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Devesh Kayal

Monday, February 25, 2008

Fund Manager's Next Big Bets

Samir Arora,Helios Capital

Insurance,broking, banking,media,defence and asset management companies. He likes to invest in companies which are competing with the government or operating in areas previously reserved only for state-run companies. There are two reasons for this: The first is that government-run sectors are usually poorly serviced, and hence there is a pent-up demand; the second is that govt. companies,typically are not strategic thinkers who know how to fend of growing competition from the private sector. In power, he prefer equipment suppliers.

Madhusudan Kela,Reliance Mutual Fund

The prices of agricultural land have soared.Many people will be encouraged to sell a portion of their land to cash in on the leaping prices. The money from the sale,most of the time, will be ploughed back into the rest of their land holding to improve output. Translation: they will invest in better technology,farm equipment,high-quality seeds and irrigation systems. Giving another boost to the rural story is the growth of the organized retail in India: supermarkets are buying agricultural produce from farmers forcing the companies dealing with agriculture to get more organized. The key beneficiaries of this change will be companies which can help in getting this sector organized,espicially in terms of supply chain linkages. Winners here will include companies involved in warehousing, logistcs, deep refrigeration plants and similar activities. He strongly belives that rural spending is poised for a surge. According to him, fertiliser stocks make a compelling investment case for the long term. He is bullish on Alternative Energy space. One of the biggest benefits is that after swallowing the capital cost, the return on investment can be pretty high because there are no variable costs. He suggests Banks as safe havens this year.

Prashant Jain,HDFC Mutual Fund

"In the next decade, infrastructure could replicate the growth witnessed in telecom over the past ten years. He believes investment demand will grow atleast twice or thrice as fast as consumption demand over the next few years. The large scale of investments will throw up oppurtinities for three different kinds of players: asset creators, asset financers and asset owners. All infrastructure projects are capital intensive and are typically 70% debt-funded. Local banks will be the dominant providers of debt to these projects and this should materially boost their businesses. "

Source: Outlook Profit

Sunday, December 23, 2007

Ajay Bodke, Fund Manager,StanChart MF- Sector likes and dislikes

On IT companies…
India imports a lot of oil, $61 billion of it to be precise. This adds majorly to our current account deficit. However, with all the gas being found on the coast and since gas and oil are fungible, gas usage is set to rise. This would help save on subsidies and lead to the imports coming down, as a result of which, the current account deficit will come down and the rupee appreciate further.

In addition, the staff cost of IT companies is huge. Tax sops are about to vanish in 2010. With global firms also playing the ‘labour arbitrage game’, things really do not look good for IT companies.

In the last few quarters, they have been able to protect their margins by entering into more fixed price contracts and doing more work offshore as against onsite, besides reducing bench strength and emphasising on recruitments at the lowest level.

However, most of these companies would like to move up the value chain by getting into consulting. Now, consulting requires more employees onsite and that too senior, highly experienced ones. So, they are in a Catch-22 situation. If they want to go up the value chain, they have to have more employees onsite. If they do that, their margins take a beating, and if they don’t, they do not move up the value chain.

On telecom companies…
The low-hanging fruits have already been plucked. New customers are coming in at lower margins and that explains why the average revenue per user has been coming down. A large chunk of new business is expected to come from rural locations spread across a huge geographical area.

In order to service them, companies will need to put up more towers. Now, putting up a single new tower costs around $65,000. Hence, companies will have to make a whole lot of capital expenditure and this in turn will impact the margins. Number portability remains a major issue, too.

On state-owned refiners…
These companies, for no fault of theirs, have ended up developing a unique business model. The more they sell, the more losses they make. Also, with privatisation of these companies nowhere in sight, there is deep value that cannot be realised.

On interest rate-sensitive sectors…
These sectors do well when the interest rates are low and vice-versa. We believe that interest rates have peaked. We believe over the next 12-18 months, interest rates will come down again and consumption will take charge. This will benefit banks, which are major players in the retail segment.

Growth rates of both home loans and demand for homes have slowed because supply is there only in the super luxury segment. However, there is tremendous demand in the middle market segment. Real estate companies have woken up to that. Once supply in this segment starts hitting the market, the growth of home loans will take off again.

We are neutral on the auto sector. Competition is intense, so steep festival discounts continue and margins will continue to hurt.

On steel companies…
Indian companies in this sector are fully backward-integrated. Therefore, even though iron ore has gone up from $40 a tonne to $160 a tonne in the last few months, they have not felt the impact. Since the price of the steel is going up globally, Indian companies can hike their price as well.

On power companies…
In the XIth Five Year Plan, the outlay for the power sector is $250 billion. This will benefit companies that produce boilers and turbines for power plants. The earnings visibility of most of these companies is currently 2-3 years. There is a huge demand-supply gap. Given this, margins on incremental orders have been a lot better. Companies across the value chain benefit, including those that supply switch gears, transformers, cables and transmission towers, etc.

On air-conditioning companies…
The new civil aviation policy is expected to result in 35-40 new airports. Many real estate companies have made public their plans to make five star hotels. They are talking about supply levels in the next three years that have not been built in the last 30 years. Many corporate hospitals are coming up all over the country. All this tells me is there will be a lot of central air-conditioning needed.

On Sensex valuations…
At the beginning of the year, analysts expected earnings of Sensex companies to grow by around 18% from Rs 720. Now, two quarters down, Sensex earnings have grown by around 25%.

This has led to analysts upgrading Sensex valuations to around Rs 900 for this fiscal and Rs 1,080 for the next. Based on a level of 20,000, the Sensex is quoting at 22.2 times FY’08 earnings and 18.5 times FY’09 earnings. Is this expensive? No, if we look at other comparable emerging markets. Chinese markets are currently quoting at 45 times one-year forward earnings.

Brazil and Russia are quoting lower, but that’s because indices in both these markets have a huge weightage of commodity companies, which quote at lower multiples. Further, even if there is no further rerating in PE ratios, sustained earnings growth of 20-25% will ensure that Sensex keeps growing at a similar rate.

Source: DNA

Monday, December 17, 2007

Citigroup Venture Capital Investments

These are the investments made by Citigroup Venture Capital International in listed and unlisted entities. Stakes are as on 30th September,2007 and press releases.

Spentex Industries - 26.94% stake for Rs.81crs
KS Oils - 11.98% stake
Centurion Bank of Punjab - 2.63%
Himadri Chemicals - 14.23%
Jindal Drilling & Industries Ltd - 10.5% stake for Rs.154 crs
Shiv-vani Oil and Gas Exploration - 7% stake for Rs.100 crs.
Indu Projects - undisclosed stake for Rs.150 crs.
Sharekhan - 75% stake for $175mn.
Unimark Remedies - 27% stake for $28.25mn.
SVIL Mines Ltd - undisclosed stake for Rs.150 crs.
BGR Energy Systems - 4% stake for Rs.130 crs.
Anand Rathi Securities - 19.9% stake for Rs.100 crs.

Monday, December 3, 2007

Fund Managers Investment Strategy

Chirag Setalvad
Senior Fund Manager, HDFC MF

He is a bottom-up stock picker. Meeting the company management before he invests in a new company is a must for him. Further, Setalvad also insists on meeting junior-level people and people surrounding the business. "Typically, a junior-level employee will give you a more honest opinion of the company; leaders give visionary thoughts," he says. Well-maintained factories are a turn-on for this cleanliness freak. Best part of his job? Learning, he says, by getting to read and meeting various people. "In 99 out of 100 meetings, the fund manager is the dumbest guy in the room."

Sandip Sabharwal
CIO, JM Mutual Fund

His checklist includes the company's business, management and the management's ability to handle the business. "I don't focus too much on spreadsheets and am not driven by all numbers that the company reports; their long-term growth path is what interests me more," he says. He loves to see the cash flows that companies generate and typically avoids event-based companies—those that realise their value based on events like sale of real estate.

Madhusudan Kela,Head Equity,Reliance Capital
First is management. Second is, when you look at the opportunity, is it really scalable? If the management is able to capture the opportunity, can it be really scalable over a period of two-three-five or 10 years? Also, whether the opportunity is scalable enough in the stock market. So, you don’t bet on a small business.
Third is you look at the competitiveness of the business, as well as of the company in which you are investing. Can it be a cost leader? Can it be a price leader and can it be a profit leader? Fourth of course, you look at all the financial parameters, which everyone else looks at in the industry and finally you want to buy all this at a particular price.

Ajay Bodke, Fund Manager, Standard Chartered Mutual Fund
We follow two strategies - theme selection and sector rotation. If the theme identified is Indian capital expenditure, then you identify sub-sectors within that sector. Sector rotation is when you take a call that, say,interest rates are likely to move downward, and you reallocate your portfolio towards interest-rate sensitive stocks. Once the theme is identified, we look at competitive intensity in the industry and the pricing power players enjoy.
Quantitatively, we look at EBIDTA margins, financial leverage ratios,asset turnover ratios, working capital management and ROE. Then we look at valuations. Along with PE ratio, we also place emphasis on PEG ratios of the company in relation to its competitors. We also look at the fair value using DCF method and compare it with EV. If we feel the stock is undervalued, we see whether it is liquid. Lastly we see what kind of institutional coverage it has - the less the coverage, the more the potential to appreciate. Then we decide whether to buy.

Thursday, September 27, 2007

BRIC nations doing better than projections: Purushothaman

The four emerging economies including India projected to outshine the rich nations over the next few decades are outdoing the projections made in the BRIC report, said Economist Roopa Purushothaman, who co-authored the report.

"The growth that has come out of the four countries -- Brazil, Russia, India and China (BRIC) -- over the last few years has been higher than what was projected. They are outdoing our projections," Purushothaman said.

The report called "Dreaming with BRIC -- The Path to 2050" was co-authored by Purushothaman along with other economists of Goldman Sachs four years ago where she was working before joining Kishore Biyani's Future Capital Holdings.

The report projected that the BRIC economies together could be larger than some of the richest countries today, in terms of US dollar by 2025 and they could account for half the size of G6 countries against 15 per cent at present.

India's economy could be larger than all but the US and China in 30 years, it stated.

Although the report tends to make projections which were futuristic in nature, there was one near-term projection that China could overtake Germany in four years that is by 2008 as the report was written in 2004. The projection has met with reality a good one year early.

Cyclically the last four years have been good for the BRIC economies, but the real test will come when they are in cyclical downturn and whether they do better than the G6 countries then, she observed.

"But even if two out of the four countries perform according to the projections, it will be considered as a huge success," Purushothaman added.
Source: ET

Monday, September 10, 2007

Double-digit growth sooner than expected...How?

If all goes well (read if the government does not mess up things any more than it already has and we have status quo on the geo-political front in the sub-continent) the Indian economy should be able to record double-digit growth much sooner than anticipated. The driving force will come, not from improved performance in agriculture or continued strength in the manufacturing and services sectors, but from a completely unexpected quarter – greater participation by women in the work force.

A recent study by Roopa Purushottaman et al of the Future Capital group using South Korea's experience as a guide to simulate India's growth path over the next decades, shows increased participation by women will add $ 35 billion to India's GDP over the next five years, raising per capita incomes 12% higher than projected by 2025.

The Korean experience is taken as a good model to try and capture the impact of greater women's participation for two reasons. One the original BRICs (Brazil, Russia, India and China) analysis of Goldman Sachs projects India's per capita income at roughly $ 17,000, similar to Korea's income levels today. Two, our consumption patterns look closer to Korea's than to any of the other developed markets.

Re-running the BRICS model assuming women's participation patterns in India will mirror Korea's during 1965-2005, India's long-term GDP growth gets a 0.3% per annum boost over current projections; a boost that could well see growth tip into double-digit much earlier than predicted.

Wishful thinking? Not really! As education and aspiration levels rise, societal values change, driven in part by the women themselves, and it becomes more and more acceptable for women to take up jobs outside the house, women's participation in the work force is likely to rise significantly. The opening years of this century have already seen a sharp increase, the first in decades, in the percentage of women workers as a proportion of working-age women. From 26% in 2000 the percentage has increased to 31% in 2005.

Some of this increase is, no doubt, due to monetisation of unpaid work done by women at home earlier for which they now have to employ maids, care-givers and so on. But even so, there is no doubt that as women seek employment outside the house they are likely to move to more productive, higher-paying jobs.

In this India will only be following the global pattern where a combination of lower fertility rates, economic growth and changing social dynamics has been associated with more women entering the workforce.

Lower fertility rates – our fertility rate or the average number of children per women has fallen from 4.5 in 1980-85 to 3.1 in 2000-05 and is slated to go down to less than 2 by 2025 - along with later age of marriage – average age of marriage is now close to 20 years as against 17 in 1971 - reduces the opportunity cost of work. At the same time economic growth provides increased employment opportunities and more open social attitudes towards women lower the obstacles to their entry into the labour force.

The signs are already there. Between 1980 and 2002 the number of university women per 100 men studying for commerce-related degrees nearly quadrupled from just 16 to 63. For engineering and technical degrees, the ratio grew from 8 to 33. In many developed countries women's participation rates in the key working-age group range between 50 and 80%; in India the figure is less than 30%. The impact of a catch-up will be huge. Not only in terms of overall demand – monthly expenditure by working women is significantly higher across a range of household spending categories - but also in terms of shifts in demand.

As women gain a larger say in deciding family budgets, expenditures patterns will reflect their priorities much more than at present. A survey to assess future spending patterns suggests the biggest gainers are expected to be financial services, domestic services, educational services, personal care, packaged food, apparel, footwear and accessories, fuel and transport and leisure and entertainment.

The survey does not show health expenditure to be a big gainer. This is a bit surprising, given that women typically tend to place both health and education high on their agenda. What is clear, however, is that the 'future ain't what it used to be.

Monday, September 3, 2007

Indian Shipbuilding Sector

- Locational Advantage
- Availability of technically qualified professionals, engineers and architects
- Skilled low cost labour

- Low designing capabilities
- Supporting infrastructure at nascent stage of development.

- Ageing global fleet and technological advancement creating replacement demand
- Policy rush on domestic infrastructure development
- Global exploration and production investment
- Growing foreign trade

- Withdrawal of export subsidy on ships
- Significant appreciation in rupee against competing countries in shipbuilding
- Decline in oil prices

Source: BS

Sunday, August 26, 2007

Micro-finance: Reaching Consumers at the bottom of the pyramid

Suvarna,a frail,49-year old, grocery vendor in the village of Junnar in Maharashtra's Pune district is spoilt for choice in borrowing money, and the local moneylender is at the bottom of the pile in options.She is being offered Rs.15000 at a seemingly still steep, but less usurious, interest rate of 24% by the likes of SKS Microfinance and Share Microfin.

So far, Seven banks have managed to tap over 50 lakh customers across the country in this segment disbursing about Rs.3000 crore.But thats only a tiny percentage of the addressable market size of 6-7 crore potential customers capable of absorbing about Rs.40,000 crore, shows estimates by Micro=Credit Ratings International. It believes the 60 mn low-income households in India can consume credit worth Rs.8000 cr every year.

Banks are putting in place strategies - both plain vanilla and innovative - in order to achieve some aggressive targets.
ABN Amro Bank
Target: By 2009,10 lakh customers and portfolio of Rs.600 crore.
Key Innovations: Taking the perspective of venture capitalist rather than the lender. ABN Amro Foundation is incubating six-start up MFI's now, with plans to do another 50 MFI's start-ups in 3 yrs.

Target: Portfolio of Rs.500 cr in 18-24 months.
Key Innovations: Set up a dedicated MFI branch in Bharuch (Gujarat).Plans to use this as a hub to reach 1000 villages.

Target: To grow at 100% CAGR over the next 3 yrs.
Key Innovations: Opened a dedicated Self-help groups (SHG) branch in Tamil Nadu,which has over 10,000 individual customers associated with SHGs.By March 2008, a dozen such dedicated branches, pan-India,is planned.

Target: N.A
Key Innovation: Floated amicro-finance factory to incubate,churn out and support newer MFI models and provide support to entrpreneurs. Setting up a fanchisee model for MFIs.

Yes Bank
Target: Customer base of 5-7.5 lakh and portfolio of Rs.300 crore by 2012.
Key Innovation: Has identified urban micro-finance as a niche. Plans to disburse loans directly through Yes Microfinance India.

Source: Outlook Business