy review meet.

It seems unlikely and the RBI is expected to reiterate its ‘cautious’ stance, as the macro environment remains challenging with forex inflows continuing unabated and oil prices remaining on the boil. The RBI may well leave it to the banks to work down the money market surpluses through their balance sheets, says Enam Securities.

GS Global Economic Website is of the view that the significant policy tightening since September 2006, has moderated credit growth in line with RBI expectations. Further they anticipate measures to reduce liquidity like raising the ceiling on sterilization and an increase in the daily liquidity withdrawn through the reverse repo window. They are of the opinion that RBI may use administrative measures to limit capital inflows and banks may reduce lending rates on the back of an unchanged RBI interest rate policy.

Central Bk will be able to maintain momentum

Research By : P Lilladher

The public sector institution, the Central Bank of India is open for subscription with an initial public offering (IPO) of 80,000,000 equity shares of Rs 10 each for cash at a price to be decided through a 100% book building process. The price band for the issue is between Rs 85 per equity share and Rs 102 per equity share. After the issue, the shareholding of the Government of India in the bank will come down to 80.20%.

Prabhudas Lilladher report on Central Bank of India IPO

Turnaround with backing of size
Central Bank of India is the third biggest bank in India in terms of branch network with 3194 branches and 267 ex. Counters. It was founded on December 21, 1911 and got nationalized in 1969. Govt of India holds 100% stake in the bank, which will come down to 80.2%.
Out of total branch network of 3194 branches, 2250 branches are fully automated and 324 branches are on CBS covering 35% of business. Bank has higher presence in Central, Eastern and Western India and lesser presence in North and South India.
Apart from domestic operations, bank has 20% stake in Indo-Zambia Bank where other key investors include Bank of Baroda, Bank of India and Govt of Zambia.

Investment Positives
Healthy business growth with healthy deposit mix. Central bank has reported 38% growth in advances in FY 07 compared to 37% in FY 06. Deposits have gone up by 24.5% in FY 07 compared to 9.4% in FY 06. Share of low cost deposits remain healthy at 42%.
Improvement in asset quality.Central Bank’s gross NPAs have come down from 6.8% as on FY 06 to 4.8% as on FY 07 and net NPAs have come down from 2.6% as on FY 06 to 1.7% as on FY 07.

Profitability on up trend
After decline in profits in FY 06 by 28%, bank has reported 94% growth in FY 07. RoA has improved from 0.35% in FY 06 to 0.62% in FY 07. RoE too has improved from 8.8% in FY 06 to 15.1% in FY 07.

Investments Concern
Turnaround has just begin - Central bank has just begun its turnaround and it is yet to be seen weather in a highly competitive scenario, it will be able to sustain it or not.

Valuation
Stock is available at 1.7x FY 07 ABV at lower end and 2x FY 07 ABV at upper end. With overall favourable macro environment, we believe that bank will be able to maintain its momentum. We recommend Subscribing to the issue

ITC could be your next multibagger

Research firms CLSA and Credit-Suisse have come out with their reports on ITC. According to them ITC, which has been an underperformer on concerns of VAT implementation and subsequent impact on cigarette volume, will outperform now on expectations of increase in cigarette volumes and earnings growth.

Both research firms have raised their target price on ITC. CLSA is bullish on the stock and has recommended a 'buy' on it with a target of Rs 184, which implies 20% potential upside and Credit-Suisse has recommended 'outperformer' rating with a target of Rs 188, which implies 22% potential upside.

CLSA report on ITC:

Volume surprise likely
ITC has underperformed the market by 24% YTD on the concerns of VAT implementation and subsequent impact on cigarette volume and earnings growth. We believe that the current stock price already factors in the worst and cigarette volumes and earnings growth will likely surprise on the upside. We have reduced our FY08 cigarette volume drop assumption from 7.5% earlier to 3% now and raised earnings by 6%.

Underpeformance is now behind
The stock has underperformed the market by 40% over last year on the concerns of VAT implementation. Then it was the concerns on whether the industry / ITC would be able to pass on the tax increases. Once ITC effected nearly 18-20% weighted average price increase, passing on the entire tax hike, which in turn lead to concerns on volume growth. We believe that ITC will likely surprise on the positive on this front.

Target price raised to Rs184/share; upgraded to ‘BUY’
Our 12-m target price of Rs184 per share is based on sum of parts. The key reason for the target price upgrade is the 6% increase in earnings and upward revision in our target cigarette business PE to 17x, due to more confidence on cigarette volume trend. Cigarette business accounts for 70% of sum of parts. With the target price offering 20% upside we upgrade the stock to BUY .

Credit-Suisse report on ITC:

View:
ITC’s cigarette profits tend to grow even in an adverse tax environment. Furthermore, net price realisations tend to outpace volume falls in a declining market, resulting in net sales growth. However, total costs fall, as most costs are linked to sales volume, resulting in margin expansion. ITC has effected a price rise of some 20%, which should result in about a 9.4% rise in net realisations. We expect EBIT margins from cigarettes to increase 150 bp and absolute EBIT to grow 6% in FY08E, resuming doubledigit growth thereafter . Paper should benefit from pulp capacity expansion, while supply-demand in the hotel business remains conducive to profitable growth. Its foods business is likely to turn profitable by early FY09, although entry into the HPC business is expected to drag down segmental profitability. We expect EPS to grow 14.8% p.a. from FY07-10E and ROE to remain steady at about 25%, despite high investments.

Catalyst:
In our view, the market is excessively focused on short-term volume growth in cigarettes, or the lack of it, and would be positively surprised by segmental profit growth. We believe that consensus is for underestimating the extent of a net realisation rise in the cigarette business.

Valuation:
ITC has underperformed the market by 40% over last year and now trades at 19.3x FY08E, which is at a 10% premium to the broader market. We set a sum-of-the-parts (SOTP) fair value of Rs 188, based on Rs 110 for cigarettes (16.5x FY09E cigarette earnings).

Are you buying a financial product that you shouldn't?

Have you ever come across a situation where a close relative of yours is trying to sell you a financial product? How often do you say 'yes' for buying a product, when you should have actually, said a firm 'no'? This is a problem we all face in our life almost every second day.

However, if we understand few things and ask questions to those approaching us to sell a product like personal loan, credit card, etc, a lot many of us will have lesser worries.

Here are a few questions that immediately come to my mind:

Do I really need the product being sold?
Is the person giving me the complete information about the product he is selling? There are a lot of instances where we come to know some important things about the product only after we have purchased it. Sometimes we are put in a discomfort due to this.

Is the person genuine in her/ his intentions?
Analyse from where he is getting his revenues (Salary, Commission, etc). If there are two products which a person is selling and the commission that he will get by selling one product is far greater for the seller then which product is he going to sell you?

Does the seller first ask you what your needs are and then suggests a product which satisfies that need?
There is always a shade of grey for the seller. Benefit to his client vs earning from him. It would depend on the guilt level in the seller.

We also need to understand as to who are these sellers. I like to classify them into groups:

~ Relatives: The first rule of insurance selling is to target the natural market. And relatives are the first to get targeted among this natural market. Most of the sellers are not experienced and are guided by their agency managers. They sell what they are advised to sell by the agency manager . The sale is easy as most people find it difficult to say no to a relative.

~ People in our network: That is, people with whom we come across in our daily life. I generally consider references given by someone too in this category. When we want to buy something, we generally look to buy it from a person that we know or a person who has been recommended by a close acquaintance.

~ Professional organisations with whom we deal. Each one of them is in a business to make money. If they do not earn from you then they will soon be out of business or be taken over by a competitor. So their focus would be to make maximum money from a customer. And this focus of theirs ensures that you maybe sold the products that are more beneficial to them than to you.

~ Complete strangers: These are people whom you don't know or have not met before. They generally move from door to door or from office to office trying to sell their products. Even telesales forms a part of this group.

I have spent a lot of time trying to understand intricacies of how people are sold products which they do not need.

People who sell products are very good at their job and hence we fall prey to their charm and purchase something which we do no need. There are also a lot of cases where we as individuals look for a specific investment product (influenced by friends, media, etc) before understanding our needs.

In such a case we come across sellers for our need. This too is a leading cause of us getting sold a product we do not need. Suppose we purchase/ invest in a product we do not need, then we will have to base our needs on the amount of money (returns) that the product would give us. If we make a mistake we will realise pretty late in life about it and then, would most probably not be in a position to take corrective action.

There is a very simple thing that you must do: Understand what your needs are.
This is the first step that would help us in making the 'Best Plan' that would meet those needs. This plan would help us find the suitable investment options so that those needs/ objectives are met. If we can cultivate this habit then no one will be able to sell us a product, which we do not need.

9 Investment Basics

Start early
Investing is easy once you know how. That’s why starting early gives you an extra edge, to learn from mistakes and experiment with various investment techniques and asset classes. As you grow older, you can take limited risks with equities and would prefer to invest in debt too. For instance, to get Rs 10 lakh at the end of 20 years, if you start now you will need to invest Rs 13,879 annually but if you start 10 years later, the annual investment will shoot up to Rs 56,984.

Know yourself
Invest in shares or mutual funds based on your needs and after doing proper homework. Don't buy something because your neighbour believes so, or your broker is issuing a buy report on a stock. Choose securities that fit your profile. It is important to relate the risk perceived in a given security not only to returns, but also to your attitude towards risk. For instance, what would be your reaction if your stock investments plummet by 35 per cent in a month? How would that affect your medium term or long term plans?

The risk/return trade-off
There is no harm in assuming a big risk in the quest for higher long term returns, and your profile does not preclude taking of such risks. Equities promise higher long term returns but the period taken to realize these returns too can be uncertain. As far as debt mutual funds are concerned, they are more stable tenure but returns are much lower. As an investor, you should be able to judge whether the perceived risk is worth taking in order to get the expected return and whether a higher return is possible for the same level of risk .Smart investing will involve choices, compromises and trade-offs. And you have to decide the combination of factors that suit you best.

Don't overpay for growth
Seek out shares that are capable of delivering sustainable earnings growth but don’t fall into the trap of overpaying for growth. Even the best growth stock may not deliver dream returns if your purchase price was too high to begin with. Warren Buffet said back in 1983: "For the investor, a too high purchase price for the stock of an excellent company can undo the effects of a subsequent decade of favourable business developments." So growth riding on the back of a reasonable purchase price may be a good motto to stick with.

The reinvestment risk
If it suits your plan, choose a fund that reinvests your dividends or interest. That won't leave you exposed to the risk of reinvesting the amount at equivalent or higher returns for the same level of risk. Such alternatives are more than often not easily available. The reinvestment risk is implicitly defined for a debt instrument. Yield-to-maturity, which is the actual yield on a bond if held to maturity, may be a familiar term to those who invest in fixed income. But few know that this YTM assumes that each interest cheque received by the investor is reinvested at the coupon rate. In reality, however, most investors are probably spending this interest on fullfiling current needs.

Beware of the law of averages
The average acts like a powerful magnet that pulls stock prices down sharply, often causing returns to deterioriate after they exceed historical norms by substantial margins. Stocks display runaway tendencies by appreciating sharply. Subsequently, prices may plateau causing disappointment. In such a situation, investors may profit from selling out earlier than originally planned. And if the fundamental story is still intact, you could even buy back your shares at a lower price. So stay tuned to any short-term movements in the stock market that affect your stocks. However, if your goals are long term, don't get into the trading mode, where you compromise on the big picture for short-term gains. It is important that you still think long term.

A trend may not be your best friend
The psychology of the stock market is not only based on how investors judge future events, but also on how they react to the immediate past. There is a tendency among common investors to buy shares of those companies or sectors that have performed well very recently. It is critical that you assess where you are in the cycle during any bull run. That's because what may seem to be an everlasting phenomenon eventually turns out to be illusory. It will be replaced by another, equally compelling one. And as an investor, you are left with shares bought at the peak of a cycle.

Time marches on
Time can dramatically enhance the value of your starting capital through the magic of compounding. At 10 per cent annually, the annual incremental capital accumulation on a Rs 10,000 investment is Rs 1,000 in the first year, is over Rs 2,300 by the 10th year, and just under Rs 10,000 by the 25th year. After 25 years, the total value of the initial Rs 10,000 is Rs 108,000, a ten-fold increase in value. Give your investment all the benefit of time that you can afford. Choosing an investment plan that automatically reinvests your dividends and interest is also a way to benefit from the power of compounding.

Evaluate your future
A lot of investing is about how you see your future. We all make certain assumptions while estimating our future needs, and how we intend to meet those needs. But circumstances can change. Hence it is important that you review your portfolio at least once a year. Also try to evaluate the performance of your investments against the level of risk you are assuming for achieving the returns you want. And when necessary re-balance your portfolio to stay on track with your long term financial goals.

Infy Q1FY08: What do experts think of the nos?

Infosys which is known for positive surprises has once again beaten the market expectations and posted consolidated net profit of Rs 1079 crore (including tax write back) in the first quarter of FY08 against Rs 1,144 crore in the previous quarter.

How is the market reading the Infosys numbers?
Most experts believe that the pressure will continue, are scaling down their price targets and earnings expectations.

Nilesh Shah of Envision Capital says that Infosys is fairly valued at current market price. The case for contraction of premiums is enjoyed by tier-I IT companies he adds. He feels that the IT sector will underperform in the next 2 quarters

JP Sinha of Ambit Capital says that the tech sector can underperform in the short-term.

Further on, Ashwin Mehta, Analyst at Ambit Capital said that the brokerage firm was looking at three things when the Infosys management spoke. Revival of revenues via Banking, Financial Services and Insurance was one of them and that has happened. The second point was increase in utilisation, which too had happened to almost 260 basis points. The third thing was the guidance that his firm was expecting downgrade of the guidance to Rs 77 to Rs 78 and that has happened. "In terms of our estimates Infy is expected to do somewhere in the range of Rs 80 this year and around Rs 95-96 next year. At a 23 times multiple, it would trade at somewhere in the range of Rs 2200 one year down the line," Mehta said.

Dipan Mehta, Member, BSE & NSE says that Infy growth may slow down to 7% due to rupee.

Vibhav Kapoor of IL&FS says: Infosys FY08 guidance of Rs 78-79 is in line with market expectations. We need some more clarity on the other income component. Overall, the business seems to be doing well & I expect the company will beat full year guidance. A bounce is expected in the Infosys stock as there could be some short covering. The stock should settle between Rs 2,000-2,100 in the short-term.

Devesh Kumar of Centrum Finance says: Infosys' muted earnings guidance will not go down well with the markets. I expect the stock to correct. Sentiment for all dollar driven cos may turn negative post the Infosys guidance.

While, the FII view on this comes from Moshe Katri, MD at Cowen and Company. he said that the downward revision of rupee guidance is the biggest overhang for the stock today. Though, Infosys fundamentals remain strong. He sees Infosys operation metrics as better than last quarters.

DSP Merrill Lynch says: EPS for FY08 is expected at Rs 82. Profit after tax, or PAT, is higher than expected on higher income from other businesses. Was expecting higher dollar-revenue.

JPMorgan says: Q1 result is in line. Buy Infosys in the current weakness. Infosys stock will react negatively given the lower-than-expected FY08 guidance due to the management’s conservative stance. This guidance does not reflect any weakness in business trend at Infosys.
There would be positive surprises as the company moves into the traditionally stronger quarters. JP Morgan expects 40% plus dollar-based growth which includes 25% plus Re-based revenue growth and 30% plus dollar-based EPS growth.

CLSA says: Infosys may remain sluggish till the October results when the next test of estimates and upsides will happen. Dollar-revenue in June quarter is much below the street estimates. The lack of revenue upside is key negative surprise of Q1FY08. Q1 results and outlook are unlikely to push estimates up.
From tech pack, CLSA expects Cognizant and Satyam to do better.

Angel Broking’s Harit Shah says: I was disappointed with the kind of flat revenue growth that they have given plus the significant downgrade in the rupee-revenue guidance. But overall the result has been inline. As far as business growth is concerned, there is no problem; there are a 38-40% growth in dollar terms on YoY basis in revenues. On the volume side, there is about 7% sequential volume growth this quarter and over 30% on a YoY basis.
The disappointing factor was on the downgrade in rupee guidance as well as the downgrade in the EPS. But overall the company should be able to do about Rs 80-Rs 82 kind of a range in FY08.

Sanjeev Hota, IT analyst of Emkay says: In revenue terms, it’s marginally below our expectations, but in the net profitability term, it is higher than our expectations. I am expecting an EPS of Rs 82 for FY08 from an earlier EPS of Rs 87 per share. Earlier we had a price target of Rs 2616 and we might revise it to Rs 2400. It’s definitely going to be a buy from our side but it is going to be sluggish till the second quarter results. The second quarter has always been a very good quarter for Infy. Right now if you have taken a rupee rate of 40.5, if the rupee start depreciating, then Infy might revise its guidance upwards from the second quarter. We believe that the margins are going to stabilize because this time the margin fall was driven by the improvement in the utilization rate. We expect the billing rate to improve in the next three quarters and the margins are going to stabilize around 29% for the full year.

PF vs PPF vs NSC

PF vs PPF: What's the difference?

1. What is PPF and PF?

EPF/ PF
The Employee Provident Fund, or provident fund as it is normally referred to, is a retirement benefit scheme that is available to salaried employees. Under this scheme, a stipulated amount (currently 12%) is deducted from the employee's salary and contributed towards the fund. This amount is decided by the government.The employer also contributes an equal amount to the fund. However, an employee can contribute more than the stipulated amount if the scheme allows for it. So, let's say the employee decides 15% must be deducted towards the EPF. In this case, the employer is not obligated to pay any contribution over and above the amount as stipulated, which is 12%.

PPF
The Public Provident Fund has been established by the central government. You can voluntarily decide to open one. You need not be a salaried individual, you could be a consultant, a freelancer or even working on a contract basis. You can also open this account if you are not earning. Any individual can open a PPF account in any nationalised bank or its branches that handle PPF accounts. You can also open it at the head post office or certain select post offices. The min amount to be deposited in this account is Rs 500 per year. The max amount you can deposit every year is Rs 70,000.

2. What is the return on this investment?

EPF: 8.5% per annum

PPF: 8% per annum

3. How long is the money blocked?

EPF
The amount accumulated in the PF is paid at the time of retirement or resignation. Or, it can be transferred from one company to the other if one changes jobs. In case of the death of the employee, the accumulated balance is paid to the legal heir.

PPF
The accumulated sum is repayable after 15 years. The entire balance can be withdrawn on maturity, that is, after 15 years of the close of the financial year in which you opened the account. It can be extended for a period of five years after that. During these five years, you earn the rate of interest and can also make fresh deposits.

4. What is the tax impact?
EPF
The amount you invest is eligible for deduction under the Rs 1,00,000 limit of Section 80C. If you have worked continuously for a period of five years, the withdrawal of PF is not taxed. If you have not worked for at least five years, but the PF has been transferred to the new employer, then too it is not taxed. The tenure of employment with the new employer is included in computing the total of five years. If you withdraw it before completion of five years, it is taxed. But if your employment is terminated due to ill-health, the PF withdrawal is not taxed.

PPF
The amount you invest is eligible for deduction under the Rs 1,00,000 limit of Section 80C. On maturity, you pay absolutely no tax.

5. What if you need the money?
EPF
If you urgently need the money, you can take a loan on your PF.You can also make a premature withdrawal on the condition that you are withdrawing the money for your daughter's wedding (not son or not even yours) or you are buying a home. To find out the details, you will have to talk to your employer and then get in touch with the EPF office

PPF
You can take a loan on the PPF from the third year of opening your account to the sixth year. So, if the account is opened during the financial year 1997-98, the first loan can be taken during financial year 1999-2000 (the financial year is from April 1 to March 31).
The loan amount will be up to a maximum of 25% of the balance in your account at the end of the first financial year. In this case, it will be March 31, 1998. You can make withdrawals during any one year from the sixth year. You are allowed to withdraw 50% of the balance at the end of the fourth year, preceding the year in which the amount is withdrawn or the end of the preceding year whichever is lower. For example, if the account was opened in 1993-94 and the first withdrawal was made during 1999-2000, the amount you can withdraw is limited to 50% of the balance as on March 31, 1996, or March 31, 1999, whichever is lower. If the account extended beyond 15 years, partial withdrawal -- up to 60% of the balance you have at the end of the 15 year period -- is allowed.

The better option?
In both cases, contributions get a deduction under Section 80C and the interest earned is tax free.

Having said that, PF scores over PPF in two aspects.

In the case of PF, the employer also contributes to the fund. There is no such contribution in case of PPF.
The rate of interest on PF is also marginally higher (currently 8.50%) than interest on PPF (8%).

PPF vs NSC: What's the difference?

The NSC is a post-office savings scheme while the PPF was established by the central government in 1968. But both are very safe since they are backed by the government.

How Much ?

The minimum amount you have to put into your PPF account in a year is Rs 500. The maximum you can put is Rs 70,000 per year.

With NSC, the minimum amount is Rs 100. Here, is no upper limit on investment.
However, NSC is sold in denominations of Rs 100, Rs 500, Rs 1,000, Rs 5,000 and Rs 10,000. So, if you want to invest Rs 30,000, you will have to buy three certificates of Rs 10,000 each.

What do I get?

On the face of it, both give an identical rate of interest: 8% per annum. The only difference is in the way it is computed. PPF is compounded annually. NSC is compounded half-yearly (twice a year).

Let's say on April 1, 2006, you invested Rs 30,000 in PPF and the same amount in NSC.
On April 1, 2007, your PPF account will have Rs 32,400 while your NSC will have Rs 32,448.

Both these investments fall under Section 80C. That means the investments made under this section are eligible for an income deduction upto a maximum Rs 1,00,000.
This is as far as your principal investment goes.

Let's look at the interest earned.
With PPF, you pay no tax on the interest you earn.

What about NSC?
Till FY 2004-'05, an individual could avail of a deduction under Section 80L of the Income Tax Act. This limit was Rs 12,000 of interest income received during the financial year. This deduction has been done away with from FY 2005-'06. Now, all interest income is taxable at the respective slab rate of the individual.The interest accrued on NSC is taxable. But, it is also eligible for a deduction under Section 80C.
Generally, it is advisable to declare accrued interest on NSC on a yearly basis. So, over the period of six years, you could declare the interest income for each year. In such a case, it does not amount to a huge sum.
If you do not declare the interest on accrual basis, then the entire interest earned (difference between the amount deposited and the maturity value) would accumulate in the year of maturity. You could then claim it under Section 80C but it would be a huge amount and would be taxable at the current applicable tax rate.

How long do I hold it?

PPF is for 15 years, but you can extend it for a block of five years.

Of course, you do have the option of withdrawing the entire balance on maturity, that is, after 15 years of the close of the financial year in which you opened the account.

So, if you opened it in FY 2006-07 (this financial year), you will be able to withdraw it 15 years later, starting March 31, 2007 (end of this financial year). That is April 1, 2022.

If you extend it for five years after that, you continue to earn the rate of interest and can also make fresh deposits and get the tax benefit.

NSC is for a much shorter duration -- just six years from the date of investment.

How many can I have?
Once you open an NSC, you can't keep adding to it. You will have to buy another. Let's say you buy a NSC of Rs 30,000. In a year's time, you want to add another Rs 30,000. You cannot add it to this amount. You will have to buy another NSC.

With PPF, you can have just one account. But this does not matter because you have to make annual additions. Every year, you keep adding to it.

However, if you like the safety of the investment and a guaranteed return of 8% per annum, you can open one in your child's name.

So you can have one account for yourself and one for your child. But this does not mean the tax benefit is doubled. The limit is the same -- Rs 70,000, irrespective if it all goes in your account or in your account and your child's.
Let's say you open an account for your minor child. You can deposit Rs 70,000 in your account and Rs 70,000 in your child's account. But you will only get the tax benefit on Rs 70,000.

How is it held?
The PPF account cannot be held jointly. You can nominate someone but it cannot be jointly held with someone else.

With NSC, you can hold it jointly or you can hold it singly and nominate someone.

Where can I open it?
To open a PPF account, you can drop by a State Bank of India branch. No, you do not have to have an account with them.

You can also ask your nationalised bank where you have an account if they are authorised to open PPF accounts. You can also approach the head post office in your area. If that is inconvenient, ask your local post office (selection grade sub post offices are allowed to do so).

To buy an NSC, just approach any post office.

How to pick the right mutual fund

Mutual funds are often touted as a useful vehicle for small investors as it allows an investor to hire an expert to go through a plethora of parameters for evaluating among the thousands of stocks listed on stock exchanges. However, with so many mutual funds to choose from, the investors are no better off than they were without the mutual funds.

The following discussion is an attempt to look at some of the parameters to decide how to select mutual funds for investments:

The standard approach is to look at the past performance of the fund, the risk associated with the fund , the conduct of the fund house, services of the fund house, the adherence to or the deviation from the objectives of the scheme, if any, etc.

Looking at these parameters is important, but there is another perspective that needs to be looked at. Every fund house or every fund manager has a particular style of working, certain values, and certain appetite for risk. Some funds are aggressive while some are conservative.
Some funds believe in taking certain risks, whereas the others would keep away from those. While none of the approaches is wrong, it is upto the investor to decide what suits him / her the most. There is nothing like "one-size-fits-all" in investments.

How does one determine whether a portfolio manager is taking high risk or low?
Let us start with the discussion with equity funds. Investors can look at some parameters like standard deviation, beta, portfolio turnover, stock or sector concentration, exposure to illiquid / unlisted stocks, etc. Standard deviation and beta indicate the risk associated with price volatility, which essentially indicates the uncertainty regarding the returns that the portfolio would generate in future. Both these factors need to be used to compare two or more funds. The fund with higher standard deviation or beta is riskier than other funds.

Often, the portfolio managers knowingly take certain risks in order to generate higher returns for the portfolio. Some of the approaches that the fund manager may adopt are taking higher exposure to certain companies or sectors where they have very high conviction about brighter future. However, since short term movements of stock prices may not be strongly related to the strengths of the stocks or companies, the short-term risk could go up if the prices do not move favorably. If the concentration is high, the risk goes up even further.

On certain occasions, the portfolio manager enters and exits some stock positions at a high frequency in order to take benefit of the momentum. Such aggressive entry / exit strategy focuses on momentum rather than stock picking. Some of the fund houses publish the portfolio turnover ratio of funds in the fact sheet. Between two funds, the one with a higher turnover ratio is considered to be riskier.

In case of the debt funds, one needs to look at credit quality of securities, average maturity of the portfolio, exposure to certain kind of sectors or securities, exposure to liquid / illiquid securities, etc.

The objective of debt funds is to provide regular income with high safety of the investment. In such cases, if the fund has higher exposure to low quality securities, the investor is exposed to higher risk. The quality of the portfolio can be assessed by looking at the credit ratings of the debentures that the fund has invested in. If a high allocation is made to securities with AA (or equivalent) or higher rating from credit rating agencies, the portfolio is considered to be safer. Average maturity (or duration of the portfolio) determines how the portfolio would react to the changes in interest rates. Longer maturity (or duration) denotes the fund is riskier compared to one that has shorter maturity (or duration). Debt securities that are less liquid or illiquid offer better returns to the investor if held till maturity.

Liquidity of the investments is a major consideration especially if the fund in question is an open-end fund. This is applicable for both equity as well as debt funds. Poor liquidity of the underlying instruments may present a bargain to a buyer, but when it comes to selling, the same illiquidity may turn against the holder of the stock or debenture. Liquid funds are used by the investors to park their short-term investments, such that the money is safe at all times and available when needed. In such cases, exposure to illiquid securities, market price fluctuation, and credit risk become some of the important factors to look at.

It is important for to remember that the portfolio manager takes a higher risk only with an objective to enhance portfolio return. It is very important to understand this relationship between risk and return. Such an understanding allows the investor to weigh the upside and downside with the investment goal and the appetite for risk.

At the same time, it is important for an investor to be aware of one's own ability to take risks. It is observed that the investors' risk preference oscillates between low risk to high risk depending on external factors like the state of the stock markets, the state of the economy, etc.

As Leon Levy puts in his book, Mind of the Markets: 'The reason why most get it wrong in stock markets is that there is a gap between the actual risk and our perception of the same. Most of the times, the risk is at the highest when it is perceived to be at the lowest and vice versa. The risk of terrorist attack was actually the least after WTC event, but the whole of US was terrified.'

Such an oscillation from high safety to high risk and back is harmful to the investors' wealth, and health.

P/E Ratio

P/E is short for the ratio of a company's share price to its per-share earnings. As the name implies, to calculate the P/E, you simply take the current stock price of a company and divide by its earnings per share (EPS)

P/E Ratio = Market Value per Share
Earnings per Share (EPS)

EPS = 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.

It's difficult to determine whether a particular P/E is high or low without taking into account two main factors:

1. Company growth rates - How fast has the company been growing in the past, and are these rates expected to increase, or at least continue, in the future? Something isn't right if a company has only grown at 5% in the past and still has a stratospheric P/E. If projected growth rates don't justify the P/E, then a stock might be overpriced. In this situation, all you have to do is calculate the P/E using projected EPS.

2. Industry - It is only useful to compare companies if they are in the same industry. For example, utilities typically have low multiples because they are low growth, stable industries. In contrast, the technology industry is characterized by phenomenal growth rates and constant change. Comparing a tech company to a utility is useless. You should only compare high-growth companies to others in the same industry, or to the industry average.

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. Banking as an industry enjoys an avg P/E of around 8-10 visa 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-à-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.

Most of the time, the P/E is calculated using EPS from the last four quarters. This is also known as the trailing P/E. However, occasionally the EPS figure comes from estimated earnings expected over the next four quarters. This is known as the leading or projected P/E. A third variation that is also sometimes seen uses the EPS of the past two quarters and estimates of the next two quarters. There isn't a huge difference between these variations. But it is important to realize that in the first calculation, you are using actual historical data. The other two calculations are based on analyst estimates that are not always perfect or precise. Companies that aren't profitable, and consequently have a negative EPS, pose a challenge when it comes to calculating their P/E. Opinions vary on how to deal with this. Some say there is a negative P/E, others give a P/E of 0, while most just say the P/E doesn't exist. Historically, the average P/E ratio in the market has been around 15-25. This fluctuates significantly depending on economic conditions. The P/E can also vary widely between different companies and industries.

Using The P/E Ratio
Theoretically, a stock's P/E tells us how much investors are willing to pay per dollar of earnings. For this reason it's also called the "multiple" of a stock. In other words, a P/E ratio of 20 suggests that investors in the stock are willing to pay $20 for every $1 of earnings that the company generates. However, this is a far too simplistic way of viewing the P/E because it fails to take into account the company's growth prospects.

Growth of Earnings
Although the EPS figure in the P/E is usually based on earnings from the last four quarters, the P/E is more than a measure of a company's past performance. It also takes into account market expectations for a company's growth. Remember, stock prices reflect what investors think a company will be worth. Future growth is already accounted for in the stock price. As a result, a better way of interpreting the P/E ratio is as a reflection of the market's optimism concerning a company's growth prospects.
If a company has a P/E higher than the market or industry average, this means that the market is expecting big things over the next few months or years. A company with a high P/E ratio will eventually have to live up to the high rating by substantially increasing its earnings, or the stock price will need to drop. A good example is Microsoft. Several years ago, when it was growing by leaps and bounds, and its P/E ratio was over 100. Today, Microsoft is one of the largest companies in the world, so its revenues and earnings can't maintain the same growth as before. As a result, its P/E had dropped to 43 by June 2002. This reduction in the P/E ratio is a common occurrence as high-growth startups solidify their reputations and turn into blue chips.

Problems With The P/E
Accounting
Earnings is an accounting figure that includes non-cash items. Furthermore, the guidelines for determining earnings are governed by accounting rules (Generally Accepted Accounting Principles (GAAP)) that change over time and are different in each country. To complicate matters, EPS can be twisted, prodded and squeezed into various numbers depending on how you do the books. The result is that we often don't know whether we are comparing the same figures, or apples to oranges.

Inflation
In times of high inflation, inventory and depreciation costs tend to be understated because the replacement costs of goods and equipment rise with the general level of prices. Thus, P/E ratios tend to be lower during times of high inflation because the market sees earnings as artificially distorted upwards. As with all ratios, it's more valuable to look at the P/E over time in order to determine the trend. Inflation makes this difficult, as past information is less useful today.

Many Interpretations
A low P/E ratio does not necessarily mean that a company is undervalued. Rather, it could mean that the market believes the company is headed for trouble in the near future. Stocks that go down usually do so for a reason. It may be that a company has warned that earnings will come in lower than expected. This wouldn't be reflected in a trailing P/E ratio until earnings are actually released, during which time the company might look undervalued.

It's Not A Crystal Ball
What goes up ... well, sometimes it stays up for an awfully long time. A common mistake among beginning investors is the short selling of stocks because they have a high P/E ratio. Short selling is an investing technique by which an investor can make money when a shorted security falls in value. Although a high P/E ratio could mean that a stock is overvalued, there is no guarantee that it will come back down anytime soon. On the flip side, even if a stock is undervalued, it could take years for the market to value it in the proper way. Security analysis requires a great deal more than understanding a few ratios.

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.

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-à-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.

Understanding Dividends, Bonus, Stock Splits & Buybacks

1. Dividends
During a bull market capital gains take precedence over dividends. This is because a dividend is always on face value and not on market value. Consequently, even if a company whose share price is say ruling at Rs. 400 declares a healthy dividend of say 60% (face value Rs. 10), the dividend while being at Rs. 6 per share, the dividend yield would be an abysmal 1.5%. However, it doesn't mean that dividends are of no significance to shareholders. Apart from the utility during a bear phase, dividends are looked upon by the market at large as an important signaling mechanism determining the health of the corporate. Dividends are paid out of reserves and by paying dividend the company is distributing a part of its reserves amongst shareholders. However, there is another school of thought that considers dividend payouts as a waste of money. Fast growing companies are perceived to be much better off ploughing their profits back. Case in point : Most of the US tech giants are extremely stingy dividend payers. Equity dividends in India are tax-free in the hands of share holders. However, u/s 115O, the company distributing the dividend has to pay a dividend distribution tax of 12.8125% to the exchequer. In effect, it is the share holders who bears the tax since they receive that much lesser amount as dividend. Also, the dividend amount gets subjected to tax twice, once at the company's end since it is the post tax profits which may be distributed as dividend and the second time as dividend distribution tax. Hence sometimes reserves may even be distributed as bonus shares.

2. Bonus shares
Bonus shares are nothing but shares issued free of cost to the shareholders of a company, by capitalizing a part of the company's reserves. Following a bonus issue, though the number of total shares increase, the proportional ownership of shareholders does not change.
Also, post the bonus the cum bonus share price should fall in proportion to the bonus issue, thereby making no difference to the personal wealth of the share holder. However, more often than not, as explained earlier, a bonus is perceived to be a strong signal given out by the company and the consequent demand push for the shares causes the price to move up.
As far as tax is concerned, since no money is paid to acquire bonus shares, these have to be valued at nil cost while making calculations for capital gains. An incidental benefit is that since the price more or less falls in proportion to the bonus, there may arise an opportunity to book loss on the original shares.

3. Stock splits
Stock splits are a relatively new phenomenon in the Indian context. It is important that investors understand the reasons that companies may split their shares and how a stock split is different from a bonus issue. A stock split is when the number of shares in a stock is increased and the value per share is decreased. This in no way affects the intrinsic value of your investment and has no effect on your net wealth. A typical example is a 2-for-1 stock split. Say a company announces a 2-for-1 stock split in one month. That means one month from that date, the company's shares will start trading at half the price from the previous day. Consequently you will own twice the number of shares that you originally owned and the company in turn will have twice the number of shares outstanding. The question that arises is if there is no difference to the wealth of the investor, then why does a company announce a stock split. Well, the primary reason is to infuse additional liquidity into the shares by making them more affordable. Here it has to be reiterated that the shares only appear to be cheaper, it makes no difference whether you buy one share for Rs.3,000 or two for Rs.1,500 each. As far as the tax implications for stock splits are concerned, well, there aren't any. A stock split, like a bonus issue, is tax neutral. However, when the shares are sold, the capital gains tax implications are different that what is applicable for bonus issues. Here, the original cost of the shares also has to be reduced.

4. Share buybacks
Even share buybacks are a comparatively new phenomenon. Reliance and Siemens are a couple of examples of companies which have bought back their shares. A buyback is essentially a financial tool in the hands of the corporate that affords flexibility in the capital structure. A buyback in this case allows the company to sustain a higher debt-equity ratio. It is also a tool to defend against possible takeovers. Generally companies buyback when they perceive their own shares to be undervalued or when they have surplus cash for which there is no ready capital investment need. Stock buybacks also prevent dilution of earnings. In other words, a buyback program enhances the earnings per share, or conversely, it can prevent an EPS dilution that may be caused by exercises of stock option grants etc.

Stock Idea - Indian Hotels

Research done by - HDFC Sec

Q4FY07 & FY07 Results Review; Marginally below expectation:
IHCL reported a turnover of Rs 15,445 million for the year ended March 31, 2007, and a PAT of Rs 3223.9 million, which were 40% and 75% higher yoy. The healthy topline growth was led by 28% rise in ARRs (Rs 9,234) and 3% rise in occupancy (73%).

For the quarter ended March 07, the turnover of Rs 5051.6 million and PAT of Rs 1345.2 million were higher by 45% and 71% yoy, respectively. The top line growth was aided by 25% rise in ARRs and 4% rise in occupancy.

OPM for the quarter improved 638 bps to 42%, while for the full year, it jumped a whooping 745 bps to 36.5%. Other income during the quarter and the year ended March 31, 2007, included the benefits of higher dividends received, profit booked on sale of shares and foreign currency gain.

The consolidated top line rose by 36.7% to Rs. 25115 million, against our estimate of Rs. 24300 million, a gap of 3.2%. The bottom line stood at Rs 3699 million, a growth of 48.7% against our estimate of Rs 3849 million.

Outlook and Valuation
Envisaging a tight demand-supply mismatch in the luxury category (incremental demand of over 55,000 rooms in the next 5 years, against the planned expansion of 18,000 rooms), we believe, ARRs would continue to be on the uphill, at least for a year or two. Also, within IHCL, over 1000 rooms would be added in the next 2 years. With standalone IHCL expected to do better (assuming a proxy to the industry), a turnaround in the performance of subsidiaries and higher share of profits through JVs and associates, would remain key to future earnings growth. IHC’s extensive geographic reach, strategy of spreading itself into all segments, from star deluxe to budget hotels and increasing tie-ups for management contracts would not only give it a competitive advantage, but de-risk its revenue stream too.

We value the target price at Rs 195, offering 36% upside from current levels. The stock is available at a PER of 16.0x FY08E & 11.1x FY09E EPS of Rs 9 and Rs13. We re-iterate “Outperformer”.

Stock Idea - ABG Shipyard

Research Done by - Prabhudas Lilladher

Result Snapshot
ABG Shipyard grew revenues by 8.2% YoY and 13.4% QoQ to Rs 1,746 million and profits by 6.7% and 12.5% to Rs 330 million after booking an income from subsidy of Rs 185 million. OPM improved from 12.3% last year to 17.9% during the quarter. Sequentially there has been a dip of 90 bps due to one time payment of octroi. For the full year revenues and profits have grown by 33.4% and Rs 38.9% to Rs 6,235 million and Rs 1,163 million respectively. OPM improved from 14.2% last year to 18.4% in FY07.

Result Highlights
Recent acquisition to help consolidate presence at Magdala

The company recently signed a MOU with Vipul shipyard. The total capex including the acquisition cost and modernization is about Rs 1 billion. It is located next to ABG’s existing yard at Surat thereby making the acquisition is strategic in nature. This will help ABG consolidate its position there and also help ward of any future competitors who could have set up a yard there. This shipyard will augments ABG’s capacity by 25%. It offers about 5-8 berths depending on the size of the vessel. ABG has also had to take over Vipul’s current order book, which is roughly worth about Rs 400 million. Once these orders will be executed ABG can execute its own orders there.

Other expansions on schedule
Apart from this, the expansion at Dahej is also progressing as per schedule. This yard will commence operations by April 1, 2008. In addition another rig yard is also being set up. The estimated capex on both expansions is close to Rs 10 billion all of which will be funded by way of internal accruals and borrowings. The company has already tied up the debt. No equity dilutions are expected. The company is currently already in negotiation with Essar for an order to construct a rig. The first rig is likely to be delivered in the next 24-30 months. The company is in talks for converting its unit at Dahej in to an EOU or a SEZ. No clarity is available yet.

Well-diversified order book
The current unexecuted order book stands at Rs 30.8 billion of which 75% is in favour of exports. About 40-45% of these orders are from the oil and gas sector. Within this category, it has received orders to construct DP – 2 and DP – 3 that are more sophisticated in nature. The company also boasts of being one of the only shipyards to build coastguard vessels. Currently it also has orders in hand to construct specialized vessels such as icebreakers. It continues to witness robust order inflow and is in negotiation for new orders. The last delivery on the current order book is slated for November 2011. Of the Rs 40 billion order book, about Rs 10 billion is for the new yard coming up at Dahej, where the company can build up to 90,000 DWT vessels.

Valuation
As on March 07, the company has total borrowings to the tune of Rs 2.6 billion, which is expected to rise to Rs 7 billion by March 08, and Rs 12 billion by March 09 due to expansions at Dahej I and Dahej II. Debt to equity ratio will rise from the current 0.5x to 1.5x over the same period. At the CMP, the stock is trading at rich valuations of 14.7x FY08E and 12.5x FY09E EPS estimates of Rs 27.3 and Rs 32.0 respectively. On an EV/EBITDA basis it is quoting at 14.8x FY08E and 11.8x FY09E. Thus while order book visibility continues to remains high (5.0x order book to sales based on last 12 months trailing revenues), we feel that the stock may loose momentum in the near term. Receipt of money on account of subsidy could act as a trigger for the stock. From a medium to long-term perspective we maintain Outperformer on the stock.

10 tax saving funds that can make your money grow

There are very few of us out there who don't want to make money. Most of us, in fact, are very interested in seeing our wealth grow, particularly if it happens without too much effort on our part. If you fall in this rather large category, then mutual funds are an investment option you must consider. If you are worried about tax implications, you could invest in ELSS or tax saving mutual funds.
According to a premier mutual fund research company, investing in certain ELSS funds would have seen the value of your money grow by more than 50 per cent in the last one year.
To put it simply, if you had invested Rs 10,000 on June 7, 2006, it would have multiplied to more than Rs 15,000 by June 8, 2007.

This table shows the top 10 tax saving mutual funds:

5 ways to diversify your portfolio

Diversification should be regarded as one of the basic tenets of financial planning. Having the desired degree of diversification makes the portfolio a resilient one. A downturn in a given investment can be offset by the presence of another. The following five ways would help you to minimise your losses

1. Diversify across asset classes - Firstly, the portfolio must be diversified across various asset classes. Depending on the investor’s risk profile and needs, assets like equities, fixed income instruments, gold and real estate among others should find place in the portfolio. This will grant stability to the portfolio, by making it resistant to the vagaries of the market. For example, when equity markets are at their volatile best , the portion invested in fixed income instruments like fixed deposits (FDs) and fixed maturity plans (FMPs) can prove to be handy.

2. Diversify across investment avenues - Within each asset class, there is a need to be diversified across various investment avenues. For example, the equity portfolio can comprise of direct equity investments, investments in mutual fund schemes and unit linked insurance plans (ULIPs). Similarly the fixed income portfolio can be constructed from FDs, FMPs and small savings schemes. An insurance portfolio could hold a combination of term plans, endowment plans and ULIPs.

3. Diversify across time horizons - Investors should hold multiple investment portfolios each catering to a distinct need and running over a commensurate time horizon. For example, typically an investor could have short-term goals , medium-term goals and long-term goals . Each of these objectives should be backed by a distinct portfolio and the investments therein should be aligned with the time frames. Equities can account for a higher portion of the long-term portfolio given that they are best equipped to deliver over longer time frames. Conversely, fixed income instruments could dominate the short-term portfolios.

4. Diversify across providers/suppliers - Ensure that your investments are spread across various providers/suppliers. For example, the mutual fund portfolio should have schemes from various asset management companies (AMCs). Each AMC can offer a unique investment style and process, thereby aiding the portfolio on the diversification front. Similarly, FD offerings from multiple banks can be considered for investment. Investors should make use of the plethora of providers to their advantage, by selecting the “best-in-class” financial service providers/asset managers and in the process de-risk their portfolios.

5. Diversify across countries - Investors now have the option to invest globally. Domestic mutual funds have been granted permission to invest in foreign stocks. Similarly, resident Indians are also permitted to invest in assets and securities abroad, subject to the regulations issued by the Reserve Bank of India (RBI). By adding foreign assets to their India-centric investment portfolios, investors can expose the same to a different set of market forces, thereby imparting it a unique diversification edge.

Six good habits for tax payers

The thought of doing something for the first time could make you either excited or nervous, depending on the task at hand and your natural temperament. First time tax assessees, for example, are more likely to be nervous than excited. Are you one of those individuals who, from this year onwards, will be compelled to shed the regal 'tax-free' tag?

If yes, the following might make for useful reading.

Different persons prepare differently for first-time encounters. Some get into the planning mode and seek counsel from friends and advisors. A lucky few find that their ignorance is the source of their bliss. For a tax assessee, it is vital to draw a distinction between tax planning and tax avoidance. Tax planning is your passport to tax nirvana; tax avoidance could easily make your life miserable. Tax planning is the cornerstone of a healthy tax life. Prepare for your tax life by inculcating the following good tax habits.

1. Get a Permanent Account Number
PAN is a 10 digit alpha-numeric unique code that lends you an identity and is a must for various financial transactions like buying a new house, opening a bank account, opening a demat/ stock broking account. PAN, in the days to come, will be used as a tracking mechanism for any tax deducted against this number. The effort to convert physical TDS certificates into electronic form is on as well. Once this is done done, your tax payments will become transparent and will be easy to track. The importance of PAN cannot be overemphasised. For example, you might not get credit for tax deducted by your employer from your salary if you do not have a PAN.
Obtain your PAN either online by visiting https://tin.tin.nsdl.com/pan/index.html or get a tax counsellor to help you to make a physical application.

2. Appoint a tax counsellor
Enlist the help of a good, ethical tax practitioner. She/ he would enable you to organise and structure your thought process so that you can manage your taxes efficiently. It is a myth that low-level and middle-level salary earners have no use for tax planners; getting a grip on your finances and related tax aspects early on in life will help you to eventually achieve a more holistic approach to managing your finances. In order to derive maximum benefit from your personal tax guide, maintain a smooth communication channel. Have complete trust in her/ his counsel.

3. Talk to your payroll department
For salaried individuals, it is definitely a good idea to have a reasonable amount of interaction with your office payroll team. They are the best people to educate you with regard to the amount of tax you are liable to pay. They will provide you with forms that seek infomation about your planned tax saving investments and the tax deductions you are planning to claim.
Complete these documents with the assistance of your tax/ financial counsellor and submit them within the time frame provided by your payroll team. This will help avoid deduction of excessive tax from your salary.

4. Disciplined record maintenance
If you are self employed, you need to religiously maintain relevant information/ records/ documents as stipulated by your tax practitioner.

5. Be regular in completing your tax investments
Very often, individuals end up with a tax nightmare at the end of the year because of their failure to invest in tax saving instruments evenly through the year. This acts as a double-edged sword. On the one hand, your credibility with your payroll team could take a knock; they might disregard your investment plan for the next year and resort to tax deduction from your salary.
Also, your skewed investment strategy may strain on your liquidity at the end of the year; you may have to invest all your savings to save on tax and you may also end up higher taxes by way of TDS on salary.

6. Be regular in filing your income tax returns
As the financial year comes to an end, collect all your relevant documents and hand them over to your tax counsellor. Ensure that the returns have been filed and obtain acknowledgement for your records.

These simple steps will ensure you lead a stress-free tax life. Aim, prepare and you will certainly succeed in becoming an honest, yet efficient, tax assessee.

Simplifying mutual funds for you

What is it that makes mutual funds such an attractive investment option?
Here is a look at the basic factors that are necessary in a sound mutual fund, and some dos and don'ts you must keep in mind before signing up.

Understand your expectations and the risk involved
Before deciding to invest in a mutual fund, you need to have a clear idea about what your expectations from your investment are (how much you expect your money to grow) and whether you are comfortable with the level of risk involved

Think first, choose later
Understand what you need the money for, and let that decide the future course of your investments.
Here are some steps that might help you pick the right funds:
~ Carefully assess the portfolio to check for the sectors it is focusing upon. Choose a fund where your level of comfort with their preferred sector is higher. In an ideal scenario, choose a fund that does not have a heavy focus on any particular sector; this cuts down the risk the fund is taking.
~ Understand whether your fund subscribes more to the 'value philosophy' or the 'growth philosophy'. This will give you an impression of the nature of risks the fund will be taking in the future.
It is probably a safer investment to choose a mutual fund that does not buy and sell stocks too often if you are looking for a long-term investment and stability. This is also known as the 'value philosophy'. If you are comfortable affording a higher risk and choose to ride the markets, then you might opt for a fund that makes the most out of current booming sectors. This is the 'growth philosophy'.

A bird in hand...
Most investors are restricted by the degree of risk they can take with their investments. Give good thought to your investment process and also to the time horizon of the intended investment . Don't change mutual funds just to make a quick buck. If you stick with a particular mutual fund scheme for more than two years, the chances of earning a decent profit on it increases. However, if you often sell units of one scheme to buy units of some other scheme, you may end up paying more in terms of fees than earning any profits. Instead, stick to a few funds that you think will give you good returns. Mathematically too, the chances of making money are far higher with investing small amounts regularly than with speculation. Remember, there is no way of perfectly timing the market .Unless there is a compelling reason, exiting a fund might not be the prudent choice.

Avoid putting all eggs in one basket
As a rule, always diversify the risks associated with your investments no matter what your ability to take risks may be. For instance, assume you have invested Rs 100,000 in a mutual fund scheme. And it would not make any difference to you even if the value of your investments come down to Rs 50,000. If this is your risk-taking capacity then you will be better off by investing Rs 50,000 in two different schemes, say one in an equity scheme and the other in a debt scheme. This will help you manage your risks better.

A few pointers to cutting down on risk are:
~ Average out the risk in each category; invest in different asset classes like equity, gold, real estate, commodities etc.
Equity investors would cut down on risks by investing a portion of their funds in debt. Diversifying even within a class like either debt or equity might be prudent.
~ Split your investments across fund managers. Every fund manager has his own areas of strength when it comes to investing. There is no 'ultimate fund manager'.
~ More often than not, the quirks in the market decide who ends up maximising the returns. This will cut down on your profit margins a bit, but will also heavily bring down the risk.

Success is nine parts observing, one part investing
There are merits to studying and following the markets regularly.

If you do not plan to invest for the next two months, it does not mean you should ignore the ups and downs in the markets for that period. You can never be sure when to enter or exit the market, but you can better your chances by being systematic.

The basic philosophy of rupee cost averaging would suggest that if you invest regularly through the highs and lows of the market, you would stand a better chance of generating higher returns than the market for the whole duration.

Systematic investment plans, SIPs, offered by all funds helps you invest regularly. Simply issuing post-dated cheques to the fund takes care of most of your worries. In the case of a majority of funds these days the amount is directly debited electronically from your account.

Which is the right fund for me?
Debt funds have lower returns. It is of higher importance to find funds that charge a low fee, as the fee charged eventually goes from the pocket of the investor.
Funds can be utilised in saving tax. Investors of equity should use the dividend payout option. This is since all dividends are currently tax-exempt in India, and this will help in reducing tax-liabilities.
Debt investors should avoid the payout option, as they will be taxed dividend distribution.
If the market enters a bearish period, equity investors can minimise losses by switching to debt funds. And it is never a problem to switch back to equity once the equity markets start rising.

When to throw in the towel?
On meeting with the initial expectations of the fund, you should immediately book profits, that is, sell your units and take home the profits made. At times, it may not be advisable to continue with the current fund.

Some of these pointers may help in deciding when to quit:
~ In case the fund is not performing relatively in the long run. If a fund has not performed as well as most of its peers in the past, then quitting might be an option worth exercising. When comparing funds, however, ensure that comparisons are drawn between parallels and across the same category. For example, do not compare debt funds with equity funds.

~ Changes in the Asset Management Company , open-ended funds changing to close-ended funds and any change in the premises from the offer document might be reason to quit.

~ Significant rise in the fund's expense ratio leading to lower returns.

~ In case a fund does not comply with its objectives. For example, if some diversified equity funds had large exposures to ICE (Information technology, Communications, and Entertainment) sector scrips, then it adds to the volatility and also defies its objective.