Where to Invest Profitably In 2010
Ali On Content / 21 Dec 2009
Considering the fact that the market has gone up substantially from the 2009 lows, it was imperative for us to apply extra caution while creating a portfolio for 2010. Thus, instead of taking stock-specific approach directly, we first focussed on the sectors that we believe would do well in 2010. Our analysis led us to believe that sectors such as IT, auto ancillary, pharma, power, textile, banking, infrastructure, cement, agro chemicals and even mobile manufacturer would do well.
| Company | Cmp | Qty | Value |
| Bayer Crop Science | 498 | 140 | 69720 |
| Bilcare | 460 | 239 | 109940 |
| Federal Bank | 236 | 255 | 60180 |
| Geodesic | 113 | 530 | 59890 |
| L & T | 1681 | 83 | 139523 |
| Mangalam Cement | 136 | 1029 | 139944 |
| NTPC | 208 | 288 | 59904 |
| Rane Madras | 69 | 870 | 60030 |
| Spice Mobiles | 31.5 | 3810 | 120015 |
| SRF | 192 | 573 | 110016 |
| Tata Elxsi | 239 | 293 | 70027 |
| Cash On Hand | 811 | ||
| Total | 1000000 |
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[INSERT_1]Circa 2009 has been memorable in more ways than one. It has shaken off the despondency borne out of the global financial crisis in 2008 which had devasted the financial markets. But the financial crisis not only spooked financial markets, it also took its toll on other asset classes such as real estate, gold and diamond. Most of these markets were back on their feet in 2009. So what does the new year 2010 hold in store for various asset classes such as equities, debt, mutual funds, real estate, gold and diamond as well as for the Indian economy? We invited experts on these investment avenues to give their take on the prospects for these asset classes in 2010. You can read their views on how to invest profitably in these assets in the subsequent pages. Based on their observations and our own assessment, we present our own considered view of what 2010 has in store for the financial markets and how one can go about investing profitably in various assets classes in the new year.
Indian stock market has bounced back from the intra-day low of 8,047 on March 6 this year to touch the intra-day high of 17,457 on
October 20 and is currently hovering around the 17,000 level for quite some time. This means the market recovered by about 117 per cent between March and October, a span of just seven-and-half months. If we consider the year-to-date performance, the Sensex closed the first trading session of the year at 9958 and closed at 17,119 on December 11, giving an impressive return of almost 72 per cent. We had recommended a Rs 10 lakh portfolio of 7 stocks at the beginning of 2009 and this portfolio has outperformed the Sensex, appreciating by 105 per cent (see box). This market is now awaiting for positive triggers to make its next upmove and when that trigger comes about, it is likely to test its all-time high of 21,206 reached on January 10, 2008 and probably surpass it too. “I would expect the markets to test new highs in 2010. There is also a strong possibility that this could happen as early as the first half of calendar 2010. With floating stock managed very well and a full IPO pipeline, a bullish market is on the cards,” says R Balakrishnan, an independent equity advisor.Hence, it is advisable to remain invested now so as not to miss the rally that seems imminent sooner rather than later. This time, we have given a Rs 10 lakh portfolio comprising of 11 stocks which we feel are likely to do well in 2010. So, go ahead and buy all of these stocks.
Equity mutual funds are a reflection of the stock markets since these funds primarily invest in equities. Mutual funds too witnessed a
slide when the market was down and now that the market is up, mutual funds too have been performing well and have given good returns. The average year-to-date return given by diversified equity mutual funds was 74 per cent. Since we expect the market to go up further, we also expect mutual funds to perform much better going forward. Hence, one can buy diversified equity mutual funds now and stay invested for good returns in 2010.The debt market has witnessed a slide in interest rates during 2009 as the Reserve Bank of India brought down interest rates in
order to increase liquidity and expand credit off-take with a view to spurring demand for goods and services. The expansionist policy has worked as consumption demand has accelerated, industrial production has picked up and companies have once again begun hiring new employees. However, the excess liquidity has resulted in spurt in prices of goods and services and high inflation. Due to this, the RBI is expected to suck in excessive liquidity by hiking interest rates in 2010. Hence, one can expect the interest rates to go up hereon, which would make investments in debt instruments an attractive proposition in 2010. When interest rates go up, one can invest in fixed income instruments – be it in fixed deposits, bonds, debentures, debt mutual funds, etc.
GOLD:-Gold was virtually on fire in 2009 and almost touched Rs 18,000 per 10 grammes, giving a year-to-date return of about 40 per cent. The dream run of gold in 2009 was primarily because the demand for gold worldwide reached its peak due to depreciating dollar as many countries rushed to dump the dollar and buy gold instead. “This is not a cycle; what it appears to be is a burst of energy, so to speak, in the gold market that takes place about every 17 weeks. It has been doing this for the last 10 years or so. We should carefully look for market explosions to start at this time,” says equity and gold market guru Larry Williams. But the breath-taking run of gold appears to have lost its steam now as the prices have started correcting. But the yellow metal still appears to have a long way to go before the prices come down to more realistic levels. Hence, it may be better to adopt a wait and watch approach now so that as and when the prices bottom out, one can buy it and wait for the next upmove. One can expect the prices to move up in the second half of 2010
The real estate market also bore the brunt of economic slow-down and 2009 was probably one of its worst years. The demand for
residential and commercial space slumped in the first half of 2009 as individual and corporate buyers deferred their decisions to buy or lease residential or commercial space due to the tough economic environment. However, the latter half of 2009 has seen some revival in the property market as individual buyers as well as companies have started purchasing or leasing residential and commercial premises. The demand is expected to pick up going forward and 2010 may in fact witness a rally in the real estate market. “Indian real estate sector is expected to be in the stabilization mode at the commencement of 2010. Improved macro-economic conditions and substantial improvement in sentiments are likely to trickle down to the real estate sector. As such, real estate in India is expected to continue to build upon the improvements it has seen in the last two quarters. While office and residential sectors are likely to see substantial improvements, retail real estate market may continue to be sluggish for a while,” avers Abhishek Kiran Gupta, Head of Operations, Research & Real Estate Intelligence Service, Jones Lang LaSalle Meghraj. Hence, investors can consider investing in residential and commercial spaces to take advantage of the rally. As is evident from above, 2009 was an excellent year for the financial and bullion markets. New year 2010 is also expected to be a good year and investors can expect to make decent gains on their investments. For this, investors need to remain invested in some (if not all) of these investment avenues. Happy investing![PAGE BREAK]
CMP: Rs 498
Face Value: Rs 10
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While building a portfolio it is always better to pick companies that are not only just fundamentally strong, but continue to perform and put up a good show even in times of adversities. Therefore, we have zoomed in on Bayer Crop Science, a subsidiary of the Euro 35 billion Bayer AG. BSCL is an agrochemical company and its business is divided into crop protection, environmental science and bioscience.
It should be noted that BSCL is a leader in the agro-chemical industry in India with a market share of over 23 per cent and factors such as low penetration of pesticides in India, new product launches and outsourcing from its parents are slated not only to help it sustain this market share, but also to help grow it further. What is also important to keep in mind is that pesticide consumption in India is at a mere 0.48 kgs per hectare. This is quite low when compared to around 5 kgs per hectare in the US and more than 10 kgs per hectare in Japan. This opens up a huge growth opportunity for BSCL in India. Besides, with its strong R&D BSCL continues to offer new products to its customers. Over the last two to three years, the company has already launched five to six products. This helps it strengthen its revenue growth, which augurs well for the company. Also, what will further give support to BSCL are the export revenues, which currently stand at around 16 per cent. Out of these exports nearly 80 per cent revenue is derived from its Bayer AG group companies. Thus if the Bayer AG group companies continue to outsource due to the cost advantages they have, it will help BSCL to expand its exports. Further, despite the fact that the overall monsoon has been poor this time, BSCL still has managed to put up a fantastic performance in the first half of FY10, wherein its profits grew by 28 per cent to Rs 109.42 crore (Rs 85.8 crore). The revenues during the same period grew by 19 per cent. It should also be noted that the H1FY10 profit at Rs 109.42 crore is higher than Rs 94.46 crore that BSCL posted for the full year of FY09. Additionally, the company shut down its plant at Thane in 2007 after providing a golden handshake (VRS) to its workers. The said plant is spread on a premise of 108 acres and according to media reports the value on a conservative basis could be anywhere around Rs 1,000 crore. BSCL’s market cap is just Rs 1,999 crore. This could generate huge cash reserves if BSCL decides to sell the plot. Finally, for FY10 we expect BSCL to post revenues and profits of Rs 1,751.77 crore and Rs 118 crore. At these estimates, BSCL yields an EPS of Rs 30, thereby resulting in a PE of just 16x. Therefore, you should grab this one at its current levels with a one year price target of Rs 632.
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Bilcare
CMP: Rs 460
BSECode: 526853
Face Value: Rs 10
Div Yield (%): NA
your portfolio for 2010. Incorporated in 1987, Bilcare is a leading player in the pharma packaging industry. It is a leader in the barrier blister packaging in India and commands a market share of over 60 per cent. The company has grown over the years from just being a supplier of packaging materials based on sensitivity of drugs to providing innovative packaging solutions to the global pharma companies. The company is divided into pharma packaging, which contributes 85 per cent of the total revenues, while the balance 15 per cent comes from its other segment viz. global clinical services (GCS), wherein it handles a broad range of requirements from pre-formulation research and development, manufacturing, analytical services, packaging and labeling to worldwide distribution, returns and destructions accountability.What makes Bilcare stand out is the fact that it has been a consistent performer and has been growing at a brisk rate of 54 per cent and 28 per cent in its topline and bottomline respectively. It should be noted that this growth has not only come through organic but also inorganic growth. In fact, though the company faced a comparatively tough FY09, wherein its bottomline growth remained flat, the company’s growth seems to have bounced back on track in the first half of FY10 with a bottomline growth of 42 per cent to Rs 50.69 crore (Rs 35.70 crore), which is quite commendable. The topline growth during the same period has been 27 per cent. It should be noted that packaging solutions provided by the company help its clients to counter the 4Cs of challenges faced by the pharma industry, which include counterfeit, communication to the patients, compliance and convenience of packaging to the patients. Thus, packaging becomes an integral part of the pharma industry, providing good growth visibility for companies such as Bilcare. And it is because of these well-researched pack-aging solutions that the company caters to a huge clientele base that includes pharma majors such as Pfizer, Merck, GlaxoSmithKline Pharmaceuticals, Novartis, Sanofi-Aventis, Johnson & Johnson, Cipla, Dr Reddy and Ranbaxy etc. With such an enviable client list Bilcare is bound to post good growth in the coming years. In fact Rakesh Jhunjunwala continues to remain bullish on this company and still holds 11.63 per cent in Bilcare as on September 2009. On the financial front, we feel Bilcare could post con-solidated revenues of around Rs 1,094 crore, while profits could be around Rs 105-110 crore for FY10. At these estimates Bilcare gives an EPS of Rs 61, thereby resulting in an estimated PE of just 7x, which is a steal. It there-fore makes sense to add Bilcare to your 2010 portfolio with a one year target price of Rs 620.
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CMP: 236
BSECode: 500469
Face Value: Rs 10
Div Yield (%): 2.1
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Federal Bank, which was earlier known as Travancore Federal Bank, is the fourth largest private bank in India. Despite all the tumult which the banking sector experienced last year, Federal Bank was able to maintain its asset quality and the net non-performing assets (NNPA) of the bank remained below one per cent. At the end of Q2FY10 it was 0.54 per cent. One of the reassuring things is 
the bank’s provision coverage ratio (PCR) of 82 per cent, one of the highest in
the banking sector, and this will help it prevent any deterioration in its profit figure due to the new rules announced by the RBI which stipulates a minimum of 70 per cent by September 2010. Another important parameter where Federal Bank scores over its competitors is the improvement in its loan book, which increased by 21 per cent on a y-o-y basis whereas the industry average remained around 15 per cent during the same period. The bank’s loan book is well-diversified, 40 per cent of which compromises corporate credit while retail takes up 29 per cent and SMEs share 31 per cent. This healthy improvement in credit has helped the bank to increase its credit deposit ratio by 3.8 per cent on a y-o-y basis to 77 per cent at the end of Q2FY10. This improved lending along with a drop in cost of funds has helped the bank to increase its margins. The bank’s net interest margin has increased by 40 bps sequentially and currently stands at 3.7 per cent, once again the best in the industry. Apart from revenues, the bank was also able to keep its costs under control and its cost/income ratio dropped by 4.6 per cent sequentially to 35 per cent. But this is likely to increase going forward because the bank is expanding aggressively outside Kerala and has opened 20 new branches during the last quarter. It is expected to open 26 more branches this quarter, thereby covering pan-India locations, including Delhi, Gujarat and Maharashtra. However, this will also help the bank to lower its dependence on one state i.e Kerala, which accounts for 60 per cent of its cur-rent branches and almost half of its business. The bank is well-capitalised and maintains one of the highest capital adequacy ratios (CAR) in the industry. At the end of Q2FY10 it has a CAR of 18.47 per cent and still has room to tap Tier 2 capital if required. The bank is even pursuing an inorganic route to grow. There has been talk of a merger with the Catholic Syrian Bank (CSB) for over a year now, particularly after it acquired a 5 per cent stake in the privately-held CSB last year. Despite having one of the best operating matrixes, the bank is trading at a huge discount as compared to its peers. The shares of the bank are currently trading at 7.3 earning multiple of the bank’s last 12-month trailing earnings and the price to adjusted book value is of 0.9 times. Therefore, looking at the better operating performance and pretty valuation, our suggestion is to take exposure in the counter with a 12-18 month time horizon.
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CMP: Rs 113.20
BSE Code: 503699
Div Yield (%): 1
It is always better to have a high growth company in one’s portfolio as it not only provides greater amount of stability to the portfolio but also ensures better returns to the investors over the long term. Since the scrip has also underperformed the broader market, the probability of this scrip catching up with the valuations is quite high. Hence it makes sense to include Geodesic in one’s portfolio.
Since its inception in 1999, Geodesic has been carving a niche for itself in the information, communication and entertainment space and has been trying to improve the way people communicate and collaborate with one another. Through its products, the company basically caters to the enterprises and retail segment. In the enterprise segment, the company provides comprehensive Customer Alignment and Relationship Management (CARM), which helps enterprises grow their businesses and lower costs, Real Time IP based all in one communication suite which helps enterprises cuts communication cost by as much as 25 per cent to 40 per cent, etc. While in the retail segment, it provides services under the ‘Mundu brand’, which includes instant messenger, SMS, push email, IP telephony and live streaming internet radio for both mobile as well desktop computers. Thus, through these services Geodesic has indeed created niche for itself and this has helped the company to grow at a very brisk pace. It should be noted that Geodesic has been growing at three-year CAGR of 75 per cent and 65 per cent in the bottomline and has been enjoying operating margins of over 50 per cent till FY09, which is quite commendable. Also, there is no other company with similar business model in the listed space and hence Geodesic would continue to command premium on the bourses.[PAGE BREAK]
Face Value: Rs 2
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After facing one of the worst financial crisis since the great depression, the world economy is trying to stand on its feet, thanks to the government support and spending worldwide. Indian government too doled out three stimulus packages with emphasis on infra-structure spending. Larsen & Toubro (L&T), one of the largest Indian conglomerates with interests spanning in engineering and construction, technology, etc. is the key beneficiary of this spending. The trend is clearly visible in the order backlog of the company. In FY08, orders from the public sector units accounted for only 50 per cent which at the end of FY09 stood at 80 per cent.
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Mangalam Cement
CMP:- Rs 136
BSE Code: 502157
Face Value: Rs 10
Div Yield (%): 3.29
In the stock market there are certain hidden gems which actually go unnoticed as there is no investors’ fancy in those counters. Mangalam Cement (MCL) is one such counter which holds a lot of potential to become a part of our portfolio but has mostly been ignored by the investors. Its strong dividend payment history, good management bandwidth, cash-rich position and expanded capacity make it a good buy at its current levels. On the valuation front, its CMP of Rs 136 discounts its trailing four quarter earnings by just 3.05x. But what makes MCL more attractive is that its replacement cost is more than double of its enterprise value. Hence, our recommendation is that you should buy the scrip at its current levels with a target price of Rs 225 in the next one year.
As regards its business, MCL has a capacity of 2 million tonnes and also has captive thermal power generation capacity of 17.50 MW and 6.15 MW through wind mills. Further, it has already placed an order for another 17.5 MW plant that is expected to be commissioned in 18 months. To set up a cement plant of 1 million tonne capacity would require Rs 400 crore (on a conservative basis). Therefore, going by the present capacity the company’s enterprise value should be at least Rs 800 crore. But the EV of MCL stands at Rs 367 crore. So this provides good room for upward movement. Investors should also keep in mind that these are conservative estimates and we are not even including the value of captive power plants which, by current estimates, can be worked out to be around Rs 68 crore.
This being a B K Birla Group company, it has good management bandwidth. So it also deserves a premium on the valuation front. But as mentioned earlier, it is trading at just 3.05x of its trailing four quarter earnings.
MCL is rich in cash and as on March 31, 2009 it had Rs 44 crore as cash balance. It also carried out a buy-back last year and bought 15.53 lakh shares for Rs 11.19 crore. It intended to buy 10 per cent of the equity with a budget of Rs 21.50 crore (Rs 75 per share) but it has announced a closure of the buy-back and therefore this clearly indicates healthy cash reserves.
Additionally, the company has paid dividend amounting to Rs 5.50 per share (ex-dividend) resulting in a dividend yield of almost 4 per cent. Also, it is almost a zero debt company and the debt is limited only to Rs 6.55 crore. The financial performance of the company has also been good and for H1FY10 it posted a topline of Rs 320.89 crore and a bottomline of Rs 69.15 crore as against Rs 305.29 crore and Rs 41.49 crore. This indicates a better operating performance. Considering all these factors we recommend that investors should buy this scrip with a target price of Rs 225
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CMP: Rs 208
BSE Code: 532555
Face Value: Rs 10
Div Yield (%): 1.73
NTPC is leader in power generation and with is aggressive capacity addition it will be able to maintain its position. With 2800 MW to be added in H2FY10, 4460 MW in FY11 (2460 standalone + 2000 JV) and 4940 MW (3690 + 1250) in FY12 it is expected to maintain its growth trajectory. There were some project delay concerns, but we feel those have been already factored in. Total capex is estimated at Rs 62,800 crore and will be funded through internal accruals and loans from institutions.
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CMP: Rs 69
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Our forecast for the US over the next few years calls for an extended trading range with a downward bias. Nevertheless, we cannot rule out the possibility that in terms of absolute prices the secular low may already have been seen in a similar way to the 1932-49 and 1974-82 experiences. Whether it’s a trading range or a real bear market, the important point is that the investment challenges in the years ahead are likely to be formidable. Dow 35,000 was a popular title at the 2000 peak. May we suggest Dow 2,500 as an equally flawed title for the low whenever it comes? If you would like to see the full report on the secular bear market, please go to www.pringturner.com. Praj Industries entered a corrective phase which turned out to be rather sharp, especially when keeping in mind the quantum of its rise and carried on to post an intra-week low of 070.00 during the week ended July 17, 2009. The index posted a higher bottom of 077.90 during the week ended November 6, 2009 and another higher bottom of 079.90 during the week ended November 27, 2009. Meanwhile, the bigger picture continues to remain positive and with the long-term uptrend set to commence, the scrip seems set to appreciate further from here. On the basis of the above argument and hypothesis, we can draw a conclusion that year 2010 could see a range of 17,878-19,518-21,158 and maybe a range of 24,439-26,171 to an outer extent. The probability is that Wave X is either over or about to get over or may get over in the range of 17,878-19,518-21,158. By the time this is read, we could have seen lot of price development in a period of about a month or so. It is quite possible that we will celebrate in the first fortnight of January 2010, the second anniversary of the peak of 2008. The normal range of January 2010 will be 20,439 to 21,423. Investors and traders need to move with important higher bottoms in order to take the benefit of moves towards the higher range. The important higher bottoms at this point are 16,210 and 15,530. • Taxation is like shares (long term capital gain is zero and short term is 15 per cent) Today, the Indian MF industry can lay claim to having a world-class regulatory framework, one with the ability and willingness to evolve, which in itself is a pointer to its sensitivity to the requirements of the financial markets. With a strong and proactive regulatory mechanism in place, the Indian MF industry may be expected to score even higher against the parameters of sustained asset growth, transparency and regulatory compliance. Fortunately, most of the funds are already prepared for this and therefore investors may not lose much in these funds. The credit risk quotient has come off significantly across mutual funds and is unlikely to pose significant risk to the investors. But at the same time, investors should be wary of buying low credit papers or funds as the spreads have shrunk significantly and offer little compensation for the associated credit and liquidity risks of the underlying companies’ bonds. For investors, there must be a balance in taking risks as well as marginalising correlations to external variables such as a weak US dollar. To date, a bar bell strategy seems appropriate. Regional telecoms are laggards with strong cash flows and have underperformed. Internet stocks exhibit high cash flow, are fast-growing and a proxy to consumption. Finally, Taiwan technology appears fairly priced, with strong net cash balance sheet support with operational gearing on the upside to surprises in demand. The most dominant cycles, as I see it, are the 11, 17 and 21 week cycles. These have all been averaged together (in the purple line) which suggests when cyclical peaks and troughs are most apt to occur in 2010. As an aside, I should point out that if the market is rapidly advancing as it comes into a potential cyclical low in this indicator, we would expect a reversal of the advance, and vice versa. Cycle projections are more about reversals. Well, there you have it - what my studies from the past project gold in 2010. For more insightful forecasts of all futures markets and stock indices, visit my web site www.ireallytrade.com. Transparency and paucity of channels of financing real estate development are hampering the growth aspiration of the sector. A nodal real estate regulator is required to check the excesses in the sector. Along with that, clarification on the issues related to taxation and valuation for REMF can enhance sources of funds for real estate development. Also, REIT guidelines are also expected to be formulated during 2010 which in the long term may have the potential to change the landscape of Indian real estate sector taking it to a higher orbit of growth. For the residential sector, government may need to provide higher FAR and additional tax benefits to the home buyers which in effect would reduce the residential cost of development [PAGE BREAK] As your investment time frame and goals change, so might your asset allocation. Be prepared to re-evaluate your asset allocation periodically. Some of the events that would prompt you to do so could be the education of your children, buying a house or retirement. However, the most important factor is to get started. Remember, it is never too late to get started and it’s never too late to revamp the asset allocation plan. A key element for the success of an asset allocation is to adopt the right strategy for implementing it. Once the strategy is in place, the focus has to be on selecting the most appropriate instruments. The key considerations while selecting the instruments have to be flexibility, transparency, tax efficiency, and liquidity.
CMP: Rs 31.50
Justifying the middle letter of its name Spice i.e ‘i’ which stands for innovation, Spice Mobiles (SPL) has the distinction of delivering various firsts to the Indian mobile industry such as providing dual SIM series across GSM and CDMA, the world’s first movie phone etc. SPL is a part of USD 1.5 billion B K Modi Spice Group and is engaged in the manufacturing and selling of mobile handsets. During the 15 months ending March 31, 2009, SPL has sold more than 2.7 million handsets and the current business environment provides an excellent opportunity for the company to exploit its competitive advantage. Though the company’s product portfolio is present in the entire segment of mobile sets, including monochrome, colour, CDMA etc, SPL’s competitive advantage lies in its low price and entry level mobiles that offer value for money. To exploit this opportunity the company has again added one more first to its credit and launched the world’s first people’s phone for less than USD 20, which in rupee terms is below Rs 1,000. This will help the company in riding at the bottom of the pyramid. With rural teledensity just 19 per cent at the end of September 2009 - one of the lowest among Asian countries, including Pakistan - and call rates already one of the lowest in the world, the situation augurs well to spur the demand for mobile phones across the country. To take advantage of the current situation, SPL has already committed investment of Rs 100 crore. This fund will be used at its Baddi facility to expand and extend its manufacturing facility since it is also used to produce other devices. Once this facility is ready, as expected by March 2011, it will have the capacity of producing 2 million mobile units a month. That apart, the roll-out of 3G services will help drive the sales of SPL’s 3G-enabled mobile handsets. SPL’s financial performance stands testimony to the company’s improving conditions. In the first half of FY10 the company’s profit increased by 4.68 times whereas its sales increased a shade below 60 per cent. What is heartening is that the company’s earning per share (EPS) has been increasing on a quarter-on-quarter basis since September 2008 and this has helped in the company witnessing a complete turnaround. In September 2008 the company had posted loss of 84 paise per share whereas in the latest quarter it recorded a profit of Rs 2.2 per share. Despite demonstrating such stellar growth the company is available at just 7.5 times of its last 12-month earnings. The market cap to sales of the company too is as low as 0.31 times. Further, adding strength to its balance sheet is SPL’s low debt equity which at the end of FY09 was 0.02 times. Even the EV/EBIDTA of the company stands at 4.28 times and this certainly looks attractive. Looking at the company’s growth prospects and its cheap valuation our suggestion is that you should pick up Spice Mobiles
CMP: Rs 192
BSE Code: 503806
SRF is into business of technical textiles, refrigerants, engineering plastics, industrial yarn and pack-aging films and the flagship company of Bharat Ram group is again featuring on buy list after we recommended during Muhurat buys.
The amount of money printing that went on simply acted as a medicine, but the recession never went away. So when the benign cycle of low rates and low inflation reverses, high inflation will take its toll on the markets
Led by high beta sectors like metals, infrastructure, banking and real estate, not to forget the expectation of a 7 per cent growth in Indian economy, the year 2010 may test new highs and this may well put the value investors in a quandary
2009 was perhaps a year of missed opportunities for many. Everyone waited for a ‘correction’ that never happened. Markets have a habit of not conforming to expectations, thus levelling all so-called ‘experts’ to the dust. In a year when the globe went through considerable pain, the stock markets were on a high. For those who did not listen to reason or those who chose to remain long-term investors, the rewards were ample. Our stock markets delivered handsome returns, but with much narrower participation as the FII inflows surged in and absorbed the thin floating stock in the markets. Perhaps they had faith, which the locals did not exhibit!
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When things go wrong people tend to think that there is no end to the misery. So they all start getting pessimistic about the market. In 2009, that is what happened. People thought that markets will never rise. The reverse happened when markets were going up. People thought that it would never fall.
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In the United States, the last ten years have proved to be the lost decade as the S&P has declined by 28 per cent. When adjusted for inflation the numbers are even more discouraging with a decline in excess of 40 per cent. A recent Time magazine cover story argued that the worst was behind us but my research suggests otherwise
A secular bull or bear market is a period in which inflation-adjusted equity prices persistently rise or fall over the course of many business cycles. Chart 1 shows that since 1901 there have been four secular bear markets. The most recent one began in the year 2000 but has yet to run its course. Arguably, the most popular long-term measure of stock market valuation is the price investors are willing to pay for corporate earnings. Why at one time are fearful investors only willing to pay USD 44.20 for that same USD 1 of earnings (i.e. 2000 secular peak)? The answer lies in the extremes of confidence or lack thereof only seen at major secular turning points. The Shiller P/E ratio in the bottom panel of Chart 1 therefore represents an excellent thermometer of investor sentiment.
One interesting observation is that the Nikkei in Japan peaked in 1990 and has been in a downtrend ever since. In this respect, the Japanese market is ten years ahead of the US. Chart 3 therefore overlays the inflation adjusted S&P Composite over that of the Nikkei. The Japanese market (in blue) starts in 1975 and takes us up to the end of November. The green line is the S&P and it starts in 1985 and also ends in November. Please note that both series have once again been deflated by their respective consumer price indices (CPIs).
This certainly does not sound very appealing and it’s not, but remember that the first year of the new decade is often a weak one. The opening years of the last twelve decades in the US have seen equity prices rise only four times. Three of the four - 1900, 1970 and 1980 - experienced sharp setbacks in the first half of the year. That just leaves 1950 as the only unscathed year. Clearly a time for caution.
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Market Will Test 21,200
The Sensex has been in the midst of a recovery ever since it bottomed out by posting an intra-week low of 8,047.47 during the week ended March 6, 2009. The Sensex staged a recovery but declined to post an intra-week low of 8,110.10 during the week ended March 13, 2009, did not breach the earlier bottom and these levels have not been seen since. The Sensex commenced a superb intermediate uptrend (which later converted into a long-term up trend), posted a series of a progressively higher tops and bottoms, started moving into the confines of an upward sloping channel (refer to chart), peaked at an intra-week high of 15,600.30 during the week ended June 12, 2009 only to enter a corrective phase.
A rather severe correction was followed by a fabulous recovery, which also saw the resumption of its long-term uptrend. The Sensex rallied to post a fresh high of 16,002.46 during the week ended August 7, 2009 but this time around, had a rather sharp decline and it did not test its earlier intermediate bottom but posted a higher bottom of 14,684.45 during the week ended August 21, 2009. Currently, the Sensex has continued its sequence of newer highs and has not only posted a fresh high but is also within reasonable proximity of the 17,000 level. The Sensex needs to overcome the 17,337 level from a weekly point of view which means an upward movement to the 19,000 level or more while a test of the all time high of 21,200 cannot be ruled out.
Glenmark Pharma bottomed out by posting an intra-week low of 119.15 during the week ended February 6, 2009, gave an upward bar reversal, overcame the 5 Week EMA, launched into an intermediate uptrend, posted a series of progressively higher tops and bottoms, started moving within the confines of an upward sloping channel and ultimately rallied to peak at an all time high of 268.00 during the week ended May 29, 2009. Glenmark Pharma entered a corrective phase which turned out to be of rather severe proportions and declined to post an intra-week low of 199.05 during the week ended June 19, 2009 but strong support from the 13 week EMA provided the necessary cushion for an instant recovery.
Glenmark Pharma commenced a rather hesitant uptrend from here (which hasn’t yet converted into a long-term uptrend), started moving in the confines of a broad trading range (refer to chart) and continues to do so even now while for the first time over a long period there have been some sparks of life as it has given an upward breakout from a symmetrical triangle on the weekly chart. This promises to convert the move into a long-term uptrend.
ICSA India bottomed out by posting an intra-week low of 048.35 during the week ended March 13, 2009 when a deep oversold situation prevented a further fall while positive divergence across indicators was sporadic rather than uniform. ICSA India overcame its intermediate top and set off on an overdue rally, which saw it overcome the 13 Week EMA and ultimately peaked at an intra-week high of 126.60 during the week ended April 17, 2009. It bottomed out by posting an intra-week low of 104.05 during the week ended April 29, 2009 and moved sideways for the next few weeks before giving an upward breakout by closing above its downward sloping channel during the week ended May 8, 2009.
Praj Industries bottomed out by posting an intra-week low of 049.10 during the week ended October 31, 2008, gave an upward key reversal, staged a smart but unsustainable rally and retraced this rise by posting an intra-week low of 045.10 during the week ended March 6, 2009. It almost gave an upward key reversal from here, took some support, sustained above the 5 Week EMA, entered an intermediate uptrend, posted a series of progressively higher tops and bottoms, started moving within the confines of an upward sloping channel and ultimately peaked with an all time high of 122.55 during the week ended June 5, 2009 only to decline again.
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Taking into consideration the long-term wave tree of the Sensex, it is quite possible that there will be celebrations at the beginning of 2010 and investors and traders would do well to benefi t from the movement towards the higher range
Taking into consideration the readings for 2010, the Yearly Level 3 is placed at 20,439 (on the basis of the closing of December 10, 2009). This level will change depending on the price movement till December 31, 09. The Yearly Level 4 is placed at 29,885. The Yearly Centre Point is at 14,243 and Yearly Level 2 is placed at 10,993. The Yearly Centre Point may certainly be visited in 2010 and to an outer extent of 10,093. If Wave X completes shortly then Wave Y can move down to test the Yearly Centre Point and Yearly Level 2.
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Get Market Returns With ETFs
Regular equity investors may also opt for new innovative value averaging investment plan (VIP) or systematic transfer plan (STP) on Benchmark S&P CNX 500 Fund which is based on a formula and allows you to invest more in the falling market and less when markets are moving up, back testing results show a higher returns to the extent of 3.5 per cent for VIP as compared to Systematic Investment Plan (SIP) as this method takes the emotion out of the investment decision and helps the investor to invest in disciplined manner.
Indexing or Exchange Traded Funds (ETFs) have gained popularity in global markets. With a large number of institutional investors in the market, it has become impossible for any active investor to consistently beat the market, hence the best way to participate in the market is through index funds.
ETFs are the most efficient route to take exposure to an index and when compared to any other open ended index funds ETFs are transparent, low cost, traded on the exchange just like any other stock and offers solution across asset classes.
How one can you use ETFs?
You can diversify your core equity holding with a single ETF unit
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Mutual Funds Strategy
Stage Set For A Paradigm Shift
In December 2008, SEBI stipulated that all closed-ended debt schemes be compulsorily listed on the stock exchanges and banned premature withdrawals in close-ended debt schemes. It stipulated tenure limits for investments in securities by close ended schemes of similar tenure. Following the October 2008 crisis, these measures addressed the anomaly in the MF debt segment, where the fund manager faced an illiquid market but offered the investor ready liquidity. Thus in one stroke, the investor’s concern over liquidity was addressed while the fund manager was relieved of the bother of having to offer liquidity windows
Improvement in liquidity conditions in the Indian market along with revival in investor confidence has helped the domestic MF industry tide over the problems spawned by the October 2008 liquidity crisis. The strong recovery of the industry is reflected by the growth in assets under management (AUM) of debt schemes. The average AUM increased more than two-fold post-October 2008 to reach Rs 5,88,053 crore as on November 30, 2009.
SEBI and AMFI have mandated that bond valuation would be done by two agencies instead of only CRISIL at present. ICRA has been mandated by AMFI as the second agency and has already launched its valuation matrices. The regulatory move is aimed at instilling additional confidence in investors about the valuation of non-traded corporate bonds. With the two premier agencies valuing non-traded bonds independently, a better price discovery mechanism is likely to emerge.
Wait And Watch
Now that last year’s volatility has subsided, there is evidence that Indian business activity has made a turnaround from Q4 FY09 and has seen its output rebound sharply. Though the broad trend of an unfolding recovery seems clear, many of us are surprised by the strength and the speed of it. A large and timely dose of monetary and fiscal stimulus drove this speedy recovery in India, which wasn’t as affected by last year’s credit crisis given its healthier banks and less leveraged consumers. Public sector spending has exploded in our country in the last 18 months, creating enormous demand that has prevented our economy from falling into a supply glut or debt trap.
Policy makers always respond to recessions with low rates and higher public expenditure, but the unique feature of 2008-09’s recession has been that the response has been global, aggressive and sustained. Now, given that we are likely to grow at about 6.5-7.5 per cent for the next three years, with 4.5-5.5 per cent inflation, our policy rates should be in the 5.5-6.5 per cent range. Here, our assumption is that long-term growth and inflation rates in India are 7 per cent and 5 per cent respectively. Against this backdrop, as we expect growth to sustain at long-term average rates we believe money will get costlier in the coming years.
Equity Strategy
Gold Strategy
This is not a cycle. What it appears to be is a burst of energy, so to speak, in the gold market that takes place about every 17 weeks. It has been doing this for the last ten years or so. We should carefully look for market explosions to start at this time. This is when it is most apt to reverse the current direction. This can also be combined with the cyclical observations and seasonal indications. Speaking of cyclical observations, the second panel underneath the weekly price chart is what I refer to as my Natural Cycle. This is an interesting way of predicting future price.
It is based on the price action of years in the past that have a common analogy with the unknown year. In other words, certain things took place - say seven years ago, that should have an affect on gold in 2010. The years all have one thing in common and that is why I call this a Natural Cycle. I then take the average prices of these years to make the forecast year road map or pattern. As you can see, this approach calls for a top early in the year. Then it calls for a decline into April 2, with a long drawn-out rally topping around July 2. An ensuing decline bottoms the week of July 23 and August 27. That down move should kick off a rally in the middle of October, when again a decline comes into this market.
Real Estate Strategy
In A Stabilisation Mode
Economic slowdown took its toll on the real estate market in 2009, but improved macro-economic conditions will see the sector stabilizing in 2010
Indian real estate market started the year 2009 in the “declining” phase of the property cycle. 1Q09 witnessed the highest decline in rental and capital values for most of the commercial real estate micro-markets in the current downturn. Dwindled demand for commercial space significantly aggravated the oversupply situation. As a result, many of the under-construction projects were delayed and most of the projects completed during 2H08-1H09 commenced their operations with significantly higher vacancy levels.
Indian real estate sector is expected to be in the stabilization mode at the commencement of 2010. Improved macro-economic conditions and substantial improvement in sentiments are likely to trickle down to the real estate sector. As such, real estate in India is expected to continue to build upon the improvements it has seen in the last two quarters. While office and residential sectors are likely to see substantial improvements, retail real estate market may continue to be sluggish for a while.
Office real estate market is soon expected to enter in the “recovery” phase of the property cycle. Absorption is expected to see 15-20 per cent increase from its 2009 levels. However, vacancy may continue to increase due to huge supply pipeline. As such, we do not expect any significant decline in rental values during 2010. Capital values have already started to show signs of stabilization. The current trend of yield compression is likely to continue in 2010.
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However, residential real estate is likely to lead the pack and enter in the recovery mode first. We have already noticed instances where developers have increased their brochure price taking cues from the improved demand sentiments. We do not expect any noteworthy downside risk for capital values in the residential real estate market. To sum up, all sectors are likely to see more activities in 2010 than in 2009.
Diamond
Investment In Diamonds - The 'In Thing'
Gold and diamonds are increasingly being used as a hedge by HNWI of India, China and Russia. Hence, the emerging market in BRIC countries will push the demand for diamonds further north
During the peak of the recession in January of 2009, Jelena Jankovic, currently eighth ranked women tennis player of the world, was giving a regular interview at a popular sports channel. When asked as to what will be her choice if she was given an option to choose between a branded watch and a diamond ring, her reply was amazingly curt and candid, "Of course the diamond ring...you know a diamond is woman's best friend." It's amazing and at the same time reassuring to note that the friendship had not subsided at the height of the catastrophe which saw the consumer buying go into a tizzy with the collapse of Lehman brothers. Since then so many things in this world has changed permanently but an investor's bondage with the women's best friend has increased in direct proportion to the loss of confidence in paper stocks. The Raj Kundras and Saif Ali Khans went on publicly admonishing their love for their girlfriends with iconic diamond rings and gold and diamonds emerged as tools of investment with a vengeance. In fact when the world was seeing a meltdown of prices of other commodities like steel, copper, oil and etc, hard assets like gold, silver and diamond more or less held on to their prices which can instil strong faith in the minds of an investor during bad times.
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The value of gold and diamonds are derived intrinsically from their rarity. Though both gold and diamonds are extremely rare in nature, diamonds are rarer and have shown price appreciation steadily through the last 25 years. However gold has shown much greater promise and returns in comparison. Hence diamonds now look historically cheap in comparison to its asset class peers like gold or silver which has shown phenomenal increase and appreciation in prices through the last few years, especially this year with the decline in dollar, the primary fiat currency of the world. Both diamond and gold are US $ denominated assets as over 60 per cent of world's gold holdings are still in USA. Gold & diamonds are increasingly being used as a hedge by HNWI of India, China & Russia. The emerging market in BRIC countries will push the demand for diamonds further north.
Hence the latest 'in thing' in the world of investment is to invest in diamonds. Now De Beers has started a new campaign harping the prudence in investing in love and diamonds. This new found vigour of the world in diamonds is underlined by the launch of a number of diamond investment funds this year. This is driven by the growing demand for portfolio diversification by fund managers the world over with the failing of the paper scrips, the real estates and the commodity based futures during the crisis. Only gold and diamond had more or less remained unaffected during the savage onslaught on prices of different commodities. This has given the investors and fund managers food for though and a viable option.
In 2009 an electronic diamond exchange was launched by DODAQ (Dealers Organisation for Diamond Automated Quotes) to trade categories of polished diamonds. The DODAQ exchange is intended to be a terminal market for round polished certified diamonds (which is the most liquid part of the market) and hosts its centralised storage facility in a Freezone. The exchange is an attempt to overcome the traditional investment barriers of sales tax and low liquidity on the resale market. DODAQ offers two-way auctions for individual categories of polished diamonds, thus creating real time spot prices and the first cash market for diamonds. The trading platform is open to all, both within and outside of the industry, enabling diamonds to be realised for the first time as an asset class, and an alternative investment opportunity to gold.
The idea of investing in certified loose diamonds is attractive, especially in the current environment where mainstream investments appear risky. It is true that certified loose diamonds have tended to appreciate in value over time, and therefore can be resold at a future date often for considerable sums of money. In this way diamonds are much better "investments" than many other high priced items such automobiles which rapidly depreciate over time. However, those round brilliant diamonds with excellent cuts tend to retain their original value over odd cuts such as Emerald Cuts, or Radiant Cuts.
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The recent trends of diamond investment funds and promotion of diamonds by De Beers as safe haven investment suggests that more and more HNWIs of the Western world are also prone to taking the route of investment in diamonds. Another option for investors is the vintage diamond jewelry market -- considered capable of more lucrative returns because of the added value of provenance. Most of the auction houses are selling rare diamonds at phenomenal prices. A 5 carat cushion shaped fancy vivid pink diamond ring set not one but two world records at Christie’s Jewels sale in Hong Kong last week by selling at US $ 10.78 million, a whopping US$ 2.1 million per carat. If one considers the other use of diamond which magnifies its emotional quotient during trying times, then the ROI on diamond by an investor increases further.
So what’s does the prescription look like- What is the best investment in diamonds today?
A single diamond usually termed as solitaire set in rings does not go up in value faster than say a pair or a matched set in a 3 stone ring.
But a single stone or solitaire may be more liquid than a collection. A single stone might cost less to set.
Medium quality diamonds (with no visible imperfections or obvious discoloration) are more saleable, and go up in value at a proportional rate to rarer more expensive diamonds like D Flawless or VVS quality.
Princess cuts are hot at the moment, but in a few years they will be passé. Heart shapes, marquise and other shapes come and go in fashion. Round brilliant cut diamonds are definitely the best most resell-able in the long-term.
90% of round diamonds are poorly cut. A clever buyer will buy a non-traditional ‘Ideal Cut’ diamond that will fit into the new GIA and AGS best cut standards.
Fancy colored pink diamonds may become rare if the Australian Argyle mine output falls as appears likely. But pinks are hard to re-sell.
India: Resilient, Strong, But….
There may not be too much of an upside to growth in the next fi scal as there would be some attempts at withdrawing stimulus packages in India and globally.
In response to this, monetary policy globally has taken a very interesting unconventional turn. Official rates in some countries moved close to or at zero per cent and central banks under such instances also had to resort to outright asset purchases, commonly called “Quantitative Easing”. And this was generally the accepted norm through most of the first half of calendar 2009. These measures served to ease the sharp liquidity crunch; the financial market parameters improved and the level of activity in many economies appear to be stabilizing. And, with liquidity so easily available, the riskier assets – read equities – have rallied.
Dr Jekyll And Mr Hyde Of The Economy
Faced with a larger threat of financial instability rather than price instability, as was the lesson learnt from the recent financial crisis, there seems to be an unannounced agreement among them that ensuring financial stability would be their primary task, an offshoot of which would be otherwise held as the main task of ensuring price stability and control. The current tone of our central bank as per the recent BPLR and the later credit policy document is that it would not only set the benchmark lending rates but also let banks deliver them in an appropriately risk-weighted manner, which is a right policy in that direction. The expectation is that the rates would be adjusted sectorally as per the perceived risk of the sector’s contribution to the overall financial instability not from the macro allocation viewpoint but from the micro retail lending point of view. Let us see here what role Dr Jekyll (the interest rate) and Mr. Hyde (asset price expectations) play out in an economy from a real-life perspective.
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Ram is a Mumbai-based wholesale trader who buys grains and other agricultural products from nearby mandis and stores and distributes them among Mumbai retailers who are his customers. As it takes some time between his buy and sell decisions, and there are costs and risks involved in the process, he builds his costs and market risks into his price expectations and appropriately makes his exit (timing and price) expectations. A part of the cost that gets added to is the interest rate expectations i.e. the interest rate that he loses by investing it in his wholesale trading business compared with the next best possible opportunity that he loses. One such opportunity, according to him, would be one of his own side-businesses of lending his excess liquidity to the needy in an informal manner and getting the money back at a rate usually ranging from 24-36 per cent depending on his borrower’s history and net worth, besides various other criteria that he applies in his mind before offering him a loan.
The key ingredients should be your time horizon, investment goals, and risk tolerance. Your time horizon is the expected number of months or years you will be investing to achieve your financial goals. If you have a longer time horizon, you may feel more comfortable investing in a riskier but potentially better investment option because you will have time on hand to wait out slow economic cycles as well as inevitable volatile periods. For example, while investing for your retirement, you can afford to put a greater percentage of assets in equities as you would generally have many years until you reach that stage. Risk tolerance is your ability and willingness to lose a part of your original investment during short-term market movements in exchange for greater potential returns.
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