Eventful Week Ahead: Markets poised for a Turnaround

The markets are headed for an eventful week starting 25th February 2008. The Railway Budget and the General Budget will be presented during the week, The week will also see the expiry of February futures on 28th. The events of the coming week could well mark the end to the pessimism prevailing in the equity markets currently.


Here are some of the positive factors which could drive the markets:

• Negative Global cues have been more or less discounted, be it the sub prime crisis or the spectre of a US recession. Hovever, the chances of Us slipping into a long term recession are less than 20%. The Europian markets are also in a consolidation mode.


• The slowdown in IIP was attributed primarily due to the sluggishness on the export front. With the dollar holding firm against most currencies including the Rupee, the competiveness of Indian companies is likely to be restored in the short run. The Rupee breached the Rs40/$ mark last week after almost eight months.


• According to the data released by the Central Statistical Organisation, the Investment rate of the Indian economy was a decent 36% of the GDP in 2006-07. This is expected to rise to above 38% in the current year. This will take care that our GDP continues to grow close to 9% pa.


• Fresh Mop up by Mutual Funds: Various Mutual Fund schemes have collected/ are open for subscription, and are likely to collect over Rs. 20000 crores, which will have to be invested in the secondary markets.


• Anil Ambani's 'Brahmastra': After a euphoric oversubscription and the listing fiasco of Reliance Power, Anil Ambani is finally getting things under control. The better than expected ratio of 3:5 bonus for Retail investors, the post bonus price of acquisition in R-Power will be a reasonable Rs.281-269. What is commendable is that Ambani has foregone his personal shareholding in R-Power to compensate the Reliance Energy shareholders, the holding of Reliance Energy in R-Power will be protected at 45%. This augers well for the markets. This will, possibly, take the price of R-Power shares in the positive territory (Plus Rs.450 levels).
• Budget Expectations: A low open interest of less than Rs. 80000 crores (in the F&O segment) denotes low key expectations of the market players from the budget. This will protect the market from a major downside risk post budget. However, if the budget is able to deliver a few positive surprises the markets will take a positive cue. Their are expectations on some relief in the Personal/ Corporate income tax. The exemption limit on Personal income tax could be increased by Rs.15000-20000, the increase for women and senior citizens could be higher. On corporate tax front there could be a removal/ reduction of surcharge.
• The market has been consolidating between the sensex levels of 16500-17500 for quite sometime. This means that the the scrips have been picked up by strong hands, which augers well when the revival begins.

However, there are a few negative factors also. The surging inflation rate (WPI) close to 4.5% is a matter of serious concern by the markets. The low volumes/ liquidity constraints are also negative signals. The liquidity will remain low on 25-26th February due to the strike by employees of PSU banks.

Considering all the above factors, and barring any unforeseen developments in the Global markets, markets are likely to show a positive trend in the latter part of the week. The signals are to stay invested.

Crystal Gazing: Impact of Lunar Eclipse on Markets

Analysts cover the stock market from various perspectives: Fundamental analysis, Technical analysis and so forth. There is another school of thought which analysis the market from the angle of planetary configurations. Given below are some interesting observations on the impact of full Lunar Eclipse occuring on Thursday 21st February 2008. I do not purport to be an expert in this field, so these observations may be taken with a pinch of salt.

The full lunar eclipse of 21st February 2008, will be visible partially in India. This is occuring on a Full moon day. The next full lunar eclipse will occur only in 2010 (20.12.2010). Generally, a lunar eclipse has an impact on the human mind leading to mood swings, depression, feeling of alienation. Human beings operating in the markets are subjected to the feelings of greed and fear. The impact of a Lunar eclipse would thus result in greater volatility on the markets on 21st February 2008, and its impact would last for a couple of days. It is advisable to practice restraint in these circumstances to avoid losses on the markets. However, the impact on some individuals could be extremely positive depending upon their 'Rashi'. Please consult your astrologer before taking a decision.

Astrologer Bejan Daruwalla has predicted heavy volatility in the markets from 21st - 25th February 2008 due to the Sun-Saturn opposition. However the markets are likely to stabilise post budget. Bejan Daruwalla expects the markets to revive to a level of BSE sensex 19300 post budget. So, dear investors, patience is the key in these turbulant times.

RELIANCE POWER BONUS: RAMIFICATIONS

ADAG Group is in a damage control mode, to salvage its battered and bruised image in the minds of the investor community. Its another first of its kind, a company without any track record of production/ sales and reserves is proposing a bonus issue out of its share premium account.

Infact it is an admission of the fact by The Reliance Power management that the IPO was overpriced. Or is it a ploy to pacify the grey market brokers who supported the IPO? However, if it is a genuine move to help long term investors it is a welcome move. Things would get cleared after the board meeting on 24.02.2008.

The bonus issue could be in the ratio between 1:5 and 1:2. If the bonus issue is in the ratio of 1:5, it will reduce the promoter stake by about 1.7%, and will reduce the effective price per share to Rs.375 from the issue price of Rs.450. This will only be an eyewash, as the share had drifted down to Rs.350 last week. A bonus ratio of 1:2 would mean promoter stake dilution of 4.2% and reduction in effective price to Rs.300 per share, which seems quite reasonable.

So keep your fingers crossed till 24th February. However, if on the basis of this news the share price moves closer to Rs.450, you may consider moving out if you are not a long term investor. Long Term for this company would mean holding with a 4-5 year perspective.

As per media reports Mr. Anil Ambani has made a request to the regulator to set up an enquiry into the price rigging in the Reliance Power counter in an attempt to pull down the share price. Why is there a move for enquiry into rigging when the market falls? Why not have an enquiry into the entire issue of overpricing and the role of grey market operators in the IPO market.

TAX SAVING IDEAS: ELSS

The Financial Year is approaching its end. Its time to invest funds to save taxes. As you are aware Section 80C of IT Act allows deductions upto RS. 1,00,000 for investments in specific schemes, incl. PPF, NSC, Insurance and of course ELSS schemes of Mutual Funds.
ELSS (Equty linked savings scheme) of Mutual Funds have consistently beaten all other investment options, so it is prudent to invest a major chunk of your investments in these instruments.
Which are the best performing ELSS schemes? I have shortlisted the best two, and their comparisons. You can choose your option from these two blue chip funds:

Magnum TAX Gain(from SBI MF) Vs. HDFC Tax saver(G)
Launch date: Magnum:March 1993 , HDFC:March 1996
NAV as on 15.02.08: Magnum:57.88 , HDFC:173.85
Expense Ratio : Magnum:1.89% HDFC:2.14%
Investment break-up: Magnum:Equity-89%, HDFC:Equity-97%
Top 10 holdings :
Magnum; (RIL, JP assoc., Welspun Gujarat, L&T, Reliance Comm.,
HDFC, IDFC, ICICI Bank, Axis bank, Crompton Greaves.)
HDFC: (ICICI bank, L&T, ITC, Crompton Greaves, RIL, Thermax,
SBI, Suzlon energy, BHEL, Amtek Auto)
% of Top 10 Holdings: MAGNUM:33%, HDFC:49%
Top 3 sectors:
Magnum: Financials-15%, Energy-12%, Diversified-12%
HDFC: Engineering-20%,Financials-19%,Energy-9%
RETURNS:
1 year: Magnum:29.13%, HDFC:18.47%
3 Years: Magnum51.16%, HDFC37.71%
5 Years: Magnum70.61%, HDFC 55.68%

So, the above data will help you understand the return potential of ELSS schemes, make your choice and see your money grow with tax savings as a bonus.

Power Packed Offer from REC

The IPO market is in shambles after the Reliance Power fiasco and Power is a dirty word in the market circles. Investors who lost money in the Reliance Power issue are still suffering from the aftermath of the 430 volt shock. In these circumstances REC (Rural Electrification Corporation) is coming out with a reasonably priced offer to raise Rs.1400-1600 cr. in the price band of Rs.90-105. Primary market investors may take an exposure in this issue for decent long term gains. As the oversubscription is likely to be low given the current sentiment, the chances of allotment will be fairly high. Invest with a minimum application for 120 shares (RS.12600).

The plus points of REC issue:

• It is a Public Sector Power finance company engaged in diversified financing of power trasmission, distribution and generation projects.
• The govt thrust on 'Power for all' by 2012 requires massive investment in Transmission and Distribution infrastructure.
• It is an existing profit making company with a healthy net interest margin of around 3.3% for FY07.
• REC has access to cheap resources such as Capital Gain Bonds (under IT ACT), and other taxable bonds. Its average cost of funds is under 6.60% currently.
• It is favourably placed against its peer level companies like PFC. Its return on net worth at 21% is signifactly higher than that of PFC. Its outstanding loan assets for FY07 are Rs. 31,974 crores.
• On the post issue Equity capital of Rs.859 Cr. it is valued at 7-8 times its expected FY08 earnings.

The major risk factors:

• Ability to raise cheap funds in the future, given the tax advantages enjoyed by it currently.
• The possibility of delays in payments from its clients primarily State Electricity Boards.

Considering all the above factors the issue deserves a closer look by long term investors.

The darkness after the Power Failure

Their is darkness in the lives of people who believed in 'Reliance Power' story. But their is always light at the end of the tunnel. But this tunnel is so long that the light is not visible in the near future. Those of you who have made the mistake of applying for the Reliance Power shares must realise that it was a bad investment decision. But still you can rectify this mistake by booking partial loss. The company is not likely to generate any power before 2010 and is unlikely to generate profits before 2012, so stay invested if you can for the next 4-5 years or quit at a price close to Rs.400. The grey market operators are likely to jack up the price close to Rs.400 when the market revives, it will be a prudent time to quit at that time, and invest in better power scrips like NTPC, CESC. Based on fundamentals R-Power does not even merit a price of Rs.300 currently.
However, there are a lot of positives that have emerged out of the R-Power issue:

• The market that had run too far ahead of valuations has corrected for the better after the R-Power fiasco. This gives a lot of opportunities to buy blue chips at attractive price levels. The market which touched 21000 in January 2008 was atleast 12-15 months ahead of the valuations. These levels would have been justified in April 2009, after declaration of FY09 results.
• The undesirable elements in the market, who have taken investors for a ride by playing the Grey Market have learnt their lesson, and will tread cautiously, atleast for sometime. This augers well for the market to move along fundamentals.
• The Book building route for new issues which had become a hunting ground for promoters to charge unreasonable premium would allow only genuine issues to be subscribed in the days to come. we will see only excellent issues hitting the primary market, which will leave scope for capital appreciation post listing.

We must thank the R-Power issue for these positive developments.

Saare Zamin Par: Lessions to be learnt

The bare truth about mega IPOs is before everyone to realise.
Anil Ambani's dream of becoming the richest man/ richest Indian has been put on hold, and alongwith him the dream of the aam aadmi from becoming a sultan overnight has also been decimated.
The mega issue of Reliance Power has been listed at a steep discount, despite being oversubscribed several times over. It is a matter of some soul searching for the promoters, lead managers to the issue as well as the brokers who advised their clients to subscribe to this highly overrated issue. Earlier, last week the EMAAR-MGF mega issue was also shelved, leaving the promoters with a wish unfulfilled. However, small investors must thank their stars that they were spared of their hard earned money getting locked in one issue, and getting only upto 17 shares in the other, reducing your loss considerably.

Dear investors, there are a lot of lessions to be learnt from this episode:

• There are no shortcuts to make money on the stock market.
• Stock market is not a Casino.
• Money can only be made in the long run.
• Patience is the key to success, on the markets.

The mega issues have taken a heavy toll of the secondary markets, but it is not the time to press the panic button. Hold on to your stocks for long term, the market revival may be around the corner.

History repeats itself, and this time will be no exception. Past record of the sensex tells us that the returns from the sensex are in excess of 18% per annum, leading to the sensex doubling in value every four years on an average. The long term trend line of the sensex is around 16800 levels currently. Stay invested, have patience to reap profits in the long run.

Rule of 72: Predicting future sensex levels

Rule of 72 deals with the layman's understanding of the power of compounding. According to this rule number of years needed to double a base figure is: 72/base figure. For example, if you have Rs. 100 today, and you expect a growth of 18% pa, then your money is expected to double in 4 years (72/18).

The BSE sensex was established in April 1979, with a base of 100. From the rule of 72 you can see that it has given a return of over 19% pa since its inception. Now let us see, whether at the current levels of 17,500 it is reasonably priced or not. The current year expected EPS of sensex stocks is likely to be Rs. 870, which can go up to Rs. 1000 in FY09. Thus, the sensex trades at a trailing PE of 20 and one year forward PE of 17.5, which is considered reasonable for a growing economy like India, expected to grow at 8.5- 9.5% over the next four years. If this is the scenario, we can expect sensex companies to grow at a reasonable 18% per annum, which is close to the long term growth of the sensex in the past. Applying the Rule of 72, the Sensex can double in 4 years (72/18) from the current levels. So we can reasonably expect the sensex to hit 35,000 levels by April 2012. Of course, some sensex companies will outperform these growth rates while some will underperform it.

Your queries:
I have received queries about the growth prospect of 2 stocks.

SBI: The stock currently trades at Rs.2100-2200, ex-rights. The rights are being offered at Rs.1590/ share, which is quite attractive. Those who do not hold the stock can buy it around Rs.1900 in a fall. It is qouting at a reasonable PE of 16, and is likely to outperform the sensex. The stock has a potential to double from the current levels of around Rs. 2000 in 3 years time, giving a reasonable annualised return of 24%.

AGRO DUTCH FOODS: The company is the largest producer and exporter of canned mushrooms. It has not got market fancy due to the lukeworm response to export units. It is growing at a reasonable level of 10% pa. The FY08 turnover is expected to be Rs. 220 cr. with a net profit of around Rs. 40 cr., giving an EPS of 12. It currently quotes at RS.38 (52 wek hi/lo of 50/24), which gives a PE of 3.2. given the current fundamentals, and the budget giving thrust to agri exports it can be bought at current levels. If the market fancy is seen towards the agri exporters post budget, this stock can double in a years time. The concern however is its low floating stock and low volumes.

The sense and the senselessness of Mega IPO's

The bookbuilding route allows the companies to raise huge funds for their mega projects. But the moot question remains, whether it makes sense to give such high valuations to these projects having very long gestation periods. Infact subscription to these IPO's depends upon the liquidity in the market. A case in point is the huge oversubscription to Relince Power IPO, whreas the EMAAR-MGF issue is struggling to get subscribed. A large number of these issues do not merit such high discounting based on fundamental analysis.

What should retail investors do with these issues. Based on shear fundamentals it is advisable to switch to other fundamentally strong scrips which are quoting at reasonable valuations. A few switch options that can be beneficial in the long run:

1. RELIANCE POWER Vs. NTPC: If RPower lists above Rs.600, quit and buy NTPC around Rs.200.
2. FUTURE CAPITAL Vs. SBI/ ICICI: Recently listed share of future Capital is quoting at around Rs.1100, switch to blue chips like SBI or ICICI Bank.
3. EMAAR-MGF Vs. PARSVNATH: Rather than appplying for Emaar-MGF issue even at the lower band of Rs.540 buy double the number of Parsvnath shares at Rs.270. Parsvanath has a earning visibility and past performance, whereas, Emaar-MGF has yet to prove its track record.

These are only a few examples, and through this strategy you will be reaping huge profits in the future.

Results Season Over: Identifying Potential Winners.

Quarterly results give long term investors an opportunity to analyse companies and to pick up potential winners from the lot. I have identified 5 such winners from the Mid cap space which have a potential to give 40-50% returns over a one year period. The benchmarks for selecting winners are:

• Consistent growth, based on past one year figures, and future growth potential.
• Decent turnover, consistent profit margins.
• Reasonable trading volumes.
• Consistent growth in EPS, and a reasonable PE as compared to peers.

1. APOLLO TYRES (Rs.48): The Auto ancilliary industry is expected to do well as India prepares to become the export hub for small cars, and apollo tyres is poised to take advantage of this scenario. Commercial vehicle sales are also likely to pick up. Trailing 12 month turnover and net profir are Rs.3604 cr. and Rs.202 cr. respectively, giving an EPS of Rs.4.4. It trades at a PE of 11.2.

2. SU-RAJ DIAMONDS (Rs.66): Suraj Diamonds is one of the few companies with integrated spectrum of gems and jewellery business. Its wholly owned subsidiary located in Antwerp, Belgium ensures consistent diamond supply chain. It has reported turnover and profits of Rs. 1838 cr. and Rs. 58 cr. respectively for the trailing 12 months ending Dec. 2007, giving a healthy EPS of 14.4. It trades at a ridiculously low PE of 4.7 and the potential for gains is tremendous.

3. KEI INDUSTRIES (Rs.87): It is one of the largest cable manufacturing companies in India, and an established player in the power cable segment, where the growth prospects are temendous. Its new unit at Bhiwadi, Rajasthan has been commisioned recently, which will add over Rs. 300 cr. to the annual turnover of the company. Trailing 12 month turnover and net profit are Rs. 823 cr. and Rs. 48 cr. respectively, giving an EPS of 8.4. The stocks trades at a PE of only 10.4, which is low for a stock in a high growth sector.

4. PARSVANATH DEVELOPERS (Rs.270): It is the most diversified realty player with a presence in 48 cities spread over 17 states. It is executing 11 approved SEZ's. The stock is quoting at a 10% discount to its issue price. Trailing 12 month turnover and net profit is Rs. 1600 cr. and Rs. 432 cr. respectively, giving an EPS of 23.3. The stock trades at a PE of 11.6, as compared to very high PE's of other realty stocks. The above factors make the stock a bargain pick.

5. INDIA CEMENTS (Rs.204): It is the largest producer of cement in South India with a 28% market share. It caters to the markets in Southern states and Maharashtra. Companies in the cement industry are favourably placed as per supply-demand scenario for atlest the next 2-3 quarters, and a strong performance is expected from them. Trailing 12 month turnover and net profit of the company is Rs. 3020 cr. and Rs.663 cr. respectively, giving a healthy EPS of 26. It trades at a trailing PE of 7.9, which is lower than its pears, giving it a decent upside potential.

You can identify many such winners after analysing the latest results announced by the companies.