moneylife 2 october 2014

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Personal Finance Magazine Rs 30Personal Finance Magazine Rs 302 October 2014

RANJIT SINHA ISTHE SYMPTOM

WILL RBIS LENIENCYWITH SAHARA CONTINUE?

CAN RBI STOP WILFULDEFAULT THIS TIME?

Pages 68

SUCHET ON:

www.moneylife.in

INSURANCE 46 YOU BE THE JUDGE 58YOUR MONEY 21 HEALTH 54

(SUBSCRIBER COPY NOT FOR RESALE)

17 stocks selected with thesame methodology that beat 88%

of equity schemes last year

Best StocksBest Equity Schemes


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I S S U E C O N T E N T S

2 October 2014

Picking the Winners

Disclaimer:Moneylifehas a policy of not allowing its editorial staff tobuy and sell stocks that are written about in the magazine. All personaltransactions in individual stocks are subjected to internal disclosure rules.

MONEYLIFE | 2 October 2014 | 4

Cover Story28Top Bets of Best FundsUsing Moneylifesunique stock-selection formula, Jason Monteiroidentifies the best stocks from the portfolio of top equity schemes

Different Strokes16Ranjit Sinha Is the Symptom: The malaise of corruptionand influence-buying is deeply ingrained in the system

RBI Goes after Guarantors RBI Focus on Sahara Master Communicator

14

The raison dtreof fund houses is thatthey use their knowledge and expertise tochoose the best stocks for investors. However,

at Moneylifewe believe that asset management

companies can do much better if they are less

callous with your money. Often, schemes have

overvalued stocks, or stocks that were picked

only because they have a high weightage in

their benchmark index. We think mutual fund

portfolios can have fewer and better quality

stocks. Therefore, over the past few years, wehave been compiling a Super Stock portfolio

a portfolio of the top stocks of top mutual

fund schemes that excludes the stocks that are

unlikely to add value. Our unique approach

to stock-picking has done well in the past.

We have not only beaten the Sensex but have

outperformed a majority of professionally

managed and constantly monitored equity

schemes. Turn to our Cover Story to see the

top bets of best equity schemes and a review of

how our portfolio has performed in the past.

While mutual funds pick index stocks,

such that their performance is in line with

that of benchmark, one cannot blindly invest

in companies simply because they are in the

index. Our columnist, R Balakrishnan, points

out in our Smart Money section, on how one

should have a method for stock-picking.

The malaise of corruption and influence-

buying is deeply ingrained in the system.

Sucheta, in her Different Strokes section, writes

about the sordid episode of the goings-on at the

residence of CBI director Ranjit Sinha and howhigh-ranking bureaucrats misuse their power.

Like Mr Sinha, many of our top bureaucrats,

including bank chairmen, seem compromised.

Will the government do something about it?

On 16thSeptember, Moneylife Foundation

proudly received the 10thMR Pai Memorial

Award. This Award, in the memory of well-

known consumer activist MR Pai, is given to

a consumer activist or consumer organisation

each year by the All India Bank Depositors

Association. We thank you for being with us on

this eventful journey.

Debashis Basu

ICICI Bank Offers Cardless Cash Withdrawal at ATMs No Retrospective Effect of New Capital Gains Tax Rules Forum Denies Death Claim for Suppressing Material

Information CBDT Rationalises Norms of Scrutiny

Your Money21

18 M ONEY L I F E

QUIZ 189Moneylife

Quiz no


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CONTENTS

Letters............................ 8

Book Review....................62

Money Facts....................64

DEPARTMENTS

STOCKS

Good Getting Better

41Long Term

A Step Back, To MoveForward:A short-term declineand then a rally

40Which Way

38Street BeatIgarashi Motors India:Riding the Auto Sector Growth

42Growth Picks Positive Trend Continues

Pension

LICs Varishtha Bima PensionYojanaHealth Insurance Group Insurance for Jains with

Taxpayers Money?Fine Print

INSURANCE

46 InsuranceTrends

56 SEBI RegulatesResearch Analysts

LEGALLY SPEAKING

Will investors benefit from this?

58 Now WhichLeg Was It?

YOU BE THE JUDGE

Be a pest and ask questions, before

medical negligence ends up causingserious problems

50 CCI Skewers AutoManufacturers

AUTO

This judgement could turn the tide infavour of consumers and end-users

66 India Wastes 2,000MW PVSolar Energy Each Day!

BEYOND MONEY

With its ample sunshine, India shoulduse more solar energy and less fossilfuels on a daily basis, writesN Madhavan

Tax-free Bonds:Still Your Best Bet26

FIXED INCOME

Top-rated Corporate Bond Yields Interest Rate May Not Soften Soon

A Relook at Evidence-based Medicine54

Is the relationship between scientificmethod and medicine fragile?

Pulse Beat:Medical developments

from around the world

HEALTH

SC Issues Notice toTamil Nadu on BuildingCollapse

52

Not Giving Completion CertificateCosts Real Estate Company Rs1 lakh

Builder To Repay Rs33 Crore

Maintenance Fees E-Registration of Property Launched

REAL ESTATE

ML FOUNDATION EVENTS

59

Salary does not make yourich, but avoiding losses andsensible investing can

Safe & Smart FinancialPlanning for HULsWorking Women

The Cost of ActiveFund Management60

EARNING CURVE

A majority of actively managedschemes underperform theirbenchmarks. Do not let high costs eatinto your returns

Dont Save 10% of Your Income,Spend 50% of Every Raise

Pick the SensexWinners22

SMART MONEY

To create wealth, buy stocks thatcompound your returns at high rates

PlacingSectoral Bets24

MUTUAL FUND SERIES


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STRUGGLE OF A BANK

CUSTOMER

It is disappointing to note that

Dr Raghuram Rajans tenure as RBI

governor seems to be nothing to write home

about. When he was appointed governor, he

attracted attention for all the wrong reasons

(smart & suave, handsome personality, an

individual with international exposure, etc).

However, after several months, one does not see

any remarkable change in the banking system.

Any action taken is directed at causing further

mental torture to the average middle class.

A news report on 16 August 2014 mentioned

that banks are going to levy charges for

withdrawing your own money from ATMs.

Tomorrow, you might be charged for requesting

to update your passbook. The working of PSU

(public sector undertakings) banks has plunged

to abysmal levels, even as private sector banks

have a field day charging customers for

different services and misguiding them on

services like mutual funds.Vijaya Bank has started charging Rs10

for sending account updates on mobile

phones. When I asked the HAL stage III

manager the reason for this, he said it is a small price to pay for

all the effort that goes into it. As a customer, I would urge all the

readers of Moneylifeto update their passbooks regularly and look

out for debits in the account. Banks, it seems, are under liberty to

change rules and charge you without your permission or approval.

I had a bad time recently with recovering my original home loan

document from Indian Bank. My loan tenure had got over but the

staff in the branch was constantly playing musical chairs. Can you

believe this? For close to a month, the concerned branch of IndianBank, Indira Nagar, 80-ft Road, had a notice stuck on the entry to

RNI No: MAHENG/2006/16653

Debashis BasuEditor & Publisher

[email protected]

Sucheta DalalManaging Editor

[email protected]

Editorial ConsultantDr Nita Mukherjee

[email protected]

Editorial, Advertisement,Circulation & Subscription Office

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Moneylife is printed and published by

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Editor: Debashis Basu


Volume 9, Issue 16

19 September 2 October 2014

Total no of pages - 68, Including Covers

Write tothe Editor!

a prizeWIN

Mutual Fund investmentsare subject to market risks,

read all scheme relateddocuments carefully.

ric a or

a prize


9/68


10/68


LETTERS

Capping free transactions istotally contrary to justiceto account-holders. On the one

side, RBI (Reserve Bank of India)

has made a provision to charge

account-holders for having certain number of

specified transactions. On other side of the story,

which is either un-discovered or un-recognised, is

that:

(a) Public sector banks have maximum number of

bank accounts.(b) Public sector banks have largest accountholder

base.

(c) Public sector banks have the largest ATM

network.

The darker side is that they are lethargic in

maintaining their ATMs. When an account-holder

visits the nearest ATM of his bank, most of the times,

he finds the ATM out of order. Due to the inability to

complete the transaction at that ATM, the account-

holder is forced to visit a nearby ATM of a different

bank, where he is forced to pay beyond the specific

limit of transactions.

Under these circumstances, RBIs action has doubly

penalised the account-holder: (a) he has to pay for

travel expenses as the second nearest ATM could be

at sizeable distance (b) he is forced to pay for the

transaction at other banks ATM as his banks ATM

is unable to serve him.

One of the questions which RBI must have

ignored is: What

is the customers

fault if currency is

stuck in the ATM

while withdrawing;

subsequently, the

customer uses a

different banks ATM

to withdraw to meet

the need of the hour.

This is one place whereRBI has ready data on

record to analyse. RBI

must not permit banks

to arbitrarily penalise

account-holders

where the fault is

on the part of the

banks only. The

need of the hour

is to improve the

banking system.

RBI should collect data on failed transactions, denied

transactions, out-of-order machines, etc. It must

order banks to indemnify customers for all such

cases on a per-transaction basis with the same Rs25

per-transaction basis (or an enhanced value) so that

banks are taught to maintain their ATMs in the best

banking interest.

Trivendra Sharma, by email

Why Penalise the

Account-holder?Best

the

letter

CongratulationsTrivendra Sharma

Mutual Fund investmentsare subject to market risks,

read all scheme relateddocuments carefully.

fai act ons, ied

YOU WIN APERSONALISED

CLOCK

the home loan department. The notice said: Home

loan department closed for two weeks. By order. IsRBI even aware of this? On an earlier occasion, one of

the office staff asked me not to open a fixed deposit in

the bank!

Every week, my visits to the branch proved futile with

explanations ranging from so & so is not well to so

& sos daughter is getting married and so she had to

go on leave. Confronting the branch manager proved

to be another exercise in futility. If there is anything,

please call me on my mobile was her retort. But when

we called up on her mobile, she was more keen to

disconnect than to talk.

After struggling for close to six weeks, I thoughtenough is enough and decided to contact their head

office near MG Road in Bengaluru. Prior to that, I had

sent an email copying some of their directors, whoseemails I could trace from the Indian Bank website. The

regional/zonal officer was so rude on the phone that I

could not believe my ears. It appeared as if he wanted

to say: why are you calling me and disturbing me? I

have so much work to do!

I had to resend my email twice or thrice and then, as

a last resort, I marked the email to their chairmans

office. It was then that things started progressing at a

faster pace. I got my documents within a week. The

branch staff explained to me how they were saddled

with all the work and the clerical staff shirked work

because they belonged to some union.After I received the document, I thanked the branch

Trivendra Sharma


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11 | 2 October 2014 | MONEYLIFE

LETTERS

DEFINITELY AN IMPROVEMENTThis is with regard to Will Narendra Modi Go

after Chain-money Schemes? by Sucheta Dalal. A

comprehensive and holistic approach to financial

inclusion is yet to emerge. The present initiative

is definitely an improvement, if we compare with

earlier efforts. Here, life cover, a conditional loan

(overdraft) facility, a credit card and a proposal for

continued relationship, which both sides will have to

nurture, are factored in. Several informal and formal

arrangements for credit, especially in the rural areas

and among small borrowers, do not get space in

the picture emerging.

MG Warrier

COMPLACENT FIAT MANAGEMENT

This is with regard to The Evo Arrives by Veeresh

Malik. There is something fundamentally wrong

with Fiat management... their engines and AMT

gearbox (from Fiat's sister company) are more

successful compared to those of the rivals. Fiat is

sitting on the fence and applauding them, being

happy to sell engines/gearbox/spares to them. Fiat

needs be the leader rather than just be a spectator.Manufacturers like Maruti and Tata source the same

engine from Fiat and tune it for more power in theircars... shame on you, Fiat management!

Shib

LET THE CHIPS FALL?

This is with regard to What next for coal mining

sector post Supreme Court ruling by AK Ramdas.

It is interesting to read that suddenly the Supreme

Court has decided to take some action after sleeping

for almost a decade in the case of Coal-Gate. Media

has been shouting, but our judges slept. It is time to

wake up our democratic system. Have the Hon'ble

judges taken measures to protect the power and

industry sectors? The Supreme Court must show its

independence and show some teeth in taking action.

Shadi Katyal

CREATING CONFUSION!

This is with regard to Non-filing of I-T return for

assessees is subject to tax audit before

30thSeptember by Girish Borkar. Be it company

law or income tax law, the authorities seem to excel

in creating confusion where none exists. So much for

simplification!Shivkumar

OUR READERS WHO CLICK WITH US

Heres a sample of the kind of feedback that we receive from our readers on our vibrant website, www.moneylife.in

staff and also copied the directors and the branch

managers. I even made some valid suggestions to

Indian Bank as a customer. But I did not receive any

response from them later on.The question is: Do I have to struggle so much to

recover my own document? That too after paying all

my EMIs (equated monthly instalments) without fail!

How much patience should I have to deal with Indian

Banks internal problems with its employees? Look

at the treatment that I got and look at the treatment

people like Vijay Mallya get.

Of course, I do not pay bribes to get loans sanctioned/

approved by banks. There lies the difference.During the entire process, I was worried sick about

the safety of my original home loan documents. A

floating bank employee population does little to

reassure you!

Venkatesh Ganapathy,by email

Letters to the Editor can be emailed to [email protected]

can be posted to: The Editor, MoneylifeMagazine, Unit No. 315,

3rdFloor, Hind Service Industries, Off Veer Savarkar Marg, Dadar

(W), Mumbai 400 028 or faxed to 022-49205022. Letters must

include the writers full name, address and telephone number and

may be edited for clarity or space.

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For new subscription requests, complaints about current sub-

scription and books, write to [email protected]

to Subscription Manager, Unit No. 315, 3rdFloor, Hind Service

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call 022-49205000 or fax to 022-49205022.

Advertising:For information and rates, email us at [email protected] or call 91-022-49205000.

HOW TO REACH US


12/68

www.moneylife.inExclusive news & views with a big difference

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EXCLUSIVE NEWSNews you had beter not miss

Why a European

version of quantave

easing will be tough

William Gamble

Maharashtra govt

orders closure of

Pune SOS Balagram to

reclaim elite land?

Vinita Deshmukh

EXCLUSIVE VIEWS

On issues that mater to you

3 ways to boost SMEs

to make India a factory

to the world

PS Deodhar

How Aadhaar linkagecan destroy banksEven if Aadhaar numbers were proof of

identy, which it is not, its use to

make money transfers make financial

transfers un-auditable, propagate money

laundering and financial fraud. There is no

jusficaon for introducing an unverified

and un-audited number to allow

payments and selements.

The Reserve Bank of India (RBI) is

empowered by the Payment and

Selement Systems Act, 2007 to regulate

various payment systems. About 59

organisaons are authorised by the

RBI under this Act for se

ng up andoperang payment systems in India. RBI

states its mission is to ensure payment

and selement systems in the country are

safe, efficient, interoperable, authorised,

accessible, inclusive and compliant with

internaonal standards. All key systems

should be secure should be equipped

with adequate safeguards.

Govt destroys over 11,000 historicalfiles on PMs

order!Between 5thand 8thJuly this year, over 11,100 files were destroyed

without following any mandatory procedure on direcons from the PM

Modi govt used first 100 days for oiling the machineryNomura says the Modi governments approach will be incremental,

although movingideology-wisein the right direcon. The government

will be more efficient, which will be posive for producvity and growth

Non-filing of I-T return for assessees is subject to taxaudit before 30thSeptemberThe CBDT order has created confusion among taxpayers and taxprofessionals by not specifying the due date for filing the I-T returns

>> Moneylife Foundaon,

an NGO, has two

goals. One, to reach

out to regulators

and policy-makers so

that beer rules are

framed. Two, to provide

financial consumers a platorm

where they can share the experience

and knowledge of some of the best

minds in advocacy, acvism and investor

awareness. Join our efforts by registering

at hp://www.moneylife.in/register.htmlRegistraon is free.

ML FOUNDATIONHAVE YOUR SAY

Vote in theMoneylifepoll onthe top issues of the week

How would you rate Modi govtsperformance during its first 100 days?

71.3%

22.3%

BadAverage

Good

Small-cap stocks rally, despite so-so resultsEven though the aggregate sales of small-caps on Moneylifes database

declined, the market valuaon of these stocks has shot up by over 65%

Domesc airlines need

to fend for themselves

AK Ramdas

How terrorists finance

their operaons

Saiyid (SSK) Zaidi6.4%


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14/68

The notification of the

Reserve Bank of India

(RBI)that individuals

and companies who fail to honour

guarantees provided to wilful

defaulters can also be charged with

wilful defaultis welcome and

long overdue. Especially since the

notification says that the group

concept will come into play when

persons, or entities, do not honour

guarantees to companies within a

group. This is a huge step forward.

For the 30 years that we have been

reporting on business and finance,

there has been endless debate about

applying the group concept to

bad loans, especially when there

is deliberate mismanagement ofcompanies in a group. After all,

corporates grow when new entities

in a group (sister companies and

subsidiaries) piggy-back on the

parents goodwill to raise funds.

But RBI has also said that

the new norms would apply

prospectively; this means that all

the games companies played in the

past will have no consequences.

In India, corporate guarantees,

including personal guarantees ofwell-known industrialists, had a

magical way of disappearing from

loan conditions after fund-raising

needs were met, or the going got

tough. Some of the most respectedcorporate groups in India have used

this trick to evade responsibility for

loss-making entities.

The change in loan conditions

could not have happened without

the active collusion of lenders

which means that RBIs new norms

will also work only if the regulator

puts in place a system to monitor

crucial changes in loan conditions.

Vijay Mallya, recently declared a

wilful defaulter by United Bank

of India (UBI) in connection with

Kingfisher Airlines, also escapes

the new provisions. While most

industrialists used to keep room

to wiggle out of the personal

guarantee, the flamboyant Mr

Mallya wanted to be different.He went to court to fight for

the right to pay himself and UB

Holdings a fat fee for the loan

guarantees provided to Kingfisher.

It is a mystery why lenders arestill fighting shy to invoke that

guarantee.

RBI governor, Dr Raghuram

Rajan, recently said that the

wilful-defaulter tag is a powerful

weapon in the hands of creditors

for resolving distressed assets.

Indeed, it is; but a weapon is

powerful only if used correctly and

effectively.

One recalls that RBI, bankers

and government officials were

just as gung-ho about the

SARFAESI Act (Securitisation

and Reconstruction of Financial

Assets and Enforcement of Security

Interest Act) 2002 which was

touted as the ultimate statute

to end the bad loan problem by

giving banks a powerful recovery

mechanism.

Strangely, RBI has never

been called to explain why themonumental failure of SARFAESI

was not anticipated or how just 50

corporates have run up a combined

default of about Rs40,000 crore

under its watch. If 33 debt recovery

tribunals (DRTs) under SARFAESI

failed to deliver (as of March 2012,

there were 67,000 cases involving

over Rs1,36,000 crore pending

before the DRTs), will the new

norms make a difference? After

all, companies will still misusethe judicial system to delay any

recovery action.


RBI Goes after

GuarantorsWill it stop wilful defaultthis time?


15/68


E

ven as Subrata Roy is working

on a 15-day extension to meet

the Supreme Courts condition

to release him from jail, a

whistleblower has, after many

efforts, managed to catch RBIs

attention on the issues at Sahara

India Financial Corporation Limited

(SIFCL). This is a residuary non-

banking company which is under

RBI supervision. SIFCL was barred

from accepting any fresh public

deposits in June 2008 and asked to

repay existing deposits as and whenthey mature. In 2011, RBI issued

a notice warning depositors about

Sahara which also said it would not

guarantee repayment of deposits by

SIFCL or other group entities. A

similar warning was issued by the

market regulator.

Little information is available

in the public domain about

SIFCL, except a fact sheet which

says that one Mr Madhukar and

BM Chaturvedi are independentdirectors and Om Prakash

Srivastava is a whole-time director

of the company as of 5 September

2014. This means that Subrata Roy,

who was the chairman of SIFCL,

has also stepped down and there

is no immediate family member on

the board. Nobody is designated

chairman either.

This means that

the two independent

directors, Mr Madhukar

and Mr Chaturvedi,

who are accused by

the whistleblower of

colluding with various

entities to sell off assets

belonging to depositors,

form a majority on the board. He

claims in a letter to RBI that over

Rs500 crore had already been

diverted until September this year.

The whistleblower also alleges thatthe two independent directors have

been improperly appointed without

seeking prior approval from RBI.

Who are these directors? Mr

Madhukar is on the board of several

Sahara group companies including

its mutual fund and Sahara

Infrastructure & Housing Limited

(SIHL). More importantly, he is a

former whole-time member of the

Securities & Exchange Board of

India (SEBI) and former chairmanof United Bank of India.

Mr Madhukars faith in

Sahara and loyalty to the pariwar

seems unshakable, despite all the

allegations against the group.

He has stayed on, even when

another loyalist, Amitav Ghosh,

a controversial former deputy

governor of RBI, stepped

down as independent

director on the SIHL

board in April 2013 (well

after the path-breaking

Supreme Court order

asking two Sahara group

companies to refund

Rs25,000 crore raised

through hybrid convertible

bonds without SEBI approval).

Mr Madhukar stepped in to replace

by Mr Ghosh on that board.

On 20thAugust, RBIs Kanpur

office wrote to the whistleblowerthat the two issues flagged by

you are being examined by our

Central Office at Mumbai. It

remains to be seen if RBI will act

in time or take shelter behind a

long-drawn examination of issues.

The whistleblowers emails seem to

suggest that nothing has changed

at Sahara pariwar. As for RBI, the

stringent action by the Supreme

Court has apparently not made

this regulator more vigilant aboutthe goings on at this controversial

group.

Prime minister (PM) Narendra

Modi is now acknowledged as

a master communicator. His

massive electoral victory was

a powerful and carefully

choreographed multi-

dimensional effort, but his

big initial breakthrough

was in bypassing

a hostile

mainstream

media and reaching out to people

directly through social media.

The PM is now using the very same

tools to win friends and followers

globally with spectacular results, so

much so that his tweets to heads

of State or the people of Japan (inJapanese) are rewriting the rule book

for diplomacy.

After his 100 days in

office, Twitter put out a

blog post noting some

of the new records set

by Mr Modi. It says, @

narendramodi is

the second most

followed politician

in the world after

US President Barak Obama on Twitter.

Mr Modis election victory tweet, India

has won (in Hindi and English) is the

most re-tweeted tweet (70,620 times) of

all times from India.

Today, following @narendramodi

and @PMOIndia has become a necessityfor diplomats, journalists, companies

and policy-makers, since Twitter remains

the primary communication tool of

Indias prime minister. Given Indias

population and the continuous accretion

to the number of people acquiring

smart phones, mobile connectivity

and access to social media, it is only a

matter of time before Narendra Modi

becomes the most followed politician in

the world.

MasterCommunicator

Narendra Modi set twitter

records

RBI Focus onSahara

Will whistleblowers missives

work?

Mr Madhukar, a Saharaloyalist

cknowledged as

icator. His

victory was

refully

u ti-

t, but his

rough

for diplomacy.

fter hi

office, Twit

blog post n

of the new

y Mr Mo

nare

t e

fol

in


16/68

Activist and advocate Prashant Bhushan has rendered

yeoman service by informing the Supreme Court

of India about the goings-on at the residence of

the Central Bureau of Investigation (CBI) director Ranjit

Sinha. He added substance to his allegation that CBIs

Mr Sinha was going slow on various mega scam

investigations by revealing the list of visitors to Mr Sinhashome; and the list is truly startling.

Key functionaries of the Anil Ambani group allegedlymet Mr Sinha 50 times in 15 months. The accused in

every major scam under CBIs investigation, includingcontroversial meat-exporter and alleged hawala-dealer

Moin Akhtar Qureshi, have been frequenting Mr Sinhas

home; some even thrice a day. This is gross impropriety.

The Supreme Court has issued a notice to Mr Sinha even

as CBI tried to gag the media.

As an aside, we also discover the CBI chiefs maharaja-

like lifestyle. The Economic Timessays he has seven cooks,22 domestic helpers and a cobbler at his disposal, all paid

by the exchequer. That the CBI director, who is lower

than a joint secretary in the pecking order of government,can live like a king, tells you how our public funds are

being misused.

The sordid episode throws light on the variousinvestigating arms of the government. The CBI director

has immense power over the lives and reputations ofindividuals, companies and institutions in India. He can

initiate, or close, investigations at will; arrest people or

destroy careers without accountability, toplease political masters. The income-

tax and enforcement departments

and the department of revenueintelligence (DRI) are equally willing

handmaidens when it comes toworking on political instructions.

A slow judicial system with

its propensity to remain silent

about judicial corruption, as hasbeen revealed by Justice

Makrandey Katju

on his blog,

d i s s u a d e speople from

f i g h t i n gback. The

few, who do, often end up broken and frustrated by the

system at every turn.

The misuse of government investigation agencies beganalmost immediately after independence but peaked underUnited Progressive Alliance (UPA) government. We saw

a decade when unbridled corruption and mind-boggling

scams were allowed to flourish in the name of coalition

dharma.

The lay public may be shocked at reports about theCBI chiefs visitors, but many of us in the media have beenhelpless spectators of this gross corruption over the decades.

Helpless because those who blithely give out details about

corrupt people and practices will do nothing to stop it norprovide proof to allow publication.

Consider some reactions that I have heard in the weekthat Mr Sinha was making news.

An IIM professor who conducted a training programmefor senior income-tax officers was reportedly told by

one attendee some of us are losing Rs1 crore a day

attending this programme. We frequently hear from

government insiders that top income-tax and police

appointments, especially in Delhi and Mumbai, are

auctioned. How do we prove it, when there are no

whistleblowers?

A senior RBI (Reserve Bank of India) official names a

couple of bank chairmen who, he thought, were more

likely candidates for CBIs sting operation on SyndicateBank and Bhushan Steel. He claims that one chairmanwas cautioned by RBI after reports about his corrupt

ways escalated. He cannot say why no action wasinitiated against him, instead of issuing a mere word

of caution. The rise in corruption at banks is in directproportion to the ballooning of bad loans even as RBI

remains a silent spectator.

We have been hearing about a finance ministry

bureaucrat who was exceedingly rude and humiliatingto bank chairmen. Rampant corruption was also one

of his qualities that has attracted the PMs attention.

Is the Central Vigilance Commission (CVC) only abugbear for mid-career bureaucrats? Isnt it curious

that neither CVC nor CBI has such corrupt bureaucratsin its crosshairs?

The Serious Frauds Office of the United Kingdom

brought corruption charges against Alstom (UK) forallegedly paying a bribe of over three million euros to the

DIFFERENT STROKES SUCHETA DALAL

Ranjit Sinha Is the Symptom

The malaise of corruption and influence-buying is deeply ingrained in the system


, ,

destroy careers without accountabiplease political masters. The in

tax and enforcement depart

and the department of reintelligence (DRI) are equally

handmaidens when it coworking on political instruc

A slow judicial system

its propensity to remain

about judicial corruption,been revealed by J

Makrandey

on his

d i s s upeople

f i g hbac


17/68

Delhi Metro Rail officials in 2001 to secure a contractfor a train control, signalling and telecommunicationssystem. It reminds us of how the Securities & Exchange

Board of India (SEBI) under CB Bhave wound up aninvestigation into the round-tripping of a massive $250million into Reliance Communications with a consentorder and no admission of guilt. Anil Ambanis RelianceADAG paid just Rs50 crore and managed a vague andopaque public disclosure without admission of guilt,even though the Financial Services Authority (FSA) ofthe UK issued a far more explicit order and also finedthe UBS bankers $2 million.Can we expect this to change? Prime minister Narendra

Modi has made several clear commitments to the peopleof India. We have to create systems where there is no

injustice against anybody, he tweeted. More specifically,he promised to act as a chowkidar (guard) who wouldprevent the plunder of national wealth. I will neither takea bribe not allow anyone else to accept one, he has said.

We know this is easier said than done. Other than

a rumour about the PM having actually asked the son

of a senior leader to return a bribe, we have yet to see

any change down the line, especially in regulatory and

investigation agencies.Conflict of interest often breeds corruption. The

government is working on the Prevention of Corruption(Amendment) Bill, 2013, but who really believes it willmake a difference? Then there is the lapsed privatemembers Bill on conflict of interest introduced in the

Rajya Sabha by Dr EMS Natchiappan.A multi-disciplinary group of NGOs called the Alliance

against Conflict of Interest (AACI) is working to resurrectand improve on it by putting together a detailed note withdocumented cases of how conflict breeds corruption andskews policy-making and regulation in diverse areasfromeducation to public health, food, safety, environment orfinance.

Transparency International, a global NGO that tracks

corruption, defines conflict of interest as any situation

where an individual or an entity, whether a government,business, media outlet or civil society organisation, isconfronted with choosing between the duties and demands

of their position and their own private interests.In India, every position is influenced by corruption ornepotism and duty is never a consideration. This is at itsworst when it comes to public servants and bureaucrats.While politicians face the ballot every five years, corruptbureaucrats can damage the system for decades, especiallywhen they are due to retire.

Even the most egregious cases of conflict, where retiringbureaucrats or chairmen of nationalised banks, insurancecompanies or regulatory bodies have immediately acceptedlucrative advisory positions or board directorships withprivate and foreign companies, are rarely questioned. The

mandatory cooling-off period is usually invoked only asan act of revenge rather than regular discipline.

The AACI points out how policies that decide peopleslivelihoods and set standards for their food and health areset by advisory bodies/groups/committees that are riddledwith conflict of interest. Powerful corporate influence isvisible everywhere. This was legitimised over the past

decade under the guise of public-private partnerships, suchas the PHFI (Public Health Foundation of India), whichalso obtained huge tracts of land and funding from Unionand state governments.

Conflict of interest is just as destructive when it worksin a covert fashion, where powerful corporate and vested

interests influence policy-makers to engage only withNGOs under their control and influence.

The consequence is bad law, unfair systems, morelitigation and, in the worst case, public anger and protests.Suppressing any discussion on these issues in the mainstreammedia is another manifestation of the conflict-corruptionnexus which is even harder to break.


DIFFERENT STROKES SUCHETA DALAL

Sucheta Dalal is the managing editor of Moneylife. She was

awarded the Padma Shri in 2006 for her outstanding contribution

to journalism. She can be reached at [email protected]


18/68

Another quiz to tease your brain. The answers are inthis very issue. The winner will be chosen by a luckydraw from correct entries and answers published in theissue dated 30 October 2014. Send in your answers [email protected] with the Quiz no., name, address &telephone number before 9thOctober.

MONEY L I F E

QUIZ

1. When was Pearl Electronics Ltd incorporated through

the de-merger of the electronics division of Nouveau

Global Ventures?a. January 2012 b. September 2012

c. October 2012 d. December 2012

2. What was the share price of Igarashi Motors India Ltd

when it touched its 52-week low on 3 September 2013 on

the BSE?

a. Rs63.30 b. Rs63.50

c. Rs71.07 d. Rs283

3. What is the minimum monthly pension amountavailable under the Varishtha Bima of Pension Yojana of

LIC?

a. Rs100 b. Rs200

c. Rs500 d. Rs1,000

4. Which of these authors did not argue that evidence-

based health system is outrageously exclusionary

and dangerously normative with regards to scientific

knowledge?

a. Stuart J Murray b. AmliePerron RNc. Genevieve Rail d. Linus Pauling

5. Under SEBIs new regulations for research analysts,

what is the minimum value of net tangible assets that a

research analyst should have?

a. Rs10,000 b. Rs50,000

c. Rs1 lakh d. Rs2 lakh

CURRENT ACCOUNT


The answers to Moneylife Quiz-187 are:

1-b. Eswar S Prasad 2-b. Martin Luther King, Jr. 3-d. 1 September 2014 4-c. Raigad 5-d. Meglon InfraReal Limited 6-b. 9.88%7-b. 1.67% 8-b. 6.71%

Mutual Fundinvestments are

subject to market risks,read all scheme related

documents carefully.

U Radhakrishna Mallya

In all, 30 readers got all the answers right last time.The winner of Quiz-187 is

6. In which of the following mutual fund schemes is

eClerx Services present as a holding?

a. Quantum Long Term Equity

b. ICICI Prudential Discovery Value

c. HDFC Capital Builder

d. Reliance Top 200

7. What is the weightage of Goodyear India in the

portfolio of SMI Emerging Business Fund?a. 7.43% b. 2.18%

c. 5.23% d. 2.43%

8. What is the total number of stocks present in the

portfolio of ICICI Prudential Value Discovery Fund?

a. 63 b. 36

c. 43 d. 53

AnswerCorrectly! Wina personalisedclock with aninvestment

quote!

Congratulations!U Radhakrishna Mallya

from Udupi (Karnataka).

You win a personalised clock with aninvestment quote!

189

MoneylifeQuiz no


19/68

Moneylife has always put the reader first.

Launched in 2006 by Debashis Basu and

Sucheta Dalal,Moneylifedelivers brutally

honest opinion and hard facts about financial and

consumer products. Our deep

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on all aspects

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Unlike other media, we refused to accept paid

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policy changes implemented by various regulators

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right many times overon ULIPs, on misuse of the

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I am a regular subscriberto your magazine. I reallyenjoy and appreciate

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You are doing a fantasticjob, filling a huge void andre-establishing trust in

individuals and institutions who deal infinance. I live in the US and read yourweekly updates online without fail. Ifeel that people like me should pay amonthly or annual subscription for thisexcellent piece of journalism

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Po

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M

pr

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nt findanything

cts or compro

-one e p o savers

ofourwebsite.

o

in favour financia

ou w

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20/68

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21/68


Your Money

ICICI Bank announced its

Cardless Cash Withdrawal

service that allows its customers

to transfer money from their

account to anyone in India witha mobile

number. The

recipient

can

withdraw

money

round the clock without using a

debit card from over 10,000 ATMs

of ICICI Bank across the country.The sender needs to be an ICICI

Bank savings account holder.

The facility can be initiated by

any ICICI Bank savings account

customer (sender) by logging into

Internet banking of ICICI Bank

website. The sender first needs to

register the recipients name, mobile

number and address. The sender

will get a four-digit

verification code

while therecipient a

six-digit

reference

code,

over

SMS.

BANKING

ICICI BankOffers CardlessCash Withdrawalat ATMs

INVESTMENTS

The Madras High Court, in arecent order, has held that therestrictive provisions introduced in

the Income Tax (I-T) Act, which call for

reinvestment in only one residential

house in India for claiming capital

gains tax exemption, apply from fiscal

April 2014. The Finance Bill, 2014, had

clarified that the benefit of capital

gains tax exemption under Sections 54

and 54F was intended only in respect

of reinvestment in one residential

house in India. Thus, on enactment of

the Bill, the relevant Sections of the

I-T Act were amended.

Earlier, the words used in the I-T

Act were reinvestment in a residential

house. Prior to the amendment, there

was ambiguity on whether the term a

residential house meant a single unit

or could include more than one house.

The New Delhi ConsumerDisputes Redressal Forum,presided by CK Chaturvedi,

dismissed the plea filed by a Delhi

resident, Neeru Khosla, seeking

death claim for her husband from

Life Insurance Corporation (LIC) of

India. The Forum noted that while

taking the policy the man had hidden

the fact that he was suffering from

cancer and suppressing material

information is act of bad faith.

The contract of insurance is

based on utmost good faith and

its violation by the insured by

suppressing material information is

act of bad faith. In our considered

view, Opposite Party (LIC)

has been able to discharge

its burden to prove

suppression of facts. In these

circumstances the OP cannot

be faulted for repudiating

the death claim. The

complaint is dismissed,

the Forum said.

Forum Denies DeathClaim for SuppressingMaterial Information

LIFE INSURANCE

The income-tax department hasrationalised the norms for scrutinyof tax returns, to bring it in line with

global best practices. As per the norms

released by the Central Board of Direct

Taxes (CBDT), all cases where income

exceeds Rs10 lakh over the previous

years will continue to be selected, as

well as cases relating to survey, search

and seizure and reassessment.

However, the previous requirement

of selection of all cases where value

of international transactions exceeds

Rs15 crore has been dropped.

The CBDT norms said cases

involving addition in an earlier

assessment year on the issue of

transfer pricing in excess of Rs10

crore on a substantial and recurring

question of law or fact which is

confirmed in appeal or is pending

before an appellate authority will be

selected for scrutiny.

CBDT RationalisesNorms of Scrutiny

TAX

No RetrospectiveEffect of New CapitalGains Tax Rules

ss Cash Withdrawal

that allows its customers

money from their

anyone in India wit

e

number and address. The s

will get a four-di

verificatio

whilereci

six

re

c


22/68

We all know that Wipro is a great company.

Recently, I got an email showing how aninvestment of Rs10,000 in WIPRO in 1980

is worth nearly Rs500 crore today and the cumulative

dividends declared were over Rs100 crore. This return,

in arithmetic terms, would be something close to 48%pa

(per annum) at compounded annual growth rate (CAGR).

To put the power of compounding in perspective, over the

same period, a 15% return on the same principal wouldbe worth only around Rs12 lakh or so!

So, a four times CAGR has made the terminal value

to be several hundred times! If the Wipro share hadgiven a return of 20%, the amount today would have

been worth around Rs50lakh. So maybe this is a

good time to understandwhat difference one or two

percent differential can

make over a period of time.Then my mind goes

back. This company was

not known to anyone. Itwas named Western India

Vegetable Products Ltd and

its main product used to be

something called Oomda,

a vegetable oil that was a

desicompetitor to Dalda

the then market leader in

vegetable oils (vanaspati)

produced and sold by

Hindustan Lever Ltd.Apart from this, I donot recall much about this

company. I doubt whether

I would have chosen toinvest in this company at

that time. I also think that,

at that time, the promoter

must have owned nearlyall the shares and the only

shares that were with the

public would have been

with distributors, somefamily and friends.

In those days, if you owned shares of an unlisted

company, you had to pay wealth tax and, thus, many

promoters opted for listing. The listing could happen

easily. Someone could go around distributing 200 forms

to friends and family and the share could get listed. And,

each day, your jobber would organise some circular trades

and leave a price imprint on the stock exchange records.

The 1980 Wipro investment is like putting Rs10 lakh+

today in a single stock with no background. This is notpossible for ordinary people. And no venture capitalist

or private equity fund will hold on for such a long time.

The only ones who probably get such returns are the

entrepreneurs and a lucky few around them.

And, for every Wipro,

there will be hundreds of

companies which have gone

under without a trace. For

every Bill Gates or Warren

Buffett (who essentiallymade their wealth out ofsingle businesses), there will

be a million entrepreneurs

who did not make it. So theodds of our picking up big

winners are not very great.

To give a home-grown

example, when RakeshJhu njhunwala start edinvesting, there were a few

hundred other brokers who

were trying to make it big

time. And, most of them,would have had far more

money than what Rakesh

had at that point in time.

So, for every Rakesh,

we have a few hundred

nameless entities; thereare also a few whose lives

were ruined financially by

the investment or trading

choices they made.

Hence, it is important to

understand where we putour money. We cannot go

SMART MONEY R BALAKRISHNAN

Pick the Sensex Winners

To create wealth, buy stocks that compound your returns at high rates


The first ever BSE Sensex (formed in

1986, with 1978 as the base year) had

the following stocks

Asian Cables Indian Organic

Ballarpur Industries Limited Indian Rayon

Bombay Burmah ITC

Ceat Limited Kirloskar Cummins

Century Textiles L&T

Crompton Greaves Mahindra & Mahindra

Glindia (Now Glaxo

Smithkline Pharma)

Mukand Iron

Grasim Nestl

GSFC RIL

Hindalco Scindia Shipping

Hindustan Motors Siemens

HLL Tata Motors

Indian Hotels Company Tata Power

Indian Organic Tata Steel

Indian Rayon Zenith


23/68

SMART MONEY R BALAKRISHNAN


blindly, investing in random companies simply because

they are in the Index. In the first ever BSE Sensex, there

were names like Asian Cables, Indian Organic and Zenith

Ltd which are today not even heard of. And there weremany that came into the index and went outPremier

Automobiles, Hindustan Motors, etc. If you had chosen

all the stocks of the Index in 1980 and stayed put, you

would perhaps have got a single-digit return. The Sensex

has changed its components several times and, hence, it

is not a true measure of prosperity or otherwise. It just

takes the biggest names and there are random and illogical

changes that make a true measure hard to find.

Remember, the difference of a single percentage point

in CAGR can make a huge difference to your wealth:

Rs10,000 of 1980 would be worth Rs4.7 lakh at 12%pa,

Rs6.4 lakh at 13%pa and Rs8.60 lakh at 14%pa. A simpletwo percentage points lower return plays havoc with the

sum you have at the end.

Thus, the hike in the fees that mutual funds are going

to charge may sound trivial, but the dent to your savings is

big. So think if it is worthwhile spending time on investing

and follow a direct approach. Choose companies you think

will remain operational for the next 20 years or more in

businesses you can understand and have been around for

a long time. This will not give you spectacular returns like

the example at the beginning, but a good probability of

doing better than the Sensex.

If you want one financial number in addition

to understanding the company / business, etc,

then use return on equity (ROE). Jus tdivide the profit after taxes

(PAT) by

the totals h a r e

capital plus

reserves (alsoreferred to as net worth

or shareholders funds)

and see if it is higherthan 20% over the

past 10 years ineach of the years.

Maybe one bad

year is OK, but notmore than that. Yes, you will

not get 48% returns, like Wipro,

but a decent rate that is better than theindex. And use systematic investment plans

rather than buying at one go.

The author can be reached at [email protected]

Can you confidently

choose from thehundreds of financialproducts thrown at

you daily?

Millions of well-educated peopleacross the world will struggle to sayyes to that question. Well, its not you.

Its themthe financial worldwhich

churns out an ever-expanding list of

financ ial products that we are supposed

to keep abreast with?

The wide choices overwhelm savers. In

fact, scientists have found that since our

brain has limited capacity, taxing it with

too much information leads to fatigue

and dec ision impairment. Thats a

technical way of saying that it leads to

poor choices.

We need less, not more.

And what you need is someone to make

sense of the deluge of information and

apply an ethical and well-researched

process of selection of right produc ts.

Someone solid, unbiased, reliable.

Like Moneylife Smart Savers. We at

MSSN have a mission to make your job

of selecting the right financial products,based solely on your needs, and ensure

you stay secure and gain wealth over the

long term.

savers.moneylife.inBenefit More from Less


24/68

Mutual Fund Series

moneylife

Placing Sectoral Bets

With the market having rallied significantly

on positive economic prospects and

higher earnings, most sectors have

performed well. But, going ahead, certain sectors will

do better than others. In fact, there is some correlation

between the different stages of business cycles and

sectoral performance. Investing in the right sector

which corresponds to the business cycle will mean

better returns from your investment.

A business

cycle essentially

represents

distinct changes

in the rateof economic

activity. The

stage of a

business cycle

can be identified

by observing

indicators

such as gross

domestic

product growth,

employment, corporate profits, credit and inventories.

Fluctuations in the business cycle can be a critical

determinant of sector performance. Every business

cycle is different in its own way, but certain patterns

have tended to repeat themselves over time. While

unforeseen macroeconomic events can sometimes

disrupt a trend, changes in these key indicators have

historically provided a relatively reliable guide to

recognising the different phases of an economic cycle.

In a rising cycle, automobiles, travel, hospitality,

infrastructure, etc, begin to boom. These are known as

cyclical sectors. From January 2004 to January 2008,

when the economy was in a growth phase, cyclical

sectors delivered average annual returns of 40%.

When there is an economic slowdown, defensive

stocks from utilities, pharmaceuticals and healthcare

sectors tend to do well and provide relatively stable

returns. From January 2008 to January 2014, which

included one of the worst financial crises of our times,

defensive

companies

delivered

over 16%

annually.How can

an investor

benefit

from this

approach?

An investor

could

choose a top

performing

equity

diversified scheme or an equity scheme that has no

static market-cap bias or sector bias and will invest

across companies and industries based on economic

trends. The managers of the scheme could use various

indicators such as earnings growth trends, credit

growth, consumer spending and other relevant factors

to determine which sector or company would be likely

to perform well. A fund manager, who picks the right

stocks from the right sector, is likely to outperform

over the long term.

Different Phases of a Business Cycle

Early Mid Late Recession+

EconomicGrowth

-


25/68


26/68

Issuer Maturity

Date

Next

Coupon

Last Yield

(%)

ISIN Rating

NHB Bonds 10.14% 23 Sept-16 23 Sept-14 10.09 INE557F08ET7 CARE AAA

HDFC 9.45% 20 Feb-15 20 Feb-15 9.5 INE001A07KE8 CARA AAA

LIC HSG Fin 9.45% 30 Jan-22 30 Jan-15 9.5 INE115A07BY3 CARE AAA

NSE data as of last trade date of 8 September 2014

Chola Inv & Fin 12.90% 09 Jul-24 09 Jul-15 12.81 INE121A08NT4 CARE AA-

Punjab National Bank 10.85% 29 Sept-23 29 Sept-14 10.16 INE160A09223 CRISIL AA

Kotak Mahindra Prime 9.63% 16 Oct-15 16 Oct-14 9.72 INE916D073Z6 CRISIL AA

BSE data as of last trade date of 8 September 2014

The 10-year benchmark government

security (G-Sec) yield, which

sets the tone of the fixed-income

market, has decreased by four basis

points (bps) in the fortnight ended 8th

September to end at 8.52%. A Bankof America Merrill Lynch report states

that Reserve Bank of India (RBI) is

likely to hold the key interest rates and

these are expected to decline only from

February 2015. RBI has made it clear

that the rates are going to be driven

by inflation trends. With inflation

remaining high, the rates may remain

where they are even though the Union

finance minister had indicated that

his ministry wants RBI to cut interest

rates to boost the economy which isshowing signs of revival.

Interest Rate MayNot Soften Soon

The yields have remained unchanged in the past couple of weeks. You can expect

to get yield of around 9.50% for AAA rated bonds and approximately 10.5%-

11% for AA ratings for short and long tenor. The 10-year benchmark G-Sec yield

decreased by 4bps in the past fortnight.

Top-rated Corporate Bond Yields

FIXED INCOME

Savers in the highest tax bracketlooking for debt investment

portion of their portfolio can

still look forward to investment

in tax-free bonds of government

companies. There is no reason to

wait for primary market issues as

none is expected in the current

fiscal, going by the Finance Bill

2014-15.

The place to look for tax-free

bonds is the secondary market.

With interest rates on a mildlydownward trend, bond values have

displayed appreciation. With the

expectation of rates going south,

purchase of bonds in the secondary

market may lead to future capital

appreciation.

Buying in the secondary

market involves paying brokerage

and depends on availability of

the securities. There is increased

liquidity in the secondary market,

currently, due to renewed investor

interest in tax-free bonds. Choosebonds which had larger issues.

They could be more liquid. It is

advisable to stick with AAA rated

bonds for higher safety. Check the

yield-to-maturity (YTM) of the

bonds to understand the returns you

can expect till the end of bond term

which were issued for 10, 15 or 20

years. Do not make your decision

on the basis of the coupon rate of

the bond. It does not reflect thereturns you can get when buying in

the secondary market.

If you are holding tax-free

bonds, this is not the time to sell,

even though you can book the

recent capital gains. It is time to

enjoy the tax-free interest you

are earning and wait for further

appreciation. Remember, for a

person in the highest tax bracket it

is important to earn an income that

is also tax-free. For this, tax-freebonds are the best.

With the demand for tax-free

bonds increasing, it is prudent for

buyers to understand that tax-free

bonds sold in 2012-13 had a step-

down clause wherein the buyer in

secondary market will get 0.50%pa

lower coupon rate. It would be

better to choose from the bonds

issued in 2013-14 by government

companies like REC, NHAI, NTPC,

NHPC, NHB, HUDCO, etc.

Tax-free Bonds: Still Your Best Bet



27/68

FREE


28/68

MONEYLIFE| 2 October 2014 | 28

COVER STORY

With this issue, we return to our annual

feature that we initiated some years

agoselecting the best stocks from

top-performing mutual fund (MF)

schemes and creating a portfolio that

tries to do better than most MF schemes. In other words,

the attempt is to use our stock-picking skills and cherry-pick stocks from the best equity schemes, leaving out

the stocks that are not such great picks. But, before we

present you this years portfolio, here is a record of last

years portfolio. An equal-weighted investment in our

chosen stocks has yielded a return of 48.76%, compared

to a rise of 23.29% in the Sensex. We have beaten the

index easily. While one may argue that all stocks would

have done well in the ongoing bull market, how about

a comparison with equity MF schemes? And it is here

that our portfolio scores handsomely. Our portfolio has

beaten 88% of the large- and multi-cap schemes.

Our selection, which is based on a formula thatcombines value and return, along with insight into

industry trends and corporate governance, has worked

well. This is the strategy we apply to stocks selected for

the Street Beat section of the magazine and the Moneylife

Stockletters.This Cover Story offers a fresh listing of the best stocks

based on the latest portfolios of best-performing schemes,

and also a review of the previous article (Moneylife,26 December 2013, Super Stocks Portfolio).

As in all our past analyses, we found that MF schemes

invest in similar large-cap, well-known companies.

The same is true even for the top performing schemes.

However, we do not go by big, comfortable blue-chip

names. Many of the stocks found in the portfolio of

mutual fund schemes would not find a place in our

portfolio. Therefore, this time, we have picked stocks

from a larger set of MF schemes. We have picked the

stocks with top weightage from the top 10 large-cap,

multi-cap and mid-cap schemes. Thus, out of these

30 schemes, we got a base of 268 stocks, much morecompared to a list of 134 stocks last year.

Using Moneylifes unique stock-selection formula,

Jason Monteiroidentifies the best stocks from theportfolio of top equity schemes


29/68

The Best BetsCompared to last years 15 stocks, we now have 17stocks on our list. We will continue with four stocksand exit the remaining 11 of last years portfolio. Pleaseremember, this is not our list of recommended stocks.This portfolio is a list of stocks that equity mutual fundschemes already have in their portfolio. We are merely

compiling the best of their stocks, leaving out the possiblelaggards. Over the past few years, our portfolio selectionhas beaten the Sensex handsomely. Over the past ninemonths as well, our selection has beaten the Sensex bya significant margin. (See box: Market-beaters for theperformance analysis).

Last year, we suggested that 70% of your investmentshould be made in the 15 stocks according to theweightage that we had mentioned; the rest could be keptin cash. This year, we will follow the approach most

funds havestay fully invested.From the last years selection, Mahindra & Mahindra

Financial Services does not find a place in the top 75%of the portfolio of any of the 30 short-listed schemes;hence, it gets automatically excluded. MRF, Lupin,eClerx Services and HCL Technologies will continue onour list while we will replace the rest with new entries

and add three more.This time around, we have four stocks each from the

auto component, software and IT services sectors. Twoare from the pharma industry, while the rest come froma diversified list of sectors.

One of the industries we are bullish about is autocomponents which currently accounts for almost 7% ofIndias gross domestic product and directly and indirectlyemploys about 19 million people. Exports in the sectorgrew by 4.4% to touch $9.69 billion in 2013, as per data


COVER STORY

An equal-weighted investment in our chosen stocks has

yielded a return of 48.76%, compared to a rise of 23.29% in theSensex. We have beaten the index easily

The Super Stock Portfolio

Company Name Present in the Portfolio of- 3-Q Revenue Growth# MC/OP RoCE*

Goodyear India SBI Emerging Business 7.71% 8.81 25%

Ceat UTI Mid Cap 10.89% 3.71 14%

MRF BSL Pure Value, IDFC Premier Equity, +3 more 9.55% 6.10 15%

Swaraj Engines DSPBR Micro Cap & Franklin Smaller Comp. 24.19% 12.89 32%

City Union Bank BNP Paribas Mid Cap, +2 more 9.32% 7.40 15%

Atul DSPBR Micro Cap & Franklin Smaller Comp. 29.70% 10.61 20%

GMDC UTI Mid Cap, Tata Dividend Yield, +1 more 0.00% 7.05 18%

Excel Crop Care DSPBR Micro Cap 27.02% 9.39 24%

TV Today Network Franklin Smaller Comp. 30.97% 9.20 21%

Indraprastha Gas BSL Pure Value 8.57% 6.91 18%

Finolex Industries Franklin Smaller Companies & Tata Div. Yield 19.15% 10.61 19%

Lupin BSL Frontline Equity, HDFC Mid Cap Opp., +8 more 45.12% 15.38 41%

IPCA Laboratories HDFC Capital Builder, SBI Magnum Global, +3 more 15.53% 11.57 21%

Hexaware Technologies UTI Mid Cap 10.07% 12.66 38%

eClerx Services ICICI Prudential Value Discovery, +1 more 24.87% 14.08 44%

HCL Technologies BSL Frontline Equity, Franklin Bluechip, +9 more 30.73% 15.75 54%

Vardhman Textiles IDFC Premier Equity & UTI Mid Cap 20.95% 2.22 12%

#Past three quarter revenue growth; MC: Market-cap; OP: Operating Profit; * Return on Capital Employed is based on trailing four quarters of net profit


30/68

COVER STORY

provided by Automotive Component Manufacturing

Association of India (ACMA).

The year 2013-14 was undoubtedly one of the most

challenging ones for the automobile industry. Vehicle

and auto component sales declined during the fiscal. The

industry recorded a decline of 2%, with overall turnover

standing at Rs2.11 lakh crore against the previous

years Rs2.16 lakh crore. The annual growth rate of theindustry has been 14% for the past six years, most of it

being recorded in 2009-12.

One of the sub-sectors in the auto components sector

is tyre manufacturers. Three of the tyre manufacturers

are on our listGoodyear India, CEAT and MRF. Swaraj

Engines, which manufactures engines, is also present on

the list. The recent data of auto sales figures suggest the

onset of revival of the auto industry; this would result in

higher order inflows for the tyre companies.

Goodyear India, a subsidiary of Goodyear Tire

and Rubber Company (US), supplies tyres to Maruti,

Hyundai, Tata Motors, Volkswagen, GM, Toyota and

Ford. The tyre manufacturer reported a 12.84% increase

in net profit at Rs28.91 crore for the quarter that ended

on 30 June 2014. Goodyear, with a focus on quality and

efficient operations, has managed the recent

business slowdown very well. Its return

on capital employed (RoCENet Profit

Capital Employed) is an extremely

healthy 25%. The company

is quoting at reasonable

valuation for a multinational

company with a market-capto operating profit (MC/OP)

of 8.81 times. The stock is

present in the portfolio of

SBI Emerging Business Fund

and had a weightage of 7.43%

as on 31 July 2014.

Similarly, CEAT, too, would

benefit from the weaker rubber

prices in the short term, and the

pick-up in auto demand over the medium term. CEAT is

looking at expansion in the two-wheeler market. It plans

to expand the capacity in Bangladesh plant to 65 tonnesper day and the Halol plant capacity to 100 tonnes per

day. It plans to invest Rs900 crore in its expansion project

and expects a turnover of Rs400-Rs500 crore from the

Bangladesh market. CEATs operations are less efficient

than Goodyears. That is why it has

a RoCE of 14%. What the stock is

not so great in terms of return on

capital, it makes it up by valuation.

CEAT is quoting an MC/OP of just

3.71. The stock is present in the top

10 holdings of UTI Midcap and with

a weightage of 2.16%.Along with Goodyear and Apollo,

MRF is a leading tyre manufacturer.

It has a diversified portfolio with a

leading position in passenger cars,

motorcycles, tractor front tyre and

medium and heavy commercial

vehicles (MHCV). Of the total

tonnage off-take of MRF, the MHCV

segment constitutes 47.9%, followed by

passenger car (11.2%), motorcycle (10.2%) and light

commercial vehicle (9.3%). Revenues of MRF grew

9.4% year-on-year to Rs3,337 crore for the June 2014quarter, but the net profit for the quarter was flat on a


Top 10 Large-cap

Scheme Name

Total

Number of

Stocks

Number of

Stocks in

Top 75% of

Portfolio

Quantum Long-Term 21 20

HDFC Capital Builder 40 24

ICICI Prudential Focused

Bluechip

50 23

Birla Sun Life Top 100 66 41

Birla Sun Life Frontline 70 35

L&T India Large Cap 47 26

Principal Large Cap 40 20

Reliance Top 200 40 17

Franklin India Bluechip 42 22

SBI Magnum Bluechip 51 26

The recent data of auto sales suggest the onset of revival of the

auto industry; this would result in higher order inflows for the tyrecompanies. Three tyre manufacturers are on our list

r, with a focus on quality and

anaged the recent

well. Its return

ENet Profit

extremely

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nd

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ould

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Bangladesh market. CEAT

than Go

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CEAT i

3.71. T

10 holdi

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It has

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31/68

COVER STORY

y-o-y basis. MRF has a RoCE of 15%, around the samelevel as CEAT but its valuation is already double that ofCEAT, thanks to better perception among investors. ItsMC/OP is 6.10. The stock is present in five of the top30 schemes, two multi-cap schemes and three mid-capschemes-and enjoys an average weightage of 2.03%. Themain problem with buying this stock is its high absolutevalue. Each share costs close to Rs30,000.

According to Nasscom, software exports in 2014-15would rise to as much as 15% to $99 billion, from about$86 billion estimated for this fiscal ending 31 March2014. Actual growth in software exports in 2011-12was 16.5%, according to Nasscom data. According todata released by the department of industrial policy andpromotion (DIPP), the computer software and hardwaresector attracted foreign direct investment worth

Rs60,503 crore between April 2000 and June 2014.These are mainly designed for exports. The Central

government and the respective state governments areexpected to collectively spend $6.4 billion on IT productsand services in 2014, an increase of 4.3% over 2013,

according to a study by Gartner. From the IT sector, ourselections are Hexaware Technologies, eClerx Servicesand HCL Technologies.

Hexaware is a small software business that was beingcontrolled by Atul Nishar who remains the chairman butBarings Private Equity now controls the company. Thishas led to an improved image of the company amonginvestors. Hexawares dollar revenue grew 6.5% year-on-year to $102 million for the quarter ended June 2014and its consolidated rupee revenues increased by 3.56%at Rs610 crore versus Rs589 crore. Growth has beenslow. It reported an average growth of 10.07% over the

past three quarters. But what is attractive about it is thatit has a high RoCE of 38%. Valuation is reasonable toowith an MC/OP of 12.66 times. The company is presentin the portfolio of UTI Mid-cap with a weightage of1.28%.

eClerx Services, which is a top business processoutsourcing company, continues to remain on our listfrom last years selection. The dollar revenue of eClerxServices was higher, though operating margins declinedsequentially in the latest June quarter results. Dollarrevenues grew 2% to $36.2 million. eClerx reiterated itsstance that 2014-15 dollar revenue growth will be in lineor marginally lower than in 2013-14. It has averaged asales growth of 25% over the past three quarters. Even


Top 10 Small- and Mid-cap

Scheme Name

Total

Number of

Stocks

Number of

Stocks in

Top 75% of

Portfolio

Religare Invesco Mid N Small

Cap

48 26

DSP BlackRock Micro Cap 63 38

HDFC Mid-Cap

Opportunities

66 41

Franklin India Smaller

Companies

60 39

BNP Paribas Mid Cap 54 34

SBI Emerging Business 26 14

UTI Mid Cap 94 49

IDFC Premier Equity 50 28

JPMorgan India Mid and

Small Cap

61 36

Birla Sun Life Pure Value 56 36

Top 10 Multi-cap

Scheme Name

Total

Number ofStocks

Number of

Stocks inTop 75% of

Portfolio

ICICI Prudential Value

Discovery

63 36

Reliance Equity

Opportunities

57 24

SBI Magnum Global 94 38 26

Mirae Asset India

Opportunities

54 28

HDFC Equity 57 22

ICICI Prudential Dynamic 48 32

Tata Div idend Yield 36 22

UTI Equity 69 31

UTI Opportunities 46 21

Franklin India Prima Plus 55 28


32/68

COVER STORY


more than the robust growth rate, what is attractive is

the huge RoCE of 44%. Valuation is reasonable too. The

stock is quoting at an MC/OP of 14.08 times. eClerx is

present in the portfolio of two of the top 10 performing

multi-cap schemes, namely, ICICI Prudential Discovery

Value and Tata Dividend Yield, and has an average

allocation of 2.29% in the portfolio of these schemes.

Revenues of HCL Technologies for the quarter

ended June 2014, grew by 3.4% quarter-on-quarter. Thegrowth was led by the BPO segment at 17.7%, while core

software grew 2.3%. The company has averaged a sales

growth of 30.73% over the past three quarters. Its

valuation in terms of MC/OP is high at 15.75

times but it has one of the highest RoCE in

India at 54%. The stock is present in as many

as 11 schemes with an average allocation

of 2.81%. HCL Technologies was

present on our list last year as well.

From the pharma sector, wehave Lupin and IPCA Laboratories

Over the past nine months (13 December 2014 to4 September 2014), our Super Stock portfoliohas delivered an absolute return of 48.76%. This is

despite an allocation of 70% to the Super Stocks and

30% to cash, as we had suggested.

Compared to 71 large- and multi-cap schemes

having a track record of five years or more (since our

selection was predominantly from this category of

schemes), the portfolio returns were better than 63of the schemes present. Since our portfolio included

a low weightage to small- and mid-cap stocks, which

did extremely well over this period, small- and mid-

cap schemes did better than our portfolio. If you had

invested 70% of your portfolio in the 30-stock Sensex

and the rest in cash, your return would have worked

out to 23.29%.The return delivered by our portfolio was better

than the average return of the 192 equity diversified

schemes which worked out to 44.07% over the same

period. We may have not factored in costs; but, even

post-expenses, our Super Stocks portfolio would have

done better than most large- and multi-cap equity MF

schemes with just 15 stocks in the portfolio.

PI Industries performed the best, with a return

of 90% over the period. Torrent Pharmaceuticals

followed closely with a return of 85%. Among the

relative under-performers were Tata Consultancy

Services, Bajaj Auto and Mahindra & Mahindra

Financial Services, which delivered a return of 29%,21% and -5%, respectively.

Market-beaters

Our last years selection has beaten 63 of the71 large- and multi-cap schemes

Portfolio Performance

-6% 14% 34% 54% 74% 94%

PI Industries

Torrent Pharma

Amara Raja Batt.

Mindtree

STFC

Lupin

Tech Mahindra

HCL Tech

MRF

Tata Motors

J&K Bank

Eclerx Services

TCS

Bajaj Auto

MMFS

How Our Portfolio Fared

50%

30%

40%

20%

0%

10%

Super Stock

Portfolio

Average Return

of Equity Schemes

BSE Sensex


33/68

COVER STORY


on the list. Lupin continues on our list of last years

selection. Lupin has launched 19 new products in FY13-

14. In the current fiscal, it plans to launch another 20

products. It has established a significant presence in

the US. In domestic formulations, it is improving its

presence in lucrative chronic therapies. It is slowly, but

surely, establishing itself in geographies such as Japan

and Australia. The company has averaged a sales growthof 45% over the past three quarters, leading to an

extraordinary RoCE of 41%. Its valuation is high with

MC/OP at 15.38 times. The stock is present on as many

as 10 of the top 30 mutual fund schemes with an average

allocation of 1.84%.

IPCA Laboratories June 2014 quarter revenues grew

by 16% to Rs934 crore on the back of 21% growth in

export formulations and 10% growth in the domestic

formulations business. Net profit increased by 103%

to Rs145.5 crore. Exports of formulations, which

contribute 44% to the total turnover, have grown at

an annualised rate of 27% in the last five years and

surpassed the revenues from domestic formulations in

the process. The pharma stock has an MC/OP of 11.57

times and a RoCE of 21%. The stock is present in five of

the top mutual fund schemesthree mid-cap schemes,

one large-cap scheme and one mid-cap scheme.

We have just one bank on the listCity Union Bank.

With over 100 years of history, it is the oldest in the list

of old private sector bank category. It is largely present

in south India with a network of 425 branches of which

376 are located in five southern states and 291 in Tamil

Nadu alone. The Bank has reported an average revenuegrowth of 9.32% over the past three quarters. It has an

MC/OP of 7.40 times and enjoys a RoCE of 15%. This

stock is present in three of the top 10 mid-cap schemes.

Atul Ltd is a member of the Lalbhai Group, one of the

oldest business houses in India. The integrated chemical

manufacturer has established subsidiary companies in

the US, UK, Germany, China and Brazil. The company

manufactures about 900 pr

moneylife 2 october 2014

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