the rbi is not buckling under pressure from the government...

For Pr ivate Circulat ion Volume 1 Issue 75 14th D ec ’12

The RBI is not buckling under pressure

from the government regarding new bank

licences as it wants the Banking Regulation

Act to be amended before toeing the line

It’s simplified...Beyond Market 14th Dec ’12 3

DB Corner – Page 5

A CliffhangerThe real test before President Barack Obama is how well he will tackle the fiscal cliff and prevent the country from sliding into yet another recession – Page 6

All Roads Lead To OneInvesting in gold is a breeze now thanks to the various options available to investors in current times – Page 9

Standing FirmThe RBI is not buckling under pressure from the government regarding new bank licences as it wants the Banking Regulation Act to be amended before toeing the line – Page 12

Cutting CornersHotels are cooking up ways to cut their expenses and make profits in view of slackness in the industry – Page 16

A Thin DifferenceWhile insurance is to protect a risk, investment involves taking a risk and therefore must not be used interchangeably – Page 18

Common GoodThe recent directive by the Union health ministry will give a thrust to generic drugs with the hope of making it accessible and affordable to the masses – Page 20

A Fair ComparisonEV/EBITDA is a ratio used to compare companies with substantial capital investment requirements – Page 24

CERA: Expanding With VigourCapacity expansion, strong distribution network and increased brand visibility augurs well for the bathroom solutions provider – Page 27

The Lure Of Tax-Free BondsTax-free bonds are a popular investment option in the country owing to the taxation advantage they offer – 1

Think Out Of The BoxBalanced schemes and monthly income plans are two options that are giving higher returns as compared to traditional instruments like FDs and insurance policies – Page 33

Technical Outlook For The Fortnight – Page 36

Fishing For OpportunitiesGrowth investing is an investment strategy where the investor seeks to own shares of companies whose earnings’ growth rate is higher than the average growth rate of the industry or the overall market – Page 38

The Four-Year Game PlanThe Presidential Election Cycle is a stock market indicator which can be used in conjunction with other factors to gauge the movement of the markets – Page 42

Nature’s FuryNatural calamities not only result in loss of life and property, but they also affect the stock markets in a big way – Page 44

Volume 1 Issue: 75, 14th Dec ’12

Editor-in-Chief & Publisher: Rakesh BhandariEditor: Tushita NigamSenior Sub-Editor: Kiran V Uchil

Art Director: Sachin KambleJunior Designer: Sagar Padwal

Marketing & Operations:Divya Bhurat, Shreelatha Gollavathini

We, at Beyond Market welcome your views, comments and feedback. Do help us to grow better as per your liking. This is our attempt to reach you better while crossing horizons...

Web: www.nirmalbang.com [email protected] No: 022 - 3926 8047

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Research Team: Sunil Jain, Ruchita Maheshwari,Dipesh Mehta, Anand Shendge,Manav Chopra, Vikas Salunkhe

It’s simplified...Beyond Market 14th Dec ’124

Making financial services available to the entire population of a country is one of the major challenges facing the govern-ment. Financial inclusion, which is to provide financial services at affordable costs to different sections of the society, is one of the most important steps towards the growth of an economy. Realizing the importance of financial inclusion, the Indian government has been urging the Reserve Bank of India (RBI) to start giving out new banking licences to financial institutions. However, the RBI is in no hurry to do so.

While the Finance Ministry is looking at bringing in new players, the RBI refuses to throw open the gates to the newbies until suitable measures are taken to fill in the gaps in the existing Banking Regulation Act. Our cover story attempts to throw light on the simmering tension between the two warring parties and what experts have to say about the ongoing fight.

In this issue you will also find interesting articles on the fiscal cliff in the US and its implication on other economies, the different initiatives being undertaken by the hotel industry in India to overcome slackness in the sector, the recent directive by the Indian Union health ministry aimed at giving a push to generic drugs by making them more accessible and affordable to the common man, the various avenues available to those seeking to invest in gold and how the EV/EBITDA ratio can be used to compare companies, among other topics.

The Beyond Basics section carries a very useful article on tax-free bonds. This is an effective investment option due to the taxation benefit it offers. This section also features an article on balanced mutual fund schemes and monthly income plans (MIPs) that investors can look at going by the current scenario in the economy.

Another section that will seek your attention is the Beyond Learning section wherein we have featured articles on techniques of great investment guru Phil Fisher, the Presidential Election Cycle in the US which is considered to be a market movement indicator and the impact of natural calamities on economies and marketS.

Tushita NigamEditor

INNER TURMOIL


Disclaimer It is safe to assume that my clients and I may have an investment interest in the stocks/sectors discussed. Investors are required to take an independent decision before investing. Investment in equity is subject to market risk. Our research should not be considered as an advertisement or advice, professional or otherwise. The investor is requested to take into consideration all the risk factors including their financial condition, suitability to risk return profile and the like and take professional advice before investing.

uch of the previous fortnight was devoted to talks on FDI, with the government

finally winning the approval of the Parliament after a two-day debate, paving the way for 51% FDI in multi-brand retail.

Following this development, there is optimism in the markets that many such initiatives will be cleared, subsequently giving a thrust to economic growth in the country.

Further, the proposal to set up a National Investment Board (NIB) to monitor and advise ministries on expediting projects entailing investments in excess of `1,000 crore is hoped to boost the economy. It may be recalled that many projects are stuck owing to delays in decision

M making by the government.

Globally, the issues plaguing the European Union have cooled off albeit for now amidst Greece’s approval for revivals. In addition to this, many are expecting a positive outcome to the looming issue of fiscal cliff in the US.

The markets look good at current levels as well as on declines around the 5,800-5,850 levels on the Nifty.

Stocks like Cipla Ltd (LTP: `417.30), IndiaBulls Financial Services Ltd (LTP: `267.95), LIC Housing Finance Ltd (LTP: `271.35), Aditya Birla Nuvo Ltd (LTP: `1,106.40), Raymond Ltd (LTP: `481.35), Zee Entertainment Enterprises Ltd (LTP: `206), Den Networks Ltd (LTP: `194.50) and Heritage Foods (India)

Ltd (LTP: `507.50) can be looked at for investment and trading purposes.

The depreciation of the Indian rupee could be a cause of concern in the coming fortnight. Also, inflation continues to be high at the moment. But many expect it to cool off in Q4 FY13.

The markets lookgood at current levelsas well as on declines

around the 5,800-5,850levels on the Nifty.

Nifty: 5,908.90Sensex: 19,409.69

(As on 10th Dec ’12)

The real test before President Barack Obama is how well he will tackle the �scal cli� and prevent the country from sliding into yet another recession

orld markets have rallied after the election in United States as President

Barack Obama has been re-elected to serve the country for a second consecutive term.

And the markets have taken the US elections on a positive note. However, all eyes are now set on fiscal cliff in the US and its impact on the world’s largest economy as well

W as the economy of other nations across the globe. WHAT IS FISCAL CLIFF?

Post the economic crisis of 2008-09, the US economy has gone through the most difficult times in its age-old history. The economy had contracted drastically and the level of unemployment in the country had reached levels of the Great Depression of 1929.

To save its economy, the US resorted to pumping huge sums of money into the economy (known as quantitative easing or QE) to revive the economic conditional as well as employment levels in the country.

However, as a result of higher spending the US witnessed a quantum jump in its fiscal deficit.

The US economy was already burdened by high fiscal deficit as a

A CLIFFHANGER



In this process of negotiation and to raise the debt ceiling, the Budget Control Act of 2011 was passed.

Under the Act, it was stipulated that if the US government fails to achieve the long-term economic plan and control its spending, then taxes would automatically be increased and there would be drastic cuts to government spending in the country.

The terms of the Budget Control Act of 2011 will be effective beginning of the year 2013. This is why fiscal cliff in the US refers to the year-end deadline, which could automatically trigger expiration worth several billions of dollars in tax cuts and spending cuts, which is estimated to be around $109 billion.

In simple terms fiscal cliff is a $600 billion package of automatic tax increases and spending cuts, scheduled to take effect at the end of 2012, which could severely strain economic growth.

Among the laws that are set to change are last year’s temporary payroll tax cuts and the end of certain tax breaks provided for US corporates.

Also, there could be a shift in the alternative minimum tax along with expiration of Bush tax cuts extended by President Obama.

In addition to this, tax issues relating to Obama’s health care law and federal employment benefits could come for reconsideration.

Apart from taxes, government spending, which was agreed upon as a part of raising the debt ceiling, too would be scanned. Spending on social schemes, defense and other administration costs could fall into this category of reconsideration.

Experts believe over 1,000

government programmes, which include defense budget and Medicare, could face automatic deep cuts.

Considering the nature of the event the term like “fiscal cliff” has been used to describe the fact that as a result of spending cuts and increase in taxes, the mounting US fiscal deficit will come down but its impact on the United States as well as the global economy, including the markets could be quite significant.

Meanwhile though the deadline is still away, the Obama administration is working and negotiating a new deal to avoid the fiscal cliff. There are certain proposals such as repealing certain legislations or passing new ones to extend the provisions. Though it is not yet clear, negotiations could be on changing some of them or extending the timelines regarding the same.

In fact to seek the support of the people of US, the White House has set up a new Twitter account termed as “My2K”, which refers to extra $2,200 in taxes that the average family will pay if all the Bush tax cuts expire at the end of the year.

As part of the negotiation, Obama is seeking Congress’ approval on extending Bush tax cuts for the US middle class, while ending them for those who make more than $2,50,000.

WHY THE WORLD FEARS?

Many economists are of the opinion that if spending cuts and tax hikes contained in the Act come into effect, it will lead to a recession in the US and there would be a significant negative impact on employment levels in the US.

A number of economists believe that the United States is still not out of the woods in terms of the health of its troubled economy.

result of its spending over several social as well as other schemes, including financing of big wars outside the US in countries like Iran and Afghanistan.

The gap between spending and revenues was bridged through government borrowings. To fund the shortfall in federal revenues, the US government kept on raising fresh debt while borrowing almost 40% of its total spending.

As a result of higher borrowings, over the last several years its debt also kept on increasing from 55% of the GDP about two decades back to over 90% of the GDP recently.

However, there is a limit to the amount that the United States can borrow. This limit in borrowing is also known as debt ceiling which can only be increased following a vote by the Congress.

This time again in the year 2011, the US government passed the debt ceiling bill and raised the debt limit to $14.3 trillion.

This not only allowed the government to borrow more, but also led to downgrade of the US sovereign debt rating from AAA to a rating of AA+ in the year 2011.

More importantly, this time the deal of raising the debt ceiling was reached along with several tax cuts, which were supposed to be restored in a very gradual manner as the purpose to revive the sagging US economy is achieved in the future.

One more aspect of this negotiation or deal involved fiscal cliff, wherein the US government was forced to provide the road map to control spending in the stipulated time frame and thus control the fiscal deficit in the world’s largest economy.


A marginal improvement in the economy witnessed over the last two years could just be negated if tax cuts are restored completely.

The US Congressional Budget Office estimates that in such an event the US GDP could take a hit and the economy could record a negative growth in the year 2013.

Many economists call it as an economic disaster, which could lead to the US economy entering yet another cycle of recession.

This would certainly hit the world economy especially in the light of fragile conditions in the Euro zone and worries over slowing growth in the Chinese economy.

Countries, which depend on the US and other developed nations for their exports will suffer.

WHAT IT MEANS FOR INDIA?

The US economy is the largest economy in the world. Many countries including the emerging nations have close trade relations with the US.

Experts believe that emerging countries like India have less dependence on the US in terms of exports as most nations over a period of time have diversified their exposures to other developed

countries of the world.

This could, however, mean that the pain would be less but it is surely going to impact India.

There are a number of companies and sectors which derive a large part of their revenues from US and Europe.

Besides trade, the currency movement will also negatively impact several corporates who have a huge revenue exposure as well as foreign debt in their books. China is considered to be the second largest trade partner of the US and its impact on China particularly on commodity prices will be seen in the adverse situation.

Also, there is an increasing threat to companies in emerging markets like India as the US might look inward to tackle the ongoing problem of domestic unemployment.

Positively in either case there is consensus among experts that the US Federal Reserve will continue its quantitative easing and expansionary monetary policies.

This is possible given that the US policy makers and the politicians will try to avoid another recession and protect employment levels. And this is considered to be one positive side of the event. World equity markets,

especially emerging markets like India, which could offer relatively better investment options given higher economic growth and long-term demographic dividend, could attract more money. This will also provide liquidity support to the domestic equity markets.

Adding to that, the economists also believe that if the US continues to pursue quantitative easing, other countries including those from the emerging markets could follow similar policies so that emerging market currencies may be protected against the dollar.

To sum it up, we can say that all markets will react positively if the US reaches a deal and manages to avoid the fiscal cliff.

On the contrary, if it fails to reach a consensus, the markets will react negatively. That is because experts believe that curtailing spending and increasing taxes would reduce the US economic activity and could lead to the US economy entering into recession or in a worst case, possible deflation or depression.

There are also people who believe that the Obama administration may be able to postpone the crisis while extending deadlines on key issues, thus tackling them at a later stage when the economy is in a better position to handle iT.

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Investing in gold is a breeze now thanks to the various options

available to investors in the current times

he Indian government and the central banking authority of India, the Reserve Bank of India

(RBI) are not too happy about the fact that Indians can’t get over their fascination for physical gold. The Indian government on its part has tried very hard to make physical gold less attractive by raising duties on gold as well as forbidding banks from lending money to its customers for the purchase of gold.

T Even non bank financial companies (NBFCs) who till last year were gung ho about lending money against gold jewellery, have been snubbed. NBFCs can now only lend up to 60% of the value of gold that is being offered by the borrower as against 80% to 85% permitted earlier.

The government’s push behind making the shine of yellow metal less attractive to Indians is understandable. India has

traditionally been the biggest buyer of gold in the bullion market and demand typically rises around October and November. This festivity of Diwali is immediately followed by the wedding season that carries on till the fag end of the calendar year.

However, this is not a reason to cheer simply because the import of gold makes it a large contributor to the current account deficit of the country and in turn puts pressure on the rupee.



OTHER FORMS OF PHYSICAL GOLD

If you are a staunch believer in owning gold in its physical form, invest in gold coins or gold bars. If you are saving for an upcoming marriage in the family, do not buy jewellery that may go out of fashion in time. Instead, buy gold bars and coins from banks or jewellers. This is hallmark gold. So, you can be assured that you are getting pure gold and will not lose out on making charges when you go out to sell them for jewellery.

However, the disadvantage of buying gold in the form of coins and bars is that while banks sell such products they do not buy it back from their customers. The other problem is that you have to buy this form of gold at least at a 5% to 10% premium. You will not be able to recover this cost while selling it though because when you sell, it is at a discount of at least 5%. Having said that, it is still considered to be a better option instead of investing in gold jewellery.

GOLD ETFs

If investment in gold as an asset class is on your mind, this form of paper gold is perhaps the best way of investment as financial planners unanimously concede. All you need is a demat account and you can start with your investment.

If you are a beginner, you can start with a very small amount of say one gram and keep up your investments from time to time according to your convenience. Gold ETFs also come with a systematic investment plan (SIP) option so that you can choose to put in a monthly sum into these schemes, just as you do with any other fund.

However, if you are expecting them to be as liquid as physical gold, you may

be disappointed as it takes its own course to sell units of an ETF just like it is with any other stock that you invest in. Also, make sure that you check the credentials of the funds offering such an ETF so that you do not get locked away in a fund that is simply illiquid.

The best known gold ETFs in the market today are Kotak Gold ETF and Gold BeES from Benchmark, which was a pioneer in launching such a scheme. Over the years both fund houses have rewarded investors with handsome returns. E-GOLD

In a sense this is an option which gives you the best of both worlds. You need a demat account to transact online in this fund and you also get to take physical delivery of gold albeit on some conditions. Your regular demat account will not work as you will need to have an account with one of the empanelled depository participants. E-gold was a platform launched by the National Spot Exchange (NSEL), which also offers a similar investment option on silver and platinum as well.

One unit of e-gold equals one gram of physical gold. If you want to save for your child’s marriage in the long term, it is best to go the e-gold way. In its functionality it resembles a gold ETF and can be bought and sold like shares. This is the best way to invest in gold in small quantities and be completely hassle free and tension free as you do not have to bother about picking up the insurance or storage cost.

When your target is achieved, you can take delivery from the exchange and use it according to your requirements. If you have bought e-gold units for investment purposes only, you can sell them off whenever you wish in

Gold imports in the year 2011-2012 rose to the level of $62 billion as compared to a total of $43 billion in the previous year and this has had the current account deficit soaring to 4.2% of the GDP, which is a record 30-year high!

The Reserve Bank of India too has made it clear time and again that till such time as the high fiscal deficit and the current account deficit are not brought under control the chances of reducing interest rates are low. But much as these reasons hit the headlines every single day, it has done little to slacken the demand for gold in its physical form.

Let us face it, we are indeed a gold crazy nation! From the times of our grandmothers and even before that we have known that gold is associated with prosperity.

In earlier days gold used to be referred to as “stredhan”, meaning the wealth of the lady of the house or wife. When a woman left her father’s home, it was customary for parents to give her gold for it used to be her only financial security.

Though times have changed significantly, we still maintain the tradition and continue to believe that gold should be given to a new bride at her marriage.

Although there is a lot of merit in holding onto tradition, it is high time that we Indians realized that buying jewellery for consumption is not the real investment.

If you are really interested in investing in gold as an asset class for long-term investment here are the best ways to go about it. After all there is no denying that in times of trouble, when the economy is in doldrums, gold does provide a safety net because it can be encashed easily.


lieu of cash.

HEDGING THROUGH GOLD FUTURES

This is not so much an investment but a hedging tactic that is used by those who are used to trading in gold. What these futures essentially do is they protect you against a future price

hike. For instance, if the price of one unit of gold is `31,000/10 gm now and a future with a tenure of three months is available at a price of `31,500/10 gm, you can lock yourself at this price and protect yourself against price fluctuations in the short term. However, this may be an oversimplified explanation and truth be told you need to be savvy with a

little bit of technical knowledge to understand how futures operates.

The bottomline however is that investing in gold is a viable option at the current state that we are in. But instead of rushing to the jewellery store think wisely and choose the option that you think is best suited to your investment goalS.


The RBI is not buckling

under pressure from the

government regarding new

bank licences as it wants

the Banking Regulation

Act to be amended before

toeing the line

assets (NPAs) of the banking sector are a source of constant concern. Estimates made by credit rating agencies and industry bodies say that total NPAs of the banking sector will mount to `2 lakh crore by the end of March ’13.

In fact even when the erstwhile Finance Minister had made a case for the opening up of the financial sector, some senior bankers were taken by surprise and had even stepped forward to say that the need of the hour was consolidation of the banking sector and the government was being kind of utopian in thinking that a handful of new banks would be able to achieve what the public sector banks with their reach had not been able to achieve even after so many years of nationalization.

UTOPIAN IDEAS

For instance KV Kamath, whose name is synonymous with the growth of ICICI Bank, commented that the idea that setting up new banks would bring about financial inclusion was “way off.” Kamath said that the need of the hour was to make the existing products more bankable in terms of their operation.

The challenges he mentioned were product related and banks need to put their heads together to figure out ways and means to reach out to the

greater unbanked population by making small changes to the existing product suite.

The RBI, however, did go ahead and release draft guidelines with regards to the entry of new banks in August ’11 after having published a discussion paper on the same issue about a year ago.

It has since then made it very clear that it would not move ahead till it gets adequate powers to supersede the boards of the banks, a power that can only come to the Reserve Bank of India, once the Banking Regulation Act is amended.

RBI’s WORRY

RBI’s concern is obvious. It is more than painfully aware of the lack of initiative that the Finance Ministry has shown with regard to the amendment of regulations. Though the Finance Minister is insisting that sufficient clauses are in place to go ahead with the required regulations, the central bank is not convinced and rightly so.

The central bank has had several bad experiences in the past. The cases of Bank of Punjab, Centurion Bank and Bank of Rajasthan were not particularly pleasant.

The fact that the RBI swooped in at the right moment and averted a disaster is another story altogether. Despite its hawkish watch over the banking sector, the failure of the Global Trust Bank (GTB) is a blemish that is likely to remain with the central bank forever.

It is common knowledge that there are many well known names in the financial world that are making a beeline to make a foray into the banking space. There are non banking financial companies such as

hose who are involved with the banking industry in India believe that the differences between the

Finance Ministry and the Reserve Bank of India (RBI) is material that legends are made up of. On and off there have been reports of the RBI chief and the Finance Minister locking horns over several issues. The recently concluded Bancon 2012 established that the issuance of new bank licences is the bone of contention between the top financial authorities in the country.

While the Finance Minister is openly nudging the RBI to finalize guidelines and start inviting applications for new bank licences, the RBI is refusing to succumb to the pressures till such time as the Banking Regulation Act of 1949 is amended.

Only the amendment of the Banking Regulation Act will give the RBI the power to supersede the boards of rogue banks.

FINANCIAL INCLUSION

The government’s contention is that opening up the banking sector will increase geographical access of the banking sector and bring the aam aadmi within the ambit of the financial sector.

The erstwhile Finance Minister Pranab Mukherjee in his Budget Speech of 2010-11 had mentioned that the banking sector has to grow in “size and sophistication” in order to improve the access of the banking sector. He also made a glowing comment about how the banking sector has emerged “unscathed from the financial crisis.”

Since then a lot has changed and the problems of the banking sector have come to the fore. The non performing

T


Indiabulls, IL&FS and Aditya Birla Financial Services who have been waiting for over two years now for the final guidelines to be published.

There is a lot of noise of healthy competition these players have been making from time to time. But one must not forget that competition is a double-edged sword.

With more competition, the margins are bound to get squeezed and the banks are likely to do all it takes to generate more returns for their shareholders. This may be recalled was the exact problem in the western world that led to the sub-prime crisis, which eventually snowballed into a

full blown economic crisis that gripped the world in 2008-09.

In fact the economic crisis had thrown up a lot of questions about the role of the banking sector worldwide and the systemic risks within. Since then the Reserve Bank of India’s concern has doubled and it is refusing to make any laxities in the banking sector.

The government’s push for more banks in the name of increasing geographical reach of the banking sector and giving financial inclusion a shot in the arm is a weak argument.

If that had been their real intention, then there is obviously something

wrong with the current structure of the banking system. It is almost a given that with the entry of new players all kind of inconveniences will be conveniently avoided. In this situation, the government’s agenda seems evident.

The realization that the 2014 elections are perilously close seems to have dawned upon them. In this situation to show to the world that the “reform oriented” government has done its job well seems to be the real intention.

One can only hope that the RBI chief Dr Subbaro does not succumb to the pressure ultimately and holds his stance as he has done so faR.

The most intelligent strategy in Chess is to be ready

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involves moves that are a combination of knowledge

and skill, backed by years of experience.

Currency Derivatives Trading with us keeps you a few

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CUTTING CORNERSHotels are cooking up ways to cut their expenses and make profits in

view of slackness in the industry

here was a time during 2004-05 and 2007-08, when the hospitality sector in India was

booming. But then came the economic slowdown, and like other sectors the growth in the hotel industry too took a beating. While other sectors gradually came on track, the hotel industry did not show any signs of recovery.

Consider this: the average occupancy rate across the country was around 66.8% in December ’10, which decreased to 62.1% in December ’11. And if industry estimates are to be believed, it is going to fall further down to 58% - 60% this year.

The hotel industry is largely dependent on tourism and foreign arrivals. Since 2008, there has been a continuous fall in the growth of tourist arrivals. A total of 50 lakh tourists arrived in India in 2007, which grew to only 62 lakh by 2011, showing a meager compound annual growth rate of 3.5%.

The silver lining is that the Tourism

T Demand from domestic tourists has not been strong either. In the case of domestic tourists, there is a growing trend among domestic tourists to travel to countries in Europe, which are relatively cheaper now than before because of Europe’s financial crisis, or to countries such as Malaysia or Australia which have been advertising aggressively for the Indian market. But, despite this, there has been a slow growth in the domestic tourism market.

The fact is that while both domestic and foreign tourists have upped their spending in India, the hotel industry is not seeing the growth that it should have seen from the boom in new hotels across the country. Between 2007 and 2010, the number of new hotels in the country has increased by 75%. Delhi and NCR has seen a steep rise in the number of hotels.

The problem is that the new hotels that have come up are mostly in premium categories, whereas the demand is more in the budget hotel segment. The maximum growth in terms of number of rooms has taken

Ministry of India has taken note of the decline in tourist arrivals. Dr K Chiranjeevi, Union Tourism Minister says, “We have many opportunities for growth of tourism. All it needs is promotion and provision of facilities for foreign tourists.”



Hotels, one of the largest hotel companies, was 34% in FY08, which came down to 17.9% in FY12. Other premium hotel companies such as EIH and Hotel Leela Ventures also suffered from decline in operating profit margins, which got halved these years. Reports say that in the next two fiscal years, the operating profit margin will be around 16% for the premium hotel segment, which is the lowest in 10 years.

Faced by a slowdown, the hotel industry, especially the premium hotel segments, have been forced to reduce their tariff rates. Some industry experts believe they had no other choice because nobody was willing to take the hotel rooms at their original price.

Even tourism minister Chiranjeevi has asked the hotel industry to lower room tariffs and taxes, which are around 20% to 30% of the hotel tariff. It is noteworthy that most countries charge taxes up to 5% to 7% of the hotel tariff.

Some hotels are offering discounts up to 25% in packaged deals on premium rooms booked through online portals. Apart from cash discount, many are also offering deals like ‘stay three nights and get one night free’.

Prices have also come down in the MICE (meetings, incentives, conferences, exhibitions) segment. However, industry experts say the MICE segment is worth considering in terms of generating revenues. This segment can help shorten the gap between demand and supply.

Currently, the MICE segment in India is seeing a growth of 15% to 20% annually. According to the International Congress and Convention Association (ICCA), 69% of MICE events are held in city hotels and rest in resorts. India has

both the resort and hotel segments, which means India has a great potential to become a leading player in the Asian MICE market.

Even hotels are coming around to this belief. The newly opened Kempinski Ambience Hotel Delhi is targeting the MICE segment. It is expecting 70% of the revenue to be generated from MICE through its conference and banquet facilities. Metros are the preferred destination for MICE events in India. However, cities like Gurgaon, Jaipur and Hyderabad are also emerging as target markets.

In the near future, the hotel industry will be divided into two segments, premium and budget or non-premium hotels. Experts feel revenue growth of premium segments will be muted due to less corporate spending, weak global economy and tourists from US and Europe, who are considered to be the backbone of this segment.

Some believe that the premium segment cannot be revived until the US and Europe recover from the economic crisis. As a result, many future projects could be delayed or even shelved.

Budget hotels are seeing gradual growth and have not been affected by the economic crisis, because tourists prefer budget hotels to keep their expenses under check. In fact, even domestic travellers prefer non-premium hotels, as they are affected by the economic slowdown.

India is ranked 12th in Asia Pacific and 68th overall, according to the Travel & Tourism Competitiveness report of 2012 by the World Economic Forum. However, the report further states that post 2013, the sector will witness improvement in average room rates and occupancy levels. Let us hope that this happens very sooN.

place in the 5-star hotel segment, whereas growth in 3-star and lower hotels has been less.

In contrary to supply, foreign as well as domestic tourists prefer cheaper lodgings as can be seen by the room occupancy ratio of different hotel segments in Goa, Jaipur and Shimla. Cheaper travelling and lodging has become the USP of Indian tourism.

It should be noted that 65% of the total revenues of premium hotels comes from foreign tourists, clearly showing that domestic tourists shy away from premium hotels. Presently, the average occupancy rate of premium hotels is around 55% to 60% whereas in FY10 it was 63%.

Rising fuel and oil prices have added to the woes of the hotel industry. Employee costs have risen drastically, growing every year due to inflation. According to industry experts there is a shortage of almost 25% skilled labour such as housekeepers, front office staff and chefs. With the shortage, the hotels have to keep the salaries up to the mark to prevent the risk of losing them to competitors.

As a cost-cutting measure, some hotels are investing in training their employees in ‘multi-tasking’. The result of all these measures is that the operating expense of hotels, which has been growing at a CAGR of 9.1% over the last five years, has been higher than the revenue growth.

However on the positive side, the hotel industry has been able to keep sales and administrative costs in check, which only increased at a meager rate of 3%. The food and beverage revenue also increased, contributing about 10% in FY12.

The operating profit margin of the hotel industry is under stress though. The operating profit margin of Indian

thindifferenceAWhile insurance is to protect a risk, investment involves taking a risk and therefore must not be used interchangeably

ver the years people have been investing in Money Back Policies, Endowment Policies,

ULIPs and many others for reasons such as risk protection, good returns, regular income, among others. But a majority of them seem to be quite unhappy. So what actually went wrong? Did your insurance policy give you the desired returns?

The terms ‘insurance’, ‘investment’ and ‘protection’ are interlinked and made to look more complicated given the array of insurance policies available in the market.

Let’s look at these terms and try to decode the various myths people have about them.

Insurance in basic terms is a contract between two parties where one party agrees to take the risk of another party (in exchange of premiums) and promises to compensate the other in case of a loss.

Investment on the other hand, means putting money into something with an expectation of gain over the period of the investment tenure.

O Also, protection is to defend or guard a person or an object from any loss or danger arising out of any event.

While insurance and protection have a similar objective, investment is a completely alien concept. The former is used for risk protection whereas the later has an in-built expectation of receiving gains from the money invested in it.

In fact, the very objective of insurance and investment is different. We invest money so that we can use it when we are alive whereas we buy insurance, especially life insurance, so that it can take care of our family when we are gone.

If so, then why is investment always linked to insurance? Do we not ask our insurance advisors what returns will we get at the end of maturity? We sure do. Why don’t we ask general insurance companies to guarantee us returns on our investment in say a car insurance policy?

While general insurance works on the concept of pure protection, we fail to understand that it should work the same way for life insurance as well.

In general insurance, the loss is defined and measurable. Here, it works on the principle of indemnity (nothing more nothing less than the loss incurred). But it is not the same in life insurance. It is practically not possible to put a value to human life. One of the reasons why people get swayed is that the insurance industry has been promoting and marketing such products through various attractive means like advertisements and higher commissions. But the same does not happen in case of pure term plans.

Repeated advertisements have a huge impact on investors and they tend to overlook the benefits of the pure term cover in favour of such insurance-cum-investment plans. ULIPs which are one of the most popular products in recent times are investments although with an element of a risk cover. So then why should they be compared with the returns of an insurance product and not an investment product? “Apples should be compared only with apples and not with oranges.”

Remove the element of the risk cover



remain underinsured. There is an emotional loss also which is attached to a human life along with the financial loss. The family needs to be taken care of in the absence of the bread winner of the family. Regarding a company’s group insurance policy a lot of us may agree with Anand.

But what would happen if we switch jobs? We suddenly would be left with no cover. Sure we may get another term cover from the new company. But is it certain that we will die before retirement from that company? Or that we will never again switch jobs? So what would happen once we outlive retirement and are left with no life cover? Buying an insurance cover will become difficult due to age and health factors. It is, therefore, always advisable to have a separate term cover to cover the risk of your life. We assessed Anand’s life insurance needs as per the ‘Need-based Analysis’ method from the following details provided;

Household expenses (per annum) - `6 lakh, Spouse’s Age (29 years)

Assumptions – Spouse’s life expectancy – 80 years, Return on investments – 9%, Inflation rate – 7%Based on this data, it is estimated that Anand would require a life insurance coverage of approximately `2 crores (way higher than the term cover provided to him by his company).

Now let’s see what happens when he takes a term cover as compared to a ULIP. The annual premium for a term plan for a tenure of 30 years with a sum assured of `2 crore is `22,000. Alternatively, with the same annual premium, the sum assured that Anand can get under a ULIP plan is `1 crore.

However, in a ULIP, he can hedge the risk of his invested premiums with the fund value receivable on maturity.

The fund value of the ULIP at the end of 30 years is `39.80 lakhs (assuming a return of 10% post expenses; which is still on a higher side). Now, if he takes a cover of `2 crores in a ULIP, the premium amount will double which means his maturity benefit would be `79.6 lakhs.

Let’s see what would happen if Anand buys the term cover and invests the difference amount of premium (`44,000 - `22,000 p.a) as an SIP in any other good equity mutual fund for the same tenure of 30 years. The future value of this SIP fetching returns at the rate of 16% will result in a handsome amount of `1.35 crore. Needless to say, `39.80 lakh is a far cry as compared to what he can get if he separates the investment component from insurance where he sufficiently covers his family.

It is, therefore, observed that even after mixing insurance with investment, the total benefit that Anand can get is much lower than what he gets as risk protection from a pure term cover. The surplus money could rather be invested in another pure investment vehicle, which may be able to fetch higher returns as against an insurance-cum-investment product where you end up compromising on either the life cover or the maturity benefit.

Term plans are also known as plain vanilla plans and are the most inexpensive ones (cheapest form of insurance as it is generally referred to) but it serves the purpose of protecting the risk of our lives and securing the family. So does this mean we should not buy insurance cum investment plans? No. Instead, we can buy them but after being sufficiently covered so that our loved ones do not suffer any financial loss. Insurance is to protect the risk whereas investment involves taking a risk. Hence, do not mix botH.

from it and compare it with any other investment product, be it a PPF or mutual fund to see which one is a better option. It is highly unrealistic to expect insurance to provide the kind of returns that a properly managed investment does.

Who Needs Life Insurance

Young adults, beginning families, established families and working couples as both of them support each other financially (children do not need life insurance – insure yourself not your dependents) or in short people who have dependents need life insurance policies.

A person who lives alone or who does not have any dependents does not need life insurance. But that does not mean he should not cover other risks associated with his life. These risks could be covered by taking a mediclaim, personal accident cover, critical illness cover, etc.

Let us look at an example. Anand (age 32 years) working with a reputed MNC argued that he does not need a life insurance cover since he has been given a term cover from his company for `80 lakh and that he has already exhausted the limit u/s 80C.

Let us get a perspective here. There are many other sections under which you can attain the benefits of deductions from your total income such as 80E for education loan, 80G for donations, etc. Does this mean you will donate the amount to charity or take an education loan even if you don’t need it only for the purpose of getting a deduction?

The same logic applies to insurance premiums also for which you will surely get a deduction u/s 80C. But that does not mean that if your limit is exhausted, you will overlook the need for insurance for your family and

COMMONGOOD

The recent directive by the Union health ministry

will give a thrust to generic drugs with the hope of

making it accessible and a�ordable to the masses



respected manufacturers who have a long standing reputation as far as quality products are concerned.

Industry experts say that ‘generic drug’ referred to in the US and other developed countries is a drug, which was under ‘product patent’ and has become ‘generic’ after the expiry of the patent. In India, generic drugs are being manufactured by almost all companies with quality brands competing in the market since many years, with prices determined by market forces and, hence, very competitive. In fact, almost all drugs in the market are generics, barring a few exceptions.

Members from the pharma industry are skeptical about this move. They say that establishing a company’s name in the market is a big task in the pharma sector. Brand names are necessary to identify a product by a company. It is a practice in the country to get the permission of drugs with brand names. Brands are the only assets the industry has and by removing brands assets worth lakhs of crores are being put on stake.

Drug regulators have a responsibility and duty to safe guard the quality of drugs placed in the market. When they are not aware if a specific brand name has been issued to a company or not, how can they control the movement of spurious drugs industry experts ask.

Any spurious drug manufacturer can manufacture a drug with any brand name. And even if the regulator finds that the brand name is being used by any manufacturer, he will not be able to take any action since the brand name is not endorsed. The spurious drug manufacturer will be caught only while placing the product in the market for sale.

Pharmaceutical manufacturing

activity is knowledge-based and every manufacturer is trying to establish his own name in the market by producing efficacious drugs. Some manufacturers establish their own standards over and above the national standards to improve the quality and efficacy of drugs manufactured by them. Such companies’ interests get affected seriously. Experts said that exports of formulations would be seriously affected. At the time of independence, the country was importing almost 95% of its medicines. But now it is exporting medicines worth `55,000 crore. Most formulations are registered in foreign countries with brand names and the registering authorities in foreign countries always ask for permission of the product from local licensing authorities with full particulars including the brand name.

Any change in the registered product needs to be informed and an approval needs to be taken again after paying high registration charges. It will force the industry to spend hundreds of crores on re-registrations and in some cases the buyers may not be interested in buying generics. This is definitely going to give exports a major setback. No new company would invest in India in the pharma segment.

Considering this as a sensitive issue and one that will definitely hit the Indian pharma exports business badly, the Pharmaceuticals Export Promotion Council of India (Pharmexcil) expressed their concern. Issuing a clarification, the ministry said the recent directions to the state drug licencing authorities to grant or renew drug licences in proper generic names only will not be applicable to exporters in the country.

It further states that the direction is applicable only for manufacturing

fter a month-long hassle the Union health ministry recently issued a directive to all states

and union territories to instruct drug licencing authorities to grant or renew licences to manufacture for sale or for distribution of drugs in proper generic names only.

Under the provisions of the Drugs and Cosmetic Rules 1945, applications in various forms for grant/renewal of a licence to manufacture for sale or distribution of various categories of drugs as well as various forms for grant/renewal of such licence require the name of the drug to be specified.

Such forms for application as well as grant/renewal of the licences do not require mentioning of any trade name /brand name. In view of these, the grant of drugs manufacturing licences under a trade or brand name is not in accordance with the spirit of the legislation. Therefore, manufacturing licences for drug formulation should be granted in proper/generic name only, reasoned the ministry. However, this directive by the Union health ministry will not have a major setback on pharma exports as feared by many.

But, in case of drug formulations containing multiple ingredients the licence should be granted under the name of categories of product viz, multivitamin tablet/capsule/syrup, antioxidants, multivitamins and multiminerals, etc. In addition to this, the composition of such product shall mention the name of active ingredients as well as its strength.

The imposition of unbranded generics on patients will now enable retail chemists – over 6,00,000 - to push products with better margins instead of the medical fraternity advising patients to purchase trusted and assured generic drugs from

A

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Disclaimer: Insurance is a subject matter of solicitation. Mutual Fund investments are subject to market risk. Please read the scheme related document carefully before investing. Please read the Do’s and Don’ts prescribed by Commodity Exchange before trading. The PMS Service is not o�ering for commodity segment. *Through Nirmal Bang Securities Pvt. Ltd. ^Distributors #Prepared by Research Analyst of Nirmal Bang Commodities Pvt. Ltd.

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licences issued by drug licencing authorities under the provisions of the Drugs and Cosmetics Act. The direction does not apply to the various types of certificates, namely CoPP, GMP certificate, Free Sale Certificate, etc required for the purpose of exports of drugs as these are not issued under the Act.

Moreover, it is presumed that most of the organized Indian pharma industry and groups would sell off if their

brand is not allowed to be used to market their medicines as all their margins will be gone. So they cannot invest in R&D of new molecules. This means that in future we will not have any new medicines in the market and there will be no future for these pharma companies.

No multinational company would launch or introduce new research products in the country if they cannot create their brand value. Now with

product patent, pharmaceutical companies will not be able to control the price of the new patented molecules and prices will go very high. Only if Indian pharmaceutical manufacturers exist and flourish can they keep tab on the activities as in the past efforts by many Indian companies resulted in lot of products being sold at very less MRP and prices coming down subsequently, said a senior official of a pharmaceutical companY.

EV/EBITDA is a ratio used to compare companies with substantial capital investment requirements

A FairComparison



investors who don’t pay heed to this multiple considering it too technical and move on to see the upside. After all, it is the price of the scrip that matters the most.

However it is better to understand how one arrives at the multiple, as it would help investors in understanding the valuation of a business better before buying or selling it. The EV/EBITDA multiple has two components – numerator is EV or enterprise value. In layman’s language, it is the price of the firm. EV is arrived at as market cap plus debt raised, preference share capital minus cash and cash equivalents.

To put it simply, it is the price you will pay if you want full control of the firm. By paying off all shareholders and bondholders you can enjoy full control of the firm and quite understandably you can enjoy the cash the way you want. Hence, EV consists of all types of capital but deducts cash and cash equivalents. The denominator is EBITDA. It means earnings before interest, taxes, depreciation and amortization. In a profit and loss statement, an investor can simply deduct cost of goods sold from net sales. Net sales mean gross sales minus sales tax or taxes billed to the customer.

In plains terms, EBITDA represents operating profit. It talks about the profit a company makes by being in the business. It does not take into account various factors like the cost of financing, rate of tax and non-cash expenditure such as depreciation.

Hence, EV/EBITDA, in essence, captures what an acquiring company would have to take on its books and how it would gain in terms of cash and other sector dynamics of the company that is targeted for the

purpose of acquisition. THE REASONS EV/EBITDA is a preferred valuation technique used by investment bankers and business analysts to compare one business with another. This tool works better to compare companies with varying capital structure with each other. It helps analysts in keeping away the influence arising out of capital structures.

For example, a company with no debt will report a high net profit margin compared to a company with huge debt on the balance sheet. But a focus on EBITDA ensures that the analyst has gauged the operational efficiency of the company. EV on the other hand brings in a more realistic measure of a company’s intrinsic value. Market capitalization of the equity shares bring in the market perception of the company.

Typically well-managed companies enjoy higher multiples in public markets than those companies with poor managements.

In the short term the market capitalization of a firm might go up or down due to some temporary events or sentiments in the markets. In case of debt, the market looks at the market value of debt, if the debt is listed on the exchanges.

For example, if the bonds issued by a firm is listed on the stock exchange and market value of these bonds is quoting below the face value, then the market value will be taken and not the face value.

Also, if preference shares of a company are traded on the exchange then the market value is considered. If such instruments issued by the bank are not traded on the stock exchanges,

n markets, where most financial parameters are dynamic, to value a company can be a daunting task. Some

say valuing a company on price to earnings multiple is a good way to gauge whether a company is expensive or economical.

There are those who suggest price to book value - the cash a company can generate by selling off its assets - as the right financial parameter to arrive at a value of a company.

And there are many who recommend looking at debts of a company to ensure that the value of a company is captured well.

However, each of these financial parameters, when considered in isolation, fails to capture a few aspects of a company’s balance sheet.

This is the reason why many analysts and fund managers use Enterprise Value to Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) as a financial parameter to gauge the value of a company, especially while considering its acquisition. So, what are the reasons that make this financial parameter the most preferred one in gauging the value of a company? THE BASICS For those who access research reports daily, the possibility of coming across the financial parameter EV/EBITDA is quite high.

Many brokerage reports end with analysts recommending a stock citing the reason that the stock quotes at a 30% discount to the EV/EBITDA multiple of the industry average.

However, there are many retail

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REGD. OFFICE: Sonawala Building, 25 Bank Street, Fort, Mumbai - 400 001. Tel: 022 - 39267500 / 7501; Fax: 022 - 39267510 CORPORATE OFFICE: B-2, 301/302, Marathon Innova, O� Ganpatrao Kadam Marg, Lower Parel (W), Mumbai - 400 013. Tel: 022 - 39268000 / 8001; Fax: 022 - 39268010Disclaimer: Insurance is a subject matter of solicitation. Mutual Fund investments are subject to market risk. Please read the scheme related document carefully before investing. Please read the Do’s and Don’ts prescribed by Commodity Exchange before trading. The PMS Service is not o�ering for commodity segment. *Through Nirmal Bang Securities Pvt. Ltd. ^Distributors #Prepared by Research Analyst of Nirmal Bang Commodities Pvt. Ltd.

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then the face value or historical value is taken into account along with the accrued interest on such instruments.

The ratio is influenced to the extent of market perception. However, it gives a fair idea of the valuation the firm is quoting at. Therefore, enterprise value keeps fluctuating as the market sentiment changes. If one is comparing a company with another in the same sector, comparing them on the basis of their abilities to run operations is a fair deal. EV/EBITDA ratio compares the price of a firm against the operating profit – that is the firm’s ability to run the ongoing business.

For instance, in the case of a mining company, it is the operational ability that matters in the long run. Capital structures of a company can be amended relatively quickly instead of operational efficiencies.

A mining company cannot become the lowest cost producer of a particular type of coal or iron ore overnight. But the capital structure can rather be changed in a short

period of time.

If a company has superior business efficiency or low cost manufacturing - translating into high operating profits – it can take debt and increase production, thereby growing its profits copiously.

Markets would prefer such companies and there would be high investor interest in the company’s stock, thereby enhancing its market capitalization and then EV/EBITDA. VARIANTS Even though EV/EBITDA is a widely used financial parameter to gauge the value of a company, there are a few variants of this to arrive at a value of a company. These variants are used when companies have negative operating profits and are also incurring major losses.

One of these variants is EV/Sales. Here instead of EBITDA, it is the total revenue that is used, while other things remain the same.

The rationale behind using the sales

parameter is that when a company turns profitable its sales are expected to grow strongly. This helps in analyzing a company in case it is making losses.

Many a time companies in sectors such as airlines, infrastructure and other capital-intensive businesses which squeeze more revenues due to high debt, the EV/Sales financial parameter comes handy. EV, however, has got its own disadvantages too. It originates in public markets – market capitalization of a firm is applicable only when the shares are listed and there is enough free-float in the market. In an unlisted company the shares quote at face value.

In case of a public limited company which does not have much float, share prices can be manipulated. The EV of such a company can also be influenced. In such cases, a combination of financial parameters is taken into consideration. These are debt to equity, replacement cost value, working capital management and cash flow from operationS.

Capacity expansion, strong

distribution network and

increased brand visibility

augurs well for the bathroom

solutions provider

ncorporated in 1980 by the demerger of the ceramics division of Madhusudan Industries promoted by Vikram Somany, Cera Sanitaryware is a key player in the sanitaryware segment with

1,000 dealers/distributors and 10,000 retailers.

Cera Sanitaryware Ltd (CSL) is the third largest sanitaryware company in the organized sector with about 22% market share in India. The company is engaged in the manufacture of sanitaryware and faucets (commenced since September ’10). The company also markets wellness products, which are majorly outsourced. The company’s manufacturing facility is located at Kadi in Mehsana district of Gujarat.

The company is in the process of expanding its capacity from the current 2 million pieces of sanitaryware units to 2.7 million pieces (Q3FY13E) and further to 3 million pieces by January ’13. Cera Sanitaryware has opened Cera Bath galleries in different towns, complementing its distribution network and also getting visibility among influencers and institutional buyers.

I

EXPANDINGWITH VIGOUR



INVESTMENT RATIONALE

Continuous Capacity Expansion In Various Business Segments To Drive Growth

Cera Sanitaryware is one of the leading players in the Indian sanitaryware market. Cera Sanitaryware plans to invest `140 crores in its manufacturing facility in Gujarat to enhance capacity.

Currently, the company has a production capacity of 2 million pieces per annum, which will increase to 2.7 million pieces by the end of Q3FY13E at an investment of `60 crores. The company plans to further increase the production capacity of its sanitaryware products to 3 million pieces per annum at its plant located in Kadi near Ahmedabad with a capex of `100 crores. The ongoing expansion is likely to be commercially commissioned by January ’13.

The company has diversified into faucetware by setting up a Greenfield project at Kadi, Gujarat with an installed capacity of 2,500 pieces per day in September ’10. The company is planning to increase its manufacturing capacity from the current 2,500 pieces per day to 5,000 pieces per day with an investment of `40 crores, which is scalable to 10,000 pieces per day.

We are of the opinion that with growing demand and continuous expansion, the company will be able to garner better opportunities.

Underlying Opportunity

India’s sanitaryware industry has touched a market size of `2,000 crore, growing by 15% to 16% over the past few years on account of improving living standard and increased awareness levels.

According to the census data 2011, around 47% of the total Indian households have proper sanitation facilities. Around 69% of the total rural households and 18.6% of the total urban households still do not have access to even basic sanitation. However, increasing cross-country sanitation drive and improving literacy levels will correct the anomaly and accelerate the growth of the sanitaryware industry on the whole.

The sanitaryware industry (organized sector) comprises of 60% of the market, while the unorganized segment accounts for the rest. The organized segment of the sanitaryware industry is growing at 15% to 16% annually. The premium segment, on the other hand, is growing at the

Source: WHO, UNICEF 2012, Nirmal Bang Research

Source: HSIL Annual Report 2012, Nirmal Bang Research

Developed EconomiesIndia

2090

8010

Demand For SanitarywareSanitaryware Industry New Demand % Replacement Demand %

rate of 20% to 25% annually, outpacing overall growth of the industry. These trends augur well for Cera and we expect more preference for premiumization among the general populace.

INDIA’S SANITATION VIS-À-VIS ITS ASIAN COUNTERPARTS

Cera currently has a 22% market share in the sanitaryware segment and is expecting to garner 30% to 32% of the market share in 3 to 5 years down the line.

Increase In Demand

Sanitaryware caters to new demand or replacement demand. If we see the below table, in India new demand comprises of 90% compared to the developed economies of 20%. Due to rising awareness, the trend is gradually shifting and the replacement demand is gathering pace slowly. The replacement market for wellness products is also registering a 15% growth in India, which holds a lot of significance for the company in its fast track growth plans for the years ahead.

Aggregate Population Across 11 Countries,Devoid Of Basic Sanitation Access (%)

31

1944

43

32

222

24

IndiaChinaNigeriaPakistanIndonesiaBangladeshEthopiaDemocra c Republic of CongoUnited Republic of TanzaniaRussian Federa onBrazilRest of the World

Apart from higher purchasing power, growing young population and increasing urbanization will drive demand for other categories of building products in all segments. Tier-II and Tier-III cities are also accepting branded products, reducing the dependence on unorganized sector.

Extension Of Related Product Categories To Provide A Complete Bathroom Solution

Cera Sanitaryware ventured into related product categories


Source: Company, Nirmal Bang Research

Net SalesTotal ExpenditureEBITDAInterestOther IncomeEBDTDepreciationPBTTaxPATEPS (Unit Curr.)EquityEBITDA(%)PBT(%)PAT(%)

9111.3892.9518.431.641.66

18.452.01

16.455.42

11.038.716.33

15.70%14.00%9.40%

73.2961.59

11.70.822.33

13.211.88

11.333.687.656.046.33

15.20%14.70%9.90%

Q2FY13 Analysis (` in Cr)

52.00%50.90%57.50%99.60%

-28.80%39.70%

6.70%45.20%47.20%44.20%

90.5174.8815.631.241.58

15.972.1713.84.56

28.457.3

6.3316.30%14.40%9.60%

23.10%24.10%17.90%32.00%5.00%

15.50%-7.60%

19.20%18.80%

-61.20%

Particulars Q2FY13 Q2FY12 YoY% Q1FY13 QoQ(%)

(the company is already present in the kitchen sink, faucets, wellness, personal care as well as mirror segments) so as to leverage distribution network and brands and also to provide a complete bathroom solution under one roof.

Recently, the company has extended its product range by foraying into the tile business to further leverage its distribution network and offer one source solution to its distributors and retailers.

The management has targeted `20 crores of revenues from the tile business in FY13E. The company will not manufacture tiles in-house but will outsource tiles from indigenous tile makers.

Cera has launched an array of elegant HD digital wall and vitrified tiles with matching floor tiles. The company is also offering normal vitrified tiles with nano technology. The company has received a very good response for its tiles from the market.

Strong Distribution Network And Increase In Brand Visibility To Aid Growth

To ensure that the products are made available across the length and breadth of India, Cera has increased its distribution network from 600 dealers and 5,000 retailers in 2011 to 1,000 dealers and 10,000 retailers in the year 2012 to reach out to the unexplored regions of Tier-II and Tier-III cities.

To increase brand visibility, the company has launched Cera Style Studios in Ahmedabad, Bengaluru, Chandigarh, Kolkata, Cochin, Hyderabad and Mumbai.

Cera Sanitaryware has opened Cera Bath galleries in different towns, complementing its distribution network and also gaining visibility among influencers and institutional buyers.

The ‘Cera Bath Studio’ is only a display centre of all the products the company has to offer to consumers. This allows end users as well as architects to have a closer look at the entire product range.

We feel that the company’s strong and widespread marketing and distribution channel acts a major contributing factor to the successful introduction of new and innovative products in the market.

Cera has made a conscious effort towards this end by increasing its distribution network. And with timely

RESULT ANALYSIS

� Cera posted a strong number during Q2FY13, where net sales grew by 52% year-on-year (y-o-y) to `111.38 crores on the back of approximately 20% volume growth.

� The company reported an EBITDA of `18.43 crores, a jump of 57.5% and 17.9% in y-o-y and quarter-on-quarter (q-o-q) growth, respectively. The margin was up by 50 bps y-o-y to 16.5% in Q2FY13.

� The PAT was up by 44.2% y-o-y to `11.03 crores though the margin fell by 50 bps y-o-y to 9.4% in Q2FY13 due to the jump in interest cost by 99.6% and fall in other income by 28.8% y-o-y. The higher interest cost was due to the higher working capital loan. Interest expense increased by 99.6% y-o-y to `1.64 crores in Q2FY13.

FINANCIAL ANALYSIS

Cera’s revenue has grown at a strong CAGR of 29.5% over FY10 to FY12 and is expected to grow at a CAGR of 31.2% over FY12 to FY14E. We expect the net revenue to grow by 35.1% y-o-y to `431.4 crores in FY13E and by 27.3% to `549.3 crores in FY14E owing to enhanced capacity expansion in the sanitaryware division and foray into the tile division.

The PAT of the company grew at a CAGR of 28% over FY10 to FY12 and we expect the company to continue the same momentum and grow at a CAGR of 29.3% over FY12 to FY14E, going forward. We expect the EBITDA to

capacity expansion, the company would be able to effectively market its new products in new geographies effectively. This, in our view, will improve the revenue growth of the company going forward.


grow by 36.9% to `73 crores and by 27.1% to `92.8 crores in FY13E and FY14E, respectively.

The PAT for the company is expected to grow by 33.2% to ` 42.7 crores in FY13E and by 25.5% to `53.6 crores in FY14E. With the new capacity coming on stream, the capacity utilization could be impacted to some extent in FY13E.

The growth in revenue is attributed to: a) enhanced capacity in sanitaryware from 2 million to 2.7 million by Q3FY13E and further to 3 million by January next year, b) to increase its distribution network and brand visibility c) increasing awareness for improving sanitation and d) changing demographics and lifestyle of people.

If we compare Cera Sanitaryware with Kajaria Ceramics as both companies are linked with the same drivers for demand growth, we find that they are not directly comparable in terms of product portfolios except the tiles business, which is still nascent in the case of Cera. On the PE front, the Kajaria stock is available at 17.5x FY13E and 13.2x FY14E earnings whereas Cera Sanitaryware is available at 11x FY13E and 9.8x FY14E, which looks attractive.Source: Company, Nirmal Bang Research

20.0%

27.0%

31.5%

35.1%

27.3%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

0.0

100.0

200.0

300.0

400.0

500.0

600.0

FY10 FY11 FY12 FY13E FY14E

Net Revenue And Growth%

Cera Sanitaryware enjoys a strong ROE of +25% over FY11 to FY14E. The company also has a D/E ratio of 0.4x in FY13E and FY14E, which is quite manageable according to us.

Source: Company, Nirmal Bang Research

18.8% 18.9%16.7% 16.9% 16.9%

10.2% 10.9% 10.0% 9.9% 9.8%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

20.0%

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

90.0

100.0

FY10 FY11 FY12 FY13E FY14E

EBITDA, PAT And Margins

EBITDA PAT EBITDA% PAT%

FY11FY12FY13EFY14E

243319.4431.4549.3

27.00%31.50%35.10%27.30%

45.853.4

7392.8

18.90%16.70%16.90%16.90%

26.532

42.753.6

10.90%10.00%9.90%9.80%

2125.333.742.3

17.714.7

119.8

4.23.42.62.3

26.50%25.60%26.90%26.50%

FinancialsYear Net Sales

(` Cr)Growth

(%)EBITDA

(` Cr)EBIDTAM

(%)PAT (` Cr)

PATM(%)

EPS(`)

P/E (x)

P/B(x)

ROE

Source: Company Data, Nirmal Bang Research

VALUATIONS AND RECOMMENDATIONS

The company’s outlook remains quite favourable on account of enhanced capacity in the sanitaryware division, gaining market share through growing brand popularity, increased distribution network, strategy to launch new products, leveraged distribution network through the launch of tiles as well as other bathroom-related products and high growth in the industry.

At the current market price of `415 per share, the stock of the company is trading at a PE of 11x FY13E and 9.8x FY14E. The EV/EBITDA of 6.2x and 5x in FY13E and FY14E, respectively. The stock looks attractive from a long-term investment perspectivE

TAXfree

THE LURE OFTAX-FREEBONDSTax-free bonds are a popular investment

option in the country owing to the

taxation advantage they offer

ax-free bonds are tax free, that is, the interest earned on the bonds are exempted from taxation. This feature of the instrument makes it highly attractive for individuals from the higher

tax bracket or for institutions as well as corporates. Tax-free bonds are issued mostly by public sector entities. These bonds are issued with the purpose of raising funds for infrastructure development by the government of India.

FEATURES OF TAX-FREE BONDS

The income by way of interest on tax-free bonds is fully exempt from Income Tax and shall not form a part of the total income as per provisions under section 10 (15) (iv) (h) of the IT Act. Since it is backed by the government of India these companies are mostly highly rated and have a kind of sovereign guarantee attached to it, which makes it a very attractive investment avenue.

The bonds are listed on stock exchanges and thus provide liquidity as well. With the expected rate going forward, these bonds may find a lot of buyers on the exchange.

As per provisions under section 2 (29A) of the IT Act, read with section 2 (42A) of the IT Act, a listed bond is treated as a long-term capital asset if the same is held for more than 12 months immediately preceding the date of its transfer. Under section 112 of the IT Act, capital gains arising out of the transfer of listed bonds shall be taxed at 10% without indexation or at 20% with indexation.

Individuals, HUF, NRIs investing up to `10 lakh will be considered in the retail individual category compared to a limit of `5 lakh in the last financial year.

T

HOW TAX FREE BONDS WORK

Let us see how these work in case of an individual in 10%, 20% and 30% tax bracket by taking rates offered for an individual for 10 years and 15 years tenure in FY11-12. Last year there were five companies, which issued tax-free bonds during December ’11 to March ’12. Rates offered varied based on the reference G-Sec rate and was in the range of 8.13% to 8.22% for individuals for 10 years and 8.30% to 8.35% for individuals for 15 years.

As per the Notification given by Ministry of Finance(NOTIFICATION NO. 46/2012 [F. NO. 178/60/2012-(ITA.1)], DATED 6-11 2012)

National Highways Authority of IndiaIndian Railway Finance Corporation LtdIndia infrastructure Finance Company LtdHousing and Urban Development Corporation LtdNational Housing BankPower Finance CorporationRural Electrification Corporation LtdJawaharlal Nehru Port TrustDredging Corporation of India LtdEnnore Port LtdTotal

List Of Companies And Issue Size Allowed To LaunchTax-Free Bonds:

10,00010,00010,000

5,0005,0005,0005,0002,000

5001,000

53,500

Public Sector Entities Aggregate amount(in ` Crores)

Tax Free Interest Rate offerPre Tax returns for 30% Tax BracketPre Tax returns for 20% Tax BracketPre Tax returns for 10% Tax Bracket

Let’s Consider 8.13% And 8.30% For Our Example:

8.30%12.01%10.45%

9.25%

8.13%11.77%10.24%

9.06%

Tenure 10 Years 15 Years

Given that four months are left in the financial year, there will be a flurry of tax-free bond issues. A person seeking investment in tax-free bonds must read the Prospectus carefully and look at the rating of the company apart from the rates on offer (which would be more or less similaR).


Contact At: 022 3926 9140,e-mail: [email protected]

THINK OUT OF

THE BOX

Balanced schemes and monthly income plans are two options that are giving higher returns as compared to traditional instruments like FDs and

insurance policies

ndian investors who have the tendency of putting their money into traditional products such as bank fixed

deposits and insurance policies need to change their investment pattern.

In the current scenario where inflation has remained at higher levels in the past four years, money put in traditional products has given negative real rate return.

I Therefore, it is time to consider products that are less risky and can give sufficient returns over the long term. Investors can look at investing in ‘balanced schemes’ and ‘monthly income plans (MIPs)’ to reap better benefits compared to other financial products available.

The main reason why investors should look at balanced mutual fund schemes and monthly income plans is



like other pure equity funds, these funds also invest 65% of the total corpus in stocks from the equity markets as long term capital gains are not taxed.

Bonds add stability to a portfolio during market downturns and volatile periods, while company stocks provide growth.

Since the return on different types of assets rise and fall at different times, the risk is usually lower in balanced schemes than in pure growth or income schemes.

In current times when interest rates are likely to come down from high levels, balanced funds might help investors to get comparatively decent inflation adjusted returns for the next two-three years.

Below are few balanced mutual fund schemes with consistent track record that investors can look at for the purpose of investment.

Reliance Regular Saving Balanced

Despite lagging behind in the year 2011, this fund has managed to show resilience and has bounced back in a smart way. In the current year it has again entered quartile with year-to-date returns of over 30%, highest in the category. The main objective of this mutual fund scheme is to generate consistent positive returns by investing a major portion of assets in equity and a comparatively small portion in debt and money market instruments.

The fund is a bit aggressive with an exposure of over 40% of assets in mid- and small-cap stocks, but on the other hand it has managed to generate extra alpha of over 3% to 5% over shorter as well as longer duration against its category.

HDFC Prudence

This fund is for those investors who wish to take minimum risk and generate better returns. However, the performance of this fund has been subdued this year. Despite being a balanced scheme, this fund has managed to give annualized returns of over 20% since it was launched in the year 1994.

During the rally in the year 2009 this balanced fund managed to give returns of around 85%. However, in the year 2011, it was unable to repeat a stellar performance like in the past.

Co-managed by Prashant Jain known for his superior fund managing ability, this mutual fund takes some aggressive calls and in the past has paid off its investors quite handsomely. But with solid history of outperformance it will be sooner than later that this fund will rebound.

Tata Balanced

One of the oldest schemes from the balanced category, Tata Balanced has been giving steady returns over a period of time.

In the past five years despite giving negative returns in the years 2008 and 2011, it has beaten the benchmark returns by decent margins.

Even in the year 2012 it has had an impressive run and has given a year-to-date return of over 30%, one of the highest in the balanced category. The fund is mandated to have 75% of exposure in equity and remaining in debt.

Even in the equity side, fund managers of the balanced fund at Tata Mutual Fund use a bottom up approach and stay invested in quality stocks of companies such as HDFC, ICICI Bank and Tata Motors in the

because these mutual funds are likely to benefit from the fall in interest rates. We have seen interest rates surging in the past few years and now fund managers say they have peaked out and will start falling.

Both the funds - balanced as well as MIPs - invest a large portion in debt securities. And with the fall in interest rates the net asset value (NAV) will surely rise.

Mentioned below are certain categories and mutual fund schemes that investors can consider from an investment perspective.

BALANCED SCHEMES

As the name suggests, these funds are balanced in nature and invest the corpus in a mix of equity and debt securities (largely government securities and bonds). Though they do not give returns like other pure equity funds, they offer some stability with lower risk.

Typically, balanced schemes aim to cut risks that are often associated with investing in stocks by having a stake in both equity as well as the debt markets. It completely depends upon fund managers of mutual funds to exploit market conditions and buy the best class of assets at every feasible opportunity before them.

By mixing stocks and bonds, a balanced scheme is likely to give a return somewhere in between those stocks and bonds.

In the last one year on an average these funds have given returns of nearly 20% against CNX Nifty which gave returns of around 22% for the same period.

In normal conditions, balanced schemes invest around 65% to 80% of their portfolio in equities alone. Just


portfolio, which has helped the performance of the fund.

MONTHLY INCOME PLANS (MIPs)

Many investors might be aware of debt and equity funds, but very few know that monthly income schemes also know as MIP is one category which gives regular pay-outs to investors. These schemes primarily invest in debt instruments with 20% in equity, giving that extra dash of returns to the investors.

Monthly income plans invest predominantly in interest-yielding debt instruments such as commercial papers, certificate of deposits, government securities and treasury bills. Debt investments ensure stability and consistency, while equity instruments in the portfolio are meant to boost returns. MIPs are affected by interest rate changes in the economy (since a majority of investments of this fund are in debt instruments).

Therefore, when interest rates rise, this fund does not deliver superior returns. But when interest rates are expected to fall, the net asset value (NAV) of monthly income plans tend to increase.

MIPs are debt funds and hence taxation is the same as debt funds. If you sell fund units before a year and there is a gain, short-term capital gains (STCG) tax is applicable - the net gain will be added to current taxable income and the tax amount will be levied as per your personal income tax slab. If an investor sells the units of the MIP after a year and there is a gain, a long-term capital gains (LTCG) tax is applicable - 10% tax will be levied (without indexation benefit) or 20%

tax with indexation benefit, whichever is lower.

For conventional investors who are looking for better returns than bank fixed deposits, MIPs could be a good investment option. Although monthly returns cannot be guaranteed, one can look for steady income through pay outs in this fund.

Reliance MIP

When it comes to assets in the ‘MIP category’, no one can come closer to this Reliance fund, which manages a corpus of over `3,400 crore.

This mutual fund scheme primarily aims to ‘generate regular income in order to make regular dividend payments’. Its secondary objective is ‘growth of capital’.

The Reliance MIP scheme sticks to its 20% limit on the equity side and if we go by the past history of this mutual fund scheme, we find that this fund has shown some good performance in previous years.

Even in the debt side, the fund manager manages the fund aggressively with major investments in non convertible debentures, government securities as well as zero coupon bonds.

Across the time frame of one, three and five years, the fund has managed to give returns over the benchmark. In the current year-to-date it has given returns of 15.15%.

DSP Black Rock MIP

This is another impressive fund. But it invests up to 25% in equity and sometimes in order to get better returns it takes some aggressive equity holding.

The remaining 75% is invested in

debt funds. Its active equity management has led the fund to deliver double digit returns in the last one year. In the last one year DSP Black Rock MIP has given returns of 15% and the fund has given returns of 10.01% on an annualized basis since it was launched in the year 2004.

Looking at the fund’s portfolio, it seems that it plays safe with the debt portfolio. Credit risk is minimized as it has high quality debt papers which are rated AAA and AA+.

As said earlier, the fund manager tends to manage the equity portion of the portfolio in a relatively passive manner. This fund has also invested in some offbeat stocks that are from the mid-cap segment.

Birla Sun Life MIP II Savings 5

The main advantage of investing in this MIP fund is that, investors might not get best returns in the MIP category, but some good fund management will protect the downside during a likely fall in the equity market.

Though the one year and three year returns have been similar with the benchmark, the MIP fund has given quite an impressive return over a longer duration.

This fund will suit investors looking for a debt fund with little exposure to equity. The fund mandates to invest not more than 10% in equity and sometimes it might even get out of equity completely.

However, the fund manager of the Birla Sun Life MIP II Savings 5 takes aggressive calls on the debt side with investment in a mix of papers such as floating rate notes, debentures as well as government securitieS.


he Nifty Futures rallied more than 5% in the second half of November. The markets were buoyed

by the passage of the bill on multi-brand retail in the winter session of the parliament as well as the government’s proposal to set up the National Investment Board (NIB), which will monitor and advise ministries on expediting projects.

However, the rally in the Indian equity markets was mainly due to two factors, namely announcement by ratings agency Moody’s that India’s credit outlook was “stable” and upward revision of India’s GDP growth forecast by the global investment banking and securities firm Goldman Sachs.

In its annual credit analysis on India, Moody’s maintained a stable outlook for India with its Baa3 rating. But it maintained a negative outlook for Indian banks. Goldman Sachs announced that India’s GDP growth is expected to accelerate from 5.4% in 2012 to 7.2% in 2014. The investment bank has forecasted that the Nifty is likely to touch 6,600 points by December ’13.

In line with street expectations, India’s gross domestic product (GDP) growth fell to 5.3% in the second quarter (July-September) of 2012 -13 from 6.7% in the same quarter during the previous fiscal, on account of poor performance in the manufacturing as well as the agriculture sectors.

The Put Call Ratio - Open Interest (PCR-OI) for Nifty Options is hovering between a very narrow range of 1.11 and 0.96 since the past fortnight. The current PCR-OI stands

TTECHNICAL OUTLOOK FOR THE FORTNIGHT

at 1.05 (as on 7th December) and going forward we see this PCR consolidation to continue between 0.90-1.10, maintaining a neutral view on the market till the end of the December expiry.

On the Nifty Options front, the December series’ highest OI build up is seen at 5600PE and 6000CE, which is slowly shifting to 5800PE and 6000CE. Looking at the current Options scenario, we expect the markets to consolidate between the narrow range of 5,800-6,000 and breach of this on closing will further decide the trend of the market.

India VIX, which measures the immediate 30-day volatility in the markets, is trading between the range of 13-16 (currently at 14.50) (as on 10th December)). But going forward, we believe that it has already formed a strong base near 13.9-14.1 and we may see an upward breakout. Levels of 19 and 22 can be seen on India VIX in the coming months.

Technically, Nifty closed marginally in the green. However, the Nifty managed to close marginally above the 5,900 mark for the first time since 13th Apr ’11. Till the time 5,840 levels are intact there is a valid possibility that the Nifty may make an attempt to scale higher to the 6,050/6,100 level.

The daily chart shows that the Nifty is trading in the rising channel, indicating that the Nifty is in an uptrend. The rising channel indicates that the Nifty has a strong support of the 5,750 level for long-term positions. Short-term technical parameters indicate that the Nifty has a support of 5,700 mark, which is supported by the 50-DMA.

The weekly chart indicates that the Nifty is trading in higher top-higher bottom, indicating a potential up move in the coming trading sessions. Important oscillators RSI and MACD are in a buy mode. In the coming trading sessions, if the Nifty manages to close above the 5,950 level, then the upward trend may confirm for a target of 6,050/6,100.

In an alternative scenario if the Nifty breaches the level of 5,700 on a closing basis, then a further sell off till the recent swing low of 5,550 is likely. Traders having long positions are advised to book profits on every rise with a view to re-enter on dips or hold existing long positions and protect their capital with a strict stop loss of 5,800 level.

The Bank Nifty has confirmed the bullish breakout by closing above its recent high. The recent rise was accompanied by a sharp rise in volumes, which indicates a bullish bias and continuation of the uptrend. The index is likely to test 12,750 and 12,900 levels in the near term. There is an immediate support at the 12,120 and 11,980 levels on the downside.

OPTIONS STRATEGY: SHORT STRANGLE ON NIFTY

It can be initiated by ‘Selling 6000CE and 5800PE of the December series’. The net combined premium inflow comes up to around `70-75, which is also the maximum profit (that is if the Nifty December series expires between 5,800-6,000 levels). The break-even stands at 5,730-6,070 levels. There is unlimited loss beyond the break-even range. Traders can square off their strategy when the combined rate of the Strangle crosses the 110+ marK.

f the various approaches to investing, value investing and growth investing are the two most

widely used ones. Some are either pure value investors or pure growth investors. While Benjamin Graham’s contribution to value investing in

O noteworthy, Philip Fisher’s contribution to growth investing is equally remarkable.

Philip Fisher or Phil Fisher, as he is popularly known, is regarded as the father of growth investing. His book ‘Common Stocks and Uncommon

Profits’ is a must-read for every investor even after 60 years since it was published. In fact, Warren Buffett too recommends this book.

Phil Fisher lists out 15 criteria for growth investing that should be considered by every investor.

FISHINGFOR

OPPORTUNITIES

Growth investing is an investment strategy where the investor seeks to own shares of companies whose earnings’ growth rate is higher than the average growth rate of the industry or the overall market



market conditions. It is possible that a pure value investor may not give much attention to company and industry analysis.

There is a wide difference in both the approaches. However, for those who want to take the advantage of growth investing here are Fisher’s 15 points.

Ø Point 1Does the company have products or services with sufficient industry potential which will allow it to scale its business over the next few years?

Scalability of the business is the most important aspect and it is possible if the company has products and services which cater to the industry with higher growth potential. Higher industry potential will allow the company to grow in terms of size and revenue in the long run and thus reward shareholders of the company.

Ø Point 2Does the management have the mindset and the attitude to continuously develop products and processes which will increase the company’s growth potential even in a challenging environment or at a time when the attractiveness of the existing product and services is being exploited?

Apart from scalability, stability and survival of the company in the long run are very important. Opportunities in the industry can sustain the company’s growth for some time. But if it does not have an exceptional management, it could face growth challenges, which will ultimately ruin the company and its investors in the long run. An exceptional management will keep on inventing and exploring new products and services, which will continue to grow even after the opportunities in the sector have been exploited and thus retain their position in the industry.

Ø Point 3Is the company putting enough effort into research and development in relation to its size?

Companies that stay ahead of the competition as well as time keep on investing and undertaking research and development activities. If companies with an exceptional management team do not take enough measures to invest and innovate, then there is every chance that the company is likely to face challenges in terms of its growth and survival.

Investors should look at these fronts in terms of amount invested in R&D and track its results. They can also monitor competitors’ strategies and the results in R&D to gauge the relative performance of the company under consideration. Companies that do not innovate and invest in R&D suffer from the competition.

Ø Point 4Does the company have an above-average sales organization?

Fisher says that a strong marketer must be constantly alert to the changing desires of customers so that the company can supply what the customers desire today and not what they used to desire. Companies that have best factories, best employees, best offices but do not have good marketing, sales and distribution team and strategies to capture the market will fail to compete and thus could be a worst investment in the long run.

A good sales organization should have a good mind set to sell and market its products and build the brand in the mind of consumers, which will last in the long run and also retain its position in the industry. Ø Point 5Does the company have a worthwhile profit margin?

However, before we get to know about these points, let us understand the basic difference between growth investing and value investing.

GROWTH INVESTING

In growth investing, investors seek to own the shares of companies whose earnings’ growth rate is higher than the average growth rate of the industry or the overall market. Therefore, without paying much attention to the price they seek to buy high quality stocks or companies with good long-term growth prospects. A growth investor would rather spend more time on assessing the industry and the company’s growth prospects instead of trying to time the markets or the share prices.

VALUE INVESTING

Value investing, which derives its ideas from Graham and David Dodd ever since they first began teaching at Columbia Business School in 1928, on the other hand, involves investment in companies whose stocks trade at a value less than their intrinsic values.

Value investors actively seek undervalued stocks. Therefore, even if they find a very exciting business with good growth prospects, they still might not buy it. They give more attention to the price. They seek to buy companies at low prices. They are also known as contrarians who seek to buy some of the good companies when there are poor sentiments in the markets.

They take advantage of short-term concerns or pessimism about a particular stock in the market to invest in it for the long term. This allows value investors to buy some of the great businesses at very low prices and provide greater margins of safety in case of adversity in the analysis or


Companies which not only grow in terms of revenues but also in terms of profitability will tend to reward their shareholders in the long run. Investors who keep track of the growth of the company’s size over a period of time should also look at profitability and margins and check the company’s worth in the industry.

Companies which have paper thin margins could be susceptible to competition and adverse industry conditions. On the other hand, companies that have healthy profit margins have enough cushion to deal with fierce competition and downturns in the industry. This is good in the long run because it will ensure stability and predictability of the company’s operations, which is good for long-term investors.

A closer look at competitors’ margins could be of great help. Typically, the company with margins that are higher or near the industry average will have a better operating profile and an efficient cost structure, which will reflect the management quality of the company. On the other hand, very high margins should not be a cause of confidence as investors should check out the sustainability and susceptibility of such margins.

Ø Point 6What is the company doing to maintain or improve its profit margins?

Margins could play a major role in the overall cost structure of the industry and positioning of companies. Thus, it is important to understand margins in the future because as inflation goes up, the cost structure too keep moving higher. If companies are unable to maintain margins over time, they will eventually go out of business. To stay in the business, the companies have to keep on improving their

margins because all the other components of costs keep on changing. Companies should not only make efforts to protect their margins, but should also keep on doing internal engineering to boost them. Typically, companies resort to integration, outsourcing and internal cost rationalization to improve margins, which could be a continuous effort.

Improvement in margins could lead to superior earnings and thus lead to higher return ratios like return on equity and assets. Higher returns will reward shareholders and if the company has an asset-light business model, then it will generate a good amount of internal cash, which can be used to explore growth opportunities in the sector or can be paid back in the form of dividends to investors.

Ø Point 7Does the company have great labour and personnel relations?

Many companies fail to establish good relations with their labour and suppliers, which lead to frequent strikes and shut down of the operation. Fisher says good relation with the labour force makes a happy organization and leads to higher productivity and predictability of operations in the long run. Good relations ensure that the company is able to retain its key employees or talented people. This can be gauged from the management’s attitude towards its employees and its internal assessment policies.

Ø Point 8Does the company have great executive relations?

Like labour and employee relations, good executive relations too are equally important because executives are the ones who actually oversee or execute the affairs of the company. Typically in family-managed

businesses, which are controlled by a group of promoters, the question of relationship arises. How is the company treating its executives in terms of salaries, bonuses, stock options, etc are questions that comes to the forefront. Also, it is important to understand the flexibility and decision making powers that are enjoyed by the key executives.

Ø Point 9Does the company have depth to its management?

Depth is related to the ability of the organization to create a team of exceptional and quality people. The organizational structure should be such that it encourages executive roles, delegates authority and allows independent decision making. A management with good knowledge, expertise, experience and capabilities tends to do well in the long run.

Ø Point 10How good are the company’s cost analysis and accounting controls?

The quality of profits depends on the understanding of the cost. A company which knows its costs better is able to price its products and services better in the markets and stay fit in the competition. This is possible only if companies have enough accounting and cost controls in the sense that the company’s accounts do not just cater to the regulatory requirements, but are maintained for internal controls and costing purposes.

Ø Point 11Are there other aspects of the business somewhat peculiar to the industry involved which will give the investor important clues as to how outstanding the company may be in relation to its competition?

It is important to understand what are the critical things or aspects that are


attached to the particular industry and where the company stands on the whole. For instance, in a metal industry, integrated operations could be of paramount importance. Likewise in an FMCG industry, sales and distribution network are very important and in health care, R&D can be considered as the most important differentiator. Investors need to identify these unique aspects and assess a company’s positioning based on these parameters.

Ø Point 12Does the company have a short-range or a long-range outlook with regards to profits?

Companies that know what they are trying to achieve and where they are aiming to go will stay on course and thus attain growth. If companies have a fair idea of what they want to achieve in terms of sales and profits and communicate the same to the investors, then there will be greater predictability and transparency among investors. Fisher feels companies with a long-term view do more sensible things, instead of focusing on meeting quarterly estimates and reacting to share prices.

Ø Point 13In the foreseeable future will the growth of the company require sufficient equity financing so that larger number of shares then outstanding will largely cancel the existing stockholders’ benefit from this anticipated growth?

This is a very interesting point and something which a number of lay investors forget to pay attention to. Companies talk about huge growth in business and their future plans to achieve higher growth. But one also needs to assess if the same is going to be funded by internal resources. If higher growth in the business is funded by additional equity, then it

will dilute the interest of the existing shareholders. Even huge borrowings for growth may not be a good idea for existing investors.

Ø Point 14Does the management talk freely to investors about its affairs when things are going well but “clam up” when troubles occur?

Most investors seek information and views about companies in the industry from the management. It is important to know how frequently and reliably the management communicates with its shareholders. Managements’ view and openness to accept responsibilities and mistakes and communication during adverse situations is equally important.

It is mostly observed that when there is good news, the company’s management informs everybody. But that may not be the case when the company is going through tough times, which is why it is more important to understand the reliability of the management. Every company goes through difficult times, but companies that talk to investors even in such situations are the most investor-friendly. Ø Point 15Does the company have a management of unquestionable integrity?

It is important to know who is running the company and the integrity of the management. Even the best companies in the industry and markets sometimes go bust due to poor corporate governance. It is a fact that certain companies fail to reward investors due to the managements’ involvement in unethical activities.

The past track record of the management and the perception of the management in the civil society could

help in understanding the integrity of a company. A good management will advocate transparency and would not hide key affairs of the company. Customers, suppliers, civil society, industry body, creditors and bankers could be a way of assessing the integrity of the management.

Finally, growth investing alone may not work and it is a widely accepted fact that most investors combine both value investing and growth investing in a proportion that suits their individual style, risk appetite and other factors. Who can explain it better than legendary investor Warren Buffett who said that he is 85% Graham and 15% Fisher.

Here are a few points that could help investors understand how to combine both approaches of investing.

The debate as to which investment approach is better and has given better returns in the long run still continues. But, more informed investors take the middle path. They combine quantitative techniques and concepts like margins of safety of value investing with qualitative assessment of the industry and the company prescribed in growth investing to benefit in the long run.

The concept of GARP (Growth At Reasonable Price) to a large extent explains the combination in a much better way. Under GARP, the investor assess the growth potential and qualitative aspect of a company but when it comes to buying stocks he relies on reasonable price as sought by value investors.

GARP investors look at valuations in terms of growth. A company which is trading at a PE of ten times with a growth prospect of 20% could be a better choice as against a company which is trading at 10 PE but has growth expectations of 10% onlY.

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down fiscal deficits, etc. This is generally the worst year in terms of performance when it comes to the four-year cycle.

2nd Year of PresidencyAlthough the stock markets give below average returns in the second year of the President being in the office, the performance is still somewhat better than the first year.

The reforms that were introduced in the first year start showing results in the second year. The markets typically bottom out in the second year. So if you are an investor, this is the best time to go bottom fishing and buy stocks.

3rd Year of PresidencyThis is the year when the markets usually give maximum returns. This can be attributed to the fact that the industry has now adjusted to policy measures, there is adequate capital infusion by the government, taxes are cut and new jobs are created. Also no new restrictive policies are introduced with the fear that it may slow down the economy in the months leading up to the elections.

4th Year of PresidencyThis is the election year. There is an air of caution as the markets realize that there is a chance that there may be a new political party, which can come into power.

The returns this year are reasonable but not as much as the third year. So it would be wise to take some profits off the table at the beginning of this year.

KEY TAKEAWAYS

The first second year period of the cycle usually means weak markets and the second year period means strong markets.

Market “bottom” tends to happen in

the first half of the cycle and “top” by the end of the third year. This cycle can also be interpreted the other way round. This means that the cycle can help predict who would take the office in the next elections.

Hence, if the markets have been trending upwards in the years preceding the elections, it means the general public is optimistic about the future of the country and the voters are likely to vote back the party and the candidate who is already in power.

On the other hand if the markets are trending downwards in the years preceding the elections, it means that the public is pessimistic and they are more likely to vote for the new party or candidate.

DRAWBACKS

The main drawback is that it is a theory based on averages and hence cannot always give the same results. The cycle is not consistent. There have been cases of aberrations when markets have not followed the cycle. Thirdly, the sample size is very small since elections come only once in four years in the US. External factors such as politics, socioeconomic and international factors are not taken into account.

Remember, the Presidential Election Cylce is just another stock market indicator and should always be used in conjunction with other factors such as domestic and world economy, inflation, interest rates, GDP and most importantly investor sentiments. To build a portfolio based merely on the PEC could be detrimental to your financial health.

Many people believe in the efficacy of the PEC and many others have dismissed it as rubbish. To each his own. But one thing is for sure, it sure makes for an interesting reaD.

ast month the US went to polls and re-elected Barack Obama as the President for a second

four-year term. His re-election had a lot of implications on the stock markets there. And we are no exception since our markets too takes cues from the trends and directions of other stock markets, especially the US markets.

Therefore, if we manage to get a general idea as to how the markets in the US are expected to perform in the coming years, we can safely assume that we would move more or less in line, make informed investment decisions and build our equity portfolios accordingly.

While there are several indictors that help predict the short and medium term market moves, there is one indicator specific to the US market which helps predict the long-term trend there. It is known as the Presidential Election Cycle.

We are fresh out of the US elections and this is the perfect time to learn about this theory.

PRESIDENTIAL ELECTION CYCLE (PEC)

The PEC theory was first developed by a stock market historian named Yale Hirsch based on historical observations of a four-year pattern that the stock markets follow, on an average, corresponding to the four-year election cycle in the United States. Given below are the key observations of his theory:

1st Year of PresidencyThe stock market declines or gives the weakest performance in this year because the President who is fresh out of campaign starts implementing harsh and unpopular measures to rein in inflation, increase taxes, bring

L

other Nature may be forgiving this year, or next,

but eventually she’s going to come “M

Natural calamities not only result in loss of life and property,but they also affect the stock markets in a big way

around and whack you. You’ve got to be prepared,” said Geraldo Rivera, an American author and journalist.

Last month we saw how the greatest

superpower of the world with all the wealth at its disposal was rendered helpless and brought down on its knees by the fury of Mother Nature. We have seen this time and again in

NATURE ’SFURY



NEGATIVE IMPACT ON THE STOCK MARKETS

SILVER LINING

HEDGING AGAINST NATURAL DISASTERS ON A PERSONAL FRONT

IMPACT ON AN ECONOMY

EQUITIES | DERIVATIVES | COMMODITIES* | CURRENCY | MUTUAL FUNDS | IPOs | INSURANCE | DP# # #

QUALAT NIRMAL BANG, YOU’RE MORE THAN

JUST A BUSINESS ASSOCIATE,YOU’RE AN EQUAL PARTNER.

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Disclaimer: Insurance is a subject matter of solicitation. Mutual Fund investments are subject to market risk. Please read the scheme-related document carefully before investing. Security is subject to market risk. Please read the Do’s and Don’ts prescribed by Commodity Exchange before trading. The PMS Service is not offering for commodity segment. *Through Nirmal Bang Commodities Pvt. Ltd. #Distributors

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portfolio by cutting down on aggressive stocks and stocking up on defensive stocks such as pharma and FMCG.

their equity exposure and increase their exposure to defensives such as gold and fixed instruments.

company/industry would stand to

be an early buyer in that stock and reap rich profits.

estate rates plummet. This could be a very good opportunity to buy prime properties at rock-bottom prices with an almost sure-shot profit once people have forgotten the unfortunate event.

their valuable property against such natural calamities to help them get back on their feet. Don’t give it a miss just to save a few bucks on the insurance premium.

there is one small opening to get out if the main door is not reachable.

which may destroy your original documents.

Remember that a true investor is one who finds opportunity where others find threaT.

Date:29th November, 2012.Venue: Hotel Capitol,

Bengaluru.

LEARN THE ART OFCOMMODITY INVESTING

LEARN THE ART OFCOMMODITY INVESTING

Exchange Partner

BeyondPresent

&



BEYOND MANDIVISITS BENGALURU

Investors should make use of expert advice to take right investment decisions

As a part of its investor education drive, Nirmal Bang Commodities Pvt Ltd, in association with ZEE Business, had organized Beyond Mandi, the investor education camp at Hotel Capitol in Bengaluru on 29th November this year with the aim of educating traders and investors in the art of investing in commodities by bringing market participants and industry experts on a common platform and thus helping the former to take right decisions through sharp acumen and guidance. The panel of experts embodied Angshuman Purohit, Head – Investment Products, NSEL; Kunal Shah, Head – Commodity Research, Nirmal Bang Commodities Pvt Ltd and Rajesh Mehta, Chairman, Rajesh Exports. All of them acknowledged the growing importance of commodities as a new asset class among retail investors.

Amish Devgan, the anchor, commenced the event by introducing the panelists and explaining the objective behind the camp.

Angshuman Purohit, began the event as the first speaker. He explained about the various asset classes available to investors in India. Purohit said, “The first and the foremost of these asset classes is equity which can be routed through two ways - direct and mutual funds. Through the direct method, the investors can directly invest, buy and sell shares whereas through the mutual fund route, a professional portfolio manager manages your money in equity for a fee charged by him/her.”

Further Purohit added, “Real estate investment and gold are other asset classes available for investors. Commodity as an asset class is very new to Indian investors and now they are getting used to it. E-series of various commodities such as e-gold, e-silver, e-copper, e-lead, e-zinc, e–nickel and e-platinum is a step ahead in the same direction.” Purohit credited NSEL for introducing e–series to the Indian investors.

He then threw light on their flagship product e-gold. He said the growth pattern in e-gold is fruitful and, hence, it is quite beneficial for retail investors. E–gold has no hidden costs and can be converted into physical form and hence investors have benefited nearly 100% due to price appreciation. He also gave an overview of other e–series products.

Angshuman Purohit Head of Investment Products at NSEL

Amish Devgan, Commodity Editor andAnchor at Zee Business

Mr Angshuman Purohit holds an MBA in Finance and Marketing from XLRI. Prior to joining NSEL, he was Product Manager for non-precious metals segment at NCDEX for four years. He brought about many innovative developments in first-of-its-kind exchange-traded derivative on ferrous metals.


Kunal Shah, Head of CommodityResearch at Nirmal BangKunal Shah serves as the Head of Commodity Research at Nirmal Bang. He closely tracks precious metals, base metals, energy and agricultural commodities. He addresses seminars on the outlook of commodities across the country. He appears regularly on business channels. He is also sought by the print media and wire services, on a regular basis. Prior to Nirmal Bang, he was associated with Motilal Oswal Commodities Pvt Ltd, where he managed the research desk.

Taking the discussion forward, Kunal Shah talked about brokers’ perspective and what commodity market economics has to say in the short term. He also mentioned about the effect of the rupee movement on the commodity market.

He said, “We were witnessing a decline in prices of all commodities in the last few months. But now we are hearing positive news from everywhere. To name a few, gold and silver prices are increasing. There is positive news from Europe. There are chances of a cyclical upturn in the ongoing Chinese economy slowdown. Fiscal cliff is a worry and Bank of Japan plans to open its bond purchase programme in the first quarter. All this will infuse abundant liquidity in the future.”

He elaborated on the ongoing debt crisis world over and explained how printing notes leads to depreciation in the currency which further leads to reduction in the overall debt.He urged investors to not trade in commodities according to news in the market. He advised them to be smart traders and not news followers. Only then would they be able to earn profits.

At the end of his talk, he gave a special outlook on commodities such as gold, silver and crude oil, agricultural commodities like black pepper, jeera and soya bean and base metals like nickel, copper and zinc.

Rajesh Mehta is responsible for the overall functioning of the company. He is also in-charge of the finance and marketing functions of the company. He has an experience of over 20 years in the functioning and management of the jewellery trade and has travelled extensively within India and overseas for establishing a strong network in the industry. In addition to this, he is a member of the export trade advisory committee of the Bengaluru Jewellers Association. He is also the president of the Karnataka Jewellery Exports Association.

The final speaker for the day was Rajesh Mehta. He spoke about gold as an asset class and the future of gold in the short term.

According to him, gold is not only an asset class but also an international currency. Shedding light on the way people invest in India, Mehta said that although there are various options available like e–gold and gold ETFs, Indians still invest majorly in the physical form of gold. The reason behind this is speculative gain as well as for immediate liquidity. Also, gold is the only asset class which can be used by wearing the precious metal in the form of jewellery.

Going back in history, he explained how Indians were smart enough to understand the importance of gold, centuries ago. The government and people of western countries used to consider gold as a debt investment, but with time their views have changed and they have started investing in the yellow metal because it is a hedge against inflation as well as currency.

Ending his talk, Mehta gave an outlook on gold and said that gold is bound to increase in the long term and, hence, it is the best form of investment for us.

The event was then thrown open for an interactive question answer session with the enthusiastic audience.

The next Beyond Mandi camp will be held in the month of Januray.

Rajesh Mehta, Chairman at Rajesh Exports

the rbi is not buckling under pressure from the government...

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