Out of gas

Gujarat Gas shares fell by over 5% on Friday, as the company reported a 46% drop in its net profit for the December quarter. This was primarily on account of significant loss in the company’s transmission business. Gujarat Gas, which is India’s biggest gas distribution company, arns transmission income from third party transportation of gas on its Hazira Ankleshwar pipeline. Contracts amounting to 80% of its total transmission volume expired by September 2005, which led to a dip in not only revenues but also profitability in the December quarter. Analysts expect earnings to remain under pressure for the next 2-3 quarters due to the loss of this business. Also, it will be a while before the growth in the gas distribution business will be able to make up for this loss. According to analysts, the loss in the transmission business should be offset by the ending December quarter of 2006.
The annual results look more respectable, what with revenues growing by 14.4% to Rs 746.8 crore, primarily on the back of increased gas distribution volumes. What’s more, net profit rose 28.1% to Rs 98.8 crore. Over the last five years, volumes of the gas distribution business of the company have grown at a compounded annual growth rate of 18%. This is not surprising since natural gases are much cheaper. For instance, compressed natural gas (CNG) remains almost 30%-35% cheaper than petrol prices. In addition, regulatory directives that force old vehicles to convert to CNG work in the company’s favour. Demand, as a result, is expected to be strong going forward. The company’s share price, however, has been under pressure of late, reflecting the near-term disappointment with the drop in transmission income. Besides, valuations are not cheap either, since the company’s trades at a price-earnings ratio of 18 times consolidated earnings.

The blocks in the education loan route

Vivek Kaul Monday, February 27, 2006 21:35 IST

Kunal Bajpai completed his MBA in 2002 from one of the newer institutes, whose promoter equated providing MBA degrees to soap selling. The more the merrier. This thinking led to the setting up of this particular business school across all big cities in India.
Bajpai got into the business school in 2000. When he was selected for the course, there was optimism everywhere. Hence, he did not think twice before taking an education loan of Rs 4 lakh, at an interest rate of 12%, to finance the course. The loan repayment would have to start one year after Bajpai completed the course or six months after his securing a job, whichever is earlier.
This condition essentially ensured that if Bajpai did not get a job immediately after completing the course, he had sometime to start the repayment. But back in 2000, he did not think that this would be the case. Repaying the loan would involve paying an equated monthly instalment (EMI) of Rs 8,898, six months after he started working. He would have to repay the loan through EMIs over a period of five years.
One reason for taking the loan was that under Section 80 E , he could claim a tax deduction of up to Rs 40,000 for repaying the education loan. This deduction would be available for a maximum of eight successive years.
When Bajpai started the course, he found to his horror that there were a total of 800 students in his batch. By the time he was ready to pass out of the institute, the economy was not doing well, and corporates were hardly recruiting. Those who where recruiting were paying salaries as low as Rs 10,000 per month.
Bajpai did not find a job during the extended recruitment season. After the course, he was recruited by the publications division his business school ran, at a salary of Rs 10,000 per month. By recruiting its own students, the institute was able to show 100% placement.
Bajpai started working from April 1, 2002. His first EMI was due on October 1, 2002. It was not possible for him to service an EMI of Rs 8,898 when his salary was just Rs 10,000.
The moral of the story: It’s easier taking an education loan, but at times very difficult to repay it. His parents chipped in to help him and paid the first six EMIs. From April 1, 2003, he moved on to a better job. And since then, he has been paying the EMIs himself. For April 2003 to March 2004 and April 2004 to March 2005, Bajpai was able to claim a tax deduction of Rs 40,000. Last year, the rule changed. Now, only the part of the EMI, which goes towards interest repayment, is available for tax deduction. So for April 2005 to March 2006, Bajpai can claim a tax deduction of Rs 23,050, the interest part of the EMIs for April 2005 to March 2006. This change in law works well for those who have just started repaying their loans as the interest part of the EMI tends to be higher in the initial years of repayment.
But for individuals who have taken a loan of around Rs 4 lakh, the interest part of the EMI in the first year of repayment works out to be less than Rs 40,000. Hence this change benefits those individuals who take loans of higher amounts (let’s say, for studying abroad) as their interest component is higher. Let’s say that an individual takes a loan of Rs 10 lakh at the prevailing interest rate of 11.5%. The total amount paid towards the repayment of the loan in the first year would be Rs 2,63,912. The interest part for this would work out to be Rs 1,06,895. And this can be claimed as a deduction against taxable income.
The example is hypothetical

Don’t bury an ambition for want of money

Vivek Kaul Friday, February 24, 2006 23:20 IST

Padhoge likhoge banoge nawab; kheloge kudoge banoge kharab —Old Hindi saying

MUMBAI: For Ashish Choudhary, it was the best of times and the worst of times. He had been granted admission to the Sentinel Centre for Human Resources Development (SCHMRD), a top business school. This morning, his girl friend, Sunanda, had called up to say that their relationship was over.

They had broken up more often than he could remember. But she always came back. It made him wonder, did she ever love him? Or was it the case of him loving her always and she just reciprocating. A bit like the television serial, The Wonder Years, he playing Kevin Arnold to Winnie Cooper.

An emotionally hurt Choudhary had a number of things to sort out before he started his MBA in SCHMRD. Right now, the priority was an education loan. The total cost for the two- year course would be around Rs 4 lakh. His parents are willing to bear his education expenses, but he did not want it that way.

Choudhary made a visit to a public sector bank, down the road. They were willing to give a loan. He needed to submit a proof of admission to SCHMRD, a schedule for expenses for the specified course, passport size photographs, etc.

The loan would cover his education, hostel fees, books and a computer. The bank would charge an interest of 10.5%. The bank gave education loans for up to Rs 10 lakh for studies in India and up to Rs 20 lakh for studies abroad. He also had an option of buying a two-wheeler, which would cost up to Rs 50,000. The bank was ready to increase the loan amount to Rs 4,50,000. Choudhary did not feel the need for a two-wheeler.

Increasing the loan amount would have had two implications. First, the interest rate would go up to 11.5% as the bank charged a higher interest rate for loans greater than Rs 4 lakh. Second, for a loan greater than Rs 4 lakh, the bank would give a loan to meet only 95% of the total expenses i.e, the bank would be willing to give a loan of Rs 4,27,500.

Choudhary would have to raise the remaining Rs 22,500. This, in technical terms, is referred to as the margin amount. In case of loans taken for overseas study, the margin money amounts to 15% of the total expenses.

One thing Choudhary could not figure out was, “When a bank could offer a 20-year home loan of Rs 20 lakh at an interest rate of 9%, why was it charging 10.5% on a education loan of Rs 4 lakh?”

The answer lies in the fact that giving out education loans is an inherently risky business. A lot of students who take the loan do not repay and the bank has to bear the loss. So for loans greater than Rs 4 lakh, borrowers have to provide a security to a bank.

This could be shares approved by the bank, house property, national savings certificate, etc. Thus, if the borrower defaults the bank can sell these assets and make up on the losses.

The loan repayment would have to start one year after Choudhary completes the course or six months after securing a job, whichever is earlier. This condition essentially ensures that if an individual does not get a job immediately after completing his course, he has sometime on his hand before the repayment starts.

Choudhary would have to repay the loan through equated monthly instalment (EMIs) over five years. This would involve paying an EMI of Rs 8,598, six months after he started working. He would get a tax rebate on the interest part of the EMI.

Having figured out how to go about getting the education loan, Choudhary was looking forward to time away from the city and his ex-girl friend, Sunanda. Maybe, distance might make her heart grow fonder and life like always would start going around in circles.

(The example is hypothetical)

Even the best can make the wrong moves

Vivek Kaul Thursday, February 23, 2006 21:50 IST

“Kyun dare zindagi mein kya hoga, Kuch na hoga to tajurba hoga” - Javed Akhtar
MUMBAI: Dheeraj Sharma was going back to his office from a site visit. The company he worked for wanted to set up a new plant to expand capacities. Sharma was deputed to take a look at various locations and file a report, so that the management could finalise a site for the new factory.
Sharma was skeptical about his company’s decision to expand capacity but really could not do anything about it. He thought the expanded capacities would do no good to the company and just bring down prices, without really expanding the market.
When Sharma had started working around two decades back, he was of the opinion that it’s difficult for investors to figure out the future of the company. But people who ran the company (both managers and owners) would find it a lot easier being in the position they were.
Now, after two decades of work, he felt how wrong he had been. His experience had taught him that managements of businesses at times turn out to be as wrong about the future of a business as investors are at other times.
Sharma thought about the town of Modinagar he had to cross on his way to his hometown, Meerut, from New Delhi. Over the years, this town had turned into an industrial graveyard. One could see rows of dilapidated factories of cement, steel, textiles, etc. The family of Gujarmal Modi had tried to enter almost every business, unsuccessfully.
All this made Sharma wonder, “Why can’t the management of a company, being in the position where it is, see the future coming?”
Debashis Basu in his book, Face Value, Creation and Destruction of Shareholder Value in India, points out, “Managers are usually too full of their own strengths and cannot see the pitfalls ahead in their business when the market does.”
Further, it also does not help when the top management collect ‘yes men’ around them who go with what they are told instead of trying to question decisions.
Basu further points out, “Management assumptions always overestimate the future sales and underestimate the costs needed to get the projected level of sales. Actual performance rarely lives up to these rosy projections - as most project reports and analysts’ research reports testify.”
At times, the management is so focussed on the demand side of the business that they forget the supply side. In a climate where everyone is optimistic, managements tend to look at the growth opportunity that has presented itself without realising that there are many other companies in the market getting ready to tap the same market. This leads to a supply-side glut. Two excellent examples are the American and European consumer durable companies, which have come into India, but over the years really haven’t been able to make a dent into the market.
As Basu points out, “On the supply side, there are hundreds of drug companies in India fulfilling the basic needs of people. Like foreign consumer products companies, foreign pharma companies have to face doughty Indian competitors who happen to be more enterprising in changing their business model to discover new revenue sources.”
But the stock market usually figures out which way the company is headed in the days to come. This information gets reflected in the price of the stock. The stock market, at times, even ignores good financial results of a company. A good result is past data. What the stock market is interested in is the future. And if it feels that the future of the company is not clear, excellent financial results have no impact on the price of the stock.

For Jim Roger's, India’s only a tourist spot

Vivek Kaul Thursday, February 23, 2006 22:21 IST
MUMBAI: “I have a dream, a song to sing, to help me cope with anything,” sang Abba many years back. Abba just sang the song, Jim Rogers is actually living it.
So who is Jim Rogers? A Wall Street legend who chose to retire at the age of 37, after the fund that he ran gave 4200% returns over a 10-year period, compared to S&P 500’s 50% return. Rogers chucked up a successful Wall Street career to chase his dreams. And he has since entered the Guinness Book of World records for becoming the first hedge fund manager to drive around the world — not once, but twice.
In 1992, Rogers travelled 100,000 km around the world on a bike. The next time, towards the end of the Millennium, he went around the world in a Mercedes, driving across 116 countries and travelling 245,000 km.
In between and after his two journeys, he has found the time to teach finance at the University of Columbia. He is the author of three best sellers — Investment Biker, Adventure Capitalist and Hot Commodities. A man who hated kids and now has a daughter. “I was dead wrong. This little girl is so much fun for me”, he says.
India is Rogers’ favourite country, but only as far as tourism is concerned. He is cautious about the Indian stockmarket, and he has sold out of the Indian markets.
“I wouldn’t be buying into Indian stocks,” he says. As soon as he landed up in Mumbai, on his way out from the airport, he could see billboards urging people to buy shares of companies. And this, he feels, will not happen when the markets are at the bottom. Every time foreigners flood the stockmarkets, the market is usually at its peak. Like others of his ilk, he is bullish on China. Chinese, he says, are the best capitalists in the world, Communism not withstanding. And he has been teaching his daughter aged 2 years and 9 months Chinese, because China is where the opportunities are and will be in the days to come. But he foresees a setback in Chinese real estate. And his advice to global investors is, “If you see problems in China, pick up the phone and buy China.”
Rogers isn’t gung-ho on the world’s reserve currency, the dollar. The Greenback, he feels, is a terribly flawed currency. The US is the world’s largest debtor nation and owes the world around $8 trillion, and this has been going up at the rate of $1 trillion every 15 months.
His lack of confidence in the greenback can be made from the statement, “My baby girl has a Swiss bank account. She knows what they are doing to the dollar. She’s got to take care of me”.
But what Rogers is really gung-ho about are commodities. He draws a parallel between mutual funds in the 1980s and commodities now. In the 1980s, no one really knew what mutual funds were and how one could invest in them.
Commodities are at a similar stage right now. And his confidence is reflected in the fact that his baby girl owns only commodities. Investors should buy into commodities, he feels, as history has shown that bull markets in commodities last from 15 years to 23 years. Given this, the current bull run will last till anywhere from 2014 to 2022. The reason for this bull run is very simple — a gap between demand and supply.
People around the world are not really investing in productive capacities as far as commodities are concerned. Take the case of oil, the biggest oil fields in the world — North Sea and Alaska — have been on a decline. But the demand for oil has constantly been going up.
When reminded of the Saudi Arabia’s oil reserves, Rogers feels much is being made about them. In 1979, the Saudi oil reserves stood at 245 billion barrels. In 1988, Saudis came up with a new figure — 260 billion barrels — despite no major oil discoveries being reported in the intermittent period.
And from 1988 to 2006, every year, Saudi Arabia has been reporting reserves of 260 billion barrels, and the media has been lapping it up. In the same period, 63 billion barrels of oil have been produced. Something here is seriously wrong as far as the numbers are concerned.
And when it comes to alternate sources of energy, not much progress has been made, Rogers feels. Solar and wind power are still not competitive. Given this, and given the fact that it takes a long time for new supply to hit the market and consumption patterns to change, oil prices will keep going up. Rogers remains optimistic about gold prices as well. Gold is currently at $540 per ounce, nowhere near the all-time high of $875 it touched long time back.
So, it still has a long way to go on the upside. Rogers remains optimistic about agriculture commodities like sugar as well. As countries prosper, they consume more sugar.
If you still don’t believe that commodities are the place to be, then let’s throw in some numbers. His index fund, Rogers international commodities fund, has delivered a return of 253.3% between August 1998 and January 2006.
In the same period, the S&P 500 gave a return of 28.1%. But the world at large continues to remain unaware of this phenomenon. World over, there are around 70,000 mutual funds investing in stocks and bonds and under 10 mutual funds which invest in commodities. Isn’t it time that we woke up to this?

The best way to sell a stock: Tell a tale

MUMBAI: Sharad Mavlankar is retiring today. He has worked for a stock market broker for the last four decades. He has seen the market change and evolve over the years. When he started working in the mid-60s people had the time to listen to him. Every stock had a story behind it. And it was a part of his job to narrate those stories to investors. The best sales pitch for a stock was to tell the investor a compelling story, backed with some anecdotal evidence.
Over the years, things have changed. People still need a story to invest, but now they can get it from other sources like business media, websites etc. His role had diminished, and towards the end of his career, Mavlankar had very little work to do.
Aswath Damodaran in his book, Investment Fables, Exposing the Myths of “Can’t Miss” Investment Strategies, points out, “Investment stories have been around for as long we have had financial markets and they show remarkable longevity. The same stories are recycled with each generation of investors and presented as new and different by their proponents.” The present-day experts have simply been recycling stories that Mavlankar had always told his clients.
In his initial days, Mavlankar realised that it was easier to sell a stock if he could back it up with a story. As these stories appealed to the basic human nature of fear, greed and hope. And they came in various forms, each trying to target a particular kind of investor.
For an investor who is risk-averse, experts recommend stocks with a low price-to-earnings (PE) ratio, stocks which pay high dividends, which trade less than their book value, companies which have stable earnings etc. For the risk-seeking investor, there are growth stocks and loser stocks (stocks which have fallen to an extent that they can fall no more). For those who have taken poor investment decisions in the past, there were stories like stocks always win in the long-term, just follow the experts, etc.
There’s some amount of truth in these stories and that’s why they work. As Damodaran points out, “Part of the reason is that each story has kernel of truth in it. For example, the rationale for buying stocks that trade at low multiples of earnings. They are more likely to be cheap, you will be told. This makes sense to investors not only because it is intuitive, but also because it is often backed up by evidence.”
Damodaran, in the context of the American stock market, further says, “Over the last seven decades, for instance, a portfolio of stocks with low PE ratios would have outperformed a portfolio of stocks with high PE ratios by almost 7% a year.” But most of these rules do not work all the time. Now let’s take another oft-repeated story, “Stocks always give greater returns in the long-term.”
The BSE Sensex touched a high of 4546.58 in 1992. In 2000, it touched a high of 6150.69, giving returns of around 4% per annum in the intermittent period. In between, once it touched a high of 4643.31 in 1994. At the same time, other form of investments would have given better returns than the stock market.
The Sensex kept falling from 2001 till 2003 when the present bullrun started. So this story did not work for a period of 12 years — from 1992 to 2003.
As Debashis Basu points out in his book Face Value, “By the end of 2002, BSE Sensitive Index, was actually down over eight years of economic growth. Post office savings did better than the 30-elite Indian companies carefully chosen and changed to be part of the Sensex". He further says, “Instead of investing in blue-chip companies like Reliance Industries, Hindalco, ACC, TISCO, Grasim, Telco, L&T, SBI, Glaxo, Gillette (earlier Indian Shaving), P&G, Thomas Cook, Nirma and others you would have been better off putting money in fixed deposits.”
The example is hypothetical

No cash: Banks cut back on government paper

Sanjay K Pillai & Vivek Kaul Sunday, February 19, 2006 20:50 IST


MUMBAI: Banks are fast running out of cash to lend - whether to corporates or government. This becomes increasingly clear from a close look at trends in the investment-deposit and credit-deposit ratios over the last six months. While the former is falling, the latter is rising, indicating that banks are investing less in government paper and lending more of available deposits to commercial borrowers, both corporate and retail.
The investment-deposit ratio shows banks investments in statutory liquidity ratio (SLR) instruments (plus other eligible papers) as a percentage of deposits.
According to current regulations, banks have to maintain a minimum SLR level of 25% of net demand and time liabilities (i.e. deposits). A few months ago, this ratio was far above 41% - a good 16 % ahead of requirements. On February 3, 2006, it was down to 36.71%. This suggests that banks are either selling their holdings of government paper to raise resources for lending, or investing proportionately less than their growth in deposits.
“Credit demand continues to be robust despite higher interest rates. We have already told our business development heads to route cash to higher return customers,” says the treasurer of a private sector bank. On a year-to-year basis as of February 3, 2006, credit from banks had gone up by 31.2% to touch Rs 3,28,675 crore.
As is logical, the declining investment-deposit ratio has meant that the credit-deposit ratio has gone up. It touched 70.10% as of February 3, 2006. This means that for every Rs 100 that the bank has in terms of deposits, it is lending Rs 70.10 as credit to create assets for the bank. The credit-deposit ratio as on September 2 last year was 65.41%.
Analysts say the investment-deposit ratio has come down not merely because banks are selling their SLR investments but because they have stopped provisioning for more. This is borne out by the fact that the incremental credit-deposit ratio of many banks in India is now more than 100%. They are literally lending all the money they take in as deposits.
This sends a clear signal that both deposit and lending rates will remain firm - as is evident from the overnight money and short-term government securities markets. Last week, banks were borrowing an average of Rs 17,000 crore from the Reserve Bank’s repo window (See page 20) at 6.5%, which is far above current retail deposit rates. Prices of short-term government paper are falling, which means interest rates will be north-bound for a while. At the 91-day treasury bill (T-bill) auction last Wednesday, yields moved up to 6.69% against 6.56% in the previous week. The 364-day T-bill auction saw a cutoff of 6.81% against 6.74% in the previous auction.

Bank lending rates

Bank lending rates have risen across the board this calendar year. But this doesn't mean that banks would enjoy a better net interest margin, as a result. While lending rates have gone up, so have borrowing rates. Thus, the spread between lending and borrowing rates will still be more or less the same. Credit offtake has been high in the past one year, with corporate borrowing picking up to fund expansion projects. Since this was not matched by a proportionate growth in deposits, borrowing rates naturally rose. Banks have increased interest rates on term deposits by around 50 basis points on an average lately. They have also been concentrating on raising more wholesale deposits. Now, interest rates offered on wholesale deposits are around 50-75 basis points higher than those offered on term deposits. Certificates of deposits (COD), for instance, contributed to almost 10% of the incremental deposits raised by banks last year. What's more, the interest rates offered on these instruments have increased to around 7% from about 5% a year ago.
This trend of increasing rates is also expected to lead to a drop in the proportion of low-cost deposits, as investors may shift funds to term deposits because of the increase in the yield differential. All this could actually lead to a drop in net interest margins of banks. Besides, public sector banks also face a significant "reinvestment risk" on their bond portfolios. As and when the bonds held by these banks mature, they will have to be replaced with bonds which have substantially lower yields. Needless to say, one way to tackle the pressure on the net interest margin is to shore up the proportion of non-interest income, or fees income. In this regard, private sector banks are way ahead of their public sector.

Diversification does not always mean big bucks

Vivek Kaul


Mumbai : “Coffee isn’t my cup of tea,” Samuel Goldwyn once remarked. Ganesh Sharma might not agree with this. He liked having his freshly brewed filter coffee, first thing in the morning, with his business newspapers. The newspapers today talked about a leading business family getting into a new area of business. “This step, in the long-term, will lead to increasing shareholder value,” the chairman had remarked. Sharma could see history repeating itself. The family- owned business enterprises (FOBEs) in India have always lacked focus. Most of them are heavily diversified. The managing agency system that prevailed during the Raj days is responsible for this disease. In a managing agency system, a single management is responsible for various businesses like cement, tea and so on. A typical British company in India was usually a managing agency, which raised money in England and invested it in a large number of businesses in India. This agency became a model for Indian businessmen. As Gurucharan Das points out in his book, India Unbound, “Since a businessman did not decide what he should produce and depended on what licences were available, there was a made scramble for these, and business houses ended up producing all kinds of unrelated products.” Further, as the new generations get involved, the male scions want independent businesses. This leads to an FOBE diversifying into unrelated areas to some extent as well. But the main reason for diversification, then and now, remains the addiction of Indian business with size. As Debashis Basu points out in his book, Face Value, “So the moment they were through with planning for one project, they were ready with another. And the moment they achieved a respectable size in one business, they wanted to become big in another.” In most cases, companies try and get into a new business when the markets are booming. This is a time when raising money for a new business is relatively easy. Thus, companies plan a big leap from the current operations, which rarely pays off. Further, companies rarely have several successful businesses under one umbrella. If one business does well, another pulls down the profits. A good example is Grasim. Grasim is into four major areas — viscose staple fibre (VSF), sponge iron, cement and chemicals. Grasim’s results for the quarter ending December 2005 were similar to the quarter ending September 2005. The bad performance of the company’s sponge iron and VSF divisions hit group profits. Stockmarket data seems to suggest that it rewards companies which have a certain business focus. The 10th Motilal Oswal Wealth Creation study for 2000-05 clearly indicates that during the period, of the top wealth creating companies, diversified companies formed only 3%. This has largely been the trend since the survey was first carried out in 1992-97. As the study points out, “The participation of diversified companies in wealth creation remains limited”. Another example is the recent demerger of RIL. One reason why the stockmarket was positive about it was the fact that the demerger will bring greater focus to the residual entities.

Making sense of stockmarket bubbles

Vivek Kaul Friday, February 10, 2006 21:11 IST


Never follow the crowd —Bernard Baruch

…the fact is it is really quite comfy to be a part of the crowd — Adam Smith

MUMBAI: Kavi Kumar had just finished taking a class on financial markets at the Sentinel Centre for Human Resources Development. During the course of the class he had tried to explain that the price of a stock equals the future expectations the market has from the stock.

Towards the end of the class, one of the students, Ashwini Kumar, had suddenly woken up from a snooze and asked: “All that’s fine. But it’s never too obvious as to what the future is. And doesn’t that lead to stock market bubbles, when a rosy picture of future is painted and then you have excess cash chasing a single investment theme?”.

The question had stayed in Kumar’s mind. Future is so uncertain. And predicting how a company will perform in the days to come is such a difficult task. Chances are that the actual scenario might turn out to be very different from what the expectations are.

A particular sector that is deemed to be hot as of now may not perform in the future. But for the time it is deemed to be hot, a lot of money will flow into the stocks in that sector leading to increased valuations which investors will realise in retrospect were not really justified in the first place. There perception of future might turn out to be wrong.

James Surowiecki , in his book The Wisdom of Crowds, says, “The problem with the stockmarket is that there never is a point at which you can say that it’s over, never a point at which you will definitely be proved right or wrong. ” The stockmarket might eventually get it right, but till it gets it right there is a bubble in place that keeps bloating as more and more investors chase the same set of stocks.

“But what makes investors invest in the same set of stocks?” wondered Kumar. The answer for this is provided by Robert Shiller in his all-time classic Irrational Exuberance.

He says, “A fundamental observation about human society is that people who communicate regularly with one another think similarly. There is at any place and in any time a zeitgeist, a spirit of times”.

If a person wants to invest, the chances are he will look around to see what his acquaintances, neighbours or relatives are doing with their money. The desire to conform to what others are doing is a fundamental human trait. But the prices cannot keep going up forever. Sometime in the future a crash might occur.

(The example is hypothetical)

Deluge of info, but is anyone gaining?

Vivek Kaul Thursday, February 09, 2006 21:14 IST

MUMBAI: “Water, water everywhere, but not a drop to drink” goes an old English saying by Samuel Taylor Coleridge.
If one were to paraphrase it in the context of the amount of news being churned out by the business news channels these days, it would be “information, information everywhere, but no time to think”.
The business media in India has come a long way from getting the unabridged report of Reliance Industries Ltd within a few days of its printing meant an exclusive story to news anchors providing real-time information to investors and making a big hit when the Sensex crossed 10,000 for the first time.
So, the question to be asked is, is more information good? The general rule is more information is always better. Investors need to have enough information on companies they are investing in. But more information need not always be good.
Let’s take the case of US stockmarkets, and the stockmarket bubble in the late 90s. This bubble coincided with the explosion of business news channels. The most influential of them is CNBC. This channel provided non-stop coverage of what was happening in various stockmarkets through a ticker tape running at the bottom of the screen.
As James Surowiecki points out in his book, The Wisdom of Crowds, “The network was, in one sense, just a messenger, letting the market, you might say, talk to itself. But as CNBC’s popularity grew, so did its influence. Instead of simply commenting on the market, it began - unintentionally—to move them.
It wasn’t so much what was being said on CNBC that prompted investors to buy and sell, so much as it was the fact that it was being said on CNBC”.
Economists Jeffrey Busse and T Clifton Green carried out a research on how markets reacted to information provided in the ‘Morning Call’ and the ‘Midday Call’ segments on CNBC. These segments, which were broadcast when the market was open, gave analysts’ views on individual stocks. When the recommendation on a stock was positive, the price of the stock went up within the first 15 seconds of the programme. When the recommendation was negative, the information was incorporated into the stock price over a period of 15 minutes.
The point that clearly emerges here is that investors were not reacting to the content of the report. In 15 seconds, it’s not humanly possible to decide whether what was said in the report made sense. As Surowiecki points out, “All the investors, or speculators, cared about was that because CNBC said it somebody would be trading on it. Once you know that other people are going to react to the news, the only question becomes who can move fast enough”.
CNBC and other business channels bombarded investors with news. At any point of time, an investor knows what other are thinking. This made it difficult for an investor to make an independent decision on a stock.
Further research in psychology shows that more information does not necessarily improve judgment. Any extra information is helpful only if it comes without any bias or hype. But that is rarely the case. Business channels typically react to each and every piece of information they can lay their hands on.
More often than not, any fall in the price of a stock is attributed to the trouble that lies ahead. And when the price rises, good times are promised ahead. This leads to investors buying and selling more often because they take each piece of new information to be more meaningful than it actually is. As Surowiecki points out, “The problem of putting too much weight on a single piece of information is compounded when everyone in the market is getting that information”.

ITC in another FMCG line

Vivek Kaul Wednesday, February 08, 2006 22:25 IST
ITC reported another quarter of strong growth - its net sales growth of 37.5% was way higher than consensus estimates, as was the net profit growth of 24.8%. The higher-than-estimated growth was largely because of a pick up in cigarette volumes.
The company’s new FMCG business including processed foods, lifestyle retailing, matchboxes, agarbattis, greetings and stationery, saw an impressive 71% jump in turnover. However, these businesses continue to be a drain on overall profitability. Last quarter, they posted a loss of Rs 39.5 crore, or 15% of the revenues of Rs 260.6 crore. But this doesn’t seem to be bothering the ITC management, which will soon enter segments like soaps shampoos and detergents.
The company initially plans to launch these products through its e-choupal network, which according to analysts is a smart move considering that this network is mainly spread across areas which have very low consumption of products like soaps and shampoos. But going by the strategy ITC has followed with its other initiatives, it will only be a while before it launches these products nation-wide.
ITC, of course, given its huge cash reserves, would not mind incurring losses initially while trying to build up a presence in the new segments. Most of its new initiatives are businesses that have a long gestation period, and it would not be surprising to see a price war in the soaps and shampoos space soon. This certainly wouldn’t augur well for HLL, which has just about come out of its price war with P&G. It’s no wonder the HLL stock has underperformed its peer in the FMCG space by a huge margin this year.

Share price equals future expectations

Vivek Kaul Wednesday, February 08, 2006 21:27 IST


Life can only be understood backwards; but it must be lived forwards — Soren Kierkegaard, Danish philosopher

MUMBAI: Kavi Kumar has two passions in life, reading books and listening to music. And to bankroll his twin passions he does a variety of odd jobs. One of them is teaching at the Sentinel Centre for Human Resources Development (SCHMRD). Over a period of time he had started firmly believing in the Socrates philosophy of teaching. He questioned his students thereby compelling them to think about a problem and come to a logical conclusion themselves.
“Pantaloon retail’s stock price on February 7, 2006, closed on Rs 1,699.95. If I add the earnings per share for the last four quarters it comes to Rs 24.61. Given this the trailing price to earnings (P/E) ratio for the company is 69. This is very high when compared with the P/E ratio of the Sensex, which on the same date was 18.64. Other listed retail companies seem to have a very high price to earnings ratio as well. Why is it like that?,” asked Kumar and set the ball rolling for a free wheeling discussion.
Price of a stock = future expectations,” came a voice from the back of the class. The back benchers were awake.
“Would anybody like to elaborate on that ?,” asked Kumar.
Anubhav Arora, the Mr Know-it-all of the class remembered reading something in a book titled Face Value written by Debashis Basu.
His fabulous memory allowed him to repeat that for the benefit of the class. “ A clearly visible, high growth future can change the valuation of the entire sector not just of one company. This was how the software companies started getting higher and higher multiples on the same incremental performance,” replied Arora.
“But were software companies highly valued from day one, Mr Arora?” asked Kumar.
“Initially the stock market was apprehensive. Software companies it was felt made their money through only body shopping and correcting the Y2K problem. It took the market sometime to realise that the Indian companies had successfully used these measures as an opportunity to get other business out of companies. Once the market realised this there was a re-rating of software companies and their stock prices started going up,” replied Arora. “And what happens if the stock market feels that the future is not clear?,” asked Kumar trying to take the discussion further.
“In that case even consistently good financial results do not lead to a higher stock price,” replied Varun Sinha, the fast thinker in the class. “Can you give an example to substantiate your point?,” asked Kumar.
“In a recent Wealth Creation Survey for the period 2000-05, carried out by Motilal Oswal, there were 30 state owned companies in the 100 - wealth creator group. Despite all the government controls, these state owned companies delivered 27% earnings growth during the study period. But at the end of the study period their average price to earnings ratio was 8.6. During the same period the private companies achieved an earnings growth of 34% but their average price to earnings ratio at the end of the study period was 14.3.
What this clearly tells us is that the stock market remains sceptical of the ability of the sustainability of the earnings of the state owned companies and hence has not rewarded them fully in terms of market capitalisation,” came a long wielding response from Sinha.
“All that’s fine. But it’s never too obvious as to what the future is. And doesn’t that lead to stock market bubbles, when a rosy picture of future is painted and then you have excess cash chasing a single investment theme?” asked Ashwini Kumar, suddenly waking up from a comfortable snooze.
Kumar felt he was trapped. Just as he was about to say something, the bell rang. “Thank God for small mercies,” he thought and walked out of the class.
The example is hypothetical

The generics business

Vivek Kaul Tuesday, February 07, 2006 22:08 IST
The performance of the Indian pharma industry in calendar year 2005 clearly showed the impact of pricing pressure in the US generics market. With an increasing number of players competing in the US generics market, competition in the generic space has heated up for even smaller drugs with sales of around $100 million, leading to a profit squeeze for these companies. Further, innovator companies have been using the authorised generics route to reduce the attractiveness of six month exclusive marketing rights as well as create strong entry barriers for follow-on generics.
But things are set to improve this year for the generics market, especially in terms of volume growth. With the expiry of patents of some mega drugs in the US, the generics market is expected to improve from the June quarter of this year.
This trend could continue, since around $45 billion of blockbuster drugs in the US will go off patent between 2006 and 2008. Even after factoring in price erosion and the fact that some people will still continue to buy the original drug, the incremental opportunity for the Indian generic companies is huge. Besides, non-US generic markets are also well placed to grow strongly, and given the pricing pressure in the US market, concentrating on these markets seems to be a good idea.
The other positives in store include the upside from the contract research manufacturing space and the potential of the Indian market with the start of the IPR regime. But most of these positives seem captured in top pharma stocks, which trade at an average multiple of around 15 times two-year forward earnings.
In case there’s news of further pricing erosion in generics going forward, pharma stocks could continue to underperform the market. Of course, there are exceptions like Cipla and Sun Pharma which demand high valuations because of their consistent earnings growth records.

Want to know more about money? Come to Moneypur

Vivek Kaul Tuesday, February 07, 2006 21:18 IST
MUMBAI: In school I detested Physics. I remember asking my mother, why Physics couldn’t be presented in an interesting way? You know, like Hindi film songs. You hear them once and remember the entire number.
Time went along, and as luck would have it, I ended up on the other side of the table, teaching subjects in finance and economics, to business school students. After a semester of teaching I realised that students were receptive to what was being told in class as long as it was presented in an interesting manner, which involved a large dose of story telling (real or fiction).
Adventures in Moneypur, by Swapna Mirashi, introduces the various concepts of money through a story format. It’s a story of a 12-year-old, Honey, a talented cartoonist, who abhors the way his Maths teacher teaches (that makes me wonder where have all the good Maths teachers gone?) and would rather draw cartoons in class. Honey gets chosen by a Guru (called Guru Future Rishi) to attend and clear a very tough course in Money Wisery in the island of Moneypur.
In Moneypur, Honey meets Money, a bachcha rupee, and together they go through various tests and realise different aspects related to Money Wisery.
The story starts with the concept of barter and how gradually this concept is taken over by money in the form of shells, beads, stones, feathers etc. There were problems with this form of money and then metal coins were introduced. Metals coins could not be carried everywhere, as they were heavy and bulky and then paper money was introduced.
Paper money had its own share of problems. Inflation was the foremost. Inflation in this book is introduced as a demon named Infley shun who feeds on bachcha rupees.
The book then takes a contemporary turn, and explains the vices of consumerism, through the aptly titled disease called buyingitis and a deadly beast called Want-A-More.
It then explains various facets of personal finance, like various kinds of investments and the importance of having an investment portfolio. All told through a story. And that’s were the beauty of this book lies.
The concepts are weaved into the story. Also the author has taken adequate amount of care not to go overboard with concept and introduces them gradually one by one over this 270 page book.
How many of us actually understand the various aspects of money.
Most of us are reasonably good at earning and spending it. But when it comes to saving money and investing it to make it grow, most of our efforts come cropper. And this is where books like Adventures in Moneypur can be a great help in promoting financial literacy among children so that when they grow up they have a greater idea of what to do with their money than their parents ever did.

Tie the knot, you can at least save some tax

Vivek Kaul Monday, February 06, 2006 21:30 IST

Manchahi ladki kahin koi mil jaaye, apna bhi is saal shaadi ka iraada hai — Lyrics by Anjaan in the movie Waqt ki Deewar

MUMBAI: It’s been a few years since Kavi Kumar and his friends have passed out of college. But for old times’ sake, they still meet once in a while. Over the years, these meetings had been far and few between. For want of better topics, most of their conversations hinged on two points, ‘Mumbai ka mausam’ and ‘Aur shaadi ka kya socha?’ After some customary greetings, Ganesh Sharma, who was to get married in April, set the ball rolling. “Kumar, I think it’s high time you got married.”
“Not again, why did I even decide to come to this place,” thought Kumar. “And may I ask why?” replied Kumar, slightly irritated. “Well, actually you could get a greater home loan to buy that Rs 47- lakh two bedroom flat you have been eyeing for,” replied Sharma.
“Now that was something new,” thought Kumar.
“At your current salary of Rs 45,000 per month, you would be eligible for a loan of around Rs 23 lakh. Now let’s say you are able to find a girl who earns the same salary as you do. Given this, the combined monthly salary would be Rs 90,000. At that salary level, you would be eligible for a loan of Rs 46 lakh. But most of the banks or housing finance companies would lend around 85% of the value of the property (Rs 47 lakh in this case). That would turn out to be around Rs 40 lakh. The rest you will have to manage from your own resources.”
“Ganesh, for once you seem to be talking sense,” Kumar egged him on. “So let’s say, you and your wife take a home loan of Rs 40 lakh at a fixed rate of 8.75% per annum to be repaid over 20 years. Both of you have an equal share on the home loan i.e, 50:50. The equated monthly instalment (EMI) would work out to be around Rs 35,350.
Section 24 of the Income-Tax Act, 1961, allows for a deduction of up to Rs 1,50,000 from taxable income for interest payment towards a home loan.
Under Section 80 C of the I-T Act, the money going towards the principal repayment is eligible for deduction. The limit under Section 80 C is Rs 1,00,000. Since you and your wife have taken a joint home loan, you will be allowed tax deductions in the proportion of the loan i.e. 50.50,” Sharma explained.
“I did not understand the tax part of it. Can you elaborate it a little more?” asked Kumar.
“Well, see in the first year, the total interest part of the EMIs will amount to Rs 3,46,966. Now both of you would be allowed a deduction of up to Rs 1,50,000 from your taxable income. The principal part of the EMI in the first year will be
Rs 77, 234. Since both of you would have taken a loan in the 50:50 proportion, both of you will be allowed a deduction of Rs 38,617 each from your taxable income under Section 80 C,” explained Sharma.
“That’s all, or you have a few more aces up your sleeve?” said Kumar. “If you do not want such an expensive house, you can pay a greater EMI and pay off the loan faster,” explained Sharma.
“All this is fine. But you know Ganesh, I really do not want to get married. Currently, I live in with my girl friend. Will a bank give me a housing loan?” replied Kumar. Sharma did not have an answer for this question.

It’s the stocks that matter

Vivek Kaul/Praveena Sharma Monday, February 06, 2006 21:39 IST


MUMBAI:

“Savour the moment, worry about tomorrow, tomorrow!,” said Ramesh Damani, one of India’s most respected brokers on the Sensex touching 10,000.
The question now is, where does it go from here? Different analysts have different takes. A weekly news magazine and a Sebi member even predicted that the Sensex will touch 16,000 in the days to come.
At the same time, many experts have been of the view that a correction is long overdue. Some of them have been talking about a correction, since the Sensex first touched the 6,000-mark in January 2004. But when will the correction come? Well, your guess is as good as ours. Given this, investors should keep certain things in mind while entering the stockmarket.
If the idea is to speculate and try and ride the market, then the best way out is to earmark a certain percentage of the total investment for it. How much loss the investor should be ready to bear?
If an investor can answer this question, he knows how much money he should earmark for speculation. Further, the quality of stocks is of utmost importance.
“However, to be euphoric today would be foolish, because at the end of the day, what matters are the stocks that an investor owns and not the index. I am sure all those investors who had invested in penny stocks would probably be worse off today,” said Krishna Kumar Karwa, Director, Emkay Share and Stock Brokers Ltd.
Another rule that investors should keep in mind is what Benjamin Graham recommends Intelligent Investor: “We have suggested as a fundamental guiding rule that the investor should never have less than 25% or more than 75% of his funds in common stocks, with a consequent inverse range of between 75% and 25% in bonds.”
He further says “Conversely, sound procedure would call for reducing the common stock component below 50% when, in the judgment of the investor, the market level has become dangerously high”.
In short, do not stay invested only in stocks. Look at other asset classes like fixed-income instruments or bonds, real estate, gold etc. The Sensex has given a 50.80% return in the last one year. Expecting similar returns one year down the line is next to impossible. For that to happen, the Sensex will have to touch 15,000.
Looking at other asset classes, gold demand should pick up further as investors try to increase the proportion of yellow metal in their investment portfolio. “Even though the prices of precious metal is at a 25-year high, it would still be preferred by investors as it offers better liquidity, mobility and maintenance, compared to the other asset class. There will be a flight of investment from equity to gold as it is a safer bet,” says Pramit Mistry of Brics Commodities.
Bullion experts believe investors would increasingly use gold to hedge their profits against market volatility. As investors book profits in the stockmarket, property pundits predict the flow of earnings from stockmarkets into real estate.
This trend was set off when the equity market had touched 8,000 last year. Besides the high net worth individuals, institutional investors like India Bulls and Anand Rathi have also substantially invested in real estate. This has sent real estate prices soaring and will keep them there as long as there are sustained returns from the stockmarket. Last six months have seen real estate prices across India move up over 30-40%.
The market has also seen some blazing pace of price rise in places like Jaipur (300%), Noida (125%) and Bandra-Kurla-Complex in Mumbai (over 200%).
On the other hand, real estate prices in Gurgaon have dipped marginally as supply outstrips demand. “From here, we are likely to see a slowdown in the rate of real estate price appreciation, if the supply of land is not interfered with,” says Pranay Vakil of Knight Frank, a property consultancy firm.