First quarter results do not present a rosy picture

Stock markets generally reflect the mood of India Incoporated's quarterly results. A euphoria was built by market participants in anticipation of some extra ordinary first quarter results. With a major chun kof results already announced for the first quarterr of Fiscal 2010-11, there is a fit case for valuations to adjust downwards.

An analysis of the 300 leading companies reveals that although sales have grown strongly at an average of 20%, profits have shown a subdued growth figure of 12% (excluding the loss making oil PSU's). The reasons cited for the sluggish profit growth are pressure on margins due to higher than expected commodity prices, which have pushed up raw material costs. Interest rates are likely to resume their upward march, after declining fo the past one year, in the wake of a series of rate hikes by RBI. This phenamenon is likely to continue for next two quarters putting more pressure on the margins.

The results have been a mixed bag. With a few companies showing excellent growth in profits, it is perhaps a time to churn your portfolio, after analysing the first qurter results, and also giving due weightage to the full year guidance given by these companies. IT and Banking sector stocks have, by and large, returned excellent figures, leading to a run up in thier stock prices. It may be prudent to wait for a while to enable these stocks to cool off, before taking a decision to invest.

The art of profit booking

"Index falls by 200 points on profit booking". Investor's would have come across such headlines in business newspapers quite frequently, and wondered why markets react immediately to profit booking. At the very outset it would be appropriate to understand the meaning of the term "profit booking". Any investment is made with a definitive purpose, and generation of profit is one of the prime motivators for any investment, other than charity. Profit booking refers to the act of realising a profit on any investment through the process of buying/ selling. For a day trader profit booking is done on a day to day basis, whereas for a long term investor it occurs quite infrequently, depending upon the need for urgent funds or on achievement of the target price of a particular security. Profit booking is an art and every investor must learn this art to maximise his returns from the market.

Imagine, an investor telling you that he had invested in 100 shares of company 'A' 20 years ago by spending Rs.1000, and proudly claiming that his investment is worth Rs.5000 today. Assuming an annual inflation rate of 8%, the adjusted value of his investment would be Rs.4660, thus, in real terms his gain has only been Rs. 340 over a period of 20 years. It is definitely not worth taking the risk of equity investment for such a paltry gain. Had this investor booked profit on his investment, and re-entered at a later date he would definitely had made more money. Even the blue chip stocks also give ample opportunity to make substantial gains through profit booking. Of course no one can time the markets, so you cannot always sell at the peak and buy at the bottom. But some amount of profit booking is essential to optimise your gains on the stock market. If you do not know the art of profit booking you need not enter the stock market on your own, do invest through Mutual Funds, because your Fund manager shall improve your returns through profit booking.

Next is the important question when to book profits? Markets follow the time tested principle of valuation, where every stock is valued according to its worth. Though, in the medium term this principle is violated due to excessive speculation in the market. One must book profits when a stock is overvalued due to euphoria and re-enter when it gets undervalued due to poor sentiment. The most important indicator of valuation of a stock is Price to earnings (PE) ratio. Generally a lower PE indicates a time to enter the stock and vice-versa. But all low PE stocks are not the candidates for buying and not all high PE stocks are candidates for selling. Another indicator is the PEG ratio which is nothing but PE/ Growth. If the growth prospects of a stock are high it will have a low PEG ratio, even though PE may be high. This makes an attractive investment opportunity in that stock. An investor should not be wedded to a stock permanently, thus denying himself an opportunity to sell the stock during euphoria. For any dud stock in your portfolio, it is advisable to book a loss as well, and move to a decent growth stock. Booking a loss on your investment is a much more difficult task, because nobody wants a cut in the principal investment amount. But this painful decision making has to be learnt to cut down on prospective losses.

The current status of the equity markets calls for a partial 'profit booking', as our markets are trading at a 2010-11 PE multiple of 17-19 times, which seems overstretched at this juncture. The average returns from the stock markets from the lows of March 2009 have been over 100%, so there is a good amount of profit to be booked. The chances of Indian economy growing at over 8-8.5% are bright, but it will take some time before the stock markets are able to reach their previous highs. The news flow from global markets does not instill enough confidence in the current rally. There is a high probability of the Indian markets correcting anywhere between 10-20% from the current levels, which will offer a great opportunity to re-enter the markets to ride the next bull run.

Economic Revival & Stimulus Packages

In the aftermath of the global economic crisis that gripped the world in 2008-09, global markets have rebounded sharply from their lows tested in the period between October 2008 to March 2009. This has been largely on the back of stimulus packages announced by the various governments, which have helped boost economic activity and create fresh demand. While many Asian countries like India, China have been back on growth track, many parts of Europe are still struggling to overcome the after effects of the crisis. Coinciding with the G20 summit at Toronto, a debate has been sparked off about the appropriate timing of the withdrawal of the stimulus packages.

The BRIC countries (Brazil, Russia, China, India) are in favour of continuation of the stimulus packages, as they fear a fall in their exports to the Euro zone, if the stimulus is withdrawn in haste. They are also opposed to the levying of the proposed tax on bank transactions to pay for the future bailouts. But the German Chancellor has reiterated her resolve to push for the tax, which threatens the existence of the European Union. The financial system of the developed world has proved to be fragile, as most lenders in these countries have escaped unscathed in the midst of a severe crisis. Indian PM Dr. Manmohan Singh has sounded a word of caution against the hasty withdrawal of the stimulus packages; "We have to be conscious that the recovery is still fragile and uneven. New worrying signs have emerged in the euro zone".

India is, however, taking appropriate steps to lower its fiscal deficit in a calibrated manner. The hike in petroleum prices amidst opposition is seen as a step in this direction. The Finance ministry is firm in its resolve to bring down the fiscal deficit to 4.1% of GDP by 2012-13, from the current level of 6.7%. The outcome of the G20 summit shall be watched by market pundits carefully, as the future of risk capital depends a lot on the sustained global recovery. Any set back to the recovery process is likely to put pressure on the equity markets around the world. The signs emerging from the Euro zone do not instill confidence in the equity markets. Investors are, therefore, advised to tread with caution, at least in the immediate short term.

New Listing Norms: Opportunities galore for Investors

The government has notified rules asking all listed companies to ensure minimum public shareholding of 25%. This is likely to increase opportunities available to investors to benefit from steady growth of Indian economy. According to a report by rating firm Crisil Ltd, there are 179 listed companies that have a public shareholding of less than 25% as of today, the prominent amongst them being: NMDC (10%), Nalco (13%), Power Grid Corp (14%), SAIL (14%), NTPC (15%). Some prominent private sector companies like Reliance Power and Wipro also fall in the same catagory.

The new rules said companies could meet the 25% norm in phases, they would have to add 5% every year to public holdings till it reaches 25%. Uniform listing requirements for all companies, including state-owned ones, could trigger a lot of activity in the primary market. The markets could see fresh paper supply over the next 12 months to the tune of  over Rs58,000 crore from BSE 500 companies. The markets should be able to absorb this supply given the current liquidity conditions. But if liquidity conditions turn unfavourable, due to global problems, it could put pressure on the Indain secondary market. Experts believe that an increase in the public holding of stocks typically increases liquidity and helps in better price discovery.

With the June 4  notification of the Securities Contracts (Regulation) (Amendment) Rules, 2010, at least three private sector firms that had initial public offerings last fiscal will have to hit the market again this year. Mahindra Holidays and Resorts India Ltd, DB Corp Ltd and Godrej Properties Ltd all have promoter holdings of 80% or more and will have to go to the market again before March 2011. Real estate firms dominate the list of companies that need to dilute shareholding, the bigger names amongst them are: Puravankara Projects Ltd, Omaxe Ltd and DLF Ltd. It seems to be a good opportunity for investors to increase their stakes in these blue chip companies, provivded the issues are priced attractively. There may be many companies that currently have a lesser public shareholding, choosing to get delisted rather than increasing their public shareholding further, the government would have to spell out the guidelines for their delisting under such circumstances.

First year of UPA II: The clock has turned full circle

Last year in May, UPA II was given the mandate to run our country for the second innings. The markets greeted the new government with a 'thumbs up'. Both the Sensex and the Nifty, that were languishing at lower levels, hit circuit breakers on the eventful day of declaration of election results in 2009. It clearly signalled the end of the bear phase and defined the new range for the markets, with 4500 on the Nifty as the base of this new range. The market after briefly dipping below this level in July 2009 has more or less traded above these crucial levels. There were lot of hopes and aspirations from the new govt. Have these hopes been belied? The clock has turned full circle in the past one year, and the markets are headed closer to the May 2009 levels.

An analysis of the first year report card of UPA II will be important for deciding the future trends of our stock market. The report card is a mixed bag of hits and misses. The biggest challenge before the Govt. last year was to bring the economic growth back on track in the midst of global turmoil. The govt. launched a series of measures to spur demand backed by consumer spending, and has come out with flying colours on the economic front. World bank has also acknowledged this fact, and has now estimated the growth of Indian economy at 8.75% for 2010. The fiscal deficit is a bit of a concern, but the bounty of 3-G spectrum auctions has eased the threat to a large extent. Inflation still continues to be a challenge, and rising oil and gas prices are not going to help matters too soon. A normal monsoon will, however, have a sobering effect on food prices. However, infrastructure spending has languished in the first year of UPA. New additions to rail and road infrastructure have slowed down. Financial deregulation has also moved at a slow pace, many important financial bills are pending before the parliament. Implementation of GST has been postponed to 2011.

But the biggest failure of the govt. has been on the political front. The govt. has not been able to combat the unreasonable demands of its crucial allies like Trinamool and DMK. It has taken some symbolic decisions like Telengana statehood, Women's quota but subsequently has transferred them to cold storage. These controversial issues are ticking time bombs for the stability of the Govt. Another major threat to the economy is the spread of the naxalite movement. The govt. has failed to form a consensus on this important issue. The inability of the govt. to hold prices of essential commodities is also a big negative of UPA II's first year report card. this is leading to a discontent amongst the masses and could be a setback for the stability of the govt.

The markets currently are in the grip of a negative sentiment. The sentiment is likely to improve in the last quarter of the year, provided monsoon is normal and prices come under control. It might coincide with some stability in the Euro zone. Equity markets will continue to languish for a couple of months, before resuming their upward journey. The out performance of India vis-a-vis the developed world will ensure that the markets prepare themselves for a decent up move in the last quarter of the year. Investors with a long term perspective are advised to accumulate stocks of Infrastructure, finance, pharma, healthcare and retail sectors on declines.

Different Strokes: Cricket and Equity Investing

Cricket is a passion in India and cricketers (other than film stars) of course are the demi gods. For those who play the stock market game it is no less than a passion. It would be interesting to find similarities between the two passions. Just like the followers of cricket, who think they could have done a better job than the selectors, most stock market participants also feel that no one can beat them in the world of investments. So there is no dearth of advice to Dhoni and his men on how to play cricket, as well as free advice on which are the best stocks where you can make quick money.

There are three versions of international cricket: test cricket (longer version), one-day cricket and the T-20 (instant cricket). Stock market investing also has 3 versions: Long term investment, medium term investment (from settlement to settlement), and the day trading, corresponding to the three versions of cricket. Because of the excitement it generates, the shorter version is the most popular both in cricket as well as stock markets. Shorter version of cricket generates the best TRPs for sports channels and the shorter version of markets (day trading) generates the maximum revenues for the business channels. Most of the advice given by business channels is for day traders, and long term investors need not give too much importance to that. But for real lovers of cricket, test cricket still remains the ultimate benchmark, where real merits of the players are tested. Similarly for long term investors, the real worth of a company/stock is discovered only in the long run.

Analytical skills play an important role in playing both the games. In cricket, the winning captain analysis the pitch report, the strengths of his team and the weakness of the opposition. In stock market, the investor analysis the global situation which is akin to studying the pitch report. Strength of your own team would mean analysing the strength of your economy/ company. The opposition here would mean other players in the markets, just like the bulls analyse the moves of the bears and vice-versa. Like a bad and bouncy pitch can undermine the performance of an excellent batsman, similarly an excellent stock can also decline if the global cues are negative. The stock market pitch report studies the global economic data. The Greek sovereign crisis is a case in point, which has led to a severe decline in our markets in the recent past. A test player really knows how to handle the situation if the pitch is bad. He would play defensive strokes initially and show his hitting capability when the pitch eases later in the day. Similarly, a long term investor is expected to be patient if the going is not good, if he wants to make money in the long run.

Winning a cricket game starts with selection of the best team, with a right combination of batsmen, bowlers and fielders. In stock market investing creation of the right portfolio is as much important for wealth creation. Each stock has to be picked on its merits after careful analysis. A cricketing pitch with an uneven bounce is akin to a volatile market. The volatility of the markets can be measured in terms of the volatility index (VIX), it is better to refrain from fresh investment when the VIX is high. Incidentally, the Nifty VIX has recently crossed the level of 30% after trading in the 15-25% band for quite some time. This indicates uncertainty in the markets ahead. A consistent player in cricket will always have a higher average, as compared to the one day miracles. Same is true for evergreen growth stocks versus the one day performers also known as momentum stocks. Long term investors should always focus on the former.

A cricket captain has to take a minimum level of risk to win the game. He must know when to become defensive and when to play his strokes. Too much defensive approach can also be bad for the team. Similarly, a stock market investor should know when to make a fresh investment and when to take his profits. The sweet timing of the stroke ensures that the ball will reach the boundary (destined goal). Early loss of a couple of wickets need not deter a good captain to take some bold steps to win the game. Similarly, in the markets if you have lost some money in the past should not deter you from entering the market again, but after learning from the past mistakes. Short term trading or excessive speculation is akin to lofting a good length ball, where the chances of losing your wicket (your money) are fairly high. Remember, 'a game cannot be won without playing, and wealth cannot be created without investing'. So take the plunge provided you have the appetite to take risk, there is a lot of money to be made on the stock market.

Equity Investing: Beware of irrational exuberance!

The economic growth momentum in India is fairly robust, and India continues to be an attractive investment destination for FIIs in the long run. But the negative sentiment from the Euro zone is weighing heavily on our markets, from a short to medium term perspective. The intermediate trend of our equity markets has turned negative and hence investors are advised to tread with caution. It is human psychology that we do not react to early warning signals, but wait for the time when we are forced to accept the reality. It happened when the 'Sub prime' crisis unfolded in the year 2007, and it is happening again with respect to the Greek sovereign crises.Ultimately, the markets will have to accept the reality, and adjust according to the impact of the crisis. I have a feeling that slowly the feeling of desperation is gripping the equity markets. In any case, the markets have discounted most of the positive news, however, a major downfall has been avoided due to the existence of excess liquidity in the markets.

Equity markets ride on the risk appetite of the global investors. The risk appetite takes a beating with negatives emerging on the economic scenario. The situation in Euro zone has reached alarming proportions, and the contagion affect will see the 'Greek crisis' extending to other Euro zone countries. Euro zone also continues to face the wrath of nature with volcanic ash clouds continuing to pose a threat to the Airline and Tourism industry. The current downturn in the equity markets should be viewed in the above context. Whenever their is a news of bailout packages, the markets tend to rise rapidly. This can only be treated as 'irrational exuberance', and investors should not get carried away by the bounces. Volatility in the equity markets is on a rise, and is likely to rise further. Major sectoral indices like Oil & Gas, Metals, Banks have turned negative. The markets are not expecting any immediate drivers for revival.

I continue to maintain that investment in Indian equity markets is the best bet for 'wealth creation' over a period of next 3-5 years. But investment needs to me made in a staggered manner. It may not be a bad idea to start an SIP (systematic investment plan) at this juncture. For those investors who would like to invest in direct equity can also use the SIP method to buy their favourite stocks. If you want to buy 100 shares of a company, buy it in four lots of 25 shares each, which will reduce your average cost if the market moves down. The markets are likely to remain in a corrective mode for at least the next 2-3 months. The trigger for revival of the Indian equity markets will only come with the advent of a normal monsoon and easing of inflationary pressure. The impact of the Euro zone crises will be marginal in the long run, as Indian economy is largely driven by domestic demand and has little dependence on the Euro zone. For the present it is most likely that our equity markets are heading for at least a 10% correction from the current levels.