The proposed safety net by SEBI is likely to curb mispricing of...

For Pr ivate Circulat ion Volume 1 Issue 74 19th Nov ’12

The proposed safety net by SEBI is likely to curb mispricing of IPOs and offer relief to investors

It’s simplified...Beyond Market 19th Nov ’12 3

DB Corner – Page 5

The Battle ContinuesWith no solution in sight, the debate over the abolition of Cash Reserve Ratio rages on – Page 6

Hope On The AnvilHigher earnings growth next year could lend support to the markets in the medium term – Page 9

For A Safer TomorrowThe myopic problems notwithstanding the benefits of implementation of Basel-III norms will be felt only in the long term – Page 12

Restoring FaithThe proposed safety net by SEBI is likely to curb mispricing of IPOs and offer relief to investors – Page 14

Bridging The Digital DivideDigitization is hoped to provide a level-playing field to all players, thus boosting their revenues – Page 18

Sweet ProspectIf the recommendations made by the Rangarajan committee on decontrol of sugar are implemented, they could transform the beleaguered sector for good – Page 22

A Burden Off The ShoulderHome buyers can prepay their loans through an SIP and avoid the huge interest burden as well as enjoy the benefits of reduction in the tenure of the home loan – Page 25

Defying LogicDespite economic slowdown, real estate prices have risen tremendously as developers are going against basic economics and keeping rates high – Page 28

When Turbulence Strikes...No one but Kingfisher Airlines alone is to be blamed for its own downfall. Yet, it teaches interesting lessons that its peers can avoid – Page 32

Phillips Carbon Black Ltd: Black WonderExpansion of its power business along with focus on exports will help the company to report better performance in the coming times - Page 35

In It For The Long HaulSandesh Kirkire, CEO Kotak Mutual Fund, believes in getting small things right and participating in the change and hopes to be able to introduce financial literacy in schools and colleges – Page 40

High FiveICICI Prudential Discovery, SBI Magnum Emerging Business, Quantum Long-term Equity, Reliance Banking Retail and Franklin Build India are five funds that have given superb returns over the long term – Page 44

Important Statistics For The Fortnight Gone By – Page 47

Safety FirstHedging is an important tool that investors can employ to diversify risk – Page 49

Volume 1 Issue: 74, 19th Nov ’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, Afsana Tamboli, Shreelatha G.

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

HEAD OFFICE Nirmal Bang Financial Services Pvt LtdSonawala Building, 25 Bank Street, Fort, Mumbai - 400001 Tel. 022-3926 7500/7501

CORPORATE OFFICE B-2, 301/302, Marathon Innova,Off Ganpatrao Kadam Marg,Lower Parel (W), Mumbai - 400 013Tel: 022 - 3926 8000/8001

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

It’s simplified...Beyond Market 19th Nov ’124

Realizing the impact of the underperformance of several initial public offerings floated in the Indian stock markets, SEBI recently proposed a safety net mechanism to reinforce investor confidence and bring about transparency in the markets. It also introduced rules to reject draft offer documents. This is also to ensure quality disclosures during the IPO process. The impor-tance of these regulations and their likely impact on investors has been featured in the cover story.

Among other stories we have covered topics like the debate over the abolition of the cash reserve ratio between banks and the Reserve Bank of India, factors that could lend support to the Indian stock markets in the medium term and the Basel III norms and its impact on banks and investors.

We have also covered the topic of digitization, which is likely to create a level-playing field for players in the sector, the transformation that the sugar industry could see if the recommendations made by the Rangarajan committee on decontrolling of sugar are put into action, the lessons to be learnt from the downfall of Kingfisher Airlines and the reasons for high realty prices despite the slowdown in the economy, among others.

The Beyond Work section in this issue features Mr Sandesh Kirkire, Chief Executive Officer at Kotak Mutual Fund where he talks about his journey till now and how he aspires to introduce financial literacy in schools and colleges. Also, read about ‘hedging’- an important tool to control and reduce risks involved while investing – in this issuE.

Tushita NigamEditor

Reinstating Trust


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.

ollowing months of intense campaigning by Barack Obama and Mitt Romney, the Americans

settled the question of which man will lead the United States for the next four years by electing the nation’s first black President for the second consecutive term.

However, he faces a series of challenges in the second term. And foremost among them is preventing the government from plunging into the fiscal cliff, a combination of lower spending and higher taxes that is expected to extract a huge amount from the economy. Till there is clarity on the same, uncertainty prevails.

Global markets too took a beating owing to concerns about the outlook of the economy in the US as well as

F the Euro zone. European Central Bank President Mario Draghi also cautioned that the economic activity in the Euro zone may remain weak.

On the Indian front too, the Reserve Bank of India (RBI) left key interest rates unchanged but reduced cash reserve ratio (CRR) by 0.25% to pump liquidity into the economy, while indicating that it may ease monetary policy further only in the March quarter as worries over inflation persist.

Although results of India Inc were in line with expectations, those of PSU banks and metal companies were below expectation.

The Indian stock markets look good in the coming fortnight. The Nifty has support at the 5,680 level and 5,600

level, thereafter. Market participants can look at buying around these levels. Stocks like State Bank of India (LTP: `2,190.65), Yes Bank Ltd (LTP: `424.75), Tech Mahindra Ltd (LTP: `946.60), Rural Electrification Corporation Ltd (LTP: `227.95), Aurobindo Pharma Ltd (LTP: `178.45), Anant Raj Industries Ltd (LTP: `96.15), Atul Ltd (LTP: `429.70), DCW Ltd (LTP: `22.90) and Tata Global Beverages Ltd (LTP: `168.90) look good on declines for investment and trading purposes.

In the coming fortnight, all eyes will be set on the month-long winter session of the Parliament, which will begin on 22nd NovembeR.

The Indianstock markets

look good in thecoming fortnight.

Sensex: 18,670.34 Nifty: 5,683.70

(As on 12th Nov’12)


TIME LINE FOR CRR AND INTERNATIONAL SCENARIO

In the early 1990’s CRR used to be as high as 15% and SLR used to be as high as 38.5%. Thus, interest rates were higher in the system and banking as a business was less profitable. But, the RBI used to pay interest on CRR to banks.

Till 2007, the RBI could raise CRR to a ceiling of 20% and the floor was kept at 3%. However, post the 2006 amendment to the Banking Act, there is neither a floor nor a ceiling on CRR. The RBI also stopped paying interest on CRR in 2007.

Now again in 2012, news reports suggest that the finance ministry is pushing for the RBI to pay interest on CRR to banks.

While the rationale for the ministry is

that banks will transmit the benefits to the customers in terms of lower interest rates, the RBI says that apart from giving liquidity cushion to the banks, CRR is an effective tool with the central bank to manage liquidity in the system, and it may not let go such a tool.

A committee on banking sector reforms called the Narasimham Committee had in 1991 acknowledged that high reserve ratios act as a hindrance to the banking sector and had sugessted a gradual reduction in both CRR and SLR. Among global counterparts, UK, Canada, Sweden, Australia and New Zealand do not have the CRR system in any form. In USA, there is a graded system i.e. small banks do not need to maintain any CRR with their central bank, while big banks need to maintain a CRR deposit according to

their size.

While each economy has its own dynamics, the RBI as a regulator has done a fair job in discharging its responsibilities over the years.

It has somewhat ring fenced India from the worst of the global financial crisis of 2008. This, therefore, strengthens the view that one cannot ignore or doubt the credibility of CRR as mandated by the RBI.

THE MOOT POINT

Even if CRR is required, why should it be on banks alone? There are a number of institutions that raise funds from the public, like insurance companies, mutual funds and NBFCs. Hence, CRR should be applicable to all. This is a moot point. See the following table for more views and counter views.

VIEW

CRR is a NPA (non-performing asset) for banks and affects their profitability.

CRR is not applied to insurance and other companies who are mobilizing deposits from the public.The pinch of high lending rates which the customers are facing is the result of CRR.If the RBI can’t do away with it, it should at least pay some interest on CRR since banks pay their depositors.Since banks already have to deposit 23% of their money in government bonds as Statutory Liquidity Ratio (SLR), there is no point in having CRR.Open market operations are used for credit control and liquidity management.

Like any other cost, it is a regulatory cost for banks. Banks can pay less interest rates to depositors and demand more while lending and maintain profitability.Not all institutions can mobilize cheap funds in the form of savings and current account.There are many reasons for high interest rates and CRR cannot be the only prime reason.If RBI pays for CRR, it cannot be deemed to be a monetary tool in the hands of the RBI.CRR was meant for preventing banks from going insolvent.

CRR can be used for credit control in the system.

COUNTER VIEW

IN A NUTSHELL

As can be seen from the mentioned argument, the debate over the abolishment of Cash Reserve Ratio is by no means conclusive. While some may argue that Cash Reserve Ratio and Statutory Liquid Ratio as concepts are arcane subjects, an equally strong argument emerges from proponents of such reserve ratios. But for now the subject is fit for serious discussion by commercial as well as central bankers, and all those who are connected with the financial sector in any manner whatsoeveR.

movements. However, the earnings cycle is a lagging indicator. This means that the markets largely move ahead of the earnings cycle. If one keeps this in perspective, there is a fair chance of gauging the direction of the markets or tracking the movement of the broader market.

In fact, during the recent economic downturn witnessed in India, there were significant downgrades of the Sensex earnings.

The Bloomberg consensus earnings estimates show that research houses were expecting Sensex earnings for the current fiscal (2013) to be about `1,490 per share in April ’11. And owing to vigorous downgrades in over a year, Sensex earnings per share estimates stand at about `1,270 per share, almost a 15% downgrade in

HOPE ON THE ANVILHigher earnings

growth next year

could lend support

to the markets in

the medium term

he political environment in India has been uncertain since quite some time. However, a host of

measures initiated by the government have brought relief to the tumultuous markets. These include reforms announcements, rate cuts by the Reserve Bank of India (RBI) and appreciation of the rupee.

Also, indicators such as Index of Industrial Production (IIP), inflation and purchasing managers index, among others, have painted a relatively better picture. The icing on the cake is the bottoming out of earnings downgrades.

There is a consensus in the markets that upgrades have begun and could accelerate further in the coming months. However, some market

T

experts and analysts are of the opinion that there is still scope for further downgrade in earnings.

POOR EARNINGS, POOR MARKETS

There is a strong relationship between earnings cycle and stock market



support to the markets.

The additional liquidity in the absence of any attractive alternative and the fact that countries like the US, Europe and Japan continue to hold near zero interest rates, has helped emerging markets like India to attract money into the country.

Even corporates are now finding it relatively easy to raise cheaper funds. This has come as a positive deployment for many companies seeking to address the liquidity issue and save interest costs as it could ease out the pressure on earnings.

As per market data, India has already received over $16 billion in the form of FIIs and there is hope of attracting more. Not only that, the recent announcement of reforms, particularly foreign direct investment (FDI) in key sectors has increased the hope of more inflows into India in the coming months in the form of FDI as a number of companies have already started talks with foreign partners as well as companies.

What is apparent is that liquidity is improving and the sectors and industries that were suffering owing to paucity of funds can hope for better days ahead, which will eventually reflect in the earnings of companies in the coming months.

At some point in time analysts will also take note of the same, which will propel earnings upgrades.

Additionally, we have seen the government addressing issues plaguing distressed sectors like infrastructure, aviation, power, oil and gas apart from restructuring of State Electricity Boards (SEBs), which is good news because it will, to some extent, help these companies to return to normal conditions and thus help report better earnings.

Today, several companies derive their revenues from these distressed sectors. But due to lack of work and poor execution, the companies have taken a heavy beating. Companies in the downstream have seen their projects stuck in between.

Additionally, there is a huge pile up of inventory and receivables. This explains the increased need for working capital. Hence, companies have turned to banks for funds to run their businesses.

If bigger sectors like power, capital goods and construction get revived, there is a fair chance that it will create a conducive environment for others as well. This will subsequently have a positive impact on ancillary sectors as well as sub sectors, including the services sector.

SEEDS OF OPTIMISM

A broad-based recovery in earnings cannot be ruled out at this point in time as enough positive triggers are visible. At the broader level, the intensity of the downgrades is changing favourably.

Today, among the BSE 100 index companies there are 15 upgrades as against 20 downgrades, reflecting that the ratio is changing and upgrades are relatively higher. This also shows the improvement in street’s expectations. Also, presently upgrades are more broad-based and cover different industries and sectors. While the situation is improving, it is still too early to call it a turnaround. That’s because we will have to see more upgrades than downgrades. The good news, however, is that no real downgrades are taking place for the current financial year.

Interestingly, the market has started looking at the next financial year with

earnings estimates.

This was largely due to the poor economic conditions, lower spending and industrial slowdown. Also, higher interest rates and depreciation of the rupee added fuel to the fire. Slowdown in the global markets also supported the downgrades as large number of companies derive their earnings from the export markets.

However, the good thing is that earnings downgrades have stopped and the intensity of the same has moderated in the last few months. In fact, since June and July this year there have been no major downgrades as a result the earnings curve has stayed flat. Not just at the Sensex level, but at the broader level too, there is positive news.

According to market data, around September ’11 there were about five upgrades for every 20 downgrades among the BSE 100 companies. This shows that pressure and intensity of the downgrades was quite high around a year ago.

THE EARNING POINT

Starting 2012, the markets were looking to the RBI and the government for some relief. However, nothing turned out as expected. The political crisis in the country and policy log jam coupled with an extended pause by the RBI gave no opportunity to the markets to improve the earnings. However, the wheel has turned.

Despite the risks associated with the gloomy economic outlook for the world economy and the markets, there is room for optimism. And the biggest factor is the infusion of liquidity by the world’s largest central banks such as Europe and the US, which has helped in providing the required monetary and sentimental

surprised the street on the higher side.

Though this quarter cannot be called as a huge beneficiary, there is enough reason for many to say that the earnings downgrade cycle is over. On the broader level, the market is expecting this quarter’s earnings growth to be in the region of 12% to 15%. And even if we are able to clock 8% to 10% growth in earnings for the entire financial year, the numbers will still look good and support valuations of the marketS.

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.

Contact Person: Gaurav Mohta - 07738380299 & Nilesh Sonawane - 07738380027 Address: B-2, 301/302, 3rd Floor, Marathon Innova, O�. G. K. Marg, Lower Parel (W), Mumbai - 400013.

BSE SEBI REGN No. INB011072759, INF011072759 & INE011072759, NSE SEBI REGN No. INB230939139, INF230939139 & INE230939139 DP SEBI REGN. No NSDL: IN-DP-NSDL-136-2000, CDS(I)l: IN-DP-CDSL-37-99, AMFI REGN. No. arn-49454 NCDEX REGN. NO. 00362, FMC Code-0075, MCX REGN. No. 16590, FMC Code-MCX/TCM/CORP/0490, MCX SX-INE260939139, PMS-INP000002981

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

Registered Office: 38-B, Khatau Building, 2nd Floor, Alkesh Dinesh Mody Marg, Fort, Mumbai - 400 001. Tel: 39268600 / 8601; Fax: 39268610, Corporate Office: B-2, 301/302, 3rd Floor, Marathon Innova, Off Ganpatrao Kadam Marg, Lower Parel (W), Mumbai - 400 013. Tel.: 39268000 / 8001 Fax: 39268010

www.nirmalbang.com


a more positive tone as the market experts have started upgrading their estimates for financial year 2014 more aggressively than before. The experts are expecting the earnings per share on the Sensex to be about `1,400-1,450 in the financial year 2014, which is much better than their earlier estimates.

Even at a conservative estimate of `1,400 earnings per share for the next financial year, the market is expecting next year’s earnings growth for the

Sensex to be in the region of about 10% to 11%, which is quite good to start with and near its historical average. Also, this could provide some support to the recent market rally to sustain in the coming months.

In fact, things have already started rolling. The results of the second quarter ended September ’12 are already out and outlook from companies have been encouraging. The companies have been reporting better numbers and many have

surprised the street on the higher side.

Though this quarter cannot be called as a huge beneficiary, there is enough reason for many to say that the earnings downgrade cycle is over. On the broader level, the market is expecting this quarter’s earnings growth to be in the region of 12% to 15%. And even if we are able to clock 8% to 10% growth in earnings for the entire financial year, the numbers will still look good and support valuations of the marketS.

FORA SAFERTOMORROW

The myopic

problems

notwithstanding,

the benefits of

implementation of

the Basel-III norms

will be felt only in

the long term

part from the pressures of a slowing economy, high inflation and a monetary authority that

is refusing to cut short term interest rates at least for now, there is another major issue that is giving Indian bankers sleepless nights.

Come January ’13 and the RBI regulations on capital requirement for Basel III will be implemented. But what really is Basel III and are Indian banks really prepared to meet these norms? These questions are causing quite a stir among bankers and shareholders alike.

Let us take a closer look at Basel III and figure out its expected impact on

A Indian banks and retail investors. WHAT IS BASEL III AND WHY DO WE NEED IT?

The Banking Supervision Committee at Basel has come up with a set of measures that are aimed at improving the resilience of the banking sector worldwide. These norms stipulated by the Basel Committee strive for improvement in the ability of the banking sector to strengthen its risk management systems. This will ultimately make them stronger in case the world economy is exposed to a crisis like the one in 2008-09.

The Basel III norms have essentially come into being after the

shortcomings of the Basel II regime were exposed during the recession. It was found that even the largest financial institutions were unable to assess the risks associated with sticky assets. And the credit rating agencies that have the responsibility of adjudging counterparty risks, had failed to do so.

As a result, financial institutions made ample use of the process of securitization to remove repackaged loans of asset-backed securities off their balance sheets and reduced the risk weightage of these assets. The entire banking system came under the scanner as it became clear that banks had the liberty to take higher risks by increasing their leverage.



banks is concerned, the banks in the private sector and foreign banks seem to be the most prepared to implement the Basel III norms. This is because most of these banks have a core capital that is in excess of 9%. The problem lies with banks in the public sector. As per estimates by the RBI, Indian banks need to raise a total amount of `5 trillion in capital to meet the Basel III norms.

Out of this total amount, the lion share is needed by public sector banks. India has a total of 24 public sector banks. Of these, the government of India holds more than 70% stake in five banks. It is, therefore, clear that the onus falls on the government to pump in the money to make these public sector banks Basel III compliant. RBI estimates suggest that the government will have to infuse a total of `90,000 crore into public sector banks to make them Basel III-compliant.

The government is in a quandary at the moment with the burden of high fiscal deficit on one hand and inflation on the other, which is impacting growth. In this situation, when a slowdown seems inevitable, pumping in this huge sum of money into public sector banks over the next five years seems to be a tall task. The one plausible solution could be to allow these banks to tap the capital markets to raise the required money.

This seems like a prudent thing to do in a situation like this as the government will not have to bear the burden and increase its borrowing on the one hand and on the other hand the public shareholding in public sector banks will go up gradually. This is likely to be a win-win situation as it will usher in greater transparency and build investor confidence in public sector banks.

But the reality seems far too different

from this as the government has been traditionally wary about losing control over the banking sector by lowering its shareholding. How justified it is is a subject of another debate altogether.

IMPACT ON INVESTORS

For now, it is clear that the need to increase capital will impact balance sheets of the banks. The ROE of these banks is set to erode as they will not be in a position to expand their loan books because of lack of capital.

According to estimates by credit rating agency ICRA, the increase in Tier I capital of banks will bring down the ROE from the current 18% to 15%. Though the central bank’s bone of contention is that profitability notwithstanding, Indian banks are set to become stronger due to Basel III, stock market pundits are using this as another excuse to avoid investments in public sector banks.

The reasons they cite are clear. Firstly the net worth of these banks which stands at a total of `3.52 lakh crore will be eroded by more than 50% because of the Basel III norms over the next five years. With such high dilution set to happen, it is unlikely that the ROE of these banks will improve in the short to medium term.

Besides, the problem of stressed assets that is mostly relevant to public sector banks is set to increase over the next fiscal. Rating agencies suggest that over the last two years stressed assets of the banking system (a bulk of which is because of public sector banks) have increased from close to 7% to 10%.

It is, therefore, clear that state-owned banks are slated to have a rocky ride ahead. Hence, it is recommended that you prudently chose stocks from the banking sectoR.

However, these problems did not pertain to Indian banks per se as the Indian monetary authority under the leadership of YV Reddy had maintained an iron hand over the banking system, making our banks one of the best prepared institutions in times of stress in 2008-09.

The preparedness for future crisis like situations did come up for debate at more than one occasion. As a result, the Reserve Bank of India deems it fit for Indian banks to fall in line under the Basel III regulations by January ’13 and implement the norms in a phased manner till 2018.

REQUIREMENTS FOR INDIAN BANKS

The core capital requirement or the Tier I capital of banks has been moved up from the current 6% to 8.5% to 11%. The total capital requirement of banks is also required to be higher at 10% to 13% as against the existing 9% norm. This is a major change and the first one to have come about as a fallout of the financial crisis when it was found that insufficient capital made banks vulnerable to crisis.

The capital adequacy ratio of scheduled commercial banks in India must be raised to 11.5% as against the current ratio of 9% (applicable by March ’18).

Banks are required to maintain common equity at a minimum of 5.5% as against the current 3.6% (applicable by March ’15)

A capital conservation buffer to the tune of 2.5% (from the common equity) must be added by the bank (applicable by March ’18). This is expected to be useful in times of stress in the economy.

THE PREPAREDNESS OF INDIAN BANKS

As far as the preparedness of Indian


SEBI stated that 72 out of 117 scrips that hit the markets between 2008 and 2011, that is 62% of the issues, were trading below the issue price after six months of listing. Out of the scrips that witnessed a fall in price, 55 scrips fell by more than 20% of the issue price. This eroded investor wealth considerably despite the benchmark index doing fairly good during that period. Investor sentiments might erode further if this trend persists in the markets.

Now, the proposed safety arrangement will prevent sharp erosion of money invested in IPOs. In short, the scheme assures a minimum return on the IPO.

Further, if in three months from listing, the market price of the newly listed share falls by more than 20%, over and above the fall in the broader index, the promoter will have to buy shares from the retail investor who had invested `50,000 or less, if they want an exit.

The promoter’s outlay would be capped at 5% of the issue size. The benchmark index would either be BSE 500 or NSE 500. The market index to be considered for this purpose shall be disclosed in advance in the offer document. What it means is if the scrip falls by 21% and the BSE 500 falls by 10%, then the safety net will not be triggered as the difference is 11% (21 - 10), which is lesser than the 20% needed to trigger the safety net.

Moreover, the safety net proposal is an extension of Regulation 44 of SEBI Regulations, 2009, which addresses the concept of a safety net for investors in an IPO. According to the existing regulations, “an issuer may provide for a safety net arrangement for the specified securities offered in any public issue, in consultation with its book running

lead manager (BRLM) after ascertaining the financial capacity of the person offering the safety net arrangement.” A maximum of 1,000 securities per retail investor in an IPO is to be covered under the arrangement. The buyback will be at the issue price and is to be exercised within a period of six months from the date of dispatch of securities. Thus, the safety net proposal is an extension of that regulation. But unlike the previous one, this regulation has been made mandatory.

ANALYSIS

Until a few years ago, the retail category in India was `1 lakh, which was eventually raised to `2 lakh. Since a majority of the retail portion gets subscribed at the higher band of `2 lakh and if only investors with investments of upto `50, 000 are eligible for safety net, a majority of retail subscribers would be left behind. Therefore, with some tweaking, the rule can become much more encompassing.

Also, by triggering the safety net, investors are assured of minimum returns. This gives a bond-like feature to equity-like investments. Though the market regulator is trying out aone-of-its kind initiative for retail investors and the intensions are noble, investors should know that risk is inherent to equity investments.

So far SEBI has followed the disclosure-based system, wherein the promoter discloses all risks associated with the issue and the subscriber participates or rejects an issue based on those disclosures.

But the recent cases of IPO manipulation indicate that the existing disclosure-based system has failed and something distinctive was needed to safeguard investors’ interest and route funds into the

M arket regulator Securities and Exchange Board of India (SEBI) had been

contemplating about overhauling the IPO market in India. Recently it announced two key steps in that direction. These steps include rules for rejecting draft offer documents and a discussion paper on safety net in Initial Public Offer.

Currently, the IPO market in India is near dead. So far, companies were able to mobilize only `770 crore from 19 issues this year. Many companies are sitting on the sidelines and taking a wait and watch approach. Investors have burnt their fingers by participating in the recent IPOs. Issuers and their merchant bankers are not sure whether or not they will receive adequate response from the investing community.

Even SEBI unearthed several IPOs where scrupulous promoters had set up financiers to rig IPOs with subscription money. This in a way explains the reason why investors’ sentiment is dampened. With this as background, SEBI has come out with these new measures to boost investors’ confidence and to keep away scheming promoters from tapping the markets.

SAFETY NET FOR IPO INVESTORS

In a discussion paper inviting comments from the general public

The proposed safety net by SEBI is likely to curb mispricing of IPOs and offer relief to investors


capital markets.

RULES FOR REJECTING DRAFT OFFER DOCUMENT

In order to protect the interest of investors and ensure quality disclosures during the IPO process, SEBI has drafted a framework for rejection of the draft offer document. A draft offer document would be scrutinized based on nearly 16 criteria ranging from ‘business with related parties’ to ‘complicated business models’ of the company that would make it difficult for investors to assess risks attached to the business.

SEBI has added that entities whose draft offer documents are rejected will not be allowed to access capital markets for at least one year from the date of such rejection and the same may be increased depending upon the materiality of the omissions and commissions. Following are some of the criteria on which the draft document will be scrutinized:

- A public issue will be rejected by the market regulator if the ultimate promoters are not identifiable.

- If there exists circular transactions for building up of net-worth or capital, an issue would be rejected.

- If the issuer enhances its prospects based on business with related parties, it could lead to rejection of the offer document.

- An issue would be rejected if there is a sudden spurt in the business just before filing of the draft offer document and replies to clarifications by SEBI are not satisfactory.

- The circular also says that the draft offer document can be rejected if the reason of the issue is vague and if the gap between raising funds and utilization is unreasonably long or if the business model is exaggerated, complex or misleading and investors may not be able to assess risks associated with such business models.

- An issue will be rejected if the issuer is not able to demonstrate the reason for which a loan or debt was taken prior to the draft submission and its proper utilization.

- If the object of the issue is to set up a plant and the issuer has not received crucial clearances/ licenses/ permissions/ approvals from the required competent authority, then this can become a ground for rejection of the issue.

- A change in accounting policy with a view to show enhanced prospects for the issuer in contradiction with accounting norms can lead to rejection of the offer document.

- An issue will be rejected if there exists litigation cases which the promoter conceals or the litigation is so major that the issuer’s survival is dependent on the outcome of the

pending litigation.

ANALYSIS

While SEBI has clarified that triggering of any of the above criteria may not automatically reject the offer document and will be looked at subjectively, the wordings of the circular have scared many people. It is clear that with this move SEBI is attempting more due diligence by investment bankers on promoters, their companies and their books.

However, though the SEBI has laid out the criteria on which an issue can be rejected, some of the points remain vague and are subject to different interpretations. This could lead to more altercations with the regulator, scaring away good companies from tapping the markets.

Experts are of the view that these measures would make it more challenging for bankers to bring new companies to the market. The move will also lead to a rise in litigations as unhappy promoters will approach the Securities Appellate Tribunal (SAT) against Securities and Exchange Board of India.

From investor’s point of view, the recent issues involving fly-by-night promoters have left a deep fear in the minds of the investors and something revolutionary was needed from SEBI even if it meant going back to the rule-based systeM.

regular investments keep worries away

an apple a day keeps the doctor away

SMS ‘BANG’ to 54646 | e -mail: [email protected] | www.nirmalbang.comE Q U I T I E S | D E R I V AT I V E S | C O M M O D I T I E S | C U R R E N C Y | M U T U A L F U N D S | I P O s | I N S U R A N C E | D PYour financial health is our concern.

At Nirmal Bang, it’s a relationship beyond broking...

BRIDGING THE DIGITAL DIVIDE

marked shift is expected in the revenue patterns of most media and entertainment companies

that will be digitised soon. These companies, which have been disproportionately dependent on advertising from companies across sectors, would now secure an additional source of revenue in the form of increased subscriptions from Direct-to-Home (DTH) as well as cable companies.

Thanks to the revenue-sharing clauses and abolishment of carriage fees by Telecom Regulatory Authority of India (TRAI), these companies would now have an almost steady source of revenue from

A DTH and cable companies. To understand this better, it is important to comprehend the functioning of the cable and satellite segment of the media and entertainment industry. This will help us understand better as to why long-established entertainment companies would be the key beneficiaries of the clauses presented by TRAI. Here is a lowdown on this. THE INDUSTRY Currently, more than 600 channels are uplinked by broadcasters. However, the analogue system has the capacity to carry only 90 channels, resulting in a stiff competition among

broadcasters, with each of them vying for precedence over the other .

To accommodate a given channel, multi-speciality operators (MSOs) — an entity that controls and owns cable operators - charge a fee known as carriage fee. Apart from this, MSOs also charge placement fee. By paying a placement fee, the broadcasters’ channels get better frequency band, good picture quality and visibility.

But due to the boom in the cable and satellite industry, there is no uniformity in the carriage fee. MSOs used to charge broadcasters on the basis of the location and the subscribers they had, forcing several broadcasters to cough up a large sum to MSOs to reach out to a maximum number of viewers.

It is estimated that carriage and placement fees form close to 50% of the revenues of MSOs. This created a lot of disagreement among

DigitiZation is hoped TO

provide a level–playing

field to all players, thus

boosting their revenues


BRIDGING THE DIGITAL DIVIDEhigh carriage and placement fees.

More so, it would bring in more transparency about preferences of viewers. Hence, digitization works more in favour of broadcasters. Experts believe that in the next two years, carriage fees as a percentage of total revenues for most media and entertainment companies would come down by 34% and 20% respectively. At present, over 66% homes use analogue services, while 30% are Direct-to-Home (DTH) subscribers and 4% of digital cable.

It is estimated that over 88 million subscribers, who use analogue services, would provide a strong source of revenue to broadcasters and cable companies as well due to sharing of revenues. The gradual reduction in carriage fees and increase in subscription revenues would boost the earnings of long-established media and

entertainment channels.

THE BENEFITS Experts believe that India’s pay TV subscription market is estimated to grow at a compounded annual growth rate of over 16% to `41,800 crore in the calendar year beginning 2010 to 2015. This presents strong business opportunities to long-established media and entertainment channels, which have high viewership as well as deep penetration. Not only cable and Direct-to-Home (DTH) companies are set to benefit from digitization, even broadcasters stand to gain immensely from this. Phase I of digitization ended on 31st Oct ’12 in the four metros of Delhi, Mumbai, Kolkata and Chennai.

One of the chief benefits of digitization norm for long-established entertainment companies is the increase in subscription revenues.

broadcasters and there was demand for a level-playing field for each player in the industry. Hence, the Telecom Authority of India (TRAI) proposed an arrangement wherein Multi-Speciality Operators (MSOs) would earn ‘reasonable’ carriage and placement fees from broadcasters. Also, TRAI had issued an order making it mandatory for MSOs to carry a minimum of 500 channels by January next year, with a view to give ample choice to consumers. Digitization will give broadcasters a clear picture about viewership preferences as also help them negotiate with MSOs. A location with a high preference to broadcasters’ channels could result in less carriage and placement fees and more subscription revenues. Hence, digitization would abolish the corrupt practice of under-declaration of revenues and almost near dominance of MSOs in terms of inconsistent and


The most intelligent strategy in Chess is to be ready

with the next move. Similarly, currency trading

involves moves that are a combination of knowledge

and skill, backed by years of experience.

Currency Derivatives Trading with us keeps you a few

steps ahead, always.

Registered O�ce: Nirmal Bang Securities Private Limited. 38-B, Khatau Building, 2nd Floor, Alkesh Dinesh Mody Marg, Fort, Mumbai - 400001. Tel: 3926 8600 / 01; Fax: 3926 8610Disclaimer: 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. Through Nirmal Bang Securities Pvt. Ltd. *Through Nirmal Bang Commodities Pvt. Ltd. #Distributors investment in securities is subject to market risk. investment in securities is subject to market risk

EQUITIES | DERIVATIVES | COMMODITIES* | CURRENC Y | MUTUAL FUNDS# | IPOs# | INSURANCE# | DP

Contact: 022-39268088 | e -mail: [email protected] | www.nirmalbang.com


Interestingly, in the overseas markets, most media and entertainment companies derive a significant portion of their revenues from subscription as stiff competition reduces the possibility of securing high share of the advertising pie in the media industry. Following digitization, broadcasters such as Zee Entertainment Enterprise and Sun TV Network would have a high bargaining power with multi-speciality operators. Zee Entertainment Enterprise, with its bouquet of 29 channels across various genres and presence in 168 countries, has a vast viewership of 650 million.

Also, Sun TV Network with its 32 channels across genres has a viewership base of over 95 million. Such strong reach works in favour of these companies. Since multi-speciality operators would have a bandwidth of 500 channels from January next year and the norm of carrying all channels has been made mandatory, these companies can now command a high revenue share from the MSOs. These advantages would help the companies to reduce their carriage fees meaningfully. Since all multi-speciality operators would have to ‘carry’ all channels, broadcasters

would have to pay less carriage fees and it would get reduced significantly in the coming years.

For example, Zee Entertainment Enterprise had a carriage fee of `292 crore. This is close to 45% of September ’12 quarter net sales of the company. It is expected that this would reduce to `108 crore in the coming three years. Moreover, since these companies are virtually debt-free, the increasing source of revenue in terms of subscription and low carriage fees would lift their net profits in the coming quarterS.

SWEETPROSPECT

If the recommendations made by the Rangarajan committee on decontrol of sugar are implemented,they could transform the beleaguered sector for good

lose on the heels of the reform measures announced by the government of India such as raising the price of subsidized

fuel to cut the budget deficit and opening up the retail sector to foreign players, comes news of revival of the beleaguered sugar industry, which had to bear the brunt of

CIt’s simplified...Beyond Market 19th Nov ’1222


compelled to pay fixed amount statuary to the farmers.

However, the committee for the decontrol of the sector has recommended abolishing SAP. Instead, it has suggested that companies share 70% of their sugar realization and its by-products with the farmers. This is good for both the farmers as well as the companies considering that companies can protect their downside and farmers can maximize their profits during an upturn in the industry.

In addition to this, the reform will also bring stability to farmers’ incomes because past estimates show that payouts used to be in the region of 55% to 80% of the realization, which will now change to 70% and will bring about stability.

The mills too will get the freedom to sell the by-products of sugar such as molasses to the highest bidder anywhere in the country, which will enable the company to earn higher realization for molasses, thus helping both farmers as well as the sugar making companies.

Furthermore, under present rules, the sugar companies are required to sell 10% of the sugar produce at `19.05 per kg under the government levy, which, in turn, is sold by the government at subsidized rates under the public distribution system or PDS. The government levy is much lower than the market price of sugar, thus impacting the companies negatively.

The committee has, therefore, recommended that the removal of government levy on sugar. This essentially means that the government will have to buy it at market price. If implemented, this step could alone lead to a 5% gain in realizations for sugar companies and thus lead to higher marketing. Also, the removal

of levy quota will help the sugar industry to save nearly `3,000 crore.

The panel has also recommended the removal of administrative control over non-levy sugar. This will give companies the liberty to decide their quantum of sale and the inventory they want to keep with themselves. These measures will not only boost savings but also help sugar companies to manage their finances and cash flows well.

However, it is quite possible that most of these measures may not be implemented immediately. In fact, the committee has suggested that the rationalization of sugarcane pricing and opening up of sugar trade should be implemented over the next 2-3 years in a calibrated manner.

INDUSTRY SCENARIO

The sugar industry is in a better position today not only due to the reforms but also owing to good demand-supply scenario. During the 2012-13 sugar season starting October ’12, the industry is expecting sugar production to be in the region of 23-24 million tonne. As against production, the consumption in the country for the sugar season is expected to be around the 23 million tonne mark.

Looking at the available data, we find that the demand supply situation is relatively better despite a carry-over stock of about 5-6 million tonnes from the previous year. This year the production is expected to be lower than last year’s bumper sugar production of about 26 million tonne.

Also, if industry estimates are to be believed, sugar production could have a huge downside risk given the decrease in production from states like Maharashtra and Karnataka owing to poor monsoon.

heavy regulations and cyclical nature of this industry.

Prime Minister, Dr Manmohan Singh, had formed an expert committee, under the chairmanship of Dr C Rangarajan, to examine the issues related to decontrolling of the sugar sector. The committee led by Dr Rangarajan recently presented a list of measures to rev up the sugar industry. The steps were long overdue and are hoped to bring about reforms in the heavily-controlled sugar sector.

The committee has suggested the abolishment of state-advised cane prices (SAP) and removal of regulatory control on the sale of sugar in the domestic market, of quantitative restrictions in international trade and of mandatory jute packaging.

According to credit rating agency CRISIL’s report released recently the profitability of sugar companies rated by it will increase by `600 crore in 2012-13 (refers to the financial year from 1st April to 31st March), if the recommendations made by the Committee on full decontrol of the sector are implemented.

“This represents a 50% increase in profits for the rated companies over their estimated profits under the current regulated scenario and will strengthen their credit risk profiles,” it reiterated in the report.

Let us take a comprehensive look at the recommendations and their impact on the industry on the whole.

In the current scenario, the government recommends the cane purchase price, also known as Fair and Remunerative Price (FRP) to sugar mills. However, certain states like Uttar Pradesh, Tamil Nadu and Punjab also announce SAP for sugar cane. In this scenario, companies are


Domestic sugar prices have already reacted to news of lower production and have risen to `35/kg from `29 - `30/kg in June ’12. Experts feel this could be a reversal of the sugar cycle, starting with lower production. If this continues, there could be a further decline in the production next year.

Currently the industry estimates for the next sugar season are expected to be around the same level of

production as seen last year. This has also led many industry watchers to believe that sugar prices may remain firm in the near term if consumption keeps pace and production declines over the next 18 - 24 months.

Overall, if the current scenario prevails for another year or so, the companies will not only benefit on account of reforms in the sector, but also due to improved financials.

Besides, there is a high possibility that the companies may make good money from the by-products given the high cost of international fuel, making ethanol blending much more attractive for them. Though the market is still not confident about any upturn in the industry, most of them are positive that at least the worst is behind for the sugar industrY.

ith the rapid development of infrastructure in urban centers and the

rise in real estate prices, the availability of home loans gives buyers a sense of relief! Yet, this relief also brings with it the biggest debt a person takes upon himself during his lifetime.

For instance, if a person takes a loan of `80 lakh for a tenure of 15 years, then the interest on that amount

W

Home buyers can prepay their loans through an SIP and avoid the huge interest burden as well as enjoy the bene�ts

of reduction in the tenure of the home loan

A Burden Off The Shoulder

would be as high as `83.66 lakhs. Given a longer tenure of 15 years, the interest that you end up paying on a loan of say `80 lakhs is as high as `83.66 lakhs.

However, when opting for a home loan, buyers usually want relief in the time limit to repay the loan. Instead, the double repayment is something that they usually do not expect. To avoid falling prey to double repayment, it is important to plan for the repayment of the home loan well

in advance.

Now, with the abolishment of prepayment penalties by the RBI, it has become easier to plan for prepayments. However, it must be understood that prepaying the home loan is not the only objective a person should have in mind.

This is because home loans are for relatively higher tenure and keeping a check on interest rates too becomes a part of loan planning.



earned’! But the fact is that if such surplus funds were readily available, then the question of planning for the prepayment would not arise. It is a no-brainer that if one has enough surplus funds, one would obviously try to clear off the debt he currently he has to pay.

Therefore, the way to do this is by regularly prepaying whatever one can from his surplus. While this may take a really long time to prepay the entire loan, there is another option that can be looked into. This option is to save and invest a particular amount Month-on-Month (MoM) for a given period. In simple words, it is to adopt a SIP (Systematic Investment Plan) approach to prepay the loan amount.

Currently, top banks such as HDFC, ICICI, IDBI and SBI, among others are offering floating loans with interest rates ranging between

10.25% and 10.75% for loans up to `30 lakh, between 10.40% and 11.25% for loans between `30 lakh to `75 lakh and between 10.40% and 11.50% for loans above `75 lakh.

If some amount is saved and invested at a rate which is higher than your current interest rate on home loan, the same will provide a great amount of relief in terms of repaying the home loan. Let us see how:

Let’s say Mr Suraj (age 35) earning an income of `70 lakh per annum borrowed a home loan for `80 lakh in the year 2009 for 15 years. He is currently paying an EMI of `90,928 per month. In order to prepay his home loan, he is recommended to invest `50,000 per month from his savings in an equity SIP plan for 5 years starting 2012. The below mentioned table details his inflows and outflows.

Irrespective of the type of loan - fixed interest rate loan or floating interest rate loan - switching of the home loan to another lender for better interest rate opportunities is always an option. While home loan switches may attract processing fees (usually 1% of the outstanding home loan), it will eventually result in lower interest outflows on the individual.

Also, sometimes, depending on the bank, processing fees can be negotiated upon. A person who is left with less than 10 years of loan tenure may not stand to benefit much from the switch but for someone who has a higher tenure, can benefit in dozens of ways from the switch.

Prepaying the home loan through surplus funds is the best way to reduce the debt burden as well as save a large amount on the interest outgo. After all ‘a rupee saved is a rupee

(Assumption: Income Growth Rate: 5%, Inflation: 7%)

Expenses Surplus( A - B )

Table 1: Scenario Analysis

2012201320142015201620172018

Age

A B C D E

35363738394041

Income

7,000,000 7,350,000 7,717,500 8,103,375 8,508,544 8,933,971 9,380,669

4,000,000 4,280,000 4,579,600 4,900,172 5,243,184 5,610,207 6,002,921

3,000,000 3,070,000 3,137,900 3,203,203 3,265,360 3,323,764 3,377,748

Recommended SIP@ `. 50,000 p.m

600,000 600,000 600,000 600,000 600,000 - -

Surplus after SIP( C - D )

2,400,000 2,470,000 2,537,900 2,603,203 2,665,360 3,323,764 3,377,748

Year 50,000

Table 2: Scenario Analysis

1 2 3 4 5

30,000

SIP Per Month (`)

390,633 844,063

1,370,383 1,981,312 2,690,451

40,000

520,845 1,125,417 1,827,178 2,641,750 3,587,268

651,056 1,406,772 2,283,972 3,302,187 4,484,084

Power of Compounding: The SIP investment for the amounts `30,000, `40,000 and `50,000 for a period of 5 years assuming returns of 15% are …


ACTION PLAN

1) To start an SIP of `50,000 per month from the year 2012 to 2016.

2) To continue paying the EMIs at `90,928 per month until the end of the year 2016.

3) To utilize the SIP proceeds at the end of the year 2016 to prepay the home loan.

While the SIP investment of `50,000 per month for 5 years grows to `44.84 lakh at the end of the year 2016, the estimated outstanding loan amount on the same time is ̀ 53.10 lakh. It is now recommended to use the SIP

redemption proceeds to prepay the home loan.

Hence, Suraj is now left with just `8.26 lakh (`53.10 lakhs less `44.84 lakhs) as his outstanding home loan (year end 2016). It can thus be observed that with the help of a 5-year SIP, Suraj will be able to prepay his home loan and reduce his loan burden by as much as 84%. Not only this, Suraj also ends up saving a handsome amount on the loan interest (`18.58 lakhs) along with a reduction in the total loan tenure.

CONCLUSION

With the outstanding loan amount of

In this manner, Suraj is expected to prepay his home loan entirely by the end of the year 2017, thus reducing his total tenure on home loan by almost 7 years.

There is no thumb rule in particular for planning prepayments of the home loan. It differs from person to person and loan to loan. For someone who generates sufficient surplus, he is better off utilizing those proceeds to pay off the home loan at one go. However, in a situation where one can expect higher rates on their investments, it would be wiser to save and invest the same for better returns and then utilize those proceeds for prepayment. Alternatively, in a reverse case scenario, one would be better off making regular prepayments from surplus year-on-year. Loan planning, if done properly, can save one from the huge interest burden along with a reduction in the tenure.

TAXATIONA home may cost us a handsome amount but it comes with some tax rebates too. One can get a maximum deduction of up to `1 lakh under section 80C for the principle portion of the EMIs and up to `1.5 lakh for the interest portion of the EMIs (self occupied property) and for the entire interest portion in case of a let out property. Over and above, this property becomes a long-term asset in our portfolioS.

Particulars

Current Scenario

Loan AmountInterest RateCurrent EMIInterest Paid For 3 YearsTotal Tenure Total Interest (15 years)

Amount (`)

` 80 lakh11.00%` 90,928 ` 25.26 lakh15 years` 83.66 lakh

Particulars

Recommended Scenario

Current O/s (4th Year)5 Year SIP (2012-2016)Total Tenure (NEW)Total Interest For 8.10 YearsSavings On InterestReduction In Tenure

Amount (`)

` 72.29 lakh` 48.84 lakh8.10 years ` 65.08 lakh ` 18.58 lakh 6.90 years

YOU SAVE `18.58 lakh on interest and 6.90 years on loan tenure

`8.26 lakhs at the end of the year 2016, there are two options that can be considered to prepay the home loan fully.

Option 1Either, utilize the surplus amount at the end of the year 2016 to prepay the entire sum of `8.26 lakh, expected surplus in 2016 being `26.65 lakh (Table 1 – Column E)

OR

Option 2Continue paying EMIs of `90,928 for 2017 for 10 months to prepay the entire home loan. The implication of Option 2 has been replicated below:

DEFYING LOGIC Despite economic slowdown, real estate prices have risen tremendously as developers are going against basic economics and keeping rates high



Extension Road in Gurgaon, prices have shot up by 30% to 50%. This proves yet again that real estate is very local.

As far as Mumbai is concerned, currently its real estate is among the most expensive in the world. In the Mumbai Metropolitan Region (MMR), according to statistics, a flat that cost around `27 lakh in January ’05 is now valued at `1.04 crore, showing a price appreciation of as much as 285%.

In order to justify the price rise in Mumbai, developers have started converting their existing projects into luxury homes. Many developers have raised prices up to 10% in central and western suburbs and south Mumbai.

While usually an increase in real estate price happens with respect to the rise in demand, this has not been the case with the real estate sector in India. Here, while prices have been steadily increasing, there has been a slowdown in demand.

The gap between demand and supply has increased so much so that some analysts feel there is a need for correction in prices. It is not as if demand does not exist. According to the NHB index, there is a shortage of more than 20 million homes, but affordability of homes still remains a big issue.

In Gurgaon, about 40% of ready-to-move-in apartments are lying unoccupied. Buyers cannot afford them and the investors who bought those apartments with the intention of selling them for a profit have not been able to find buyers.

In Mumbai, prices are sky high and it is almost impossible for the middle class to buy an apartment there. If a buyer wants to buy a flat in Mumbai, he must earn a take home salary of at

least `20 lakh per year to get a housing loan.

The maximum demand is for the small and mid-income home segment. But the problem is developers have been concentrating on the mid to luxury segment, which has led to a mismatch in demand and supply.

There is one city though, which is an exception to this trend. The demand for homes in Bengaluru has been healthy because developers in this city have kept prices at realistic levels. Bengaluru saw a boost in demand even for high-end properties thanks to the presence of IT professionals and executives in the capital city of Karnataka.

Pune is another city, which saw an increase in demand, although here the demand is for low and mid-income segment homes. Keeping in tune with the demand, both these cities are seeing developers launching several projects. In Chennai, while home prices have increased, new project launches seem to be far and few.

The key reason for the slowdown in demand is high interest rates charged by banks resulting in costlier home loans. High interest rates have really dampened the interest of home buyers. Lack of transparency and unfair dealings in some cases has also been acting as a deterrent for prospective home buyers.

There is an overall tendency among investors to invest in commodities such as gold and real estate whenever the equity market goes down. This was true during the economic slowdown seen in 2008. When the economy started to weaken, investors started looking for options in real estate projects to park their money in.

A bulk of the investments happened during the prelaunch stage of the

I n spite of the global and domestic slowdown in the economy, the real estate sector in India has seen a continuous

increase in home prices. In 2011 when the benchmark index, the Sensex, fell by nearly 25%, prices of residential units remained the same and in some cases even increased.

The residential real estate index prepared by the National Housing Bank (NHB) reveals that property prices have increased uniformly across the country with the exception of only a few cities.

The NHB residex is an index prepared by the National Housing Bank, which tracks the movement in prices of residential properties on a quarterly basis. Pune tops the chart with an increase of 10.5% followed by Bengaluru, Mumbai, Delhi, Kolkata and other cities except Jaipur, Indore and Hyderabad. Jaipur has seen the maximum decline in home prices of around 2.6% during the last quarter (July-September).

Interestingly, the price increase within cities has not been uniform. Real estate tends to be local. So, it is not surprising to see different micro markets within cities painting different pictures.

For instance, in the last one year or so, prices of homes in the National Capital Region (NCR), the largest residential market in India, have gone up by 11% on an overall basis. However, even within NCR, some areas have seen more price rise than other areas.

While home prices in Dwarka Expressway in Gurgaon have increased by almost 50% to 80%, on the Noida-Greater Noida Expressway and in Ghaziabad, property prices have gone up by 30%. In places such as New Gurgaon and Golf Course

Contact - Daisee Boga: +91-22-39268244, 7738068289


projects. Unfortunately, for investors, either the project they had invested in got delayed resulting in loss of money for the investor or worse in some cases, investors found out after investing that the project they had put their money into never existed.

This was because during the slowdown, several small real estate companies went bankrupt and vanished. The only proof investors had for their investment was the purchase agreement. A lot of projects also got delayed due to clearance issues or other problems such as lack of funds.

Several projects in Delhi and NCR are still under construction since 2006, though the delivery time was 42 months, with a grace period of nearly six months.

It is a catch-22 situation right now. Buyers are not willing to buy property because prices are very high and developers are not reducing prices because of lack of funds. Industry watchers say it has become a game of who will blink first.

While buyers are waiting for prices of properties and interest rates to reduce, developers are waiting for the

demand to improve. Developers have been justifying the high prices by citing increase in input costs such as steel, cement, bricks, labour and the most important raw material for real estate projects, land.

Builders in Mumbai have also been demanding a single window clearance system, because they say they have to take 48 to 53 permissions from different agencies, which results in project delays and increase in project costs. Of the above mentioned permissions, nearly 30 come from the civic body and the rest come from state as well as central government.

According to Lalit Jain, national president of Confederation of Real Estate Developers’ Associations of India (CREDAI), it takes 18 weeks to 36 weeks for the clearance of building proposals, whereas ideally it should take three weeks to four weeks.

Addressing a CREDAI conclave in Pune recently, Lalit Jain said that something like environmental clearance takes as long as two years because instead of a checklist to ensure full compliance, the clearance process is kept vague for individual interpretation by the concerned government officials.

Developers say construction costs go up by as much as 30% because of the measures they need to take to meet the environmental norms. Builders have demanded incentives or cross-subsidy as eco-friendly measures demanded by the green lobby pushes up the cost of the project to a large extent.

The blame for the slump in demand, however, lies more with real estate companies, who are defying basic economics, where the price of the product falls with a fall in demand. Experts say builders are “manipulating” the system and have raised the prices so high that it would be very difficult for them to increase it any further.

A section of experts are optimistic about a correction in property prices in Mumbai, Delhi and NCR and advice home buyers to wait till the end of 2013. One reason that could force developers to reduce prices is the high inventory of unsold properties. Developers cannot sit on so much inventory for long. This means, they will eventually have to reduce prices. Till then, both buyers and developers are adopting a wait and watch strategy to see who will make the first movE.

hey say every natural adversity brings with it lessons to learn and introspect. However, if the

adversity is consciously created or is the consequence of gross negligence, what does one learn? A person’s misery and predicaments serve as a template to others.

It is fairly obvious that the operations of Kingfisher Airlines have reached its lowest point. The airline company’s future is in peril. Some supporters say it is the capital-intensive nature of the airline industry, which has made the aviation business very expensive for Kingfisher Airlines.

However, there are others who object to this claim and blame the absolute disinterest of the company’s management to revive its operations, while leaving a host of financial institutions in the lurch, for the crisis.

Whether or not the operations of the company would be revived is a debatable question, there are

Timmediate lessons that its peers from the industry can learn and prepare themselves for any eventuality in the industry, as their fortunes are determined by several uncontrolled external factors. THE BASICS Financial experts have severely criticized the method of operating Kingfisher Airlines. Despite a market share of less than 20%, positive cash flow of ̀ 2.2 crore for FY11 (first time in the last five years) from operations, massive debt restructuring and other factors that impact most airline companies, most sectoral and financial experts perceive that the company is nearing its doom.

Since its inception in 2005, Kingfisher Airlines never made profits. Even on the operational front, the company recently showed positive operating profit. Today, since the company has already cut down on its flights - it operates less than 100 flights at present and 10 aircraft from its peak period (2008) of 570 flights and 78 aircraft, it is fairly obvious that there is little scope that the company would make enough revenues to meet even its working capital requirements and sustain its operations. There are several factors that provide currency and significance to concerns by financial experts over sustainability of operations of the company, Firstly, in an industry that demands copious amount of cash to sustain operations and fight competition, Kingfisher Airlines has virtually exhausted most possible routes of raising funds.

Despite opting for routes like Global Depository Receipts (GDRs), which didn’t fructify, preference shares, debentures and the recent rights issue

No one but Kingfisher Airlines alone is to be blamed for its own downfall. Yet, it teaches interesting lessons that its peers can avoid


options left to revive its operations. It is estimated that it is losing close to `8 crore every day due to suspension of its operations. Adding to the woes of Kingfisher Airlines is its high debt of close to `8,000 crore. It has exhausted most options of collateral.

Even the Reserve Bank of India (RBI) has asked banks not to consider Kingfisher Airlines’ brand as a collateral since it is intangible. Having lost its market share due to its poor commitment to its business from close to 20% a year ago to 3.2% in August this year, there seems to be a very slim chance of foreign airline companies evincing investment interest in the company. LESSONS Weighing these factors in mind, there are a few lessons for other airline companies to learn from this episode. a) Focus There is a clear demarcation in the airline industry in terms of offering of

services. There is a low cost carrier segment in the industry, which does not offer meals and other eatables but just the mere basics required for a journey. Then, there is the premium segment, which offers meals and other eatables.

When Kingfisher bought Air Deccan (an over-paid acquisition), it started offering eatables even in the low-cost format. And these costs ate into the bottom line of the company. Subsequently, the company decided to exit from the low-cost carrier segment. In India, if one has to be a part of the airline business, one cannot ignore the low-cost carrier segment, which forms a meaningful part of the total traffic. Its decision to terminate its operations in the low-cost carrier segment proved to be a total disaster.

Fully aware of the cyclical nature of traffic in the airline industry, its competitor Jet Airways, has always been wary of being present in only one segment. Instead, it juggled its focus between both the segments –

of `2,000 crore, the company’s financial health has not improved and yet it continues to bleed financially.

Secondly, the massive debt restructuring does not seem to have served its purpose. Unlike its larger peer Jet Airways India, which saw the salubrious impact of converting rupee-denominated loans to dollar-denominated loans in its operations to a certain extent, Kingfisher Airlines has been unsuccessful in handling its burgeoning interest expense.

Especially when one takes into account the fact that the company resorted to a massive debt restructuring, which helped it convert a substantial portion of its debt into equity. In the June ’12 quarter, the interest expense of Kingfisher Airlines as a percentage of its net sales was 127%, while Jet Airways India’s was just 5.7%. This shows that the company has been unsuccessful in servicing its debt burden.

At present, the company has very few

WHENTURBULENCESTRIKES...


w w w.nirmalbang.com


CORPORATE OFFICE: B-2, 301/302, Marathon Innova, O� Ganpatrao Kadam Marg, Lower Parel (W), Mumbai - 400 013. Tel: 022 - 39268000 / 8001; Fax: 022 - 39268010R E G D. O F F I C E : S onawala Bui ld ing, 25 Bank Street , For t , Mumbai - 400 001. Tel : 022 - 39267500 / 7501; Fax : 022 - 39267510

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.

For job openings at Nirmal Bang, visit http://www.nirmalbang.com/careers.aspx

Now, Commodity TradingIs No More A Puzzle.Commodity trading can be confusing especially if one is

inexperienced and lacks the necessary skills to trade successfully.

At Nirmal Bang, our team of seasoned analysts with years of

experience and in-depth knowledge can help you spot the

underlying clues and create the investment strategies that best

suit your commodity trading requirements.


low-cost and premium segments (Jet Airways and JetKonnect). Today, the decision of terminating its operations in the low-cost carrier segment, has worked in favour of the low-cost airlines such as Indigo Airlines as well as SpiceJet. b) Pruning Costs In a bid to provide a range of facilities right from beverages to meals, the company’s costs increased sharply. Its peers such as SpiceJet, Indigo Airlines and Jet Airways India, concentrated either on regional connectivity or price war. Kingfisher Airlines also had international operations, which ballooned its costs.

Also, it was not prompt like its peers in exiting from loss-making routes. Instead, it added routes. It was only

after the company realised it was bleeding beyond description that it announced its decision to cut down on the loss-making routes. This blew the company’s balance sheet and impacted its profitability.

According to the June ’12 quarter, the company’s total expenditure as a percentage of its net sales is 304%, while for Jet and SpiceJet, it is 96% and 98%, respectively. Gradually, the company lost cash. And as they say in the markets - sales are vanity, profits are sanity and cash is reality. The company did not pay much heed to this reality. c) Unplanned Expansion Another imprudent strategy that worked against the company was its strategy of expanding aggressively

even as it struggled to maintain its operations up and running. Today, the company has over 60 aircraft from over 35 when it started flying and there are more aircraft that are pending delivery.

Such aggressive expansion plans even when its operations have been in doldrums have taken a toll on the company. There have been incidents when the company has had to ground its aircraft due to engine problems. Also, it has cancelled flights due to poor servicing of its aircraft. These factors hurt the credibility of its brand to a large extent. Besides, the company also did not emerge as a strong player in the price war game, which most airlines gain in times of low capacity situation in the airline industrY.

Expansion of its power business along with focus on exports will help the company to report better performance in the coming times

hillips Carbon Black Ltd (PCBL) is a part of the RP Sanjay Goenka Group, which pioneered the carbon black industry in India. PCBL is the leading producer of carbon black in the country.

In fact, it is the seventh largest producer of this commodity in the world. The market share of the company stands at around 44%.

VALUATIONS ARE AT THE TROUGH (BOTTOM) OF THE CYCLE

We believe PCBL is currently trading near its historical lower valuation. Our belief is further strengthened by the following points:

P

BlackWonderPHILLIPS CARBON BLACK LIMITED


Source: Company Data, Nirmal Bang Research

0.0

50.0

100.0

150.0

200.0

250.0

300.0

350.0

Mar-02 Mar-04 Mar-06 Mar-08 Mar-10 Mar-12

/BV F (10 Y s)CMP 0.5x 0.8x 1.0x 1.2x 1.4x


The cost for the company to set up a new plant is `2 crore per 1,000 tonne, which means that for a plant with a capacity of 50,000 tonne with 8 MW power plant, the cost comes to approximately `150 crore.

Ideally the enterprise value of the company comes to `465 crore in FY12 whereas the cost of setting up a new plant comes to around `1,300 crore, which is much higher than the value of the company.

We believe that the current mismatch is due to the overall sentiment of the industry, which has impacted the performance of the company as a whole.

The company should command a higher value against the current value and this affirms our belief that PCBL is attractively placed and will bounce back once the environment becomes favourable.

Currently, a lot of issues have impacted the performance of the industry

(1) slowdown in the automobile industry, both in India and China, (2) tyre industry, which is witnessing a demand pressure (3) increased dumping of carbon black by China(4) increase in prices of carbon black feed stock, which is highly dependent on crude oil.

As a result, domestic sales of carbon black were impacted and almost all carbon black companies resorted to production cuts during the second half of the year and PCBL was no exception.


We believe multiple triggers are at the helm for a revival in the overall industry and particularly PCBL. However, the company may witness some pressure in its financial performance in FY13E before seeing an improvement in FY14E. Nonetheless, any of the below mentioned triggers can post a drastic improvement in the company’s financial performance on the whole.

the company very quickly.

demand for tyres and carbon black can reduce dumping in India.

demand for tyres by OEM (Original Equipment Manufacturers) and, in turn, lead to higher demand for carbon black.

industry can lead to higher demand for carbon black.

make the company’s product more competitive against the Chinese product.

After considering the findings of the Director General (Safeguards), the central government imposed a safeguard duty on carbon black imports from China (for rubber application) as increased imports had disrupted domestic production of carbon black. This necessitated imposition of a definitive safeguard duty on imports of carbon black (for rubber application) into India. The rate is:

(a) 30% ad valorem minus anti-dumping duty payable, if any, when imported during the period from 5th Oct ’12 to 4th Oct ’13 and(b) 25% ad valorem, minus anti-dumping duty payable, if any, when imported during the period from 5th Oct ’13 to 31st Dec ’13.

The Director General (Safeguards) had recommended safeguard duty for a 3-year period. But the revenue department set the duty for about 15 months.

We believe imposition of the duty will lead to improvement in the realization rate of carbon black as well as capacity utilization of the company. Moreover, power revenues will also witness an improvement, which will lead to an increase in EBITDA margins. However, the impact would be more visible in 2HFY13E. Prior to the duty, the price differential between domestic carbon black

-15.4%

21.8%18.4%

3.5%-3.6%

-20.0%

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

FY09 FY10 FY11 FY12 Q1FY13

d od o

Produc on (MT) % change


and Chinese imports stood at nearly 10% to 15%.

IMPROVEMENT IN THE OVERALL GLOBAL DEMAND FOR CARBON BLACK

Going forward, the overall global demand for carbon black continues to be robust with the global demand expected to grow at a CAGR of 4.6% from 2010 to 2015. Expansion plans of all tyre manufacturers in India as well as a few global majors are on track and are expected to be completed within FY13-14.

The domestic demand for carbon black is expected to grow at 7% to 8% during FY13. The demand for carbon black in the overseas markets, particularly US and Japan, have started picking up in the recent past, with China, India, and Central and Eastern Europe showing much higher demand. However, the demand in Europe may take a little longer to recover than other regions.

� Capacity Addition To Drive Growth

The company is expanding its brownfield capacity by 50,000 MTPA at Kochi, which is expected to be completed by Q2FY13 taking the total capacity to 4,71,000 MT. Along with this, the 8 MW power plant at Mundra was recently completed in Q1FY13. Going forward, the company is planning to set up a greenfield plant of 1,40,000 MT along with 25 MW power plant in Chennai (Tamil Nadu). The project is still in the initial stages and a major capex is expected to be made in FY14E. Along with this, the company is also planning backward integration in the form of a carbo chemical plant in Orissa, which is in the initial stage and is expected to be completed by FY14.

We believe that with new capacities coming on stream towards the end of FY14E, volumes are set to increase in the long run. Moreover, once the environment improves, the company will be able to derive benefit from the recent expansions which have been undertaken. Moreover, as the current scenario is not viable with a poor demand scenario, the company has kept its expansion plan of Tamil Nadu and a joint venture in Vietnam under review till some improvement is visible. We believe that Phillips Carbon Black Ltd has adopted a prudent decision considering the current scenario.

� Diversification In The Form Of Power Business To Provide Stability

While manufacturing carbon black, the production process generates waste gas, which can be burnt to generate steam and, in turn, power. As such there is no fuel cost for power

generation in carbon black manufacturing process. PCBL has set up 76 MW of power generation capacity, which is used partially for its own consumption of carbon black plant and the balance is sold to the grids.

Currently, power is sold in the open market at `2.5 per unit to `3 per unit, which translates into higher EBITDA margin of 85% to 88% for the power segment. At present about 40% of the power produced is used for its own captive consumption and the balance is sold to the grid.

Going forward, the company plans to sell nearly half of its power through the Power Purchase Agreement, which in our view would provide stability to realization from the power business.

The company has set up power plants at its existing facilities in Durgapur, Mundra, Palej and Kochi, with a total installed capacity of 76 MW. After meeting its internal requirements, power is sold in the open market. Of the total capacity of 76 MW, 8 MW was recently completed in June ’12.

There could be some dip in power revenues in FY13 as utilization rates have declined. With additional volumes from new capacities, we expect revenues from the power business (India) to increase at 30.2% CAGR over FY12-FY14E period. Similarly, we expect the power business’s contribution to total revenue to increase to 5.2% in FY14E from 3.5% in FY12.


3.8%

251.5%

39.5%10.1%

25.1% 34.0%

0.0%

50.0%

100.0%

150.0%

200.0%

250.0%

300.0%

0

20

40

60

80

100

120

140

160

FY09 FY10 FY11 FY12 FY13E FY14E

Revenue From Power Business

Revenues % increase

The company has not been able to capitalize completely on its power business because increased dumping from China had resulted in production cut in the company’s carbon black business, impacting the company’s power business rather marginally.

Going forward, however, we believe that the company will be able to witness an improvement in power revenues and will also be able to reduce the risk of cyclicality of the carbon black business.







� Better Performance By Customers To Improve Working Capital Of The Company

Tyre companies went through tough times in FY11 and FY12. Its impact was clearly visible on the company’s working capital. Increase in rubber prices for tyre companies significantly increased their cost of raw materials, thereby impacting the margins. This resulted in a significant increase in the working capital of tyre companies. This effect flowed down into the books of carbon black manufacturers as well.

However, marked improvement in performance by tyre companies will help the company to improve its balance sheet. Higher free cash flows will enable the company to reduce its debts and thereby lower its interest expenses in FY14. This will not only improve the company’s balance sheet but also enhance its profitability.

1.2

2.0

1.7

1.0

1.2 1.1

0.9

0

0.5

1

1.5

2

2.5

FY08 FY09 FY10 FY11 FY12 FY13E FY14E

Debt To Equity

186.6

-92.5

159.0

217.4

-150.0

-100.0

-50.0

0.0

50.0

100.0

150.0

200.0

250.0

FY11 FY12 FY13E FY14E

Cash Flows From Operations

CONTINUED FOCUS ON EXPORTS

Historically, PCBL had always been an exporter of carbon black, with exports contributing 20% to 25% of the total sales. However, in FY12, the company reported a significant increase in exports and exports contributed 31.85% of the total sales. The significant increase in dumping by China led the company to export more. The company enjoys lower margin in the export business as compared to the domestic business.

68.20%

31.80%

Break Up Of Sales

Domes cExport

The company’s exports are mainly based in the SAARC region and off late it has been focusing on exports to the European region. PCBL has made significant forays into overseas markets such as South East Asia and the US.

Going forward, with various capacity expansions in place, we believe the company will continue to focus more on exports. The company will continue to place emphasis on exports during FY13E to mitigate any possible situation of excess supply in the domestic markets.

20.6%

-19.7%

66.7%45.9%

-30.0%-20.0%-10.0%0.0%10.0%20.0%30.0%40.0%50.0%60.0%70.0%80.0%

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

100,000

110,000

FY09 FY10 FY11 FY12

Exports

Export (MT) % increase

BACKWARD INTEGRATION IN THE FORM OF COAL TAR DISTILLATION

Carbon Black Feed Stock (CBFS) is the main raw material used by the company at present which has to be imported. It is a residual oil, which is obtained through the distillation of crude and is subject to frequent volatilities. The price is directly linked to international crude oil prices.

20

40

60

80

100

120

140

Correlation Between CBFS And Brent Crude

CBFS Brent Crude

EQUITIES | DERIVATIVES | COMMODITIES* | CURRENC Y | MUTUAL FUNDS # | IPOs # | INSURANCE # | DPDisclaimer: 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 Commodities Pvt. Ltd. #Distributors

SMS ‘BANG’ to 54646Contact at: 022-3926 9404, E-mail: [email protected]


Registered O�ce: 38-B, Khatau Building, 2nd Floor, Alkesh Dinesh Mody Marg, Fort, Mumbai - 400 001. Tel: 264 1234 / 3027 2000 / 2005; Fax: 30272006Corporate O�ce: B-2, 301/302, 3rd Floor, Marathon Innova, O� Ganpatrao Kadam Marg, Lower Parel (W), Mumbai - 400 013. Tel.: 39268000 / 8001 Fax: 39268010


An increase in crude price can put pressure on the operating margins of the company. In order to overcome the risk, the company has planned backward integration in the form of coal tar project.

PCBL has planned to start using coal tar as its raw material in the future. The processing of coal into coke generates a by-product called coal tar. The process of putting plans into action has started and this can take effect in 2 - 3 years.

This will help the company to meet almost 30% of the demand for carbon black through internal production, thereby reducing dependency on imports. The capacity of the plant is 2,10,000 MT with an investment of `180 crore and is expected to commission in FY14E.

RISKS AND CONCERNS

based on growth in tyre industry. Any further slowdown in the tyre industry may impact PCBL’s earnings.

and thus the operating margins of the company.

VALUATION AND RECOMMENDATION

PCBL’s profitability has been impacted in the recent past owing to various reasons like slowdown in auto industry, rising crude prices and significant dumping by China. This has led to a decline in the price of PCBL’s stock and the valuation has come near the bottom of the cycle. We believe that the above mentioned points are the triggers which can revive the business of PCBL.

Moreover, the continuous efforts being made by the company to expand its power business which is a high margin-yielding business and the focus on exports will also help the company to report a better performance.

The current prices reflect the ongoing challenges prevalent in the industry and we believe that the current valuations seem propelling for the companY.

For Sandesh Kirkire, CEO Kotak Mutual Fund “simple living, high thinking” is not just another

catch phrase. It is a way of life. It is the very principle which he has applied to not just the way he lives, but also the way he runs the show at Kotak Mutual Fund.

As per the Association Of Mutual Funds In India (AMFI), Kotak Mutual Fund is the 6th largest fund in the country by way of assets under management (AUM).

IN IT FORTHE LONG HAUL

Mr Sandesh KirkireChief Executive Officer,

Kotak Mutual Fund

“The mantra for success is to create simple products and focus on longevity of investment”


Mr Sandesh Kirkire is a Mechanical Engineer and holds a Masters degree in Management Studies from Jamnalal Bajaj

Institute of Management Studies (JBIMS), Mumbai University. He joined Kotak Mahindra Group in 1994. He has

over 22 years of experience in financial services spanning Corporate Finance, Investment Banking and Fund

Management. Mr Kirkire joined Kotak Mahindra Asset Management Company Ltd in 1999 as its Chief Investment Officer (Debt) and took over as the Chief Executive Officer

(CEO) in May ’05.

Kirkire may be managing the top post at Kotak Mutual Fund today, but he is one of the few CEOs in the mutual fund industry who have been with the fund since inception. Though he has been in the top job since the year 2005, he has been with the Kotak Group since 1994.

SERENDIPITY AT INCEPTION

Joining financial services was, however, not on his wish list during his boyhood days. In fact, despite belonging to a family of bankers, he did all he could to stay away from banks and its paraphernalia.

A qualified mechanical engineer, he decided to do his management studies in a stream other than finance at Jamnalal Bajaj Institute of Manage-ment Studies. But finance perhaps was in his genes that led him towards finance as he landed his first job at SBI Capital Market in 1990, handling corporate leasing.

A couple of years later he found himself at an NBFC where he gained experience in investing, lending and borrowing. The liberalization era having just taken off in India was an exciting time to be in the thick of

services it provides across the board.

LARGE GROWTH OPPORTU-NITY IN THE OFFING

At Kotak Mutual Fund too things are not much different. Despite difficult times that have befallen the Indian economy, Sandesh believes that India is poised for higher growth as fund houses like Kotak and some others are doing their best to create alpha.

He is a strong believer in the fact that though equity investments in the country have been abysmally low till date, there is a strong possibility that retail investors may gradually come into the fold.

“The change is inevitable. With the use of technology, mobile telephony concepts are changing fast. The challenge to the industry now is to increase penetration of mutual funds in Tier-II and Tier-III cities,” says Sandesh as he recounts his experi-ences in investor camps that the fund house regularly conducts across India.

In the last one-and-a-half years he himself has been travelling across the country to participate in 80 to 100 investor awareness programmes.

action, and Sandesh’s career path had just opened up.

Opportunity from the investment banking side knocked at the door of Kotak Bank and he did not waste any time to lap it up. Times were difficult, the stock markets had just been rocked by a scam and the loopholes in the banking system had just been exposed to the public.

Yet, Sandesh witnessed firsthand how bit-by-bit a world class organization was taking shape at Kotak. “It was never about re-inventing the wheel at Kotak. It was about getting the small things right and participating in the change,” he says.

It is this philosophy of the Kotak Group that makes it unique and a world class organization today, according to Sandesh. “When you buy one stock of Kotak, you become a shareholder of an organization that is into all streams of financial services such as commercial banking, invest-ment banking, mutual fund, insurance and brokerage,” he says.

And the process of brand building continues at the Kotak Group which prides itself on the exceptional


“Our only objective is to get across to investors and tell them that you cannot beat inflation by merely being a saver. One has to take that extra risk. And what better than the institutional route to participate in the equity cult!” he says with a passion that shows.

Sandesh believes that despite its share of problems, the mutual fund industry has matured considerably today. Gone are the days when there used to be a furore over `10 face value products and a spate of new fund offers and meaningless me-too products were being launched by fund houses in the pursuit to shore up their assets under management.

Today, he believes that the industry stands unified in proclaiming that systematic investment plans (SIPs) have been the single largest success.

And the reason why this vehicle scores is because of its simplicity, he says adding, “One has to invest responsibly. The stock market is not a casino, but a platform where you can get good returns only over the long term. And that is exactly what SIPs help you achieve.”

Having said that, Sandesh also believes that only the surface has been scratched by way of penetration in the retail class. Though the interest is palpable among investors, a lot of them are yet to understand the real benefit that mutual funds can provide.

Also, Indians he believes have not learnt adequate lessons after the financial crisis of 2008-09. “The kind of rebalancing and asset class diversi-fication that was required has yet to come in,” he sighs. The onus,

however, cannot lie on the investor alone. Though there is a fantastic institutional framework that exists in India today, fund managers have to reach out to investors and garner investor confidence through the creation of simple products.

FUNDAMENTALS OF FUND MANAGEMENT

Sandesh believes the mantra for success is to create simple products and focus on longevity of investment. It is only over the long term that wealth gets created. Kotak Mutual Fund, for instance, has over a period of time concentrated on offering products that cater to the needs of their investors.

The stock picking philosophy is research-based and Kotak Mutual Fund prides itself on running research models for a total of 300 companies that are under constant surveillance. Kotak Mutual Fund follows the BMV


principle when it comes to stock picking, where B stands for business, M stands for management and V stands for valuation. “For instance, despite all the research that we carry out on a daily basis, our fund manag-ers will not pick up the stock of a company without having met the management first,” says Sandesh.

Though he does not micromanage the everyday operations of fund manag-ers, Sandesh has one ground rule for fund management. “Performance is as important as providing liquidity and that is our rule number one,” empha-sizes Sandesh and says that it is the only way he thinks they can generate investor confidence in the long run.

Every equity fund manager at Kotak Mutual Fund has the DNA of an analyst and those on the debt side have been able to outperform their peers because they have had a good understanding of the macro picture and have been able to create a strong

portfolio which has been able to anticipate macroeconomic move-ments beforehand.

This is a tradition that Sandesh strives to continue while he is at the helm at the fund house. He, like other Kotak employees, takes inspiration from Uday Kotak himself who has been the harbinger of change and has built an organisation that has gone much beyond the charisma of an individual.

And that is the takeaway for Sandesh. “There is no place for ego or aggres-sion when you are a part of the capital markets. The markets are alive as it

were and one has to be attentive enough to read the signals,” insists the CEO of Kotak Mutual Fund.

As passionate as he is about the markets, Sandesh also has an urge to share the knowledge that he has garnered in his career spanning over two decades.

Although he does not see himself move out of the industry anytime soon, he does want to get into academics at some stage and forward his mission of investor awareness by introducing financial literacy in schools and collegeS.


ICICI Prudential Discovery, SBI Magnum Emerging Business, Quantum

Long-term Equity, Reliance Banking Retail and Franklin Build India are

�ve funds that have given superb returns over the long term


With assets close to `2,000 crore, this fund has managed to give returns of over 18% in the last one year and 22.5% since it was launched in 2004. But during the crisis of 2008, it did not perform well though. But once the equity markets turned around in 2009, it gave returns of a whopping 134%. Since then the fund has managed to beat both the benchmark and the broader indices by a huge margin. The long-term track record of this scheme is impressive and can be supplemented with an existing portfolio. Investors should adopt a long-term investment horizon as the benefits of the fund’s value-investing strategy and mid-cap bias can best be enjoyed over a longer duration.

SBI Magnum Emerging Business

Despite a slow starter, SBI Magnum Emerging Business has remained in the top category in the past two years (especially in 2011-12). The fund’s impressive performance in the past three years stands out in the mid-cap and small-cap category. With positive returns in rough markets, this fund stands to benefit from the volatility in the markets in the long run.

Launched in September ’04, the scheme is benchmarked under BSE 500 index. The fund has been primarily investing in emerging themes such as outsourcing or companies that are globally competitive and in companies whose management does not shy away from the domestic markets.

The fund manager sometimes takes an aggressive approach as he focuses on searching for high growth companies and is willing to pay extra premium for the incremental growth. This is the reason why a fund does not have much diversification, which sometimes impacts the said fund’s performance in the market.

In the last one year and three year time frame, it has managed to give returns of over 20% when the main index such as Sensex and Nifty have been giving only 5% to 7% returns in the same time period. The fund has performed at an intense pace, standing tall among its competitors on both the return as well as risk-adjusted return parameters.

The fund’s opportunistic investment in fundamentally sound companies from attractive sectors has paid off superbly until now. So, this is for investors looking for high-risk, high-return opportunities with limited exposure to the SBI Magnum Emerging Business Fund.

Quantum Long Term Equity One of the few schemes that have remained ‘underrated’ in the equity space in India, Quantum Long-term Equity Fund has now established itself as one of the schemes that have a strong track performance on a consistent basis. But that has not stopped the fund’s strong performance. It’s a typical large and mid-cap scheme which believes in ‘buy and hold’ strategy. In its short history it has managed to stand tall among other famous equity schemes primarily due to its decent show and a low expense ratio. It is one of the equity schemes that have the lowest expense ratio in the industry, which ultimately helps investors over the long term. This scheme has always rewarded investors over the long term and is fit for risk-averse investors. During the rally of 2009, the fund gave returns of over 103% against the Sensex, which gained by 81%. Even during the year 2010 when broader indices gave returns of 17%, Quantum Long-term Equity Fund managed to give returns of over 29%.

n India, a large chunk of the money coming into equity funds goes to top five schemes. However, it doesn’t mean that

these are the only best performing funds in the country or are the only funds available to the investors.

Currently, there are hundreds of equity schemes ranging from pure equity to thematic to exchange traded funds (ETFs). In this article we will look at five funds that have stood against the tide and how investors can benefit from investing in them and thus diversify their portfolio.

These are funds that have a history of at least five years and have managed to stay afloat post the Lehman crisis and the slowdown in the Indian economy. It is a mix of large-cap, small-cap and thematic funds (infrastructure and banking), which can be useful for passive investors.

The biggest shortcoming of thematic or sectoral funds is the lack of diversification. The solution lies in opting for a well-managed diversified equity fund. Such funds are best suited for informed investors who have a view on the underlying sector or theme on which the fund is based. This will enable them to time their entry into and exit from the mutual funds schemes.

ICICI Prudential Discovery Though it is in the mid-cap category, this fund follows ‘value strategy’, which has resulted in the fund giving a stellar performance in the recent past. The fund invests across market capitalization and looks at factors such as low P/E and dividend yields before investing in the stocks. In the past too it has increased exposures towards large cap stocks many a times when the fund manager was not comfortable with valuations in the mid-cap or small-cap space.

I



The main advantage of this fund is that it has the ability to survive during a downfall and give decent returns during a bull rally. To encourage investors to stay invested for long, the fund has high exit loads which might have problems for some investors.

Reliance Banking Retail

Like infrastructure, this too is a sectoral fund which invests only in banking stocks. This can be risky for investors who don’t like taking any risks. But going by its history, the fund has managed to give a decent performance. So, this scheme is only for those investors with a high risk appetite as banking stocks are considered to be more volatile in nature than other stocks.

It is basically a scheme which has a mandate that allows 100% of its portfolio into debt during periods of high valuation in the banking sector. The fund which was launched in 2003, has managed to give returns of over 29%. In the last five years, it gave returns of 13% against the broader index, which is down by around 1%.

In the current year too, it managed to

give returns of 45% as against 40% for the banking index. With the hope that the Indian economy will again be able to touch a high growth rate once inflation eases, the banking sector will continue to be a key beneficiary of this trend.

It can very well be a part of the portfolio of investors whose risk appetite is high and who believe that the banking sector will do well over the long run if the India growth story has to be realized. Investors investing in any thematic or sectoral funds should be willing to track the particular sector and can also look at a strategy where investors can book their gains.

Franklin Build India In the recent past many investors might have heard a lot of negative stories about the problems facing the infrastructure sector. However, Franklin Build India which is an infrastructure-centric fund has remained a top performer in this category despite all the pessimistic reports about the sector.

Though it has a short history, it has given impressive returns. In the

current year, it gave returns of 29%. This is an open-ended equity scheme designed to tap investment opportunities in companies benefiting from the growth in sectors such as infrastructure, financial services, social development, agriculture as well as resources.

In short, it is a thematic fund that helps investors access multiple growth themes originating from the efforts to build India’s future. Coming from the Franklin Templeton house, it emphasizes on structural themes and not on the cyclical-enhancing potential for superior risk-adjusted returns over market cycles. The infrastructure sector, especially in the past three years, has been under tremendous pressure on the back of high inflation. Even during such times, the fund has managed to give returns of 7% when its benchmark was down by 2%.

The main advantage of this scheme is that it focuses on innovative businesses, quality of management as well as out-of-favour stocks that have strong business fundamentals and models to sustain high growth rates over the long terM.


Micro analysis. Mega gains.Trading at Nirmal Bang is based on extensive research and in-depth analysis, where

we focus on the smallest of details and turn them into an advantage for you.

Over the years, the analytical approach coupled with decades of experience has

helped us maximize returns for our investors and thereby inspire con�dence in them.

EQUITIES* | DERIVATIVES* | COMMODITIES | CURRENCY* | MUTUAL FUNDS^ | IPOs^ | INSURANCE^ | DP* www.nirmalbang.com

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.

SMS ‘BANG’ to 54646 | Contact at: 022-3926 9404 | e-mail: [email protected]


Source: Capital Line

Company Name Current Market Price11th Nov'10

Book Value Price /Book Value

344.6944.24

218.9850.24

147.66102.53

22.92144.58200.63112.17202.62135.29165.42156.16253.28152.84239.54

86.01123.76114.50141.73

93.98399.94

31.64131.46

51.32161.34

52.11254.57193.52319.86

73.0880.8054.81

135.34521.60178.96115.19

35.67405.62

20.43114.65

73.8949.51

221.2750.26

215.22169.56121.41218.93

0.210.270.270.270.280.300.320.360.360.370.390.390.390.390.400.420.440.460.470.470.470.470.480.490.490.510.510.530.530.530.540.550.550.550.560.560.570.570.570.570.580.580.580.590.590.600.620.620.630.64

Source: Capital Line

PRICE TO BOOK VALUE

Kemrock Industries & Exports LtdAlok Industries LtdReliance Communications LtdS. Kumars Nationwide LtdGammon India LtdAnsal Properties & Infrastructure Ltd3I Infotech LtdShipping Corporation Of India LtdAmtek Auto LtdTulip Telecom LtdPatel Engineering LtdPrakash Industries LtdEscorts LtdA2Z Maintenance & Engineering Services LtdGreat Offshore LtdRolta India LtdHousing Development & Infrastructure LtdHCL Infosystems LtdJai Corp LtdPunj Lloyd LtdPunjab & Sind BankNCC LtdJindal Poly Films LtdSuzlon Energy LtdIndiabulls Real Estate LtdSREI Infrastructure Finance LtdGujarat Narmada Valley Fertilizers Company LtdElectrosteel Castings LtdChennai Petroleum Corporation LtdStandard Chartered PLCVideocon Industries LtdOnmobile Global LtdJyoti Structures LtdAdhunik Metaliks LtdIndian Overseas BankBEML LtdUflex LtdJindal Stainless LtdMercator LtdBilcare LtdFirstsource Solutions LtdUnited Bank Of IndiaIVRCL LtdBajaj Hindusthan LtdUnited Breweries (Holdings) LtdUsha Martin LtdShiv-Vani Oil & Gas Exploration Services LtdOrchid Chemicals & Pharmaceuticals LtdCentral Bank Of IndiaGujarat Alkalies & Chemicals Ltd

Company Name Current Market Price(As on 9th Nov'12)

Book Value Price /Book Value

73.9511.7658.5513.7040.9530.75

7.4151.6572.2541.0078.2552.5064.8561.45

100.8564.95

105.7539.7057.7054.1567.0544.55

193.4515.6065.0026.0082.6527.55

134.65102.75171.25

40.1544.5030.2575.85

292.90101.85

65.8520.40

232.4511.7866.4542.8529.45

131.6530.35

133.00105.60

76.15140.65

The table represents companies listed on the BSE that are low on Price to Book Value


he Nifty rallied around 1% (on 12th November) in the month of November. In fact, the

Nifty has rallied around 24% so far in the past 10 months.

The rally in the markets can be attributed to excess liquidity in the markets on the back of FIIs who have been net buyers to the tune of ̀ 96,000 crore in equities.

Also, the quarterly earnings season (Q2 FY13) for Nifty 50 companies turned out fairly good, but the better-than-expected improvement in NPAT is owing to non-operating activities of companies. However, this does not indicate any positive sign for the overall economy.

The RBI too disappointed the markets in its mid-term policy review on 30th October as it did not meet market expectation of a cut and kept the repo rate unchanged at 8%. The reverse repo rate stands at 7%.

It however, cut the cash reserve ratio (CRR) by 25 basis points, which will help inject more liquidity of `17,500 core into the financial system. The CRR now stands at 4.25%.

The Put Call Ratio-Open Interest (PCR-OI) for Nifty Options is hovering between a very narrow range of 1.03 and 1.12 since the start of the November expiry.

The current PCR OI stands at 1.12 (as on 12th November), which is also at the higher end of the November series. Going forward, we see the Put Call Ratio consolidating between 1-1.16, maintaining a neutral to negative view till the end of the November expiry.

TTECHNICAL OUTLOOK FOR THE FORTNIGHT

On the Nifty Options front, Nifty traders have predicted that the November series could be in the narrow range of 5,600 and 5,800 and a consolidation is seen between the given range.

Highest OI build up is seen at 5600PE and 5800CE to the tune of over 8 million each (as on 12th November). Hence, a breach of this narrow range will take the markets lower to its second resistance and support level, which is directly seen at 5,950 and 5,500, respectively. India Volatility Index (India VIX) which measures the immediate 30-day volatility in the market has been choppy since the past few days due to news flows, including those of corporates and is trading between a broader range of 13-16 (currently at 14.90) (as on 12th November).

But going forward, we believe that it has already formed a strong base of 13 and we may see an upward breakout and levels of 17 and 19 could be seen on India VIX in the days to come.

The Nifty has been fairly range bound between 5,770 and 5,580 since the past couple of weeks and continues to trade with a sideways bias. In the immediate term, the 5,580/5,540 level is the cluster support for the Nifty since it is supported by the 61.8% Fibonacci retracement.

Till the time 5,720-5,670 levels are intact, there is a valid possibility that the Nifty may attempt to scale higher. The daily chart indicates that the Nifty is trading in the rising channel, showing that it is in an uptrend.

The rising channel indicates that the

Nifty has a strong support of the 5,600 level for long-term positions. The important oscillators RSI and MACD on the daily have turned positive. Once it manages to close above the 5770 level at least for one more trading session, the upward trend will confirm for a target of 5,930 level.

In an alternative scenario, if the Nifty breaches the level of 5,580 on a closing basis, then a further sell off till the recent low of 5,400 is likely and below that downside, till 5,200 cannot be ruled out. Traders having long positions are advised to hold the existing long positions and protect their capital with a strict stop loss of 5,580 level

The Bank Nifty faces strong resistance around the 11,750 level on the upside and immediate support at 11,400-11,250 levels on the downside. The overall trend remains intact so we suggest a ‘buy on dips approach’. Traders should maintain a bullish bias in Bank Nifty only on a decisive close above the 11,550 level.

OPTIONS STRATEGY: LONG STRADDLE ON NIFTY AT 5,800

It can be initiated by ‘Buying 5800CE and 5800PE of the November series’. The net combined premium outflow comes around `125-130, which is also the maximum loss (i.e. if Nifty November series expires at 5,800).

The break-even stands at 5,930-5,670 level. There is unlimited profit beyond the break-even range. Traders can square off their strategy when the combined rate of the Strangle strategy comes below 100 or 180/200, whichever is earlieR.

edging basically means reducing or controlling the risk involved in a certain transaction. In

other words, it is an investment position intended to offset the potential losses that may be incurred by a companion investment.

Insurance is the best example of hedging. When we buy a house worth lakhs of rupees, we usually buy a home insurance along with it by paying a small premium.

So, if something untoward were to happen to the house such as damage in an earthquake, fire, flood, etc, all is not lost. The insurance will reimburse

H

Hedging is an important tool that investors can employ to diversify risk

the amount in accordance with the risk cover taken.

A hedge does not prevent a bad thing from happening, but it surely helps in minimizing the financial loss arising out of the event. In common parlance, there is a saying “Zor Ka Jatka, Dheere Se Lage.”

Similarly, in stock markets, an insurance that you take to protect against loss of money in an investment is known as hedging.

The word hedge itself loosely means a boundary, fence, or a barrier. In other words, if you have a huge farm where you grow your produce, then it

makes sense to invest a small sum in building a fence around it, so that your crops are protected by the damage caused by stray animals. The same applies to stocks too.

If you are bullish about a stock, you would buy those shares with the hope of making a profit when the stock goes up. But at the same time, you are exposing yourself to the risk of making a loss if the share price falls.

To prevent making a loss, you can make use of certain instruments and strategies that can help reduce or minimize your losses in case your decision backfires. And all such strategies are known as hedging.



of -1) means that if one security moves in either direction, the other security will move in a completely opposite direction (Stock A goes up, stock B will go down).

If the correlation is 0, then the movements of the securities are said to have no correlation; they are completely random.

HEDGING INSTRUMENTS

For a person dabbling in stocks, Futures and Options are the best hedging tools.

We shall not delve deeper into what Futures and Options are and their working. (Please refer to our previous issues for a detailed explanation of the same.)

HEDGING WITH FUTURES

Long Stock, Short Index Futures/Stock Futures

If you have bought stocks of a company with the hope that it will go up in price, the stock faces two kinds of risks.

stock may already be overpriced and the stock price may start to fall.

be right but the entire market may fall and consequently the stock price may also fall.

To hedge the risk, the investor may take opposing position by selling the particular Stock Futures (futures contract of that particular stock) or the Index Futures (futures contract of an entire market Index).

So, if the stock were to fall or the market were to fall, your position in the stock will be making a loss, but conversely your short position in the stock/index futures will rise and thus your overall loss may be reduced or

you might even end up making a certain amount of profit.

b. Short Stock, Long Index Futures/Stock Futures

Consequently, if you have a short position in a stock, you can buy Index/Stock Futures.

Therefore, if the stock price starts to rise or the markets on the whole start to rise, then the loss on your short position is minimized by the rise in the Long Index/Stock Futures.

HEDGING WITH OPTIONS

Long Stock, Buy Index Put Options/Buy Stock Put Options

If you as an investor have a long position in a stock, you can hedge your stock position by buying Put Index Options or Put Stock Options by paying a small premium.

So, if the stock price falls, the Put Options premium goes up, cushioning your losses from the stock fall.

Short Stock, Buy Index Call Options/Buy Stock Call Options

Conversely, if you have a short position in a stock, then you can hedge it by buying Call Index/Call Stock Options. So, if the stock goes up, then the loss can be mitigated by the increase in the Call price.

A FEW MORE HEDGING INSTRUMENTS

Diversification

This is the best form of hedging a purely equity portfolio. Spread your investments across various stock categories such as large-caps, small-caps, and mid-caps, high beta, and low beta, defensives and aggressors so that any adverse move

DIFFERENCE BETWEEN HEDGING AND ARBITRAGE

Most people make the common mistake of interchanging the terms hedging and arbitrage very often. In fact, these are two entirely different set of concepts.

While hedging has been discussed above, arbitrage is the practice of taking advantage of the price difference between two or more markets so as to make profits.

Arbitrage involves buying and selling of the same asset at the same time, with the aim of making a profit by exploiting the price difference of the asset in different markets.

For example, buying a stock at ̀ 10.20 in one exchange and simultaneously selling the stock for `10.50, in another exchange, thereby making a risk-free profit of 0.30 paise constitutes arbitrage.

While hedging is usually done with a view to reduce risk and not to generate profits, arbitrage on the other hand, is done with the sole aim of generating profits.

Correlation

Usually to create a hedge, there should be a correlation between the two entities involved. In the world of finance, a statistical measure of how two securities move in relation to each other is known as correlation.

Perfect positive correlation (a correlation co-efficient of +1) implies that as one security moves, either up or down, the other security will move in tandem, that is, in the same direction (Stock A goes up, stock B will also go up).

Alternatively, perfect negative correlation (a correlation coefficient


in any single category does not harm your entire portfolio heavily.

Pair Trading

Here two stocks which are highly positively correlated from the same industry sector are used wherein the investor goes long in one stock and short in the other stock.

Although it becomes a zero-sum game, the strategy can be tweaked according to one’s perception of the movement of the market. For example, if you feel that the market has a greater chance of going up, then you can buy greater quantities of Stock A and short less quantity of Stock B.

Debt

Fixed deposits, bonds, liquid funds, debt funds and MIPs, among others constitute debt. Debt and equities are negatively correlated.

Although these are not perfect hedges, having them in your portfolio can give you a decent hedge against a fall in the equity component of the portfolio since these instruments give positive returns although they are low.

Gold

Gold and stocks are generally negatively correlated. So, if you have a portfolio consisting predominantly of stocks, then invest some amount in gold. Therefore, in case stocks start to fall, the gold component of your portfolio will keep it up.

Real Estate

In the past few years, while the stock markets were seen giving negative returns to investors, the real estate market gave multifold returns. Hence, the role of real estate as a hedging tool against stocks should not be

undermined.

HEDGE RATIO

A percentage of the value of portfolio protected via hedge as compared to the value of the entire position is known as the hedge ratio.

For example, if you have a position in a stock worth `10 lakhs and you have sold stock futures worth `4 lakhs, the hedge ratio would be 4/10 = 0.4. In other words, 40% of your portfolio is protected against a downside risk.

TYPES OF HEDGING

Perfect Hedge

Any counter-position that completely eliminates the market risk element of an existing position is known as a perfect hedge.

Cross Hedge

A hedge that is done by taking an opposite position in an entity that is different from the initial entity but which is positively correlated with that entity.

For example, if a company stock ABC moves exactly in line with the movement of another company stock XYZ, then one can buy ABC in the cash market and sell futures of XYZ shares. This is known as a cross hedge. Here, both entities must be positively correlated.

Double Hedge

Hedging a position by using both Futures and Options thereby doubling the size of the hedge is commonly known as double hedge.

Partial Hedge

When only a certain part of your entire holdings are hedged, it is

known as partial hedge.

Full Hedge

When you take an exactly opposite position in order to protect 100% of your portfolio investment it is called full hedge.

Rolling Hedge

This is done by closing out existing F&O positions as they near maturities and initiating fresh positions with future/further maturities. Rio Hedge

This hedge term is used in a slightly lighter vein. It means that a trader who has initiated huge investment positions, hedges this position with a ticket to some tropical destination such as Rio so that if the investment backfires, he can fly to this destination to escape the financial and legal repercussions.

THINGS TO KEEP IN MIND

eliminate risk.

profit then unhedged ones.

taxes, among others, need to be factored in.

hedges will have a margin requirement.

incurring a loss are very much possible.

for the different instruments is entirely different.

investors since the extra cost does not leave much on the table. Hedging is suitable for investments of substantial amounts.

also means reduced profitS.


Date: 2nd November, 2012.Venue: Hotel Babylon International,

Raipur.

LEARN THE ART OFCOMMODITY INVESTING

LEARN THE ART OFCOMMODITY INVESTING

Exchange Partner

BeyondPresent

&

BEYOND MANDIVISITS RAIPUR

Investors should use expert advice to take right investment decisions

Nirmal Bang has always endeavoured to promote awareness about the markets among inves-tors to enable them to gain from the movements in prices by investing rightly in the different asset classes available to them.

Nirmal Bang Commodities Pvt Ltd, in association with ZEE Business, had organized Beyond Mandi, the investor education camp at Hotel Babylon International in Raipur on the 2nd of November this year with the aim to educate both traders and investors in the art of investing in commodities by inviting experts from the industry who gave sharp insights into the commodity markets, helping them to take right investment decisions.

The panelists for the event were Angshuman Purohit, Head – Investment Products, NSEL and Kunal Shah, Head – Commodity Research at Nirmal Bang Commodities Pvt Ltd. Both of them acknowledged the growing importance of commodities as a new asset class among retail inves-tors. Amish Devgan, the anchor, commenced the event by introducing the panelists and explain-ing the objective behind the camp.

Angshuman Purohit kick started the event as the first speaker. The theme of his presentation was investment products in commodities and also the exchange perspec-tive on the same. He said that every Indian household invests in investment products like fixed return assets, real estate, stocks of equity markets, mutual funds and gold.

Purohit said, “NSEL has come up with a new asset class known as e-series and has commodities such as e-gold, e-silver, e-copper, e-lead, e-zinc, e–nickel and so on. The latest product in this category is the e-version of platinum, which is known as e-platinum. Platinum being a rarer commodity than gold holds a lot of importance but is actually priced lower than gold. Due to the religious feelings and craze for gold amongst Indians, gold is a much-invested commodity.”

He also told investors that growth pattern in e–gold is fruitful and hence. it is quite beneficial for retail investors. E–gold has certain features like it is available in a minimum denomination of one gm, has no hidden costs and can be converted into the physical form, which makes it an ideal product for investment.

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 4 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 macro outlook of the commodity markets. He also mentioned about the prevailing volatility in the markets.

He said “We are witnessing an increase in prices of commodities since the last two months. As a reuslt, the common man feels that the market is going to be stable and the scenario will be rosy in the future. But there is still lack of confidence in the markets and the big financial institutions are not very confident about the ongoing trend. Hence, going forward, the road to recovery will be full of ups and downs.”

Pointing out the reasons for the ups and downs in the world markets, Shah said that the US debt crisis and high debt burden on countries like Spain, Greece and Italy which fall in the Euro zone as well as on other countries around the world are known by each and all. These countries have resorted to what is known as “inflating their debt”. Shah explained the above concept by presenting charts and figures.

“As there are no major chances of revival in the near future, base metal prices may not witness any increase, but I remain bullish on gold” said Shah. Towards the end of his talk, he gave a special outlook on commodities such as crude oil, soya beans, chana and black pepper, among others.

Later the panelists shared their insights on the commodity markets. After that there was a discussion among the panelists and then the session was thrown open to the audience for a round of questions and answerS.

The next Beyond Mandi camp will held at Bengaluru on 29th November this year.

Date post:	09-Mar-2018
Category:	Documents
Upload:	hadat
View:	216 times
Download:	3 times

The proposed safety net by SEBI is likely to curb mispricing of...

Documents