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

Saturday, August 18, 2007

How some of the Companies names are formed !

RARE Enterprise - RAkesh Jhunjunwala & REkha Jhunjhunwala
ENAM Securities - Nemish Shah & Manek Bhansali
Ess Dee Aluminuim - Sudip Dutta
Zicom Electronic Systems - The company was initially named ZeeCom since in those days Zee TV was very popular but later changed to Zicom since it resembled Zee.
Dabur - Back in 1884, when physician SK Burman started a firm to sell ayurvedic medicines, he named it Dabur,after combining Daktar (Devanagri rendition of doctor) and Burman.
Motorola - Founded in 1928, Motolrola was a pioneer in car radios.Its name was originally a combination of moto (for motor car) and ola (implying sound).
Voltas - Volkart Brothers and Tata Sons who started the company in 1954.

Monday, August 6, 2007

How to select a Mutual Fund

John C. Bogle writes in the book, "Bogle on Mutual Funds - New Perspectives for the Intelligent Investor" on how to invest in a mutual fund.Here are five points to keep in mind:

1)The immediate past performance of the mutual fund.In most cases, a fund should prove its merit over a period of at least five to ten years.” Chances are that a fund which has performed well for this period of time has seen various phases of the market and performed well across these various periods.

2)The fund manager who is managing the scheme. As Bogle writes “Find out whether the portfolio manager has run the fund for a few months, a few years, or a few decades, and give this information whatever weight you deem appropriate".

3)If the fund manager has changed recently for that Bogle’s advice is “when managers change, a wait-and-see policy is usually appropriate.”

4)Portfolio concentration. “It is not enough to know how many stocks a fund owns, because many of them may represent a small percentage of the net assets and have little impact on the fund’s overall performance. The better test is the proportion of total assets the fund holds in its largest positions. One good measure is to check the fund’s ten largest holdings. In the more concentrated funds, the ten largest holdings may comprise up to 50% of the portfolio; in the less concentrated funds, they may comprise as little as 15%. As a general rule, the greater the portfolio concentration, the greater is the opportunity for the fund to provide differentiated performance,”

5)The size of the mutual fund. Investing in schemes with very small assets under management (AUM) is not advisable, as Bogle writes “simply because of the relatively higher expenses associated with small funds.”
Source: DNA

Monday, July 30, 2007

Some facts you may not know about these Influential People!

Mukesh Ambani owns 168 imported cars.

Anil Ambani lost 37 kg after a shareholder raised questions about his health.

Deepak Parekh takes 9 steps backwards if a black cat crosses his path.

Praful Patel owns 20 luxury & vintage cars.

Jignesh Shah started FTIL with a capital of Rs.5 lakh by mortgaging his house.Didnt take a holiday for 10 years after starting FTIL.

Rakesh Jhunjunwala has watched 25 films on the 2nd World War.

Friday, July 27, 2007

Roopa Purushothaman's report "Is Urban Growth Good for Rural India?"

Future Capital Holdings chief economist Roopa Purushothaman and her team’s recent research shows urban and rural India are too intertwined to be treated as two different worlds and when India does well, so does Bharat.

“The question has been doing the rounds in corporate boardrooms and government. There are many in policy circles who believe urban and rural are two different economies and they need different measures,” says Purushothaman. The big message from the research is the two parts of India are really one. “Policy makers just need to let the economy pull itself,” she says.

There might be something to this because the rural economy is increasingly looking urban. It too has popped the services pill. While agriculture continues to remain the bulk of the economy, it is no longer as powerful. It is important to the extent that 73% of the rural population is still stuck in farm jobs.

Unfortunately, agriculture sector no longer creates wealth. There are more wealth and jobs being created in manufacturing, construction, restaurants, hotels and trade — chemists, for example — than in agriculture. The reason why it doesn’t appear as powerful is there are far less number of people to speak for the non-farm sector. Just 27% of the rural workforce is employed in non-farm jobs.

The one large change in rural economy is wage parity with urban centres in some sectors. People employed in trade and manufacturing now earn wages that are on a par with urban centres. There are sectors such as utilities, construction and transport where the rural areas still lag behind, but the improved performance in such sectors is also responsible for closing the gap between the spending power of the two parts of the economy.

The research shows during 2000-05, the rural spending grew at 8% while urban India’s spending grew only 4%. In absolute terms, urban households spend twice the amount that a rural household does. “This will remain, but we are interested in what is changing at the margins, and there it is clear that rural India is growing much faster,” says Purushothaman.

The counter-intuitive bit is that those at the lower income levels in rural areas are closing the gap with their urban counterparts at a much faster rate. So, those in low-income groups in urban areas are facing a greater inequality than the same strata of people in rural areas. This is not surprising because little investment has been made in improving the quality of urban infrastructure.

“Our research shows that over the last 20 years, urbanisation has actually declined in the country. India clearly has a model different from China’s. China is building new urban centres while India is pushing production processes to rural areas,” she says. The rural rich are not faring that well when compared to the urban rich — for the time being.

The changes have largely been possible because the supply chain of goods and services is now spreading nationwide. Since urban headends of the supply chain are now taking more rupees of consumption, a little over a third of the rupees are ending up as income for the rural population

Sunday, July 1, 2007

Who's afraid of Wal-Mart?

Historically, MNCs have had high profit margins arising from quasi-monopolies in technology and finance, and political influence translating into protectionism. In the US, trade unions fought for a bigger share of the surpluses, and obtained the highest wages in the world. In effect, MNCs and the trade unions shared monopoly profits garnered at consumer expense.

Wal-Mart has defied this model. Far from seeking high margins, it has relentlessly cut prices and kept profit margins so low that competitors give up. Its profit margin is just 3% of sales. Prices at Wal-Mart can be half or less than at major department stores. Wal-Mart quality is often poor, though that is improving.
So, unlike historical Numero Unos, Wal-Mart has risen by cutting instead of raising prices, by reducing instead of increasing profit margins, by catering to the masses rather than the well-heeled, and by using the cheapest rather than the most expensive workers. Pankaj Ghemawat of Harvard University estimates that Wal-Mart's lower prices benefit US consumers directly by $18 billion a year. Besides, Wal-Mart obliges rivals to cut prices. The net benefit, according to consulting firm Global Insight, is a whopping $263 billion. This dwarfs anti-poverty programmes. The greatest beneficiaries of Wal-Mart are the poor.

Wal-Mart aims at scale economies of every sort. By buying massively, it pays least to suppliers. It has massive stores with acres of parking space to accommodate hordes who drive in. This strategy needs cheap land, so Wal-Mart stores are typically in urban peripheries, small towns and rural areas. Petrol is cheap in the US, so Americans happily drive an hour or more to a Wal-Mart store 30-40 miles away.

Conditions are totally different abroad, so Wal-Mart has often failed in other countries. Ghemawat says that the further Wal-Mart goes from the US the worse is its performance. It shut down in Germany after losing hundreds of millions of dollars, and sold out in Korea too. It now accepts the need to adapt to local conditions, but adaptation erodes the power of its US model.

Land prices have skyrocketed in India, so a US-style superstore would have to be situated miles outside a big city. I simply cannot see well-heeled Indians driving for hours to a big store on the outskirts of Delhi or Mumbai. Unlike in the US, the poor and lower middle-class in India do not have cars or cheap petrol to facilitate long-distance shopping.

So, small shopkeepers will easily compete. They typically evade sales tax. Many pay low rents because of rent control. They are located close to consumers, and provide home delivery at no extra cost. Some even provide credit. Even if Wal-Mart is cheaper, many consumers will opt for the convenience of local shopkeepers.

To succeed in India, the Wal-Mart model needs major surgery. It can procure imported goods cheaper than anyone else. But its Indian partner, Bharti, knows the local market much better. On balance, Wal-Mart needs Bharti more than the other way round.

Given Wal-Mart's limitations, why is the CPM so opposed to its entry? The party says it is worried that small shopkeepers will suffer. Yet, it seems hilarious that a party sworn to protect the poor from the bourgeoisie should suddenly pose as a defender of the bourgeoisie, and oppose lower prices for the poor.

What's happening? Well, ideology obliges the CPM to oppose the biggest MNC. More important, the Left is outraged by the company's anti-union policies. To keep prices low, Wal-Mart seeks only non-unionised labour, and has closed stores rather than accept unions. Some critics claim that Wal-Mart pays less than the minimum wage. In fact, it pays around $10 per hour, fractionally less than the average for all US retailers. Critics think Wal-Mart should pay much more than small companies, and offer higher health and other benefits - that is what Numero Unos have done in the past. But Wal-Mart says it is dedicated to the philosophy of everyday low prices, and gives priority to the consumer over the worker.

In theory, the Left represents the poor. In practice, it represents the labour aristocracy - the big trade unions. These unions provide CPM with cadres that are invaluable for fighting elections. The poor do not provide any such assistance. So, the CPM will always favour unions over the poor. This explains why it is so outraged by Wal-Mart.

Note that Wal-Mart has been welcomed in China, where it has supplemented rather than supplanted small shopkeepers. In the coming year, Wal-Mart will set up 20 new stores and remodel 65 existing ones in China. In keeping with the need to adapt to local conditions, Wal-Mart has even accepted unionisation in China.

The lesson is clear. The CPM should welcome Wal-Mart into India. Once it is here, India's labour laws will oblige it to accept a trade union. The CPM should seek to control that union. What a communist victory that will be!
Source: Swaminathan S Anklesaria Aiyar column in Sunday Times of India

Sunday, June 10, 2007

Of market experts and their predictions

It is tough to make predictions, especially about the future - Yogi Berra
One of the professional hazards of being a business journalist is trying to answer the question, “Where do you think the market is going?” My answer to this question always is: “If I knew, I wouldn’t be a journalist.”

But, everyone is not as lucky. Some of us have to try and answer this question day in and day out - among them, business news channels, journalists covering the stock market and so-called ‘stock market experts’. These are the people who present the stock market as a big event every day.

In the book, What Goes Up, The Uncensored History of Modern Wall Street, by Eric J Weiner, Tom Rogers, former president of NBC Cable, says, “At CNBC, what we intended to do was give people a sense that every day you had this huge event, the way a football game is a huge event on Sundays.”

And in their zeal to present everyday as a big event, the various business media experts have an explanation for every rally, every sell-off and everything else that happens in between.

But, it’s hardly the case that a particular rally or a particular sell-off happens because of what they serve. Mostly, explanations start pouring in after the market moves.

As John Allen Paulos points out in his book, A Mathematician Plays the Stock Market, “Because so much information is available - business pages, companies’ annual reports, earnings expectations, alleged scandals, online sites, and commentary - something insightful sounding can always be said.”

By having an explanation for everything, the business media and its experts end up oversimplifying things.And this leads to a lot of people, who do not have a good understanding of the stock market, thinking that they know more than they actually do and then investing in the stock market.

As Bill Griffeth, an anchor with CNBC, points out in What Goes Up, “My take is, and this is probably controversial and I don’t know if the people at CNBC would want me to say this, but there were lots of people watching us in the late nineties who had no business watching CNBC because they didn’t understand fully how the market works, or the companies they were investing in, or the investment process.”

The oversimplification at times magnifies the effect of stock market movements. As Nicholas Nassim Taleb points out in his book, Fooled By Randomness, “The market movements in the eighteen months after September 11, 2001, were far smaller than the ones that we faced in the eighteen months prior - but somehow, in the mind of investors, they were very volatile.
The discussions in the media of the “terrorist threats” magnified the effect of these market moves in the people’s heads. This is one of the many reasons that journalism may be the greatest plague we face today - as the world becomes more and more complicated and our minds are trained for more and more simplification.”

But, why should we be apprehensive of such experts and their analyses. As Taleb writes in The Black Swan, The Impact of the Highly Improbable, “Simply, things that move, and therefore require knowledge, do not usually have experts, while things that don’t move seem to have some experts.

In other words, professionals that deal with the future and base their studies on the non-repeatable past have an expert problem. I am not saying that no one who deals with the future provides any valuable information, but rather that those who provide no tangible added value are dealing with the future.”

Stock brokers, economists and financial forecasters fall in the list of experts who have to deal with future and base their decisions on a non-repeatable past.

You can watch these economists talk, theorising eloquently and convincingly. Most of them earn seven figures and they rank as stars, with team of researchers crunching numbers and projections. But the stars are foolish enough to publish their projected numbers, right there, for posterity to observe and assess their degree of competence,” writes Taleb.
The problem with experts is that they do not know what they do not know. Lack of knowledge and delusion about the quality of your knowledge come together - the same process that makes you know less also makes you satisfied with your knowledge,” writes Taleb.

Experts keep getting it wrong and the public still keep buying their logic. As Taleb points out, “Many financial institutions produce booklets every year-end called “Outlook for 200X,” reading into the following year.

Of course they do not check how their previous forecasts fared after they were formulated. The public might have been even more foolish in buying arguments” So what is the way out of this situation? A simple solution obviously is not to follow the stock markets on a day-to-day basis.

“The more detailed knowledge one gets of empirical reality, the more one will see the noise (i.e. the anecdote) and mistake it for actual information. Remember that we are swayed by the sensational. Listening to the news on the radio every hour is far worse for you than reading a weekly magazine, because the longer interval allows information to be filtered a bit,” writes Taleb.
Source: DNA

Wednesday, May 30, 2007

Chirag Setalvad perspective on Investing

“You got a temper. I like that,” he winked. “I get where you’re coming from, Changez. You’re hungry, and that’s a good thing in my book.”
I did not know how to react. But I was impressed with Jim; he had after all seen through me in a few minutes…I could understand why he could be effective at valuations….and why by extension his firm had come to be highly regarded. -From Mohsin Hamid’s The Reluctant Fundamentalist

Temper and hunger - attributes Jim liked in Changez before picking him for the job - may well be the attributes a fund manager would like to have in a mid-cap company before picking it for his portfolio, to ‘spot the potential early’.

Chirag Setalvad, senior fund manager with HDFC Mutual Fund, loves reading books. But, he feels it is important to look for some application in what you read to what you are doing. “Otherwise it becomes recreation,” he says. Chirag is currently reading The Reluctant Fundamentalist. He loves going scuba-diving in Lakshadweep once a year. He likes travelling a lot. And these days, he’s busy as his fund house has launched a new scheme called the HDFC Midcap Opportunities Fund - the first one in 18 months - that he would be in charge of. Setalvad spoke to N Sundaresha Subramanian and Khyati Lodaya on mid-cap scene, his approach to fund management, his experience with a hedge fund, his favourite books and his plans for the new scheme.

How do you see the mid-cap scene now?
It looks very interesting as right now, the mid-cap part of the market is being ignored. Keeping aside the last one month, when they have come back a little bit, in the last two years, large caps have done very well, as a result of which valuations in the mid-cap segment are a lot more interesting. Also, we find mid-cap companies are growing faster than large-cap companies. If you are stock selective, you can find high quality mid-cap companies. There is a perception that mid-cap companies are weak and don’t have sufficient market share. It is interesting some of India’s strongest companies are mid-cap companies. India’s largest AC company, Blue Star, is a mid-cap company and so is the largest battery company, Exide. We are all familiar with the big names... we know Maruti. We sit in our Maruti car and think only Maruti. But, if you look around the Maruti itself, you will see a lot of mid-cap companies. Asahi India makes the glass, Exide makes the battery, Subros makes the AC. We don’t realise so many other components are manufactured by these companies. A lot of mid-cap companies are incredibly well-run. They have strong business characteristics - the managements who run them are also very good. They are growing faster and are available cheaper.

What is your strategy for the mid-cap fund? Will you have a concentrated allocation?
We are hoping to raise more than Rs 1,000 crore. The scheme wouldn’t be excessively diversified and we will have 40-45 stocks, of high-growth companies growing at a decent rate and available at reasonable prices.

Do you think the money you raise will be of the optimum size, considering some of the larger mid-cap funds are finding it difficult to deploy the money they have?
At Rs 1,000 crore, there will be no issues with respect to size. We have created a model portfolio. What we have done is for the companies in the portfolio, we have seen what the trading history has been in the last six months. We see the average traded value in the market; we assume a market share say 30% of the trade value. We see how long it will take to build up a position. So, assuming you are taking Rs 1,000 crore, it cannot be done immediately… may be over a couple of months. It also depends on market conditions. Is the market running away? Is the market collapsing? If the market is collapsing, it may be easier to invest from the mindset point of view, but difficult from liquidity point of view. If the market is running, it may be easier to invest from the liquidity point of view and difficult from the mindset point of view. So you got to balance those things out. Ultimately, I feel Rs 1000 crore is fine, there won’t be much difficulty in deploying it.

Are you looking at the unlisted space for your new fund?
We will look at all listed entities only. Investing in unlisted firms is a very different style of investment. The private equity requires lot of involvement in the management of the company. It’s a very hands-on style of investment. We find it very difficult to mix the two.

What are the parameters you look for when you are picking a stock?
Three or four things, basically. We are looking for businesses that are easy to understand. We are trying to stay within our circle of competence. We are looking for businesses that have strong underlying characteristics in terms of the industry they operate in, cost positioning and market share. It’s a combination of looking fundamentally at the business in terms of people who are managing the business and what price we are getting it at.

What stage do you decide to meet management of a company?
It depends. In certain companies, more information is available, and some companies are not transparent. Now, if you look at an IT outsourcing company, it’s a well understood business model and so you can invest without doing much incremental work. But in IT product companies, the business model is not very simple. We need to speak to the management to try and understand it. In all cases, you want to speak to the management. If it’s easy to understand, it’s only easier to make the decision.

Fund managers can’t resist quoting the Bharti example when selling the mid-cap story. Who do you feel the next Bharti is?
All large-caps were mid-caps at some point of time. I do not think we have to find the next Bharti, if you find a good business which will grow at an above average pace fairly consistently for a long period of time. It is very difficult to identify the next Bharti because companies which have the potential tend to be fully valued. What happened with Bharti was that people did not realise that it is going to be next big thing. The IPO was priced at Rs 45 and people were hesitant to buy as you don’t know what exactly is going to happen to the stock at the time you buy it. Given this, you don’t have to get multi-baggers all the time. If you populate your portfolio, put 45 stocks and are thorough with your research on those 45 stocks, some of them will end up being multi-baggers. But it’s difficult to say at the beginning itself which one of these will be the multi bagger.

So how do you spot potential early?
You don’t start off thinking this firm is going to go 10 times. It’s just that you buy a really high quality firm and it continues to surprise time after time. The idea is not to buy dirt cheap. Because very often, such firms face inherent problems, structural problems, so we are happier to pay a little bit more for a high quality business. Even internationally, some of the great investors like Warren Buffet have moved away from the idea of buying dirt-cheap, deep-valued to buying higher quality firms with higher growth rates that tend to surprise you positively, and realising that if the surprise compounds over a period of time you make lot of money.

You have worked with both hedge funds and MFs. Which one of the two do you like better?
You can see me back with HDFC MF. That should answer your question. Hedge funds have a different mindset than MFs. You are looking at absolute returns vs relative returns. You are supposed to hedge a portfolio considerably. You are not looking at a benchmark. Hedge funds tend to be more short-term oriented in their investment philosophy, which is what I was trying to do when I was there. You also have much more US-centric approach to investing and driven by quarterly estimates, mini consensus etc. That kind of approach - there are good and bad things in that. It’s not all bad. I learnt a lot there and I’m trying to apply that in the MF context. But, the fact that it’s short-term oriented and trading-oriented, that’s something I see as a negative and that’s the reason I decided to leave the hedge fund.

Are you glued to the market day to day?
Not at all. How does it matter what happens on a day-to-day basis, except for the fact that you can take advantage of short-term volatility. There is a saying that market in the long-term is a weighing machine and in the short-term a voting machine. The market will constantly vote back and forth. It can go up and go down. So, you can get too bogged down and involved by that.

Source: DNA

Sunday, May 27, 2007

Reasons for Rupee Appreciation

Current inflation has eroded the value of the rupee — it buys fewer goods, fewer services and less of everything. Yet as things stand today, the rupee fetches more dollar: nearly 13 per cent more than it did just 10 weeks ago. How did this happen?

Since the inflation rate in India is relatively higher than in many other countries that we trade with, the rupee should have depreciated against other currencies. Instead, the exchange value of the rupee has risen significantly. Economists attribute this to a number of factors, but the most immediate and important reason is that the RBI seems to have suddenly lost its appetite for the dollar.

When the exchange rate of a currency is market-determined, as is the case with the rupee which is on a free float, supply and demand forces come into play. There has been plenty of dollar supply in the market. In the past, RBI mopped up excess dollars to ensure that the value of the rupee did not shoot up beyond limits, for that would have hurt the country’s exports. In the process, the RBI kept adding to the country’s foreign exchange reserves which have risen to $200 billion.

This process of RBI intervention in the market has a cost. For all the dollars the RBI buys, it must release equivalent rupees into the system which goes on to increase money supply in the economy. That was not such a major concern as long as domestic inflation was benign. But now, faced with the paramount task of containing inflation by all means, the RBI, in the last couple of months or so, has let the rupee gain in strength. With the main dollar buyer thus missing from the market, the rupee has reached its highest level in nine years.

A stronger currency is not a matter of national virility. As economists will tell you, it is normally an indicator of the growing strength of the national economy. By all available indicators, the Indian economy is going through an unprecedented phase of growth. The external sector of the economy in particular, as RBI governor YV Reddy maintains, has been strong and resilient.

As Goldman Sachs economist Tushar Poddar notes: “The movement of the rupee is, to a large extent, determined by the interplay of three factors — the current account deficit, the strength of capital inflows, and RBI intervention to curb volatility”.

India is running up a deficit in its current payments to, and receipts from, the rest of the world. But this was a moderate deficit of about $18.2 billion last year. The Indian economy is, against that, attracting unprecedented amounts of capital inflows. Just to cite two examples: FDI inflows, which stagnated around $5 billion in previous years, jumped to over $15 billion last year, while foreign portfolio investments added another $8.5 billion.

Despite a surge in the oil import bill and a 30 per cent growth in overall merchandise imports; despite a larger number of Indians travelling abroad and splurging more than $7.6 billion last year; and despite Indian companies investing large amounts in overseas takeovers, there is just not enough demand for the dollar that would put pressure on the rupee. Even though the RBI, through its April 24 monetary policy, has sought to encourage a dollar outflow, the point is why would anyone take out dollars when high return on assets in India seems to be attracting a deluge of dollar inflow?

Source: DNA Sunday

Saturday, May 19, 2007

India's Best Equity Analysts

Sanjeev Prasad, Head (Research- Institutional Equities)
Research House : Kotak Securities
Sectors : Media,oil and gas,telecom,chemicals
Best Picks: HT Media & Gujarat State Petronet

Shirish Rane, Partner
Research House: SSKI Securities
Sectors: Cement,power,construction and Real Estate
Best Picks: GMR Infrastructure,Unitech and Jaiprakash Associates

Jesal Shah, VP (Equity Research)
Research House: JP Morgan
Sectors: Pharma
Best Picks: Dr.Reddy's Labs

Manish Saxena, Analyst
Research House: Deutsche Securities
Sectors: Capital Goods,cement and utilities
Best Picks: BHEL

Prabhat Awasthi, Head (Equities & Research)
Research House: BRICS
Sectors: Media and Auto
Best Picks: Bharti Airtel

Priyanko Panja, VP
Research House: Edelweiss
Sectors: Capital goods,construction and telecom
Best Picks: L&T,Tulip IT and HCC
(He thinks George Soros is a better investor than Warren Buffet)

Rahul Singh, Director-India Asia Pacific
Research House: Citi Investment Research
Sectors: Telecom,Oil & Gas
Best Picks: Bharti Airtel (@Rs.20)

Sameer Baisiwala of Morgan Stanley
Unfortunately,did not get his employer's permission to be profiled)

Source: Business Today issue dated June 3,2007

Wednesday, May 9, 2007

Rakesh Jhunjhunwala's Rare Villa in Lonavala

Perched atop a hill,and looking over the Walvan Dam,Rare Villa,Jhunjunwala's house in Lonavala,seems completely cut off from civilisation.Only about a year old,the villa is an architectural gem,with terraces and viewing decks overlooking the river and dam.
Plot Area : 1.75 acres
Built-up Area : 16000 sq.ft
No. of Bedrooms : 7
Interior Designer : Nitin Khilawala
Photo Courtesy: Business Today issue dated May 20,2007

Tuesday, May 1, 2007

Shivanand Mankekar on Pantaloon Retail

Shivanand Mankekar who holds about 4% stake in PRIL.

"We didn't do any of the typical things expected from finance professors,i.e.analyse the balance sheet or meet the management. The simple reason for this was that the Big Bazaar outlet spoke much more,it screamed out that there was a guy who really understood retailing the Indian way. "

"On returning back to Bombay, when we met KB, in our first meeting itself we told him that we had at least a thirteen-year investment horizon on Pantaloon,by which we believed that Pantaloon would have Rs.1 lakh crore market cap. KB laughed it off since on that day Pantaloon's market cap was barely Rs.50 crore! But today,four years hence,Kishore says anything is possible. We always tell him that we believed more in him than he did in himself. "

Source: "It Happened in India" by Kishore Biyani published by Rupa & Co.

Friday, March 30, 2007

Sam Walton's Success Secrets

Sam Walton reportedly followed a set of rules to which he has credited his sucess.What are his 10 rules? Sam Walton credited his "10 Rules" as the secret behind his success in business and in life. Here is the list:
Rule #1 : COMMIT to achieving success and always be passionate.
Rule #2 : SHARE your success with those who have helped you.
Rule #3 : MOTIVATE yourself and others to achieve your dreams.
Rule #4 : COMMUNICATE with people and show your care.
Rule # 5: APPRECIATE and recognise people for their effort and results.
Rule # 6 : CELEBRATE your own and other's accomplishments.
Rule # 7 : LISTEN to others and learn from their ideas.
Rule # 8 : EXCEED the expectations of others by setting high standards.
Rule # 9 : CONTROL your expenses and save your way to prosperity.
Rule # 10 : SWIM UPSTREAM, be different, and challenge the status quo.

As you look closely at his 10 Rules you will see that one of his rules is about commitment as a leader, one is about serving customers, one is about controlling expenses, one is about risk-taking and six are about how to treat people.

Sam Walton once said, " If you take care of the associates (employees), the associates will take of the customers and the business will take care of itself."

Source: Corporate Dossier(ET)

Sunday, March 18, 2007

N R Narayana Murthy for President

Kaun Banega President? How about a bona fide crore-pati? I'm serious. N R Narayana Murthy is the right man for the country's top job. He has the time (after retiring from Infosys); the right profile (it may not be as photogenic as Amitabh Bachchan's) and has an even better left one (man of the masses and all that). His credentials can't be questioned. The rest of the world has heard of him and respects his contribution to India's economy. He is honest, self-made and courageous. Outspoken when he needs to articulate a position. Discreet when it comes to courting the media. He's sensible, progressive, and responsible while dealing with key issues.

His personality is nondescript. He could be anyone. His views on women are worth quoting: "There should be gender inclusive policies, adequate support systems and comprehensive maternity policies for women. There should be a technology infrastructure drive enabling women to work from home or through satellite offices, when needed, operating on flexible work schedules, especially during pre- and post-natal periods." When was the last time someone whose voice matters, spoke so eloquently on the subject? For that alone, he gets the vote of the women of this country.

Murthy may not be charismatic, but he sure is enigmatic. So far, one does not know his political affiliations, which makes his neutral stand a plus point. His appointment will meet with approval, regardless of party politics and partisan lobbying. We need a man who can inspire our youth. With India booming, and IT being the 'It factor' driving this boom, Murthy's stature as the undisputed godfather of the industry, will enhance the role played by the President in popular imagination. The present occupant of Rashtrapati Bhavan is a iconic figure adored by all. His replacement will have to be someone remarkable, but in a different way. Murthy fits the bill perfectly.

Bold and uncompromising, the man's clarity of thought is as impressive as his modesty. Does he have the all-important 'wow' factor? No, not if you compare him to someone voted 'The Star of the Millennium', by demented movie fans worldwide.
How does anybody compete with 'The Voice?' Can Murthy take on 'Sexy Sam' in a slug-test? You must be kidding. While the Big B has shrewdly bowed out much before the battle began, calling the proposition "absurd", someone smart had already planted the well-timed seed in people's minds by then.

The Murthys, as a couple, come as an attractive package deal. Sudha has independently carved out a niche for herself. She writes bestsellers and is open to acting. She has a naughty twinkle in her eyes, wears lovely silk saris and is a people person. Her husband can certainly learn a thing or two about the 'touchy feely' aspects of people management from her. Murthy's reticence is compensated by Sudha's friendly nature. Both emphasise their "simple living and high thinking" philosophy with a lifestyle that is in keeping with their stated lofty principles. A rarity.
So, don't be surprised if you're told Mr President cleans his own toilets if they ever make it to Rashtrapati Bhavan. Vi-siting heads of state may just catch the prezzie wielding a bro-om in the corridors of power, metaphorically and literally! There may be 'shock and awe' at his appointment. But rather that, than shame and horror. India's current positioning demands a figure at the helm of affairs, who is a vital part of the new Indian Dream. A person who turns his back on pomp and ceremony, puts his head down and gets on with the job. And when you get two for the price of one, that's an even better deal. And just in case Mr Murthy isn't interested, i for one will settle for Ms Murthy. It's not America alone that's gearing up for a woman in the White House — we in, India are ready, too. Go for it. Sudha. Hum sab saath hai.

The above article has been sourced from Shobhaa De's column in The Sunday Times dated 18.03.2007

Monday, February 26, 2007

Rakesh Jhunjhunwala's Private Equity Investments

The conservative estimate of his PE investments would be Rs 300cr says ace investor Rakesh Jhunjunwala.
TOPS SECURITY (16% stake for undisclosed sum)
JOHN ENERGY (30% stake for Rs 50 crore)

Source: Economic Times