Update – 1: Meet with Jay Prakash Sinha, Research Analyst – Kotak AMC


I happened to attend an inevstor meet headed by Jay Sinha, Research Analyst @ Kotak AMC. This meeting has helped me change a lot of my own practices. Here is a brief summary of Jay’s persentation.

Why did the Markets fall ?
Evereybody knew that the correction was long overdue, but why such a drastic fall ? Is it the beginning of a bear market ?
Jay has dismissed in the past and still is of the same opinion,

India is NOT heading towards a Bear Market. Loud and Clear 🙂

The correction was more than expected because of the following reasons.

  • India is no more a secluded economy, it is globalizing and hence dependant on global factors.
  • Indian economy is now driven to a considerable extent by FIIs. If FII pulls out money of our system, then our markets collapse. FIIs pulled out around USD 2 Billion and that action eroded the wealth on Dalal Street close to USD 65 Bilion.
  • Why did the FIIs pull money out of India ? Mainly emerging markets valuations were overstretched. Then the US raised interest rates by 25 basis points. Jays explaination of this helped me clear lot of doubts as to why the inverse co-relation exists between rising interest rates and falling stock markets. Say you manage a fund. 10% is your money and 90% is borrowed money. We all know that Debt funds or Deposits are risk free. When the yield for such instruments rise, then managers and investors look at those instruments and hence some sell off was triggered.
  • Indian short terms rates were also raised by 25 basis points to fight inflation. 1 of 3 CEOs were of the opinion that their CAPEX is now a bumpy ride and has to be managed very carefully. Check out my earlier post, I had told that all the companies will now go for CAPEX and only the sound ones will execute rest will die. This will make borroing of funds little bit difficult and also eat into corporate profits thus bringging the EPS down. All though to a minor extent.
  • Then the retail investor started selling in panic (no where near to the extent that FIIs have sold). All these factors had a ripple effect and the markets corrected further.
  • All of a sudden India’s current account deficit begin to bother FIIs. This is around 2.8% and has always been over 2%. Jay’s thoughts were this contributed to larger fall for SENSEX.

NOTE: Jay is extremely bullish on India. The growth story is intact. Jay spoke about two factors, Indian economic growth and Indian economic flexibility (Political and other Policy matters). Both are sound enough to attract foreign investment. Have a long term view and stay invested. He also spoke that no matter how much the manufacturing & services sector strive and grow, it is actually the Agriculture growth which is mere 3% which requiers thrust and Government of India is all determiend to provide the same.

To be continued …

SIP – The Art of Investing in volatile(falling/rising) emerging markets.

On Thursday(June 8th) the market closed at 9295. Last time the market closed at these levels around mid December 2005. I bet a lot more people were buying at that time than they are today. Same index levels, different reactions. The simple rule of winning in the stock market is to Buy low and Sell high. Most investors may find that they have been Buying high to sell higher or Buying high and Selling low when the market reverses its trend.

Have a look at the following HDFC Growth Fund spreadsheet. It is self explanatory on how SIP(Systematic Investment Plan) helps an investor gain in the longer run.

It has been proven since the past 10 years in the context of Indian stock market and it will probably be true for the next 25 years on Dalal Street. You shop and spend at those fancy malls and don’t you want to earn from the same malls ? Yes your mutual fund manager will invest in those retail companies and make money for you while you spend.

Check out this SIP calculator to calculate how much money you want after 10 to 25 years and how much you can invest monthly. Kindly invest small amount of money in Equity Growth Funds for the next 10 years. Check out what MoneyControl.com expert has to say about SIP here.

Indian Investors, Please do not panic.

I had the following recommendations for my group and blog readers. This has been backed by Killol Karia of HDFc Asset Management Company. He has attached a word document whose contents are as follows.

In the past 31 days, the Indian stock market, represented by the BSE Sensitive Index, has fallen very sharply, from 12671 to 9200, or a fall of 27.73%. This is a significant fall, and at this time we wish to share our thoughts with you on this matter.

Please do not panic: The worst thing that any investor can do now is to panic and try and sell his/her holdings.

It is the basic law of economics that when prices fall, demand rises, and vice versa. The caveat here is that all market participants have full information, and that all market participants are rational in their decision-making. In the stock markets, more often than not, when there is a fall, there is an initial reaction to sell and get out. Is this not irrational behaviour? When something that one considered as purchase-worthy has just become 20% cheaper, should one sell, or buy more of it?

Have the fundamentals weakened? Can the fundamentals of an economy weaken within 11 days? Just 11 days ago, almost everyone was so sanguine about the economy. Certainly, there was an element of hype and speculation at that point, but can anybody deny that the fundamentals are still good? Corporate profits have risen by 26% in FY 2006; interest rates are still within reasonable levels, operating profit margins for corporate India are at a healthy 17.6%. Many sectors continue to report good numbers.

This is not the first time the market has corrected sharply. Let us refresh our memories a bit, and look at the instances where the BSE Sensitive Index corrected sharply.

From 11/05/2006 12671 to 08/06/2006 9200 27.73% fall
From 05/10/2005 8821 to 28/10/2005 7656 13.21% fall
From 23/04/2004 5905 to 17/05/2004 4227 28.42%fall
From 10/09/2001 3224 to 21/09/2001 2594 19.54%fall
From 14/02/2000 6150 to 23/05/2000 3831 37.71%fall

Therefore, this is not the first time that the market has fallen. For each time, the reason was different, and all these reasons seemed very pertinent at that point of time. Ultimately, we have to remember that in the long run, the intrinsic business strength of the company concerned, and the profit growth of that company is what will determine its stock price growth. All other points pale in comparison.

Why didn’t the fund managers foresee this? After all, aren’t they the experts?

We are willing to go on record to say that nobody (absolutely nobody) can predict the movement of the stock market in the short run. This is because in the short run, the market is governed by thousands of variables (economic, political and emotional reasons, human emotions of fear and greed) over which we have no control. For all we know, the market can correct a bit more before it recovers, or it can recover straightaway. The job of a fund manager is to identify businesses that are expected to do well over a period of time, and at prices that are not extraordinarily expensive, and then stay invested. Time is the best friend of a long-term investor, as it helps in compounding the returns.

What should one do now?

If one is already invested in equities, and in companies where one is confident of the future prospects, the best thing to do now is not do anything at all.

If one is not invested in equities, or if the exposure to equities is low, then this may not be a bad time to invest in the stock market now.

At 10481, the Sensitive Index is quoting at a P/E multiple of 15 on estimated FY2007 earnings. This is significantly lower than the 19 P/E that we saw just 11 days ago. With the earnings growth for corporate India estimated to be around 16% for the next few years, this correction has provided a good opportunity for persons who are not adequately exposed to the stock market to do so.

For those whose exposure to the stock market is already adequate (the adequacy of the exposure should be judged by each person individually in consultation with a good financial advisor), this is a good time to realign the portfolio and concentrate holdings into businesses that one is more confident about. This is a good time to prune the marginal holdings and buy more of the stocks that one is more confident about.

In conclusion, the best way to participate in the growth of the economy is to stay invested in good quality businesses. When these businesses grow, the investor’s wealth grows along with it. Please ask yourselves these questions. If the answer to these questions is yes, then you should stay invested in equities.

(1) Do I have faith in the economic prospects of this country, and its private sector?
(2) Do I have the ability to withstand the fluctuations in the stock market, and am I in it for the long haul?
(3) Can I spare this money invested in the stock market without it making any impact on my Standard of Living?

Finally, in times like these, what better learning can one get than the teachings of the great masters? It is impossible to put it better than this quote from Benjamin Graham, the father of modern investing:

“ The investor who permits himself to be stampeded or unduly worried by unjustified market declines in his holdings is perversely transforming his basic advantage into a basic disadvantage. This man would be better off if his stocks had no market quotation at all, for he would then be spared the mental anguish caused him by other persons’ mistakes of judgement. ”

Do we bother about the prices of the houses that we have bought on a daily basis? Do we bother about the prices of the other assets on a daily basis? Why then should we be bothered about the prices of stocks on a daily basis?

Please stay invested in good quality businesses. That is the best thing to do. Please do not panic. That is the worst thing to do.

Happy Investing !

Breaking News: Indian Realty Stocks & Real Estate to cool off.

The co-relation between DalalStreet and Nariman Point is the latter has always followed the former. Whenever, the Sensex has risen, Realty prices in Mumbai also rise starting @ Nariman Point. However, both of them had risen too much and a correction was inevitable. Good for companies with retail ambitions.

HDFC, Chairman, Deepak Parekh had already warned earlier this year, that Real Estate market was not driven by people buying for self occupation,’’ he fumes. ‘‘It’s ridiculous and definitely unaffordable. Nowhere in the world do property rates go up on this scale. Prices are going up every day. It’s a fraud’’

Business Standard reports that in markets like Colaba, Worli and Cuffe Parade, their have been very few transactions since markets collapsed. Also residential prices are headed south in belapur, Navi Mumbai and Kandivali. Very soon the big real estate deals will begin to appear pricey.

Property and real estate stocks are no longer market favourites. Property and real estate counters have lost 20-70% since May 10, when the sensex was at its peak level at 12612. If that’s not enough, many counters such as Adani, Unitech, Patel Engineering, and others hit their lower circuit filters regularly during opening trades locking in investors who want to exit these counters.

Real estate prices will probably correct to an extent of atleast 25%. What worries and surprises the foreign investors is the large sum of Black Money involved in Real estate deals which is not common in the west. Real Estate Volumes have shrunk considerably, too. The word ‘land bank’ is fast becoming indicative of a bubble. “The biggest problem is perhaps how one values it — the land,” says Rasheesh Shah, CEO & MD, Edelweiss Capital. At this point in time, there is nothing clear on how land banks should be valued in India.

KG Krishnamurthy, MD & CEO, HDFC Venture Capital says, “Price levels of commercial buildings were clearly through the roof. Therefore, it definitely had to come down.” However, he says that a correction in land values will happen in the next 6-9 months. “What could bring down real estate prices is the correction in TDR rates, which the government will announce next week,” says Mr Krishnamurthy.

So if you are planning to BUY property in India, you must wait for atleast 3 months to grab your dream home at a bargain.

Are we heading towards a BEAR MARKET ?

Since May-10th, the various indices are down as follows

BSE Sensex Down 22%
MidCap Index Down 28%
SmallCap Index Down 33%

With rising interest rates and uncertainity over oil supplies, markets might currect further but nobody knows where the bottom is. If the market keeps falling at this rate, then very soon India will be up for grabs for FREE, which is not going to happen. Nor will the markets make a “U” turn and rise sharply.

I totally dismiss the idea of BEAR MARKET as predicted by Morgan Stanley analyst quoting India’s current account deficit as a major problem. He should know that India has been growing with the same deficit for the past 15 years and will continue to do so. Was this analyst sleeping when the SENSEX was at 12500 ?

I had advised you to SELL on every rise only to buy back later at lower levels. Wait for few more sessions until the markets stabilizes. But if you still have positions in operator oriented & speculative stocks, not too late to unwind. Remember what happeend to HFCL, Global Tele,Silverline, Pentamedia, etc in 2001 ?

BUY: Bank of Baroda

I had recommended BOB in my last post on recommendations of my fund manager. Now I see that it is a wider circle. BRICS has put a BUY on Bank Of Baroda.

Broking house, Brics PCG is bullish on Bank of Baroda, BOB. It has recommended a “BUY” rating on the stock with a target price of Rs 276.

The Brics PCG report on Bank of Baroda:

“Bank of Baroda is amongst the largest banks in India, with the biggest overseas presence after State Bank of India. Under the new management, BOB has successfully addressed its earlier concerns of slow credit growth, an unhedged investment portfolio, laggardly technology implementation and low growth in fee-based income.”

“Now, having tackled these issues head on, the bank is embarking on a robust growth path. We expect BOB to post strong business growth in FY07, armed with an adequate capital base to sustain growth. While the numbers do not reflect the improving performance of the bank as yet,
we believe this will definitely change in the coming quarters.

Investment rationale

Accelerated credit growth with improved asset quality, BOB has turned around in FY06, recording a 38% growth in advances. This was achieved via a greater focus on retail, agricultural and other priority sector lending, and was funded through liquidation of excess SLR securities. Credit growth in FY07 is expected to stand at around 25%. Net NPAs of the bank declined to 0.9% at the end of FY06 and the incremental slippage is expected to be around 1% for FY07.

Strong capital adequacy base

Of the total capital adequacy ratio, CAR, of 13.65%, Tier-I capital constitutes around 10%. With enough room to raise Tier-II capital and the option to raise Tier-I capital through hybrid instruments, CAR would not pose a constraint to business growth.

Credit growth coupled with improving yield to drive NII Increase in the PLR rate, the realignment of the interest rate of the sub-PLR credit portfolio, and a higher proportion of CASA deposits and retail assets will drive NII growth.

Investment portfolio protected against interest rate risk

After the recent transfer of securities to the HTM category, the AFS segment is cushioned against an interest rate movement of up to 8%.

Key concern – Poor return ratios

The lower return on equity is a major valuation constraint for BOB. The bank’s ROE of 12.3% at the end of FY06 is significantly lower than peers. However, this is expected to improve, going forward, on the back of improved operational performance. The management expects the
sustainable ROE to be around 15%.


At the current P/ABV of 1x, BOB appears to be a cheap stock. Employing the dividend discount model, DDM, we arrive at a target price of Rs276. We have assumed a sustainable ROE of 15%, risk-free rate of 7.75% and premium rate of 6.75%. At the targeted price the P/ABV works out
to 1.1x, which appears to be reasonable. We thus recommend a Buy on the shares of BOB at this target of Rs 276, which is an appreciation of 21% over the current price.

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