Easy Finance

Debt - Part 1

noreply@blogger.com (Raj Redkar) — Wed, 06 Jul 2011 11:16:00 +0000

Hello everyone,

Have been off blog for long. Appreciate your patience and comments on my previous posts. I have been requested to publish material on debt. So I'll be covering debt in a question / answer format which I hope would be easy for you to understand

What are Money Markets and money market instruments?
Money Markets allow banks to manage their liquidity as well as provide the Central Bank means to conduct monetary policy. Money markets are markets for debt instruments with a maturity up to one year. The most active part of the money market is the call money market (i.e. market for overnight and term money between banks and institutions) and the market for repo transactions. The former is in the form of loans and the latter are sale and buyback agreements - both are obviously not traded. The main traded instruments are Commercial Papers (CPs), Certificates of Deposit (CDs) and Treasury Bills (T-Bills).

Commercial Paper

A Commercial Paper is a short term unsecured promissory note issued by the raiser of debt to the investor. In India, Corporates, Primary Dealers (PD), Satellite Dealers (SD) and Financial Institutions (FIs) can issue these notes.It is generally companies with very good ratings which are active in the CP market, though RBI permits a minimum credit rating of Crisil-P2. The tenure of CPs can be anything between 15 days to one year, though the most popular duration is 90 days. Companies use CPs to save interest costs.

Certificates of Deposit

These are issued by banks in denominations of Rs 5 lakhs and have maturity ranging from 30 days to 3 years. Banks are allowed to issue CDs with a maturity of less than one year while financial institutions are allowed to issue CDs with a maturity of at least one year.

Treasury Bills

Treasury Bills are instruments issued by RBI at a discount to the face value and form an integral part of the money market. In India Treasury Bills are issued in four different maturities - 14 days, 90 days, 182 days and 364 days.

Apart from the above money market instruments, certain other short-term instruments are also in vogue with investors. These include short-term corporate debentures, bills of exchange and promissory notes.

Earnings to drive US stocks after ugly data

noreply@blogger.com (Raj Redkar) — Sun, 18 Jul 2010 10:33:00 +0000

After ugly economic data and an unexpected downturn in sentiment on quarterly earnings, Wall Street will face a tough time battling back from the latest sell-off.
Technology and banking results will once again shape investor mindset in the week ahead. But it'll be a tough job to shift back into a positive mode after stocks dropped nearly 3 percent drop on Friday.

Minutes of the Federal Reserve's June meeting got the market seriously worried this week after officials said they were more concerned with the pace of the economic recovery.
A raft of disappointing data didn't help, prompting questions this week on whether the economy had merely hit a soft patch or was primed for a double-dip recession.
"It doesn't mean the market can't rally, but the structural problems are there and there is no doubt about it," said Joe Saluzzi, co-manager of trading at Themis Trading in Chatham, New Jersey.
From a technical perspective, the picture is even less certain. The Standard & Poor's 500 Index is stuck in a tight range after it failed to hold its 50-day moving average, now near 1,090, after closing above it for two days.
The Nasdaq Composite, meanwhile, failed in its attempt to break its 200-day moving average, but has support around its 14-day moving average at 2,171.
At Friday's close, the three major U.S. stock indexes were each down about 1 percent for the week: The Dow Jones industrial average lost 1 percent, while the S&P 500 slid 1.2 percent and the Nasdaq shed 0.8 percent.
The coming week's earnings will include results from 12 Dow components, as well as earnings from financial powerhouses Goldman Sachs Group Inc and Morgan Stanley along with tech bellwethers Apple Inc, Texas Instruments Inc and Qualcomm Inc.
For the second quarter, earnings are expected to increase 28 percent from the year-ago period, according to Thomson Reuters data.

DOUBLE SHOT OF HOUSING DATA
The week's major economic indicators will zero in on the housing sector, which is still struggling in the wake of the worst recession since the 1930s. In the second quarter, banks repossessed a record number of U.S. homes as U.S. unemployment stayed high, according to RealtyTrac, a real estate data company.
On Tuesday, Wall Street will get data on housing starts for June, which are expected to show a slight decline to a seasonally adjusted annual pace of 580,000 units from 593,000 in May, according to economists polled by Reuters.
Another snapshot of the housing market will be provided on Thursday with existing home sales for June. The forecast calls for a drop of 8.1 percent in June existing home sales versus the 2.2 percent decline in May, the Reuters poll showed.

REVENUES UNDER THE MICROSCOPE
But investors will focus on earnings next week. Close attention will be paid to revenue for signs of improvement, in light of the contrasting results from Intel Corp and Google Inc.
"That's been the problem. They've been meeting or exceeding on cost cutting and not on demand for their products," said Terry Morris, senior vice president and senior equity manager for National Penn Investors Trust Company in Reading, Pennsylvania.
"That has got to end pretty soon because the market was expecting sales to start improving and it's not materializing."
According to Thomson Reuters data through July 16, 48 companies in the S&P 500 Index have reported earnings for the second quarter, with 75 percent having topped analysts estimates, 13 percent in line with expectations and 13 percent below expectations.
On a revenue basis, of the 48 companies in the S&P 500 that have reported results so far, 71 percent have topped analysts' expectations and 29 percent have fallen below estimates.

TAMER OUTLOOK FOR TECHS
Options investors appear to be expecting less volatility in the technology sector than the broader market next week.
Implied volatility on the at-the-money options for the SPDR S&P 500 ETF, an exchange-traded fund that tracks the benchmark S&P 500, was slightly higher than on the PowerShares QQQ Trust ETF that tracks the performance of the Nasdaq 100, according to Steve Claussen, chief investment strategist at online brokerage OptionsHouse.com.
Implied volatility, a key component of options prices, measures the expected movement in stocks calculated by options prices. It is also seen as a barometer of anxiety.
"It's notable that QQQQ is showing less implied volatility, which suggests more movements in the broader market than the straight technology sector. The tech sector will be a less exciting place in terms of movements next week," he said.
Implied volatility on August options for the S&P 500 ETF was 25.5 percent, slightly higher than 25.25 percent for the Nasdaq ETF. Usually, the Nasdaq ETF has an implied volatility that's 5 percent to 10 percent above that of the S&P 500 ETF.
The most actively traded options on the S&P 500 ETF were the August $100 and $105 puts, excluding July options that expire at the end of the day. Late Friday, the SPDR S&P 500 ETF was down 2.8 percent at $106.63.
For the QQQQ, the highest volume was on the August $44 put and August $45 call options. On Friday, the ETF was down 2.78 percent at $44.34.

India's image as investment hub to be hit: Experts

noreply@blogger.com (Raj Redkar) — Sat, 29 Nov 2008 10:34:00 +0000

As the horrendous week that saw terrorists striking in the heart of downtown Mumbai draws to a close, the ripple effects would make their presence felt, no doubt.

Speaking on the aftermath of the Mumbai terror attacks, KR Bharat of Advent Advisors said the situation was quite bleak even before the attacks. “The complete impact of the attack will hit us in a few days. We see economic slowdown in India. So, there is an urgent need of reforms in the security and economic space.”

Ashok Wadhwa, Managing Director and CEO, Ambit Holdings Private, said events of the last two days were absolutely catastrophic. “The impact of such a serious attack cannot be marginal. I think the terror attacks are likely to hit sentiment immensely. The attacks are too serious to impact India's image as an investment destination.”

Anand Tandon, Director-Equities, Brics Securities, said he is not extremely bullish at the moment. “The attack has harmed the prospects of commerce and industry. However, equity markets are not likely to see any longer-term impact. But ramifications will be seen economically and geopolitically.”

Q: How do you see the road forward from here given what has happened this week and the impact as you see it?

Bharat: If we go back three days in time before these horrendous events unfolded in Mumbai, the situation was bleak enough then. Nobody was calling for any great level of economic recovery either in the Western World or indeed in India and conventional wisdom was that the markets would drift downwards. The recession in the Western world was there for at least a couple of years if not greater.

People were looking at interest rates coming off in India in order to get some growth momentum going, so things were looking bleak and then this event happened and now people are analyzing this even and what will the impact be. My answer is regardless of what kind of brave face we put on it, the reality is going to hit us maybe in two-three days time and what is in front of us is not a pretty picture.

On the economic front there is clearly a slowdown in India and on the geo-political front, if we ignore this and talk about the spirit of Mumbaikars and how things should come back to normal; I think we are doing ourselves and our country a great injustice. This is a time for a lot of debate and for a lot of reform not only in the economic space but also in the security and geo-political space.

So the situation is not looking good and I am not saying this is only because of the horrific incidence affected me because I know quite a few people who have not been able to make it which is why I am saying let's go back to three days ago, situation was bad enough then and I don’t see how its got better, its got infinitely worse.

Q: It appears that global markets are trying to put in some kind of a countertrend rally in place into the end of the year even the S&P (Standard & Poor’s) rallied almost 20% from its November lows. Do you think that will fructify a smart bear rally kind of a move or is that being too optimistic in your eyes?

Bharat: I do not know there will be bear market rally as we go along but whether it will last ten days or twenty days I cannot tell. To me what seems to be obvious is the fact that there is a huge economic slowdown. I think the repercussions of what’s happened in the US are going to be felt not just in the US but in the rest of the developed world as well which will have impact in turn on emerging economies.

From anecdotal evidence, I speak to people in Singapore and in the US; the situation is not good at all. People don’t drive as much as they use to, people certainly don’t shop as much as they used to and banks are now under tremendous pressure to cut down on the size of their balance sheet and the entire Fed package – its not just an injection of liquidity into the system for people to do as they feel fit. It is the bailout package for banks to meet their immediate liabilities and the point is that while this will help the banks to meet immediate liabilities, the liabilities are becoming due in six-nine and twelve months going forward. I am not even talking beyond that – there is yet no provision made. So, banks will have no choice but to further contract the size of their balance sheets which means they will need to start withdrawing loans from the “good borrowers” as well which in turn means contraction of economy, recession etc as I do not need to say that far more competent people than I have outlined what’s going to happen from an economic perspective.

Therefore, in the light of that it is difficult to see why people would commit increasing amount of money assuming indeed that they have that liquidity to commit to equity markets. Having said that valuations will come to a stage where people will say, we cannot go any further than this. What I am trying to say is we have not come to that stage yet either in those markets or indeed in India on the back of liquidity by and large and if there are bear market rallies – great. But the overall trend to me is clear that this market will drift downwards over time and I am only hoping volatility is not as high as it seems to be because this is going to be prolonged and therefore the slower the pace of the fall the better for all of us. If it’s going to be extremely volatile then the pain is going to be much more than what people would like to bear.

Q: What’s your sense, unfortunate that the incidences of this week are? How do you access the limited economic and financial market impact of it going forward?

Wadhwa: It’s a horrible time for everybody, it’s a horrible time for us in India, it’s a horrible time for those who are watching this event within India or outside India and for sure the impact of such catastrophic immense cannot be marginal. I think we were all already reeling from serious troubles emerging out of global events and then going themselves into local events and I think this come at absolutely the wrong time. I believe it will hurt the sentiment immensely, I believe it will seriously impact India’s image as a country where you really want to invest.

Just a day before yesterday I had a long discussion with the group of CIO (Chief Information Officer) who came to see me and I was telling them that it doesn’t matter if the FII (Foreign Institutional Investor) money is looking at moving out of India. In my few trips over the last few weeks, I have seen serious amount of large multinationals who have strategic intent of investing in India, looking at India very seriously and dare say that the events of last two days must shake them and must get them to start seriously thinking about whether India is worth looking at a long-term destination.

Q: How much of a slowdown are you expecting from the current level of GDP growth and your take is that the market has not entirely priced it in even with the crunching fall its had over the last couple of months?
Bharat: I think so; I think the level of pessimism that you see in other emerging markets is not yet matched in India and China. I think these two markets the level of optimism is higher than that we see in other emerging markets. But is that because these two economies will do better or is that because we are still indulging in wishful thinking is a point for debate but the reality is when I speak to entrepreneurs, to promoters to find out exactly what is happening on the ground as it were, the feedback is that there is just no money coming forth from the banking system for example without mentioning names a company as of last year did a turnover of Rs 700 crore and is likely even in this difficult environment to do a turnover of Rs 1,100 crore for the last seven-months their application for increased working capital limits are still under process. So, how do you expect them to achieve a 40-50% growth if they are not getting support from the bank? It is not that they are not getting support from the bank because the bank doesn’t like them but the bank has its own compulsion.

We have to make serious efforts not just to push liquidity into the banking system but to get that liquidity out of banks and into corporate India which needs that liquidity to bring forth future growth. This is something that has been happening over the last three-four months and the fact that companies have been complaining increasingly getting support from the banking system. I am not talking about real estate companies; I am talking about companies that are in other sectors.

Therefore, I am actually much more sanguine than most about what kind of GDP growth rates we will get. We will still be better than most of the rest of the world. I don’t want to put a number to it but I would imagine this fiscal year the number maybe 6.5% but next year will be significantly lower, maybe 5% is what we can realistically expect but that is something that the market has pretty much factored in.

The issues going forward now are how we are going to reform our system financial, economic as well as geo-political that is what most people are going to wait and watch.

Q: What’s your sense of how things move from here even globally? Do you think the market can put in a bit of an effort after a dismal 2008 and try and move up a bit from here or do you think most markets will grind down and form newer lows? What’s your sense?

Wadhwa: I personally believe that the FY08-09 from an India perspective in many ways the markets will have hopefully reached the bottom or the near-bottom of it. If the Indian economy has to grow at 7.25% this year and even if there is a slower growth next year certainly in the first half, I would argue that certainly on relative basis we would have performed better than most world economies and - how low can the market go below that?

So I am more optimistic than most people in terms of the recovery. I continue to believe that the rest of this fiscal year will be extremely slow year and will be pretty range bound on the lower side that we been witnessing the markets. But I am equally optimistic that come the New Year and certainly maybe in the second half of the New Year which in the second half of FY09-10 we should see a more positive movement in the market and therefore our belief is that those who are long-term investors should see serious value in the market either right now or soon and should continue providing support to the market at those levels.

Q: I want to ask you about one sector which is getting more and more punishment. There is no recovery inside; Unitech is a good case in point. The stock is down 50% in the series again. It’s down to Rs 20 now. Does the market sense any major bad news which is coming for some of these large companies?

Bharat: What’s happening in this sector is pretty obvious. Everybody got carried away just like they did in the stock market and people started convincing themselves that prices in India whether they are stock prices or real estate prices could only go one way and you could virtually double your money every month. People had completely fooled themselves so valuations got way ahead of themselves.

Now it’s the reverse that’s happening; people are in such a state of panic; margin calls, people holding stock at ridiculously high prices and now when it’s too late perhaps people are saying, whatever I can get out, let me get out and get in whatever liquidity I can back into the system and today therefore for most companies prices are far below intrinsic worth of these companies. In some cases companies have as much cash as their market cap is. But that’s what sentiment is all about and the added problem as you very correctly pointed out is that to my mind certainly there will be a few defaults in the sector; you will have some companies going burst. We don’t know which they are; I don’t track that sector too closely and in any case I do not comment on individual companies so we don’t know and if people believe that even or two could go burst out of maybe a dozen or two dozen all two dozen of those companies tend to get punish because it’s a heard mentality. People say, lets just get the hell out of this sector and either keep money in our pocket and maybe put it in a defensive sector and that’s what you see happening.

When does it turn, if we go back to what Mr. Wadhwa was saying earlier – when is a good time to buy? I think the answer that most people have given whether it’s correct or not is irrelevant. If this is what the majority thinks, the answer is wait and watch and when we see concrete evidence of a turnaround globally or domestically then we will think of buying stocks and I can go long with that view and I am not as optimistic as a lot of people who recently be coming on your show.

I think in the five year bull market not one person ever called me and asked me – when do you think the market is going to turn? When should I sell? Whereas in the last nine months everyday I get five calls asking – when do you think its going to turn, when should we buy? I think we are not used particularly in the recent past as a nation to believe that if a bull market can last for five years a bear market will not necessarily will go away in one year’s time and that’s the way I look at it.

Q: A question on the sectors which got punished on Friday, hotels, aviation? Do you see this as an opportunity the knee jerk reaction to the panic attack or the terror attack or do you think these sectors needs to genuinely adjust downwards?

Tandon: Obviously there was a huge knee jerk down which was justifiable because the traffic will slowdown. But this would be the time when many of the hotel companies will be trading below their intrinsic value of property by a significant margins and I do not think their earning part is going forever.

Aviation is a different story; I think the aviation has not made economic value and until and unless you see sustained falls in fuel prices as well as increased seat usage. I think that will be the sector which will always remain some optimal.

Mumbai terror to impact capital flows: Mark Konyn

noreply@blogger.com (Raj Redkar) — Fri, 28 Nov 2008 11:34:00 +0000

Mark Konyn, CEO, RCM, a company of Allianz Global Investors
, said investor sentiment will be hit in the short-term because of the Mumbai terror strikes. "Since foreigners have been targeted, it might have a dampening effect on tourism. The overall perception towards India will be hit and international capital flows will be under significant pressure."

Q: Give us a word on the kind of terror attacks you have been hearing of and reading about in Mumbai and whether you think that is going to make any medium-term impact or long-term impact on FII sentiment?

A: Certainly, and the world has been shocked by the images that we have been getting out of Mumbai.

Typically, when we have seen similar outrages in other parts of the world, it does immediately hit investor sentiment but depending on how quickly things get back to normal, it proves to be typically quite short lived.

The worrying aspect here is that uncharacteristically these attacks and outrages have been targeted directly at foreigners and venue sites which are frequented by foreigners in Mumbai. So, I think that is one aspect that foreign visitors and travellers will be looking at.

It may have a dampening effect in terms of how quickly international investors come back into the market. Of course, most international investors have pulled back significantly this year in any event with some USD 13.5 billion or so already withdrawn from the Indian market.

Q: Relatively speaking, in a world which is just basically trying to get back on its feet in terms of liquidity, do you think it puts India to relative disadvantage or do you think that would be overstating the case?

A: It clearly is not going to help overall perception and risk appetite, but it is difficult to assess in these types of situations. However, in any event, international capital flows, we are talking about the equity markets, are already under significant pressure. We have got the threat of deflation now as a result of all this deleverage which is at play in global markets.

We have seen central banks internationally trying to throw a lot of money at the problem, trying to improve liquidity, certainly take positions from the government’s perspective to improve solvency and the net effect is quite marginal. This is because of the tremendous amount of leverage that was built up in the financial system particularly in the United States; it is starting to unwind. So as liquidity looks like it is improving, corporations, individuals, financial institutions, in particular, are taking the opportunity to try and draw down some of that debt and reduce their obligations.

The net result is that we are not seeing any flow through in terms of confidence, in terms of the way the banks are lending to each other and to end-users and the way in which credit markets are behaving generally.

So without that improvement, international capital flows are going to be pretty scarce over the next six months, we would estimate. Thus, in that environment, emerging markets generally don’t perform well and as we know, the Indian economy has been quite extensively dependent at the margin on international fund flow.

So, clearly they are going to be lacking anyway. To what extent this outrage that we have seen over the last few days in India has an impact that remains to be seen but one would expect it not really to disrupt the picture too significantly and certainly not longer-term. We wouldn’t expect to see any disruption. The issue really remains how quickly can the world economy get back on its feet.

Q: As we end this year, which has been a very bad one for global equities, and as we head into 2009, what is your feeling, this year has been a write off, but in 2009 do you see any reconstruction happening or it to be another difficult year for equities globally?

A: I think sort of something for emerging markets and the markets in this region including India in that sort of echoing some of the comments from the previous interview that if you think about last year, it was characterized by indiscriminant buying where euphoria really got the best of many international investors and were buying into emerging markets with literally regard to fundamentals.

This year there has been indiscriminant selling and the reverse of that now we are seeing many companies beaten down to very low multiples almost to the point where valuations really aren’t the issue. As we go into the next year, there will be opportunities for those who see the longer-term picture to pick up companies on pretty good multiples and valuations.

To benefit coming into the second half of next year, of course predicated on the assumption that as the US pulls out of this recession in the second half of next year and indication start to emerging earlier than that, investor sentiment comes back and investors start to dial up their risk rating a bit and are willing to step away from the most secured investments. At the moment this flight to quality has rally crowded out all other asset classes. The strength in the dollar up until this week was largely a reflection of that both in terms of the deleverage but also in terms of the flight to US treasuries which almost risks a bubble marking in US treasuries as money continues to flock to what is considered as the safest asset class globally. However, I would say that going into ’09 it is still tough the second half prospects of making some money particularly in some of these emerging markets where companies are doing pretty well.

Inflation at 11.89%; Experts expect RBI to raise rates

noreply@blogger.com (Raj Redkar) — Fri, 25 Jul 2008 05:38:00 +0000

Inflation for the week ended July 12 is at 11.89 % versus 11.91%.

Inflation for week-ended May 17 was revised to 8.66%, it had earlier been estimated at 8.10%.

So, what do experts see RBI doing next?

Mohan Shenoi, Treasury-Head, Kotak Mahindra Bank, said the chances of RBI pursuing a wait-and-watch policy has increased substantially as WPI has reached a plateau after a rapid rise and international crude oil prices also seems to be coming down. “RBI might just focus on managing liquidity and give the policy rate hike a pass this time. However, the RBI might make some announcements on CRR in order to curb liquidity and to show that inflation is still a concern.”

RVS Sridhar, Senior Vice President‑Treasury, Axis Bank, expects a repo rate hike by RBI. “I don’t see a hike in CRR. There will be some volatility in the next few weeks or months depending on the trajectory of inflation and the expectations on RBI action. Crude oil coming down and should be a great help in these conditions.” He sees interest rates for 10-year bond yields at around 9.25%.

Shubhada Rao, Chief Economist, Yes Bank, said these last two weeks’ numbers definitely point to some stability in the week-over-week increase in prices. “It is going to need significant effort to bring down the week-over-week index number much lower. If the current trend of marginal week-over-week increase continues for a larger part of the year, we could see inflation peaking at around 14-14.5%. Beyond that we could see it lowering. On the flipside, the patchy performance of monsoon is something that we need to watch out for.”

She sees inflation arising in primary articles. “There should be some relief on manufactured product prices. I expect double-digit inflation for a larger part of the current fiscal because the index has risen much higher in the last six week.”

She does not see a rate or CRR action by RBI. She sees rate action between two policy periods, i.e. between July and October.

Inflation Internals:
Primary articles up 0.6%
Food Articles up 0.6%
Coffee up 8% and Fruits and Vegetables up 2%
Moong and Jowar up 1%
Tea down 2% and Spices down 1%
Non-Food Articles up 0.8%
Sunflower and Raw Rubber up 3%
Rape and Mustard Seeds up 2%
Fuel, Power, Light and Lubricants was unchanged
Manufactured Products up 0.05%
Textiles down 0.1%
Tyre and Cord up 1%
Basic Metals and Alloys up Marginally
Lead Ingots up 6% and Zinc Ingots up 3%
Machine and Machine Tools up 0.2%
Electrical and Elec Equipment up 0.2%
Edible Oil down 0.3%, Oil Cakes up 0.6%
Synthetic Resins and Plastic Materials up 0.2%
Electical Industrial Machinery up 0.4%

Soros: Credit default swaps are the next Damocles sword

noreply@blogger.com (Raj Redkar) — Fri, 11 Apr 2008 13:11:00 +0000

International financier George Soros thinks the financial tension in the markets is going to ease, but there are still a number of land mines left to navigate around. Case in point: credit default swaps, or CDSs, a synthetic financial instrument that acts as an insurance policy against debt defaults.

"This is a totally unregulated market hanging like a Damocles sword over the financial system," Soros told reporters on a conference call hosted by the New America Foundation Friday. "You don't know whether your counterparty is good for its payment or not."

This is a concern that others in the financial markets have expressed. Jonathan Sablone, partner at Nixon Peabody LLP in Boston, discusses it in my "An open book?" news story in The Deal magazine.

Soros suggested that there is an active and unregulated $45 trillion CDS market that has become unhinged from actual hedging against defaults. Regulators and industry players need to create a clearinghouse or exchange where these swaps can be settled according to well established rules, which is critical to avoid an implosion, Soros adds. "Until that happens the market is nervous and creates this counterparty risk," he said. "People who have these contracts need to know whether or not the counterparties are good or not, and you will only know that when you know who the counterparties are."

He contends that the amount invested in the CDS market is roughly equal to half the entire U.S. household wealth or 5 times the U.S. national debt.

The biggest player, Soros points out, is J.P. Morgan Chase & Co., which has roughly $16 trillion to $18 trillion in CDSs while Bear Stearns Cos. has $2.5 trillion CDSs. But Soros notes that a large chunk of these financial instruments are held by individual hedge funds. Hedge funds holding CDS obligations both as parties and counterparties and observers are concerned that the inability of highly leveraged counterparties to meet their obligations on such instruments could lead to a "cascade" failure through the system.

Soros says he takes a middle-of-the-road approach to market regulation. "I have found myself to be a critic of both market fundamentalism in the West and a critic of state regulation in the former Soviet Union," Soros said. "We have to stop swinging from one extreme to the other." - Ron Orol

Key Features of Budget 2008-2009

noreply@blogger.com (Raj Redkar) — Sat, 01 Mar 2008 09:49:00 +0000

THE ECONOMY : AN OVERVIEW
! The Gross Domestic Product increased by 7.5 per cent, 9.4 per cent and 9.6 percent
in first three years, of the UPA Government resulting in an unprecedented average
growth rate of 8.8 per cent. The drivers of growth continue to be 'services' and
'manufacturing' which are estimated to grow at 10.7 per cent and 9.4 per cent
respectively.
! Growth rate in agriculture for 2007-08 is estimated at 2.6 per cent.
! Food grain production in 2007-08, estimated at 219.32 million tonnes-an all time
record. Rice production at 94.08 million tonnes, maize at 16.78 million tonnes,
soya bean at 9.45 million tonnes, cotton at 23.38 million bales each, an all time
record.
! Rashtriya Krishi Vikas Yojana launched with an outlay of Rs. 25,000 crore, National
Food Security Mission with an outlay of Rs. 4,882 crore under National Policy for
Farmers in the Eleventh Five Year Plan.

THE GROWTH STORY : FASTER AND MORE INCLUSIVE
! Agricultural credit poised to reach Rs. 2,40,000 crore by March, 2008.
! 11.4 crore children covered under Mid Day Meal Scheme, the largest school lunch
programme in the world.
! Under National Rural Health Mission 8,756 primary health centres have been made
24x7 .
! 1,82,000 girls enrolled in residential schools under Kasturba Gandhi Balika
Vidyalaya Scheme.

BHARAT NIRMAN
! Bharat Nirman has made impressive progress in 2007-08 with 290 habitations
provided with drinking water each day, 17 habitations connected through all weather
road, 52 villages provided telephones, 42 villages electrified & 4,113 rural houses
completed each day.

ELEVENTH FIVE YEAR PLAN: THE CRUCIAL SECOND YEAR
! GBS 2008-09 at Rs.2,43,386 crore higher by Rs. 38,286 crore over 2007-08. Central
Plan allocation at Rs.1,79,954 crore, an increase of 16 percent over 2007-08; Bharat
Nirman to get Rs. 31,280 crore.
! Sarva Shiksha Abhiyan (SSA): Sarva Shiksha Abhiyan provided Rs.13,100 crore
with the focus to shift from access and infrastructure at the primary level to enhancing
retention and improving quality of learning. Mid-day Meal to get Rs. 8,000 crore;
secondary education to get Rs. 4,554 crore.
! Jawahar Navodaya Vidyalaya : Rs. 130 crore provided in 2008-09, to establish
Navodaya Vidyalaya in 20 districts having large concentration of Scheduled Castes
& Scheduled Tribes.
! Kasturba Gandhi Balika Vidyalaya: Funds (as part of SSA) provided for additional
410 Vidyalayas in educationally backward areas. Rs. 80 crore allocated to set up
new or upgrade existing hostels attached to Balika Vidyalaya.
! National Means-cum-Merit Scholarship: Rs. 750 crore allocated to build up a corpus
of Rs.3,000 crore in four years. 1,00,000 Scholarship to be awarded beginning
2008-09.
! Nehru Yuva Kendra: Rs. 10 crore allocated in 2008-09 to set up a Kendra in 123
districts, and to cover recurring expenditure in the first year.
! Mid Day Meal Scheme: Extended to upper primary classes in Government and
Government aided schools in all blocks which will benefit 2.5 crore children taking
the total number of children covered under the scheme to 13.9 crore.
! Institutes of Higher Education: India to become a knowledge society, three IISERs
at Mohali, Pune and Kolkata; and an IIIT at Kanchipuram have started
functioning.Government to set up 16 Central Universities in each of the hitherto
uncovered states; three IITs in Andhra Pradesh, Bihar and Rajasthan; two IISERs
at Bhopal and Tiruvananthapuram; and two Schools of Planning and Architecture
at Bhopal and Vijayawada: Rs. 5 crore grant provided to Deccan College, Postgraduate
and Research Institute, Pune.
! Science and Technology: Rs.85 crore allocated for Innovation in Science Pursuit
for Inspired Research (INSPIRE); which will include scholarships for young learners
(10-17 years), scholarships for continuing science education (17-22 years) and
opportunities for research careers (22-32 years); Rs. 100 crore provided for
establishing the National Knowledge Network.
! Health Sector: Rs.16,534 crore allocated, for the sector marking an increase of
15% over 2007-08.
National Rural Health Mission (NRHM): 462,000 Associated Social Health
Activitists have been trained, 177,924 villages have sanitation committees functional
and 323 district Hospitals have been taken up for upgradation. Allocation to NRHM
has been increased to Rs. 12,050 crore.
! HIV/AIDS: The National Aids Control Programme provided Rs.993 crore.
! Polio: Drive to eradicate polio continues with revised strategy and focus on the
high risk districts in Uttar Pradesh and Bihar. Rs. 1,042 crore allocated in 2008-09.
! Rashtriya Swasthya Bima Yojana : Rashtriya Swasthya Bima Yojana to provide
health cover of Rs.30,000 for every worker in the unorganised sector falling under
the BPL category and his/her family. The Yojana will be launched in Delhi and in
the States of Haryana and Rajasthan on April 1, 2008. Rs.205 crore provided as the
Centre's share of the premia in 2008-09.
! National Programme for the Elderly: National Programme for the Elderly to be
started in 2008-09 with a Plan outlay of Rs.400 crore. Two National Institutes of
Ageing, eight regional centres, and a department for geriatric medical care in one
medical college/tertiary level hospital in each State to be established during the
Eleventh Plan period.
! Integrated Child Development Services (ICDS): Allocation for ICDS enhanced
from Rs.5,293 crore in 2007-08 to Rs.6,300 crore in 2008-09; Remuneration of
Anganwadi workers being increased from Rs.1,000 per month to Rs.1,500 per
month; remuneration of Anganwadi Helpers increased from Rs.500 per month to
Rs.750 per month; over 18 lakh Anganwadi workers and helpers to benefit; 5,959
ICDS projects and 932,000 Anganwadi and mini-Anganwadi centres functional
under ICDS at the end of December 2007.

Flagship Programmes
! National Rural Employment Guarantee Scheme (NREGS): NREGS to be rolled
out to all 596 rural districts in India with provision of Rs.16,000 crore; More money
will be provided to meet the legal guarantee of employment as demand rises.
! Jawaharlal Nehru National Urban Renewal Mission (JNNURM): Allocation for
JNNURM increased to Rs.6,866 crore in 2008-09 from Rs.5,482 crore in 2007-08.
! Rajiv Gandhi Drinking Water Mission: Allocation for Rajiv Gandhi Drinking Water
Mission enhanced to Rs.7,300 crore in 2008-09 as against Rs.6,500 crore in
2007-08;
! Total Sanitation Campaign to be provided Rs.1,200 crore in 2008-09.
! Desalination Plant near Chennai: Rs.300 crore in 2008-09 for a desalination plant
near Chennai to be set up under public private partnership.
! North Eastern Region (NER): Ministry of Development of North Eastern Region
to be provided Rs. 1,455 crore. Including this amount, total Budget allocation for
NER, to increase to Rs.16,447 crore in 2008-09 from Rs.14,365 crore in 2007-08.
! Development and Finance Corporations: Additional equity contributions proposed
for National Minorities Development and Finance Corporation Rs. 75.00 crore,
National Finance and Development Corporations for weaker sections
comprising Safai Karamcharis, Scheduled Castes and Backward Classes. Rs. 106.50
crore, National/State Scheduled Tribes Finance and Development Corporations
Rs. 50.00 crore, National Handicapped Development Corporation Rs. 9.00 crore.
! Scholarships: Pre- and post-matric scholarship programmes announced in previous
Budgets for SC, ST, OBC and minorities to get further funds in 2008-09: Scheduled
Castes (Rs.804 crore), Scheduled Tribes (Rs.195 crore), Other Backward Classes
(Rs.164 crore) and Minorities (post-matric) (Rs.100 crore).
! Rajiv Gandhi National Fellowship Programme supporting SC and ST students
pursuing M.Phil and PhD courses allocated Rs.75 crore in 2008-09.
! Minorities: Allocation to the Ministry of Minority Affairs increased from Rs.500
crore in 2007-08 to Rs.1,000 crore in 2008-09; Report of the Justice Rajindar
Sachar Committee taken up for speedy implementation.

Women and Children
! Rs, 11,460 crore has been provided for 100% women specific programmes and
Rs. 16,202 crore for schemes where at least 30 per cent allocation is for women
specified programmes.
! Allocation for Ministry of Women and Child Development enhanced by 24% to
Rs. 7,200 crore in 2008-09.

Self Help Groups
! Life Insurance Corporation of India being asked to scale up Janashree Bima Yojana
scheme to cover all women self help groups that are credit-linked to the banks; of
Rs. 500 crore proposed to be contributed to the corpus of the Social Security Fund
with annual contributions to be made as the scheme is scaled up.

Supplement to GBS:
! Rs.8,365 crore provided as additional funds for Plan 'B' through two supplementaries
in 2007-08; additional resources to the tune of Rs.10,000 crore to be mobilized
under Plan 'B' for Plan Capital expenditure in 2008-09 also.

Agricultural Credit:
! Growth of agricultural credit set to exceed target set for 2007-08. For 2008-09,
target set at Rs.280,000 crore, with short-term crop loans continued to be disbursed
at 7 per cent per annum; initial provision of Rs.1,600 crore made for interest
subvention in 2008-09.

Investment in Agriculture:
! Gross Capital Formation (GCF) in agriculture as a proportion of GDP in the
agriculture sector improves from a low of 10.2 per cent in 2003-04 to 12.5 per cent
in 2006-07; Target to raise it to 16 per cent during the Eleventh Plan to achieve the
growth rate of 4 per cent.

Water Resources:
! Accelerated Irrigation Benefit Programme (AIBP): 24 major and medium irrigation
projects and 753 minor irrigation schemes to be completed in 2007-08, creating
additional irrigation potential of 500,000 hectare; Outlay for 2008-09 increased to
Rs. 20,000 crore, from Rs.11,000 crore in 2007-08.
! Rainfed Area Development Programme finalised and to be implemented in
2008-09 with an allocation of Rs.348 crore. Priority to those areas that have not
been beneficiaries of watershed development schemes.
! Centrally Sponsored Scheme on Micro Irrigation: Rs.500 crore being allocated in
2008-09 with a target of covering 400,000 hectare.
! Water bodies: Agreements for a total sum of US$738 million signed with the World
Bank by the Governments of Tamil Nadu, Andhra Pradesh and Karnataka to repair,
renovate and restore water bodies. Similar agreements to be signed between the
World Bank and the Governments of Orissa, West Bengal and some other States.
! Irrigation and Water Resources Finance Corporation: 14 irrigation projects
approved as National Projects by Government; Irrigation and Water Resources
Finance Corporation (IWRFC) proposed to be set up with initial capital of Rs.100
crore contributed by the Central Government, to fund long-gestation major and
medium irrigation projects.
! National Horticulture Mission (NHM): NHM covering 340 districts in 18 States
and two Union Territories, provided Rs.1,100 crore in 2008-09.
! Soil testing: 500 soil testing laboratories to be set up during the Eleventh Plan with
Government assistance of Rs.30 lakh per laboratory; one-time allocation of Rs.75
crore to the Ministry of Agriculture in order to provide one fully-fitted mobile soil
testing laboratory each to 250 districts of the country.
! Plantation Crops: Special Purpose Tea Fund for re-plantation and rejuvenation to
be provided Rs.40 crore in 2008-09; similar support to cardamom, rubber and coffee;
crop insurance scheme for tea, rubber, tobacco, chilli, ginger, turmeric, pepper and
cardamom to be introduced.
! National Plant Protection Training Institute at Hyderabad to be converted and
upgraded into an autonomous National Institute of Plant Health Management.
! Crop Insurance: National Agriculture Insurance Scheme (NAIS) to be continued
in its present form for Kharif and Rabi 2008-09. Rs.644 crore provided for the
scheme.
! Weather Based Crop Insurance Scheme implemented as a pilot scheme in selected
areas of five States to be continued; Rs.50 crore provided for this purpose in 2008-09.
! Subsidy for Fertilizers: Government to continue to provide fertilisers to farmers at
subsidized prices; Proposals to move to a nutrient based subsidy regime and
alternative methods of delivery being examined.
! Cooperative Credit Structure: Prof. Vaidyanathan Committee's report on reviving
the short-term cooperative credit structure under implementation in 17 states.
Rs. 1185 crore has been released so far by the Central Government to four States.
Central Government and State Government have reached an agreement to implement
the report on reviving the long term cooperative credit structure. Central
Government’s share will be Rs. 2,642 crore or 86 per cent of the total burden.
! Scheme of Debt Waiver and Debt Relief for farmers:
" Scheme to cover all loans disbursed by scheduled commercial banks, regional
rural banks and cooperative credit institutions up to March 31, 2007 and
overdue as on December 31, 2007 are covered under the scheme;
" Complete waiver of all loans that were overdue on December 31, 2007 and
which remained unpaid until February 29, 2008 for marginal farmers and
small farmers;
" one time settlement (OTS) scheme in respect of other farmers for all loans
that were overdue on December 31, 2007 and which remained unpaid until
February 29, 2008; Rebate of 25 per cent against payment of the balance of
75 per cent under OTS;
" Agricultural loans restructured and rescheduled by banks in 2004 and 2006
through special packages also eligible, either for a waiver or an OTS on the
same pattern;
" Implementation of the debt waiver and debt relief scheme to be completed
by June 30, 2008; Farmers availing the relief would be entitled to fresh
agricultural loans from banks in accordance with normal rules.
" About 3 crore small and marginal farmers and about one crore other farmers
to benefit from the scheme; Total value of overdue loans being waived
estimated at Rs.50,000 crore and the OTS relief estimated at Rs.10,000 crore.

INVESTMENT, INFRASTRUCTURE, INDUSTRY AND TRADE
! Saving rate and investment rate estimated to be 35.6 per cent and 36.3 per cent,
respectively, by the end of 2007-08; between April- December 2007-2008. FDI
amounted to US$ 12.7 billion and FII to US$ 18 billion.
! Support to Central Public Sector Enterprises (CPSEs): Government to provide
Rs.16,436 crore as equity support and Rs.3,003 crore as loans to CPSEs in 2008-
09; 44 CPSEs listed as on date; Government policy is to list more CPSEs in order
to unlock their true value and improve corporate governance.
Rural Infrastructure Development Fund
! Corpus of RIDF-XIV to be raised in 2008-09 to Rs.14,000 crore, with a separate
window for rural roads.

Manufacturing Sector
! Growth in capital goods still very high at 20.2 per cent. Goal to take manufacturing
growth rate to double digit through more reforms.

Power
! Against Eleventh Plan target for additional power generation capacity of 78,577
MW Commercial Operation Date (COD) on about 10,000 MW to be achieved by
end March 2008.
! Ultra Mega Power Project (UMPP): Fourth UMPP at Tilaiya to be awarded shortly;
Chhattisgarh, Karnataka, Maharashtra, Orissa and Tamilnadu urged to bring five
more UMPPs to the bidding stage by extending the required support.
! Rajiv Gandhi Grameen Vidyutikaran Yojana to be continued during the Eleventh Plan
period with a capital subsidy of Rs.28,000 crore; allocation of Rs.5,500 crore for
2008-09.
! Accelerated Power Development and Reforms Project: Rs.800 crore to be provided
in 2008-09, A National Fund for transmission and distribution reform to be created.

Roads
! National Highway Development Programme (NHDP): Allocation for NHDP
enhanced to Rs.12,966 crore in 2008-09 from Rs.10,867 crore in 2007-08;
Completion rate in the Golden Quadrilateral is 96.48 per cent and in the North
South, East West Corridor project is 23.36 per cent; Special attention being paid to
SARDP-NE; programme devised for the North Eastern region; 180 kms of roads
completed in 2007-08 and 300 kms. of road targetted for completion in 2008-09.

Oil and Gas
! Seventh round of bidding under the New Exploration Licensing Policy; bids invited
for 57 exploration blocks; estimated to attract investment of the order of US$3.5
billion to US$8 billion for exploration and discovery.

Coal
! 53 coal blocks with reserves of 13,842 million tonnes allotted during April-January
2007-08 to Government and private sector companies; new Coal Distribution Policy
notified in October 2007; coal regulator to be appointed.

Information Technology
! Allocation to the Department of Information Technology enhanced to Rs.1,680
crore in 2008-09 from Rs.1,500 crore in 2007-08; Two Schemes for establishing
100,000 broadband internet-enabled Common Service Centres in rural areas and
State Wide Area Networks (SWAN) with Central assistance under implementation;
new scheme for State Data Centres also approved; Rs.75 crore provided for the
common service centres; Rs.450 crore provided for SWAN and Rs.275 crore for
the State Data Centres.

Textiles
! Schemes for Integrated Textile Parks (SITP) and the Technology Upgradation Fund
(TUF) to be continued in the Eleventh Plan period; Provision for SITP being
maintained at Rs.450 crore in 2008-09; Provision for TUF to be increased to
Rs.1,090 crore in 2008-09 from Rs.911 crore in 2007-08.
! Handloom sector: 250 clusters being developed and 443 yarn banks established
under the cluster approach to the development of the handloom sector; Over 17
lakh families of weavers to be covered under the health insurance scheme by March
2008; Allocation being increased to Rs.340 crore in 2008-09; Infrastructure and
production being scaled up by taking up six centres for development as megaclusters;
Varanasi and Sibsagar to be taken up for handlooms, Bhiwandi and Erode
for powerlooms, and Narsapur and Moradabad for handicrafts; Each mega-cluster
to require about Rs.70 crore; Initial provision of Rs.100 crore made in 2008-09.

Micro, Small and Medium Enterprises
! A risk capital fund being created in the Small Industries and Development Bank of
India (SIDBI); Credit Guarantee Trust with SIDBI had extended guarantees to
89,129 units for an amount of Rs.2,479 crore as on January 31, 2008; SIDBI to
reduce the guarantee fee from 1.5 per cent to 1 per cent and the annual service fee
from 0.75 per cent to 0.5 per cent for loans up to Rs.5 lakhs.

Foreign Trade
! Relief given to exporters in three tranches amounting to over Rs.8,000 crore; Interest
cost of sterilization through market stabilization bonds (MSS), which is in a sense,
subsidy to the export sector, estimated at Rs.8,351 crore for the year 2007-08.

FINANCIAL SECTOR
! Financial Inclusion: Two recommendations of the Committee on Financial Inclusion
proposed to be accepted viz (i) to advise commercial banks, including RRBs, to
add at least 250 rural household accounts every year at each of their rural and
semi-urban branches; and (ii) to allow individuals such as retired bank officers,
ex-servicemen etc to be appointed as business facilitator or business correspondent
or credit counselor; banks to be encouraged to embrace concept of Total Financial
Inclusion; Government to request all scheduled commercial banks to follow the
example set by some public sector banks and meet the entire credit requirements
of SHG members, namely, income generation activities, social needs like housing,
education, marriage etc., and debt swapping.
! (i) Fund of Rs.5,000 crore to be created in NABARD to enhance its refinance
operations to short term cooperative credit institutions;
(ii) Two funds of Rs.2,000 crore each to be created in SIDBI - one for risk capital
financing and other for enhancing refinance capability to the MSME sector.
(iii) Fund of Rs.1,200 crore to be created in NHB to enhance its refinance operations
in the rural housing sector.
These funds are to be governed by the general guidelines that are now applicable
to RIDF with some modifications.
! Differential Rate of Interest (DRI) scheme: Borrower's eligibility criteria for loan
under the DRI scheme to the weaker sections of the community engaged in gainful
occupations enhanced.

Capital Markets
! Measures to expand the market for corporate bonds: Exchange-traded currency
and interest rate futures to be launched and transparent credit derivatives market to
be developed with appropriate safeguards; Tradability of domestic convertible bonds
to be enhanced through the mechanism of enabling investors to separate the
embedded equity option from the convertible bond, and trade it separately;
Development of a market-based system for classifying financial instruments based
on their complexity and implicit risks to be encouraged.
! Permanent Account Number (PAN): Requirement of PAN extended to all
transactions in the financial market subject to suitable threshold exemption limits.
! National market for securities: Empowered Committee of State Finance Ministers
to be requested to work with the Central Government to create pan Indian market
for securities that will expand the market base and enhance the revenues of the
State Governments.

OTHER PROPOSALS
! Skill Development Mission: A non-profit corporation to be established with the
entrusted mission to address the challenge of imparting the skills required by a
growing economy; Rs.15,000 crore proposed to be garnered as capital from
Governments, public and private sector, and bilateral/multilateral sources;
Government's equity in the proposed non-profit corporation to be Rs.1,000 crore
to begin with.
! Industrial Training Institutes: 238 ITIs being upgraded under the World Bank
assisted scheme; Under the PPP scheme, 309 ITIs have been identified in 29 States
with corresponding industry partners and agreements signed in 244 cases; Rs.750
crore set apart in 2008-09 in anticipation of upgrading 300 more ITIs.
! Sainik Schools: Rs.44 crore allocated to the 22 Sainik Schools at the rate of Rs.2
crore each, for immediate improvement of infrastructure including classrooms,
laboratories, libraries and facilities for physical education.
! Public Distribution System: Rs.32,667 crore being provided next year for food
subsidy under PDS and other welfare programmes; State of Haryana and the Union
Territory of Chandigarh to introduce, on a pilot basis, a smart card based delivery
system to deliver food grains under the PDS.
! Unorganised Sector Workers: In anticipation of the Unorganised Sector Workers'
Social Security Bill, 2007 being made into law, three schemes designed to provide
social security to workers in unorganised sector in a phased manner introduced;
(i) Aam Admi Bima Yojana to provide insurance cover to poor households; in the
first year of the Yojana, LIC to cover one crore landless households by September
30, 2008; Rs.1,500 crore placed with LIC; Additional sum of Rs.1,000 crore to be
placed with LIC in 2008-09 to cover another one crore poor households in the
second year;
(ii) Rashtriya Swasthya Bima Yojana to be implemented with effect from April 1,
2008; Indira Gandhi National Old Age Pension Scheme enlarged with effect from
November 19, 2007 to include all persons over 65 years falling under the BPL
category expanding beneficiary cover from 87 lakh to 157 lakh; Rs. 3,443 crore
being allocated in 2008-09 as against Rs.2,392 crore in 2007-08.
! Housing for the Poor: 41.13 lakh houses constructed up to December 2007 under
Indira Awas Yojana (IAY) against a target of 60 lakh houses; Cumulative number
of houses constructed under IAY to be 51.77 lakh by end March 2008; Subsidy per
unit in respect of new houses sanctioned after April 1, 2008 to be enhanced from
Rs.25,000 to Rs.35,000 in plain areas and from Rs.27,500 to Rs.38,500 in hill/
difficult areas to reflect the higher cost of construction; Subsidy for upgradation of
houses to be increased from Rs.12,500 per unit to Rs.15,000; Public sector banks
to be advised to include IAY houses under the differential rate of interest (DRI)
scheme and lend up to Rs.20,000 per unit at an interest rate of 4 per cent.
! Defence: Allocation for Defence to be increased by 10 per cent from Rs.96,000
crore to Rs.105,600 crore.
! Backward Regions Grant Fund: Allocation for 2008-09 kept at same level as current
year at Rs.5,800 crore; 45 per cent of the amount likely to be allocated to the States
of Bihar, Orissa and Uttar Pradesh.
! Climate Change: Permanent institutional mechanism to be established for
development and coordination role in exploration and implementation of ideas.
! Sixth Central Pay Commission: to submit its report by March 31, 2008.
! Commonwealth Games: to be provided Rs.624 crore in 2008-09.
! Institutions of Excellence: Special grant of Rs.100 crore awarded to three institutions
of excellence for 2008-09
(i) Mahatma Phule Krishi Vidyapeeth, Rahuri, Maharashtra;
(ii) University of Mysore, Mysore; and
(iii) Delhi University, Delhi.
! India's Soft Power: Rs.75 crore grant to Indian Council of Cultural Relations to
design and implement a programme to achieve the objective of projecting the 'soft
power' of India in music, literature, dance, art, cuisine and especially films.
! Tiger Protection: One time grant of Rs.50 crore to the National Tiger Conservation
Authority to redouble efforts to protect the tiger; Bulk of grant to be used to raise,
arm and deploy a special Tiger Protection Force.
! Monitoring and Evaluation: Central Plan Schemes' Monitoring System (CPSMS)
to be put in place and implemented as Plan scheme; a comprehensive Decision
Support System and Management Information System also to be established to
generate and monitor scheme-wise and State-wise releases for about 1,000 Central
Plan and centrally sponsored schemes in 2008-09; Concurrent evaluation started
by some ministries to be supplemented by independent evaluations conducted by
research institutions.

BUDGET ESTIMATES
! Plan Expenditure estimated at Rs.243,386 crore.
! Non-Plan Expenditure estimated at Rs.507,499 crore.
! Revenue deficit for 2007-08 to be 1.4 per cent (against a BE of 1.5 per cent) and
the fiscal deficit to be 3.1 per cent (against a BE of 3.3 per cent); Revenue receipts
of Central Government for 2008-09 projected at Rs.602, 935 crore and revenue
expenditure at Rs.658,119 crore; Revenue deficit for 2008-09 estimated at Rs.55,184
crore, which amounts to 1.0 per cent of GDP; Fiscal deficit for 2008-09 estimated
at Rs.133,287 crore which is 2.5 per cent of GDP; elimination of Revenue Deficit
may need one more year; because of the conscious shift in expenditure in favour of
health, education and the social sector.
! Thirteenth Finance Commission to be requested to revisit the roadmap for fiscal
adjustment and suggest a suitably revised roadmap, after the obligations on
account of the Sixth Central Pay Commission become clear.

TAX PROPOSALS
! Tax to GDP ratio that was 9.2 per cent in 2003-04, set to rise to 12.5 per cent at the
end of 2007-08.
! Set to achieve the Budget Estimates of indirect taxes and exceed the Budget
Estimates of direct taxes.

Indirect Taxes
Customs duties
! No change in the peak rate of customs duty.
! Customs duty on Project Imports to reduce from 7.5 per cent to 5 per cent; 4 per
cent special CVD to be imposed on a few specified projects in the power sector.
! Customs duty being reduced on steel melting scrap and aluminium scrap from 5
per cent to nil.
! Customs duty to be reduced from 10 per cent to 5 per cent on certain specified life
saving drugs and on the bulk drugs used for the manufacture of such drugs. They
are also being exempted from excise duty or countervailing duty.
! Customs duty is being reduced on vitamin premixes and mineral mixtures from 30
per cent to 20 per cent and on phosphoric acid from 7.5 per cent to 5 per cent to
reduce cost of manufacture of dairy and poultry feeds
! Customs duty being reduced on bactofuges from 7.5 per cent to nil for the benefit
of dairy industry and to increase shelf life of milk
! Specified parts of set top boxes and specified raw materials for use in the IT/
electronic hardware industry to be exempted from customs duty.
! Customs duty on convergence products to be reduced from 10 per cent to 5 per
cent to establish parity between devices used in the information/ communication
sector and the entertainment sector
! Customs duty being reduced on specified machinery from 7.5 per cent to 5 per cent
to provide fillip to the manufacture of sports goods; duty also being exempted on
specified raw materials for sports goods.
! Customs duty to be exempted on rough cubic zirconia and being reduced on polished
cubic zirconia from 10 per cent to 5 per cent, in order to encourage value addition
and exports by gem and jewellery industry; Customs duty on rough coral being
reduced from 10 per cent to 5 per cent.
! Customs duty removed on helicopter simulators to facilitate training of helicopter
pilots
! Customs duty reduced on crude and unrefined sulphur from 5 per cent to 2 per
cent, in order to support domestic fertiliser production
! Customs duty exemption is proposed to be withdrawn on naphtha for use in the
manufacture of polymers in order to correct price distortions and revenue losses.
Naphtha for use in the manufacture of polymers will be subjected to normal rate of
5 per cent. Naphtha imported for the production of fertilisers will continue to be
exempt from import duty.
! Export duty on chrome being increased from Rs.2,000 per metric tonne to Rs.3,000
per metric tonne in order to conserve and make it available for value added
manufacture in India.

Excise duty
! General CENVAT rate on all goods reduced from 16 per cent to 14 per cent to give
a stimulus to the manufacturing sector.
! Excise duty on all goods produced in the pharmaceutical sector reduced from 16
per cent to 8 per cent.
! Excise duty reduced on buses and their chassis from 16 per cent to 12 per cent.
! Excise duty reduced on small cars from 16 per cent to 12 per cent and on hybrid
cars from 24 per cent to the general revised rate of 14 per cent.
! Excise duty reduced on two wheelers and three wheelers from 16 per cent to
12 per cent.
! Excise duty to be reduced on paper, paper board and articles made therefrom
manufactured out of non-conventional raw materials by units not having an attached
bamboo/wood pulp making plant from 12 per cent to 8 per cent with a further
reduction on clearances up to 3,500 MT from 8 per cent to nil. Excise duty on
certain varieties of writing, printing and packing paper is to be reduced from 12
per cent to 8 per cent.
! Excise duty is to be reduced from 16 per cent to nil on a few mass consumption
items including composting machines, wireless data cards, packaged coconut water,
tea and coffee mixes, and puffed rice.
! Excise duty reduction from 16 per cent to 8 per cent on a few more items including
water purification devices, veneers and flush doors, sterile dressing pads etc,.
specified packaging material and breakfast cereals.
! Anti AIDS drug, Atazanavir, as well as bulk drugs for its manufacture are to be
exempted from excise duty.
! Excise duty being exempted on end-use basis, on refrigeration equipment (consisting
of compressor, condenser units, evaporator, etc) above 2 TR (tonne refrigeration)
utilising power of 50 KW and above.
! Excise duty rates on bulk cement and packaged cement brought on par; bulk cement
to attract excise duty of Rs.400 per Metric Tonne or 14 per cent ad valorem,
whichever is higher; cement clinkers excise duty at Rs.450 per Metric Tonne.
! Excise duty being increased on packaged software from 8 per cent to 12 per cent,
bringing at par with customised software attracting a service tax of 12 per cent.
! Excise duty on both filter and non-filter cigarettes brought on par by applying
higher rates on non-filter cigarettes.
! Ad valorem part of the excise duty on unbranded petrol and unbranded diesel being
abolished and replaced by an equivalent specific duty of Rs.1.35 per litre; there
will be only a specific duty of Rs.14.35 per litre on unbranded petrol and Rs.4.60
per litre on unbranded diesel; there will be no impact on retail prices.
! NCCD of 1 per cent removed on polyester filament yarn and the levy shifted to
cellular mobile phones.

Service tax
! Four services brought under service tax net namely, asset management service
provided under ULIP, services provided by stock/commodity exchanges and clearing
houses; right to use goods, in cases where VAT is not payable; and customised
software, to bring it on par with packaged software and other IT services.
! Threshold limit of exemption for small service providers increased from Rs.8 lakhs
per year to Rs.10 lakh per year; about 65,000 small service providers go out of the
tax net.

Direct Taxes
! Threshold limit of exemption from personal income tax in the case of all assesses
increased to Rs.150,000. The slabs and rates of tax are :
Up to Rs.150,000 NIL
Rs.150,001 to Rs.300,000 10 per cent
Rs.300,001 to Rs.500,000 20 per cent
Rs.500,001 and above 30 per cent
! In case of a woman assessee, the threshold limit increased from Rs.145,000 to
Rs.180,000; for a senior citizens, the threshold limit increased from Rs.195,000 to
Rs.225,000.
! No change in the corporate income tax rates.
! No change in the rate of surcharge.
! Senior Citizen Saving Scheme 2004 and the Post Office Time Deposit Account
added to the basket of saving instruments under Section 80C of the Income Tax
Act.
! Additional deduction of Rs.15,000 allowed under Section 80D to an individual
paying medical insurance premium for his/her parent or parents.
! Income Tax Act to be amended to provide that reverse mortgage would not amount
to "transfer"; and the stream of revenue received by the senior citizen would not be
"income".
! Tax income arising from saplings or seedlings grown in a nursery exempted.
! Business of production of seeds and manufacture of agricultural implements added
to the list of companies allowed weighted deduction of 150 per cent on any
expenditure on in-house scientific research.
! Benefit of amortisation of certain preliminary expenses under Section 35D allowed
to assessees in the services sector.
! Corporate debt instruments issued in demat form and listed on recognised stock
exchanges exempted from TDS.
! Crèche facilities, sponsorship of an employee-sportsperson, organising sports events
for employees and guest houses excluded from the purview of FBT.
! Parent company allowed to set off the dividend received from its subsidiary company
against dividend distributed by the parent company; provided that the dividend
received has suffered DDT and the parent company is not a subsidiary of
another company.
! Insert a new sub-section (11C) in Section 80-IB to grant a five year tax holiday to
hospitals located in any place outside the urban agglomerations especially in tier-
2 and tier-3 towns; this window will be open for the period April 1, 2008 to March
31, 2013.
! Five year holiday from income tax being granted to two, three or four star hotels
established in specified districts having UNESCO-declared 'World Heritage Sites';
the hotel should be constructed and start functioning during the period
April 1, 2008 to March 31, 2013.
! Coir Board included in Section 10(29A) and exempted from income tax.
! Rate of tax on short term capital gains under Section 111A & Section 115AD
increased to 15 per cent.
! STT paid to be treated like any other deductible expenditure against business income;
Levy of STT, in the case of options to be only on premium, where the option is not
exercised; liability to be on the seller; where the option is exercised, levy to be on
the settlement price and the liability on the buyer; no change in the present rates.
! Commodities Transaction Tax (CTT) to be introduced on the same lines as STT on
options and futures.
! Law being amended to exclude entities carrying on regular trade, commerce or
business or providing services in relation to any trade, commerce or business and
earning incomes from claiming that their purposes also fall under "charitable
purpose"; Genuine charitable organisations not to be affected in any way.
! Banking Cash Transaction Tax (BCTT) being withdrawn with effect from
April 1, 2009.

CST and a Roadmap towards GST
! Central Sales Tax rate being reduced from 3 per cent to 2 per cent from
April 1, 2008.
! Roadmap for Goods and Service Tax being prepared for introduction of GST from
April 1, 2010.

Indian IPOs Grey Market Premiums on 10-01-08

noreply@blogger.com (Raj Redkar) — Tue, 15 Jan 2008 08:00:00 +0000

Following are the latest Grey Market Prices of the Indian IPO’s as on 10th January, 2008.

Reliance Power IPO Grey Market Premium : Rs 350 to Rs 370

Future Capital Holdings IPO Grey Market Premium : 570 to 580

J. Kumar Infra Projects IPO Grey Market Premium : Rs 22 to 25

Aries Agro IPO Grey Market Premium : Rs 18 to Rs. 20.

Porwal Auto-components IPO Grey Market Premium : Discount

Precision Pipes & Profiles IPO Grey Market Premium : Rs 20 to Rs 25

Grey market prices only serve as an indicative premium above the expected listing price and cannot be take as definitive.

Stock Market Survival Tools - Part 2

noreply@blogger.com (Raj Redkar) — Thu, 27 Dec 2007 07:51:00 +0000

Today I'll be covering the 2nd survival tool which is Invest in expensive oars: Wealth Creators

Good for low-risk investors or the retired, is the strategy of buying wealth creators. These are companies, who on a long-term basis, continue to generate high levels of return on capital employed, require the least amount of capital, pay high dividends, have significant competitive advantages, completely write-off expenses, pay huge taxes and still manage to consistently grow revenues and profits year-after-year.

Not just dividends, the share price too grows year on year, though maybe at rates that are more mature than a pure growth play. Over the long term, these companies are real wealth creators, having thrown off income and given capital appreciation too.

And over a period of time, a small investment emerges as a pot of gold. For example, Gillette has a huge untapped market in India. The company has significant technological advantages, healthy margins and returns and, needs little money to keep its business growing, which is why it can continuously grow for many years to come.

But such companies don't come cheap. You need to pay a high price to be a part of this business as valuations are typically high for wealth creators. Companies with a consistent performance track record and capable of rewarding shareholders through handsome returns can be classified as wealth creators.

Not many manage to stay afloat on the stock market rapids. If we look at some 4,700 listed companies, less than a dozen will stay afloat on these parameters. Companies like Gillette, Proctor & Gamble, and GlaxoSmithkline, among a few others make it to this list.
However, it is not that once a wealth-creator will always be so. The company could do badly or some external factor could change the rules of the game. For example, Hindustan Lever went out of favour of the market for no fault of its own. The company was and continues to be efficient, but the big change that has happened is that its competitors have learnt the tricks of the trade and have become equally competitive.

They have managed to become negative in working capital, generate high return on capital employed, expand their distribution and supply chain in an efficient manner using the latest technology, and can now be said to be on par with Lever.

So, don't buy and forget. It is important to continuously monitor the company to ensure that its inherent strengths and competitive advantages remain in place, which in turn will enable it to consistently grow your money.

Stock Market Survival Tools

noreply@blogger.com (Raj Redkar) — Wed, 26 Dec 2007 06:48:00 +0000

With stock market riding at all time high , people are really nervous about the market. When should a investor actually start pumping in money? Well its difficult to time the market. People who have tried to time the market have mostly incurred losses. So rather than timing the market lets look at some of the strategies which an investor should adopt to reduce risk involved as well as reduce losses.I'll be discussing 1 survival tool daily. For the day its value investing

Get a good boat and hold on tight: Value Investing

If Benjamin Graham in 1954 coined the term 'value investing', other investment gurus like Warren Buffet, Irvin Kahn and Charles Munger took it forward. Although value investing means different things to different people, the core of this strategy is to follow quantitative or fundamental analysis.

Thumbs Rules
Investigate before you invest and not vice versa.

Buy companies doing business that you understand.

In times of panic, be greedy and buy good companies.

Control your emotions -- greed and fear.

Be honest with yourself -- book a loss if you think you have gone wrong.

Avoid momentum investing.

Do not fall prey to herd mentality and take tips with a pinch of salt.

Buy more of a stock if it falls, provided you have confidence in the company.

Don't gamble -- no day-trading, no leveraged deals and no loan against shares. Follow your stocks periodically and see that all conditions (such as entry barriers and basic investment ingredients) continue to be in place.

Hold a company for 3-5 years.

Always look for bargains.

Look for businesses that are in potential growth areas.

Avoid companies that are in a dying business segment, even if they offer value.

Invest in businesses which have a sustainable competitive advantage.

It believes that all clues that are relevant to identifying a stock market winner are present in the balance sheet of a company. The company's annual report and share price data, it believes, gives enough pointers to arrive at whether a stock is expensive or cheap. So, apart from looking at how fast and consistently the net profit figure is growing, other clues are the debt-equity ratio that needs to be low, the dividend track record uninterrupted and the price-to-earnings and price-to-book-value ratio be low.

The trick is to identify and buy stocks that are cheaper than the intrinsic value of the company. The key determinant of the decision is value and not price. And just like white-water rafting needs you to hold on confidently, whatever the size of the drop, do the same with value picks: invest with conviction and hold on patiently.

Another approach to value investing looks at picking up high dividend yield stocks that throw off regular income, apart from gaining weight in price. Finally, as Manish Sonthalia, vice-president, equity strategy, Motilal Oswal, says: 'Don't take a short-term approach to value investing. If you believe the value will be much higher in future, you should not get out when the stock appreciates by 20-30 per cent.'

One way to get to these stocks is to check the value of cash, liquid or business assets a company owns and buy only those companies that are quoting much below their intrinsic value. This value at some point of time should get unlocked, though the ways in which it is done could differ.
For instance, we have seen in the past, and even recently, how demerger of different businesses owned by a company into separate companies results in the unlocking of value for its shareholders. Some examples include Godrej Consumer, Dabur India and Reliance Industries.
Also, many a times, the stock market tends to ignore companies that are largely under-performing in their respective businesses, and treats them with poor valuations. That's a perfect time to buy such stocks.

For example, Raymond was once (in April 2000) quoting at Rs 75, when it had reported Rs 32.6 crore (Rs 32.6 million) net profit for 1999-2000. Then, its enterprise value (market capitalisation plus debt of Rs 764 crore, or Rs 7.64 billion) stood at Rs 1,327 crore (Rs 13.27 billion). But, if one were to analyse the value of its net liquid assets (cash and investments of about Rs 100 crore, or Rs 1 billion), and its steel, cement and textile businesses, the company's worth was much more.In fact, excluding the steel and cement business, which Raymond sold for a consideration of Rs 1,126.9 crore (Rs 11.269 billion) a year later (resulting in profit on sale of assets of Rs 455 crore, or Rs 4.55 billion)), the company's value (mainly the textile business) in terms of value per share worked out to less than Rs 30. Today the stock is quoting at Rs 404.
However, in such situations, investors need to take a call on how soon and successfully the management can turn the business around. This last call -- will the management turn the company around or utilise the undervalued assets -- is where pure number crunching fails to work.

Vikram Pandit

noreply@blogger.com (Raj Redkar) — Mon, 24 Dec 2007 04:45:00 +0000

Vikram Pandit is the current CEO of Citigroup.

Pandit worked for Morgan Stanley for two decades and was the President and Chief Operating Officer of the Institutional Securities and Investment Banking Group at Morgan Stanley where he was responsible for the overall management of the group and focused on the trading, sales and infrastructure aspects of the business (2000-2005). Before that, he served as the managing director and head of the Worldwide Institutional Equities Division (1994-2000), and as the managing director and head of the US Equity Syndicate (1990-1994) for Morgan Stanley. Pandit left Morgan Stanley with a few colleagues to start a hedge fund Old Lane Partners, which

Citigroup bought in 2007 for $800 million.
Pandit serves on the boards of Columbia University, Columbia Business School, the Indian School of Business and The Trinity School. He is a former board member of NASDAQ (2000-2003), the New York City Investment Fund, and the American India Foundation.
On December 11, 2007, Pandit was named the new CEO of Citigroup, replacing interim-CEO Sir Winfried Bischoff. Pandit is the effective successor to Chuck Prince who resigned in November 2007 due to unexpectedly poor 3rd quarter performance, mainly due to CDO and MBS related losses.

50-year-old Pandit was born in Nagpur, Maharashtra, India to a moderately affluent Marathi Karhade Brahmin family. At the age of 16, he moved to the United States to attend college at Columbia University. He received B.S. and M.S. degrees in electrical engineering in 1976 and 1977 respectively, and later earned a Ph.D. in Finance in 1986.

Going in for a home loan? Read this

noreply@blogger.com (Raj Redkar) — Fri, 10 Aug 2007 09:15:00 +0000

For most people a home loan will be the biggest and most important loan they will ever go for in their entire life. It is something that will affect their personal finances for decades. While competition is making banks jump over each other to lend you that much-needed home loan, it is always better on your part to know a few basic things before you sign on the dotted lines.
Hence, it's important to make the right decisions when you approach a bank for a home loan to buy your dream house. Here are some important things to watch out for:

Look carefully and bargain hard
In today's environment there are many banks competing hard in the home loan business. Make sure you use the competition to your benefit. Investigate at least five banks carefully before making your final decision. Remember that a little bit of effort today could save you many thousands of rupees over the next few decades. Imagine how happy you will feel when the same money will come in handy for your child's education. When you do make your final decision make sure you bargain hard. In addition to bargaining on interest rates and processing fees see if you can obtain free extras like property insurance. Finally make sure you read the fine print on the loan agreement and if necessary consult a lawyer to explain some of the details.

Loan eligibility
One of the biggest issues when taking a loan is the size of the loan you are eligible for. Loan eligibility is calculated based on your ability to pay and the cost of the house. There are a number of ways you can increase your loan eligibility. For instance you may choose longer loan tenure in return for higher eligibility. You may request the bank to club the incomes of close relatives like your spouse or parents. Or perhaps you may be able to persuade the bank/s to increase eligibility by showing your track record on a previous loan or your credit card payment history.

Home loans and insurance
Home loans increase the financial risk to the family in case the main earner passes away. They will be forced to bear the burden of repaying the rest of the loan. It's a good idea to increase your life insurance cover to protect your family from the additional risk. It is possible to buy policies where the cover reduces as the outstanding loan goes down. You may also want to buy disability cover to protect against accidents or critical illness.

Documentation
Make sure you get a receipt for any property documents that you keep with the bank. This is important if you switch your loan to another bank and will also prove useful if your bank misplaces any of your documents. Also make sure that your bank provides a detailed statement of account; this will be useful in documenting your repayment record, which will help you while negotiating for future loans.

Fixed and variable rates
With a fixed rate you should check whether the rate is fixed for the entire tenure of the loan or just the first few years. Check whether there are any loopholes that would allow banks to change 'fixed' rates when interest rates in general start moving up. Many banks insert a 'reset clause' in your home loan agreement that allows them to increase interest rates at a given point in time.
With variable rates you should understand whether the variable rate is clearly linked to some specific index. You should also clearly understand how changing interest rates would affect your payments: whether the bank will change EMI or the remaining tenure of your loan.

Will BoJ rate hike hit yen-carry-trade?

noreply@blogger.com (Raj Redkar) — Fri, 03 Aug 2007 10:17:00 +0000

In March, there was a huge depreciation in the yen. Around the same time, interest rates in India were also on an uptrend. This prompted companies in India to raise at least USD 5 billion via the external commercial borrowing, or ECB, route.

Reliance Ports, Reliance Utilities and some other group companies raised USD 1.2 billion in March alone. While ADAG entities like Reliance Energy, Reliance Telecom, and Reliance Communications raised USD 640 million. Bharti raised around USD 3 million, JP Associates around USD 250 million, Rural Electrification Corporation USD 200 million, IRFC USD 125 million, among others.

All these companies had one thing in common they tied up loans when the yen was depreciating, which was to be settled in dollars. Now, the tide is set to turn. Rising interest rates of the yen may push costs of yen-carry-trade, which is a swap cost for borrowing in the yen and converting into the dollars to invest and take advantage of low interest rates on the Japanese currency. The Bank of Japan, or BoJ, may raise interest rates in its August 23 meeting. Could this move hit the yen-carry-trade?

Tohru Sasaki, Chief Forex Strategist, JP Morgan Chase Bank, expects a 25 bps rate hike by BoJ. He feels that the move may not hurt the yen-carry-trade much.

Mark Tan Keng Yew, Director at UOB Asset Management, is not bothered with the yen-carry-trade situation. On whether he sees some kind of unwinding in the yen-carry-trade, as the yen went back to 118, he said, “Looking at the yen, it doesn’t seem to me to be a leading indicator of what is happening in the markets. It seems to be a coincidental indicator of the market situation. What I will be looking at more closely is the extent of lending that is coming through from the US and whether there is going to be any tightening of credit in other parts of the world.”

Chin Loo, Senior Currency Strategist, BNP Paribas, feels that US payrolls will be the near-term trigger for the dollar-yen movement. She has pegged the yen's base to be around 117.5 to the dollar, while the upside will be capped at 120.5.

What Sectors & Stocks to look at now

noreply@blogger.com (Raj Redkar) — Thu, 02 Aug 2007 10:18:00 +0000

In a market that is falling like nine pins, which stocks or sectors should you look at?

Ajay Srivastava of Dimensions Consulting likes Maruti Udyog, Tata Motors and Bajaj Auto in the auto sector. “I believe that Maruti Udyog is one standout performer which is there. A totally contrarian play would be Tata Motors, which will eventually come around into giving value. In two-wheelers, Bajaj Auto is a good play at this price, purely on account of the company’s demerger. We believe that the demerger, given Bajaj Auto’s price at Rs 2,000-2,100, should give substantial value to shareholders in the next six-nine months. These are the three plays that we are looking at quite closely at this time.”
In the cement space, Srivastava likes companies, which got capacity expansion running right through or almost peaking at capacity. In this space, he likes JP Associates. Speaking on the sector, he said, “Wherever we are seeing capacity coming up, it’s a strong play; wherever capacity has peaked out, there is nothing more going to happen there in terms of earnings surprises.”
According to Srivastava, with the kind of order book that it’s carrying on its books, there is no reason to worry about BHEL as a stock, for the next three years. He feels that it will outperform the rest of the pack.
On Bharti, he said, “If you look at Bharti it is reaching an inflection point, where the capex that they have done in the past is reaching capacity utilization. The new capex, which is almost USD 3 billion, is still to give revenues for the next two-three years. So, one can easily see and compare the valuation of China Mobile with Bharti, there is a way to go for the values.”

Neppolian Pillai of Modern Shares & Stock Brokers feels that the capital goods sector will hold on its own. “I think the capital goods sector is one of the strongest, the second strongest is banking, which looks like it is loosing steam and that could be the key.”
On capital good stocks, he said, “Most of them are near about their highs. It is still going to be a momentum play rather than a buying opportunity. At every fall one could trade but investing at these levels has not yet come in. One need to wait for some more correction in the sector to get in, but the sector is going to give only shallow falls. One needs to be a quick trader in that by trying to buy bottom and then try to sell the resultant high after that bottom. For investing, I think one needs to wait for sometime.”
On metals, he said, “One needs to continuously look at that sector when it comes down, to get into. One could play it as a momentum; you could play as an accumulation. The stock that catches the eye is Hindalco. If it falls up to Rs 165-160 levels, one can buy into it. One can trade Sterlite Industries as a momentum play for a rough target of about Rs 680 and Rs 727 that looks good as a momentum pick.”
According to Pillai, investors could look at Allahabad Bank and Bank of India in the banking space.
In the auto space, he feels the smaller auto ancillary stocks looks good from an investment perspective. “One can look Asahi India with a target of about Rs 130, which could be a return of about 30%. Another stock, which I like within the sector, is Tube Investments. I think Rs 63 to Rs 53 could be a buy zone. We should get a price target of about Rs 80 on the reversal, so that’s again an 20-25% return. One can look at Cummins India, a great stock with great momentum. This stock can do a target of about Rs 430. In auto ancillary, one can still invest on the downside,” he added.

Will RBI extend the pause on benchmark rates?

noreply@blogger.com (Raj Redkar) — Tue, 31 Jul 2007 03:49:00 +0000

Reserve Bank of India (RBI) will be unveiling the much awaited first quarter review of annual monetary and credit policy on July 31, 2007. The market seems to be unanimously agreeing that the central bank will maintain status quo as far as benchmark rates (reverse repo and repo rates) are concerned. RBI is likely to shift its focus from inflation management to liquidity and exchange rate management in the review.

Stock broking firm, Sharekhan is of the view that with inflation down below 4.5% and the annual credit growth moderating to 24%, the RBI is much more comfortably placed than it was in the previous couple of quarters and consequently it will hold policy rates at the current level. Thus they feel that the monetary policy's focus is likely to shift from inflation management to liquidity and exchange rate management, as the current high annual growth of above 21% in the money supply continues to be above the central bank's comfort zone. However, they further added that market estimates suggest that there exists a 10% chance of the cash reserve ratio (CRR) being increased by 50 basis points in the upcoming policy review meet.

It seems unlikely and the RBI is expected to reiterate its ‘cautious’ stance, as the macro environment remains challenging with forex inflows continuing unabated and oil prices remaining on the boil. The RBI may well leave it to the banks to work down the money market surpluses through their balance sheets, says Enam Securities.

GS Global Economic Website is of the view that the significant policy tightening since September 2006, has moderated credit growth in line with RBI expectations. Further they anticipate measures to reduce liquidity like raising the ceiling on sterilization and an increase in the daily liquidity withdrawn through the reverse repo window. They are of the opinion that RBI may use administrative measures to limit capital inflows and banks may reduce lending rates on the back of an unchanged RBI interest rate policy.

Central Bk will be able to maintain momentum

noreply@blogger.com (Raj Redkar) — Thu, 26 Jul 2007 09:07:00 +0000

Research By : P Lilladher

The public sector institution, the Central Bank of India is open for subscription with an initial public offering (IPO) of 80,000,000 equity shares of Rs 10 each for cash at a price to be decided through a 100% book building process. The price band for the issue is between Rs 85 per equity share and Rs 102 per equity share. After the issue, the shareholding of the Government of India in the bank will come down to 80.20%.

Prabhudas Lilladher report on Central Bank of India IPO

Turnaround with backing of size
Central Bank of India is the third biggest bank in India in terms of branch network with 3194 branches and 267 ex. Counters. It was founded on December 21, 1911 and got nationalized in 1969. Govt of India holds 100% stake in the bank, which will come down to 80.2%.
Out of total branch network of 3194 branches, 2250 branches are fully automated and 324 branches are on CBS covering 35% of business. Bank has higher presence in Central, Eastern and Western India and lesser presence in North and South India.
Apart from domestic operations, bank has 20% stake in Indo-Zambia Bank where other key investors include Bank of Baroda, Bank of India and Govt of Zambia.

Investment Positives
Healthy business growth with healthy deposit mix. Central bank has reported 38% growth in advances in FY 07 compared to 37% in FY 06. Deposits have gone up by 24.5% in FY 07 compared to 9.4% in FY 06. Share of low cost deposits remain healthy at 42%.
Improvement in asset quality.Central Bank’s gross NPAs have come down from 6.8% as on FY 06 to 4.8% as on FY 07 and net NPAs have come down from 2.6% as on FY 06 to 1.7% as on FY 07.

Profitability on up trend
After decline in profits in FY 06 by 28%, bank has reported 94% growth in FY 07. RoA has improved from 0.35% in FY 06 to 0.62% in FY 07. RoE too has improved from 8.8% in FY 06 to 15.1% in FY 07.

Investments Concern
Turnaround has just begin - Central bank has just begun its turnaround and it is yet to be seen weather in a highly competitive scenario, it will be able to sustain it or not.

Valuation
Stock is available at 1.7x FY 07 ABV at lower end and 2x FY 07 ABV at upper end. With overall favourable macro environment, we believe that bank will be able to maintain its momentum. We recommend Subscribing to the issue

ITC could be your next multibagger

noreply@blogger.com (Raj Redkar) — Wed, 25 Jul 2007 12:16:00 +0000

Research firms CLSA and Credit-Suisse have come out with their reports on ITC. According to them ITC, which has been an underperformer on concerns of VAT implementation and subsequent impact on cigarette volume, will outperform now on expectations of increase in cigarette volumes and earnings growth.

Both research firms have raised their target price on ITC. CLSA is bullish on the stock and has recommended a 'buy' on it with a target of Rs 184, which implies 20% potential upside and Credit-Suisse has recommended 'outperformer' rating with a target of Rs 188, which implies 22% potential upside.

CLSA report on ITC:

Volume surprise likely
ITC has underperformed the market by 24% YTD on the concerns of VAT implementation and subsequent impact on cigarette volume and earnings growth. We believe that the current stock price already factors in the worst and cigarette volumes and earnings growth will likely surprise on the upside. We have reduced our FY08 cigarette volume drop assumption from 7.5% earlier to 3% now and raised earnings by 6%.

Underpeformance is now behind
The stock has underperformed the market by 40% over last year on the concerns of VAT implementation. Then it was the concerns on whether the industry / ITC would be able to pass on the tax increases. Once ITC effected nearly 18-20% weighted average price increase, passing on the entire tax hike, which in turn lead to concerns on volume growth. We believe that ITC will likely surprise on the positive on this front.

Target price raised to Rs184/share; upgraded to ‘BUY’
Our 12-m target price of Rs184 per share is based on sum of parts. The key reason for the target price upgrade is the 6% increase in earnings and upward revision in our target cigarette business PE to 17x, due to more confidence on cigarette volume trend. Cigarette business accounts for 70% of sum of parts. With the target price offering 20% upside we upgrade the stock to BUY .

Credit-Suisse report on ITC:

View:
ITC’s cigarette profits tend to grow even in an adverse tax environment. Furthermore, net price realisations tend to outpace volume falls in a declining market, resulting in net sales growth. However, total costs fall, as most costs are linked to sales volume, resulting in margin expansion. ITC has effected a price rise of some 20%, which should result in about a 9.4% rise in net realisations. We expect EBIT margins from cigarettes to increase 150 bp and absolute EBIT to grow 6% in FY08E, resuming doubledigit growth thereafter . Paper should benefit from pulp capacity expansion, while supply-demand in the hotel business remains conducive to profitable growth. Its foods business is likely to turn profitable by early FY09, although entry into the HPC business is expected to drag down segmental profitability. We expect EPS to grow 14.8% p.a. from FY07-10E and ROE to remain steady at about 25%, despite high investments.

Catalyst:
In our view, the market is excessively focused on short-term volume growth in cigarettes, or the lack of it, and would be positively surprised by segmental profit growth. We believe that consensus is for underestimating the extent of a net realisation rise in the cigarette business.

Valuation:
ITC has underperformed the market by 40% over last year and now trades at 19.3x FY08E, which is at a 10% premium to the broader market. We set a sum-of-the-parts (SOTP) fair value of Rs 188, based on Rs 110 for cigarettes (16.5x FY09E cigarette earnings).

Are you buying a financial product that you shouldn't?

noreply@blogger.com (Raj Redkar) — Thu, 19 Jul 2007 11:35:00 +0000

Have you ever come across a situation where a close relative of yours is trying to sell you a financial product? How often do you say 'yes' for buying a product, when you should have actually, said a firm 'no'? This is a problem we all face in our life almost every second day.

However, if we understand few things and ask questions to those approaching us to sell a product like personal loan, credit card, etc, a lot many of us will have lesser worries.

Here are a few questions that immediately come to my mind:

Do I really need the product being sold?
Is the person giving me the complete information about the product he is selling? There are a lot of instances where we come to know some important things about the product only after we have purchased it. Sometimes we are put in a discomfort due to this.

Is the person genuine in her/ his intentions?
Analyse from where he is getting his revenues (Salary, Commission, etc). If there are two products which a person is selling and the commission that he will get by selling one product is far greater for the seller then which product is he going to sell you?

Does the seller first ask you what your needs are and then suggests a product which satisfies that need?
There is always a shade of grey for the seller. Benefit to his client vs earning from him. It would depend on the guilt level in the seller.

We also need to understand as to who are these sellers. I like to classify them into groups:

~ Relatives: The first rule of insurance selling is to target the natural market. And relatives are the first to get targeted among this natural market. Most of the sellers are not experienced and are guided by their agency managers. They sell what they are advised to sell by the agency manager . The sale is easy as most people find it difficult to say no to a relative.

~ People in our network: That is, people with whom we come across in our daily life. I generally consider references given by someone too in this category. When we want to buy something, we generally look to buy it from a person that we know or a person who has been recommended by a close acquaintance.

~ Professional organisations with whom we deal. Each one of them is in a business to make money. If they do not earn from you then they will soon be out of business or be taken over by a competitor. So their focus would be to make maximum money from a customer. And this focus of theirs ensures that you maybe sold the products that are more beneficial to them than to you.

~ Complete strangers: These are people whom you don't know or have not met before. They generally move from door to door or from office to office trying to sell their products. Even telesales forms a part of this group.

I have spent a lot of time trying to understand intricacies of how people are sold products which they do not need.

People who sell products are very good at their job and hence we fall prey to their charm and purchase something which we do no need. There are also a lot of cases where we as individuals look for a specific investment product (influenced by friends, media, etc) before understanding our needs.

In such a case we come across sellers for our need. This too is a leading cause of us getting sold a product we do not need. Suppose we purchase/ invest in a product we do not need, then we will have to base our needs on the amount of money (returns) that the product would give us. If we make a mistake we will realise pretty late in life about it and then, would most probably not be in a position to take corrective action.

There is a very simple thing that you must do: Understand what your needs are.
This is the first step that would help us in making the 'Best Plan' that would meet those needs. This plan would help us find the suitable investment options so that those needs/ objectives are met. If we can cultivate this habit then no one will be able to sell us a product, which we do not need.

9 Investment Basics

noreply@blogger.com (Raj Redkar) — Mon, 16 Jul 2007 12:23:00 +0000

Start early
Investing is easy once you know how. That’s why starting early gives you an extra edge, to learn from mistakes and experiment with various investment techniques and asset classes. As you grow older, you can take limited risks with equities and would prefer to invest in debt too. For instance, to get Rs 10 lakh at the end of 20 years, if you start now you will need to invest Rs 13,879 annually but if you start 10 years later, the annual investment will shoot up to Rs 56,984.

Know yourself
Invest in shares or mutual funds based on your needs and after doing proper homework. Don't buy something because your neighbour believes so, or your broker is issuing a buy report on a stock. Choose securities that fit your profile. It is important to relate the risk perceived in a given security not only to returns, but also to your attitude towards risk. For instance, what would be your reaction if your stock investments plummet by 35 per cent in a month? How would that affect your medium term or long term plans?

The risk/return trade-off
There is no harm in assuming a big risk in the quest for higher long term returns, and your profile does not preclude taking of such risks. Equities promise higher long term returns but the period taken to realize these returns too can be uncertain. As far as debt mutual funds are concerned, they are more stable tenure but returns are much lower. As an investor, you should be able to judge whether the perceived risk is worth taking in order to get the expected return and whether a higher return is possible for the same level of risk .Smart investing will involve choices, compromises and trade-offs. And you have to decide the combination of factors that suit you best.

Don't overpay for growth
Seek out shares that are capable of delivering sustainable earnings growth but don’t fall into the trap of overpaying for growth. Even the best growth stock may not deliver dream returns if your purchase price was too high to begin with. Warren Buffet said back in 1983: "For the investor, a too high purchase price for the stock of an excellent company can undo the effects of a subsequent decade of favourable business developments." So growth riding on the back of a reasonable purchase price may be a good motto to stick with.

The reinvestment risk
If it suits your plan, choose a fund that reinvests your dividends or interest. That won't leave you exposed to the risk of reinvesting the amount at equivalent or higher returns for the same level of risk. Such alternatives are more than often not easily available. The reinvestment risk is implicitly defined for a debt instrument. Yield-to-maturity, which is the actual yield on a bond if held to maturity, may be a familiar term to those who invest in fixed income. But few know that this YTM assumes that each interest cheque received by the investor is reinvested at the coupon rate. In reality, however, most investors are probably spending this interest on fullfiling current needs.

Beware of the law of averages
The average acts like a powerful magnet that pulls stock prices down sharply, often causing returns to deterioriate after they exceed historical norms by substantial margins. Stocks display runaway tendencies by appreciating sharply. Subsequently, prices may plateau causing disappointment. In such a situation, investors may profit from selling out earlier than originally planned. And if the fundamental story is still intact, you could even buy back your shares at a lower price. So stay tuned to any short-term movements in the stock market that affect your stocks. However, if your goals are long term, don't get into the trading mode, where you compromise on the big picture for short-term gains. It is important that you still think long term.

A trend may not be your best friend
The psychology of the stock market is not only based on how investors judge future events, but also on how they react to the immediate past. There is a tendency among common investors to buy shares of those companies or sectors that have performed well very recently. It is critical that you assess where you are in the cycle during any bull run. That's because what may seem to be an everlasting phenomenon eventually turns out to be illusory. It will be replaced by another, equally compelling one. And as an investor, you are left with shares bought at the peak of a cycle.

Time marches on
Time can dramatically enhance the value of your starting capital through the magic of compounding. At 10 per cent annually, the annual incremental capital accumulation on a Rs 10,000 investment is Rs 1,000 in the first year, is over Rs 2,300 by the 10th year, and just under Rs 10,000 by the 25th year. After 25 years, the total value of the initial Rs 10,000 is Rs 108,000, a ten-fold increase in value. Give your investment all the benefit of time that you can afford. Choosing an investment plan that automatically reinvests your dividends and interest is also a way to benefit from the power of compounding.

Evaluate your future
A lot of investing is about how you see your future. We all make certain assumptions while estimating our future needs, and how we intend to meet those needs. But circumstances can change. Hence it is important that you review your portfolio at least once a year. Also try to evaluate the performance of your investments against the level of risk you are assuming for achieving the returns you want. And when necessary re-balance your portfolio to stay on track with your long term financial goals.

Infy Q1FY08: What do experts think of the nos?

noreply@blogger.com (Raj Redkar) — Thu, 12 Jul 2007 04:00:00 +0000

Infosys which is known for positive surprises has once again beaten the market expectations and posted consolidated net profit of Rs 1079 crore (including tax write back) in the first quarter of FY08 against Rs 1,144 crore in the previous quarter.

How is the market reading the Infosys numbers?
Most experts believe that the pressure will continue, are scaling down their price targets and earnings expectations.

Nilesh Shah of Envision Capital says that Infosys is fairly valued at current market price. The case for contraction of premiums is enjoyed by tier-I IT companies he adds. He feels that the IT sector will underperform in the next 2 quarters

JP Sinha of Ambit Capital says that the tech sector can underperform in the short-term.

Further on, Ashwin Mehta, Analyst at Ambit Capital said that the brokerage firm was looking at three things when the Infosys management spoke. Revival of revenues via Banking, Financial Services and Insurance was one of them and that has happened. The second point was increase in utilisation, which too had happened to almost 260 basis points. The third thing was the guidance that his firm was expecting downgrade of the guidance to Rs 77 to Rs 78 and that has happened. "In terms of our estimates Infy is expected to do somewhere in the range of Rs 80 this year and around Rs 95-96 next year. At a 23 times multiple, it would trade at somewhere in the range of Rs 2200 one year down the line," Mehta said.

Dipan Mehta, Member, BSE & NSE says that Infy growth may slow down to 7% due to rupee.

Vibhav Kapoor of IL&FS says: Infosys FY08 guidance of Rs 78-79 is in line with market expectations. We need some more clarity on the other income component. Overall, the business seems to be doing well & I expect the company will beat full year guidance. A bounce is expected in the Infosys stock as there could be some short covering. The stock should settle between Rs 2,000-2,100 in the short-term.

Devesh Kumar of Centrum Finance says: Infosys' muted earnings guidance will not go down well with the markets. I expect the stock to correct. Sentiment for all dollar driven cos may turn negative post the Infosys guidance.

While, the FII view on this comes from Moshe Katri, MD at Cowen and Company. he said that the downward revision of rupee guidance is the biggest overhang for the stock today. Though, Infosys fundamentals remain strong. He sees Infosys operation metrics as better than last quarters.

DSP Merrill Lynch says: EPS for FY08 is expected at Rs 82. Profit after tax, or PAT, is higher than expected on higher income from other businesses. Was expecting higher dollar-revenue.

JPMorgan says: Q1 result is in line. Buy Infosys in the current weakness. Infosys stock will react negatively given the lower-than-expected FY08 guidance due to the management’s conservative stance. This guidance does not reflect any weakness in business trend at Infosys.
There would be positive surprises as the company moves into the traditionally stronger quarters. JP Morgan expects 40% plus dollar-based growth which includes 25% plus Re-based revenue growth and 30% plus dollar-based EPS growth.

CLSA says: Infosys may remain sluggish till the October results when the next test of estimates and upsides will happen. Dollar-revenue in June quarter is much below the street estimates. The lack of revenue upside is key negative surprise of Q1FY08. Q1 results and outlook are unlikely to push estimates up.
From tech pack, CLSA expects Cognizant and Satyam to do better.

Angel Broking’s Harit Shah says: I was disappointed with the kind of flat revenue growth that they have given plus the significant downgrade in the rupee-revenue guidance. But overall the result has been inline. As far as business growth is concerned, there is no problem; there are a 38-40% growth in dollar terms on YoY basis in revenues. On the volume side, there is about 7% sequential volume growth this quarter and over 30% on a YoY basis.
The disappointing factor was on the downgrade in rupee guidance as well as the downgrade in the EPS. But overall the company should be able to do about Rs 80-Rs 82 kind of a range in FY08.

Sanjeev Hota, IT analyst of Emkay says: In revenue terms, it’s marginally below our expectations, but in the net profitability term, it is higher than our expectations. I am expecting an EPS of Rs 82 for FY08 from an earlier EPS of Rs 87 per share. Earlier we had a price target of Rs 2616 and we might revise it to Rs 2400. It’s definitely going to be a buy from our side but it is going to be sluggish till the second quarter results. The second quarter has always been a very good quarter for Infy. Right now if you have taken a rupee rate of 40.5, if the rupee start depreciating, then Infy might revise its guidance upwards from the second quarter. We believe that the margins are going to stabilize because this time the margin fall was driven by the improvement in the utilization rate. We expect the billing rate to improve in the next three quarters and the margins are going to stabilize around 29% for the full year.

PF vs PPF vs NSC

noreply@blogger.com (Raj Redkar) — Wed, 11 Jul 2007 03:57:00 +0000

PF vs PPF: What's the difference?

1. What is PPF and PF?

EPF/ PF
The Employee Provident Fund, or provident fund as it is normally referred to, is a retirement benefit scheme that is available to salaried employees. Under this scheme, a stipulated amount (currently 12%) is deducted from the employee's salary and contributed towards the fund. This amount is decided by the government.The employer also contributes an equal amount to the fund. However, an employee can contribute more than the stipulated amount if the scheme allows for it. So, let's say the employee decides 15% must be deducted towards the EPF. In this case, the employer is not obligated to pay any contribution over and above the amount as stipulated, which is 12%.

PPF
The Public Provident Fund has been established by the central government. You can voluntarily decide to open one. You need not be a salaried individual, you could be a consultant, a freelancer or even working on a contract basis. You can also open this account if you are not earning. Any individual can open a PPF account in any nationalised bank or its branches that handle PPF accounts. You can also open it at the head post office or certain select post offices. The min amount to be deposited in this account is Rs 500 per year. The max amount you can deposit every year is Rs 70,000.

2. What is the return on this investment?

EPF: 8.5% per annum

PPF: 8% per annum

3. How long is the money blocked?

EPF
The amount accumulated in the PF is paid at the time of retirement or resignation. Or, it can be transferred from one company to the other if one changes jobs. In case of the death of the employee, the accumulated balance is paid to the legal heir.

PPF
The accumulated sum is repayable after 15 years. The entire balance can be withdrawn on maturity, that is, after 15 years of the close of the financial year in which you opened the account. It can be extended for a period of five years after that. During these five years, you earn the rate of interest and can also make fresh deposits.

4. What is the tax impact?
EPF
The amount you invest is eligible for deduction under the Rs 1,00,000 limit of Section 80C. If you have worked continuously for a period of five years, the withdrawal of PF is not taxed. If you have not worked for at least five years, but the PF has been transferred to the new employer, then too it is not taxed. The tenure of employment with the new employer is included in computing the total of five years. If you withdraw it before completion of five years, it is taxed. But if your employment is terminated due to ill-health, the PF withdrawal is not taxed.

PPF
The amount you invest is eligible for deduction under the Rs 1,00,000 limit of Section 80C. On maturity, you pay absolutely no tax.

5. What if you need the money?
EPF
If you urgently need the money, you can take a loan on your PF.You can also make a premature withdrawal on the condition that you are withdrawing the money for your daughter's wedding (not son or not even yours) or you are buying a home. To find out the details, you will have to talk to your employer and then get in touch with the EPF office

PPF
You can take a loan on the PPF from the third year of opening your account to the sixth year. So, if the account is opened during the financial year 1997-98, the first loan can be taken during financial year 1999-2000 (the financial year is from April 1 to March 31).
The loan amount will be up to a maximum of 25% of the balance in your account at the end of the first financial year. In this case, it will be March 31, 1998. You can make withdrawals during any one year from the sixth year. You are allowed to withdraw 50% of the balance at the end of the fourth year, preceding the year in which the amount is withdrawn or the end of the preceding year whichever is lower. For example, if the account was opened in 1993-94 and the first withdrawal was made during 1999-2000, the amount you can withdraw is limited to 50% of the balance as on March 31, 1996, or March 31, 1999, whichever is lower. If the account extended beyond 15 years, partial withdrawal -- up to 60% of the balance you have at the end of the 15 year period -- is allowed.

The better option?
In both cases, contributions get a deduction under Section 80C and the interest earned is tax free.

Having said that, PF scores over PPF in two aspects.

In the case of PF, the employer also contributes to the fund. There is no such contribution in case of PPF.
The rate of interest on PF is also marginally higher (currently 8.50%) than interest on PPF (8%).

PPF vs NSC: What's the difference?

The NSC is a post-office savings scheme while the PPF was established by the central government in 1968. But both are very safe since they are backed by the government.

How Much ?

The minimum amount you have to put into your PPF account in a year is Rs 500. The maximum you can put is Rs 70,000 per year.

With NSC, the minimum amount is Rs 100. Here, is no upper limit on investment.
However, NSC is sold in denominations of Rs 100, Rs 500, Rs 1,000, Rs 5,000 and Rs 10,000. So, if you want to invest Rs 30,000, you will have to buy three certificates of Rs 10,000 each.

What do I get?

On the face of it, both give an identical rate of interest: 8% per annum. The only difference is in the way it is computed. PPF is compounded annually. NSC is compounded half-yearly (twice a year).

Let's say on April 1, 2006, you invested Rs 30,000 in PPF and the same amount in NSC.
On April 1, 2007, your PPF account will have Rs 32,400 while your NSC will have Rs 32,448.

Both these investments fall under Section 80C. That means the investments made under this section are eligible for an income deduction upto a maximum Rs 1,00,000.
This is as far as your principal investment goes.

Let's look at the interest earned.
With PPF, you pay no tax on the interest you earn.

What about NSC?
Till FY 2004-'05, an individual could avail of a deduction under Section 80L of the Income Tax Act. This limit was Rs 12,000 of interest income received during the financial year. This deduction has been done away with from FY 2005-'06. Now, all interest income is taxable at the respective slab rate of the individual.The interest accrued on NSC is taxable. But, it is also eligible for a deduction under Section 80C.
Generally, it is advisable to declare accrued interest on NSC on a yearly basis. So, over the period of six years, you could declare the interest income for each year. In such a case, it does not amount to a huge sum.
If you do not declare the interest on accrual basis, then the entire interest earned (difference between the amount deposited and the maturity value) would accumulate in the year of maturity. You could then claim it under Section 80C but it would be a huge amount and would be taxable at the current applicable tax rate.

How long do I hold it?

PPF is for 15 years, but you can extend it for a block of five years.

Of course, you do have the option of withdrawing the entire balance on maturity, that is, after 15 years of the close of the financial year in which you opened the account.

So, if you opened it in FY 2006-07 (this financial year), you will be able to withdraw it 15 years later, starting March 31, 2007 (end of this financial year). That is April 1, 2022.

If you extend it for five years after that, you continue to earn the rate of interest and can also make fresh deposits and get the tax benefit.

NSC is for a much shorter duration -- just six years from the date of investment.

How many can I have?
Once you open an NSC, you can't keep adding to it. You will have to buy another. Let's say you buy a NSC of Rs 30,000. In a year's time, you want to add another Rs 30,000. You cannot add it to this amount. You will have to buy another NSC.

With PPF, you can have just one account. But this does not matter because you have to make annual additions. Every year, you keep adding to it.

However, if you like the safety of the investment and a guaranteed return of 8% per annum, you can open one in your child's name.

So you can have one account for yourself and one for your child. But this does not mean the tax benefit is doubled. The limit is the same -- Rs 70,000, irrespective if it all goes in your account or in your account and your child's.
Let's say you open an account for your minor child. You can deposit Rs 70,000 in your account and Rs 70,000 in your child's account. But you will only get the tax benefit on Rs 70,000.

How is it held?
The PPF account cannot be held jointly. You can nominate someone but it cannot be jointly held with someone else.

With NSC, you can hold it jointly or you can hold it singly and nominate someone.

Where can I open it?
To open a PPF account, you can drop by a State Bank of India branch. No, you do not have to have an account with them.

You can also ask your nationalised bank where you have an account if they are authorised to open PPF accounts. You can also approach the head post office in your area. If that is inconvenient, ask your local post office (selection grade sub post offices are allowed to do so).

To buy an NSC, just approach any post office.

How to pick the right mutual fund

noreply@blogger.com (Raj Redkar) — Fri, 06 Jul 2007 04:37:00 +0000

Mutual funds are often touted as a useful vehicle for small investors as it allows an investor to hire an expert to go through a plethora of parameters for evaluating among the thousands of stocks listed on stock exchanges. However, with so many mutual funds to choose from, the investors are no better off than they were without the mutual funds.

The following discussion is an attempt to look at some of the parameters to decide how to select mutual funds for investments:

The standard approach is to look at the past performance of the fund, the risk associated with the fund , the conduct of the fund house, services of the fund house, the adherence to or the deviation from the objectives of the scheme, if any, etc.

Looking at these parameters is important, but there is another perspective that needs to be looked at. Every fund house or every fund manager has a particular style of working, certain values, and certain appetite for risk. Some funds are aggressive while some are conservative.
Some funds believe in taking certain risks, whereas the others would keep away from those. While none of the approaches is wrong, it is upto the investor to decide what suits him / her the most. There is nothing like "one-size-fits-all" in investments.

How does one determine whether a portfolio manager is taking high risk or low?
Let us start with the discussion with equity funds. Investors can look at some parameters like standard deviation, beta, portfolio turnover, stock or sector concentration, exposure to illiquid / unlisted stocks, etc. Standard deviation and beta indicate the risk associated with price volatility, which essentially indicates the uncertainty regarding the returns that the portfolio would generate in future. Both these factors need to be used to compare two or more funds. The fund with higher standard deviation or beta is riskier than other funds.

Often, the portfolio managers knowingly take certain risks in order to generate higher returns for the portfolio. Some of the approaches that the fund manager may adopt are taking higher exposure to certain companies or sectors where they have very high conviction about brighter future. However, since short term movements of stock prices may not be strongly related to the strengths of the stocks or companies, the short-term risk could go up if the prices do not move favorably. If the concentration is high, the risk goes up even further.

On certain occasions, the portfolio manager enters and exits some stock positions at a high frequency in order to take benefit of the momentum. Such aggressive entry / exit strategy focuses on momentum rather than stock picking. Some of the fund houses publish the portfolio turnover ratio of funds in the fact sheet. Between two funds, the one with a higher turnover ratio is considered to be riskier.

In case of the debt funds, one needs to look at credit quality of securities, average maturity of the portfolio, exposure to certain kind of sectors or securities, exposure to liquid / illiquid securities, etc.

The objective of debt funds is to provide regular income with high safety of the investment. In such cases, if the fund has higher exposure to low quality securities, the investor is exposed to higher risk. The quality of the portfolio can be assessed by looking at the credit ratings of the debentures that the fund has invested in. If a high allocation is made to securities with AA (or equivalent) or higher rating from credit rating agencies, the portfolio is considered to be safer. Average maturity (or duration of the portfolio) determines how the portfolio would react to the changes in interest rates. Longer maturity (or duration) denotes the fund is riskier compared to one that has shorter maturity (or duration). Debt securities that are less liquid or illiquid offer better returns to the investor if held till maturity.

Liquidity of the investments is a major consideration especially if the fund in question is an open-end fund. This is applicable for both equity as well as debt funds. Poor liquidity of the underlying instruments may present a bargain to a buyer, but when it comes to selling, the same illiquidity may turn against the holder of the stock or debenture. Liquid funds are used by the investors to park their short-term investments, such that the money is safe at all times and available when needed. In such cases, exposure to illiquid securities, market price fluctuation, and credit risk become some of the important factors to look at.

It is important for to remember that the portfolio manager takes a higher risk only with an objective to enhance portfolio return. It is very important to understand this relationship between risk and return. Such an understanding allows the investor to weigh the upside and downside with the investment goal and the appetite for risk.

At the same time, it is important for an investor to be aware of one's own ability to take risks. It is observed that the investors' risk preference oscillates between low risk to high risk depending on external factors like the state of the stock markets, the state of the economy, etc.

As Leon Levy puts in his book, Mind of the Markets: 'The reason why most get it wrong in stock markets is that there is a gap between the actual risk and our perception of the same. Most of the times, the risk is at the highest when it is perceived to be at the lowest and vice versa. The risk of terrorist attack was actually the least after WTC event, but the whole of US was terrified.'

Such an oscillation from high safety to high risk and back is harmful to the investors' wealth, and health.

P/E Ratio

noreply@blogger.com (Raj Redkar) — Wed, 04 Jul 2007 04:25:00 +0000

P/E is short for the ratio of a company's share price to its per-share earnings. As the name implies, to calculate the P/E, you simply take the current stock price of a company and divide by its earnings per share (EPS)

P/E Ratio = Market Value per Share
Earnings per Share (EPS)

EPS = Profit After Tax (PAT)
Number of shares in the share capital

The common sense would dictate that lower P/E ratio means that the price is undervalued and higher P/E ratio means that the price is overvalued.

It's difficult to determine whether a particular P/E is high or low without taking into account two main factors:

1. Company growth rates - How fast has the company been growing in the past, and are these rates expected to increase, or at least continue, in the future? Something isn't right if a company has only grown at 5% in the past and still has a stratospheric P/E. If projected growth rates don't justify the P/E, then a stock might be overpriced. In this situation, all you have to do is calculate the P/E using projected EPS.

2. Industry - It is only useful to compare companies if they are in the same industry. For example, utilities typically have low multiples because they are low growth, stable industries. In contrast, the technology industry is characterized by phenomenal growth rates and constant change. Comparing a tech company to a utility is useless. You should only compare high-growth companies to others in the same industry, or to the industry average.

One can only make sense of a P/E number of a particular stock by
comparing it with P/E of other companies in the same line of business
comparing it with the benchmark indices say Sensex P/E or Mid-cap P/E
assessing the growth potential of the industry
assessing the growth potential of the particular company

Let's look at a couple of cases - Banking & IT. Banking as an industry enjoys an avg P/E of around 8-10 visa IT, which enjoys PE exceeding 25-30. The reason is simple - growth.

In a normal scenario the profits of a bank are the spread it earns between the interest rates on deposits and lending. And this usually varies between 2-4 per cent. If the interest rates on deposit go up, the lending rates will also go up and vice versa. Therefore, the profit potential of a bank is limited. And hence the P/E ratio for banks is usually below 10. The only option for a bank to grow is by increasing the asset size.
Banks like HDFC and ICICI are rapidly increasing their asset base every year vis-à-vis the nationalised banks. Hence, they enjoy much higher P/Es of 20-25.

On the contrary most IT companies are growing at 30-40 per cent p.a. Therefore, in anticipation or likelihood of such high growth rates, the P/E ratios of 25-30 are not unreasonable even for average IT companies. The larger and better companies may even enjoy P/E in excess of 30-35.

Most of the time, the P/E is calculated using EPS from the last four quarters. This is also known as the trailing P/E. However, occasionally the EPS figure comes from estimated earnings expected over the next four quarters. This is known as the leading or projected P/E. A third variation that is also sometimes seen uses the EPS of the past two quarters and estimates of the next two quarters. There isn't a huge difference between these variations. But it is important to realize that in the first calculation, you are using actual historical data. The other two calculations are based on analyst estimates that are not always perfect or precise. Companies that aren't profitable, and consequently have a negative EPS, pose a challenge when it comes to calculating their P/E. Opinions vary on how to deal with this. Some say there is a negative P/E, others give a P/E of 0, while most just say the P/E doesn't exist. Historically, the average P/E ratio in the market has been around 15-25. This fluctuates significantly depending on economic conditions. The P/E can also vary widely between different companies and industries.

Using The P/E Ratio
Theoretically, a stock's P/E tells us how much investors are willing to pay per dollar of earnings. For this reason it's also called the "multiple" of a stock. In other words, a P/E ratio of 20 suggests that investors in the stock are willing to pay $20 for every $1 of earnings that the company generates. However, this is a far too simplistic way of viewing the P/E because it fails to take into account the company's growth prospects.

Growth of Earnings
Although the EPS figure in the P/E is usually based on earnings from the last four quarters, the P/E is more than a measure of a company's past performance. It also takes into account market expectations for a company's growth. Remember, stock prices reflect what investors think a company will be worth. Future growth is already accounted for in the stock price. As a result, a better way of interpreting the P/E ratio is as a reflection of the market's optimism concerning a company's growth prospects.
If a company has a P/E higher than the market or industry average, this means that the market is expecting big things over the next few months or years. A company with a high P/E ratio will eventually have to live up to the high rating by substantially increasing its earnings, or the stock price will need to drop. A good example is Microsoft. Several years ago, when it was growing by leaps and bounds, and its P/E ratio was over 100. Today, Microsoft is one of the largest companies in the world, so its revenues and earnings can't maintain the same growth as before. As a result, its P/E had dropped to 43 by June 2002. This reduction in the P/E ratio is a common occurrence as high-growth startups solidify their reputations and turn into blue chips.

Problems With The P/E
Accounting
Earnings is an accounting figure that includes non-cash items. Furthermore, the guidelines for determining earnings are governed by accounting rules (Generally Accepted Accounting Principles (GAAP)) that change over time and are different in each country. To complicate matters, EPS can be twisted, prodded and squeezed into various numbers depending on how you do the books. The result is that we often don't know whether we are comparing the same figures, or apples to oranges.

Inflation
In times of high inflation, inventory and depreciation costs tend to be understated because the replacement costs of goods and equipment rise with the general level of prices. Thus, P/E ratios tend to be lower during times of high inflation because the market sees earnings as artificially distorted upwards. As with all ratios, it's more valuable to look at the P/E over time in order to determine the trend. Inflation makes this difficult, as past information is less useful today.

Many Interpretations
A low P/E ratio does not necessarily mean that a company is undervalued. Rather, it could mean that the market believes the company is headed for trouble in the near future. Stocks that go down usually do so for a reason. It may be that a company has warned that earnings will come in lower than expected. This wouldn't be reflected in a trailing P/E ratio until earnings are actually released, during which time the company might look undervalued.

It's Not A Crystal Ball
What goes up ... well, sometimes it stays up for an awfully long time. A common mistake among beginning investors is the short selling of stocks because they have a high P/E ratio. Short selling is an investing technique by which an investor can make money when a shorted security falls in value. Although a high P/E ratio could mean that a stock is overvalued, there is no guarantee that it will come back down anytime soon. On the flip side, even if a stock is undervalued, it could take years for the market to value it in the proper way. Security analysis requires a great deal more than understanding a few ratios.

The short-term outlook
Liquidity, demand-supply scenario, political uncertainties, budget, corporate announcements etc are some of the factors, which affect the price of a stock in the short-term. Suppose there is good news flow for the steel industry. Then practically all the steel stock prices will move up even though some of these companies may not be performing too well. Therefore, buying and selling in the short-term is more of a trading call than an investment call. It is suited more for a person who can invest his time daily to the stock market.

The long-term outlook
The real benefit of investing in equity markets accrues through long-term investing. Hence it is more pertinent to understand the stock valuation from a long-term perspective.
In the long run, the price of a stock is the reflection of the operational performance of the company. The expected growth and future profits will determine the price. And because we have to take a view on the future prospects of the company, the industry and the economy in general, assessment of the 'right price' becomes difficult, subjective and prone to large volatility depending on how the future unfolds.

Therefore, one should keep in mind that:
There no concept of an absolute right PE
It is quite normal to invest in a high growth industry like IT with P/E of say 20, but not so for a low growth industry like bank
A low P/E vis-à-vis the industry average (e.g. Bank A is quoting at 3 PE as compared to the average of 8 PE for the banks) does not necessarily mean it is cheap. The PE may be low because the bank is having some problems and hence may not be expected to do well in the future.
The P/E number requires careful analysis. Only then can one assess the over or under-valuation of a stock and decide on the investment worthiness of the stock.

Understanding Dividends, Bonus, Stock Splits & Buybacks

noreply@blogger.com (Raj Redkar) — Mon, 25 Jun 2007 05:31:00 +0000

1. Dividends
During a bull market capital gains take precedence over dividends. This is because a dividend is always on face value and not on market value. Consequently, even if a company whose share price is say ruling at Rs. 400 declares a healthy dividend of say 60% (face value Rs. 10), the dividend while being at Rs. 6 per share, the dividend yield would be an abysmal 1.5%. However, it doesn't mean that dividends are of no significance to shareholders. Apart from the utility during a bear phase, dividends are looked upon by the market at large as an important signaling mechanism determining the health of the corporate. Dividends are paid out of reserves and by paying dividend the company is distributing a part of its reserves amongst shareholders. However, there is another school of thought that considers dividend payouts as a waste of money. Fast growing companies are perceived to be much better off ploughing their profits back. Case in point : Most of the US tech giants are extremely stingy dividend payers. Equity dividends in India are tax-free in the hands of share holders. However, u/s 115O, the company distributing the dividend has to pay a dividend distribution tax of 12.8125% to the exchequer. In effect, it is the share holders who bears the tax since they receive that much lesser amount as dividend. Also, the dividend amount gets subjected to tax twice, once at the company's end since it is the post tax profits which may be distributed as dividend and the second time as dividend distribution tax. Hence sometimes reserves may even be distributed as bonus shares.

2. Bonus shares
Bonus shares are nothing but shares issued free of cost to the shareholders of a company, by capitalizing a part of the company's reserves. Following a bonus issue, though the number of total shares increase, the proportional ownership of shareholders does not change.
Also, post the bonus the cum bonus share price should fall in proportion to the bonus issue, thereby making no difference to the personal wealth of the share holder. However, more often than not, as explained earlier, a bonus is perceived to be a strong signal given out by the company and the consequent demand push for the shares causes the price to move up.
As far as tax is concerned, since no money is paid to acquire bonus shares, these have to be valued at nil cost while making calculations for capital gains. An incidental benefit is that since the price more or less falls in proportion to the bonus, there may arise an opportunity to book loss on the original shares.

3. Stock splits
Stock splits are a relatively new phenomenon in the Indian context. It is important that investors understand the reasons that companies may split their shares and how a stock split is different from a bonus issue. A stock split is when the number of shares in a stock is increased and the value per share is decreased. This in no way affects the intrinsic value of your investment and has no effect on your net wealth. A typical example is a 2-for-1 stock split. Say a company announces a 2-for-1 stock split in one month. That means one month from that date, the company's shares will start trading at half the price from the previous day. Consequently you will own twice the number of shares that you originally owned and the company in turn will have twice the number of shares outstanding. The question that arises is if there is no difference to the wealth of the investor, then why does a company announce a stock split. Well, the primary reason is to infuse additional liquidity into the shares by making them more affordable. Here it has to be reiterated that the shares only appear to be cheaper, it makes no difference whether you buy one share for Rs.3,000 or two for Rs.1,500 each. As far as the tax implications for stock splits are concerned, well, there aren't any. A stock split, like a bonus issue, is tax neutral. However, when the shares are sold, the capital gains tax implications are different that what is applicable for bonus issues. Here, the original cost of the shares also has to be reduced.

4. Share buybacks
Even share buybacks are a comparatively new phenomenon. Reliance and Siemens are a couple of examples of companies which have bought back their shares. A buyback is essentially a financial tool in the hands of the corporate that affords flexibility in the capital structure. A buyback in this case allows the company to sustain a higher debt-equity ratio. It is also a tool to defend against possible takeovers. Generally companies buyback when they perceive their own shares to be undervalued or when they have surplus cash for which there is no ready capital investment need. Stock buybacks also prevent dilution of earnings. In other words, a buyback program enhances the earnings per share, or conversely, it can prevent an EPS dilution that may be caused by exercises of stock option grants etc.

Stock Idea - Indian Hotels

noreply@blogger.com (Raj Redkar) — Fri, 22 Jun 2007 08:55:00 +0000

Research done by - HDFC Sec

Q4FY07 & FY07 Results Review; Marginally below expectation:
IHCL reported a turnover of Rs 15,445 million for the year ended March 31, 2007, and a PAT of Rs 3223.9 million, which were 40% and 75% higher yoy. The healthy topline growth was led by 28% rise in ARRs (Rs 9,234) and 3% rise in occupancy (73%).

For the quarter ended March 07, the turnover of Rs 5051.6 million and PAT of Rs 1345.2 million were higher by 45% and 71% yoy, respectively. The top line growth was aided by 25% rise in ARRs and 4% rise in occupancy.

OPM for the quarter improved 638 bps to 42%, while for the full year, it jumped a whooping 745 bps to 36.5%. Other income during the quarter and the year ended March 31, 2007, included the benefits of higher dividends received, profit booked on sale of shares and foreign currency gain.

The consolidated top line rose by 36.7% to Rs. 25115 million, against our estimate of Rs. 24300 million, a gap of 3.2%. The bottom line stood at Rs 3699 million, a growth of 48.7% against our estimate of Rs 3849 million.

Outlook and Valuation
Envisaging a tight demand-supply mismatch in the luxury category (incremental demand of over 55,000 rooms in the next 5 years, against the planned expansion of 18,000 rooms), we believe, ARRs would continue to be on the uphill, at least for a year or two. Also, within IHCL, over 1000 rooms would be added in the next 2 years. With standalone IHCL expected to do better (assuming a proxy to the industry), a turnaround in the performance of subsidiaries and higher share of profits through JVs and associates, would remain key to future earnings growth. IHC’s extensive geographic reach, strategy of spreading itself into all segments, from star deluxe to budget hotels and increasing tie-ups for management contracts would not only give it a competitive advantage, but de-risk its revenue stream too.

We value the target price at Rs 195, offering 36% upside from current levels. The stock is available at a PER of 16.0x FY08E & 11.1x FY09E EPS of Rs 9 and Rs13. We re-iterate “Outperformer”.