Beyond Market - Nov 2011

8/2/2019 Beyond Market - Nov 2011

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http://slidepdf.com/reader/full/beyond-market-nov-2011 3/55It’s simplified...Beyond Market 21st Nov ’11

DB Corner – Page 5

Labour Pains The st rike at Maruti is a clear indicati on of how arm-twisti ng by employeby the unions, could hurt companies – Page 6

Triumph And Tragedy In Tumultuous Markets The Q2 earnings resu lts of India Inc are a healthy mix of positi ve and negperformances – Page 10

Pink Slips Loom Large The risk of cut in wages or job los ses cannot be ruled out as vol at ili ty in tIndian economy is forcing companies to put their expansion plans and hhold – Page 14

Now, Companies Answerable To Stockholders, TooAlthough a new concept, shareholder activism is gaining popularity, forccompanies to get their act right – Page 17

In Urgent Need Of RepairsAnomalies in governance and accounting policies of asset reconstruction

has forced the RBI to assess the problems – Page 20

When Idleness Is Good The recent decisi on of the RBI to deregu late savings ac count interest rat egood news for customers whose surplus money was fetching negative rereturns amid higher inflation – Page 22

Fragile: Handle With CareEven as the logistics industry is besieged with a host of issues, the playerinnovating by doing more with less to beat competition – Page 25

Taking Pharma To The MassesIf the government’s proposed initiative becomes a reality, consumers wilto choose the cheapest medicine from a list of alternatives, through an SPage 28

Aviation’s White Elephant Tout ed to be the next big th ing in the avi at ion se ctor, low-c ost carr iers alonger affordable for most players – 0

Bajaj Electricals Limited: Light Years AheadWith a well-diversified product portfolio and presence in all price points,able to maintain an edge over its competitors – Page 33

Fortnightly Outlook For Commodities – Page 39

Fortnightly Outlook For Currencies – Page 40

Looking Ahead: Long-Term Debt FundsInvestors can consider long-term debt funds in a falling interest rate scen– Page 42

Important Statistics for the Fortnight Gone By – Page 44

Portfolio RebalancingPortfolio rebalancing is an important tool for effective risk management helps maintain the desired allocation mix – Page 48

olume 1 Issue: 58, 21st Nov ’11

Editor-in-Chief & Publisher: Rakesh Bhandari

Editor: Tushita Nigam

Senior Sub-Editor: Kiran V Uchil

Art Director: Sachin Kamble

Junior Designer: Sagar Padwal

Marketing & Operations:

Savio Pashana, Afsana Tamboli

We, at Beyond Market welcome your views,

comments and feedback. Do help us to grow

better as per your liking. This is our attempt to

reach you better while crossing horizons...

Web: www.nirmalbang.com

[email protected]

Tel No: 022 - 3926 804 7

HEAD OFFICE

Nirmal Bang Financial Services Pvt Ltd

Sonawala Building, 25 Bank Street,

Fort, Mumbai - 400001

Tel. 022-3926 7500/7501

CORPORATE OFFICE

B-2, 301/302, Marathon Innova,

Off Ganpatrao Kadam Marg,Lower Parel (W), Mumbai - 400 013

Tel: 022 - 3926 8000/8001

Research Team:

Sunil Jain, Kunal Shah, Vikash Bairoliya,

Ruchita Maheshwari, Dipesh Mehta,

Sunit Mehta, Subhash Lalwani, Somya Dixit



The str ik e a t M aru ti

is a clear indication

of how arm-twisting

by employees, led by

the unions, could

hurt companies

ndia’s largest carmaker

Maruti Suzuki on 1st

November this year posted a

53% drop in monthly sales,

its worst in ten years, after a strike at

its Manesar plant in Haryana hit the

production of its cars.

Maruti sold 55,595 vehicles in

October as compared to 1,18,908

vehicles in the same period last year.

The company reported a year-on-year

(y-o-y) decline in car sales for five

straight months since the start of the

labour dispute in June over

recognition of a new union and claims

of worker sabotage. The recent work

stoppage at the company’s Manesar

plant has cost the firm $400 million in

lost production, since June.

Sadly, it is not just Maruti, which is

the victim of labour unrest in India.

IOther automakers such as Hyundai

Motor India Ltd and General Motors

have also faced labour problems in

the past.

A year ago, around 150 Hyundai

workers held a sit-in agitation at the

company’s Sriperumbudur plant,

outside Chennai. The strike was to

demand the reinstatement of 67

workers who were involved in violent

protests in July ’09.

According to a Hyundai statement,

150 workers occupied the factory,

which forced the management of

Hyundai to suspend production for

three days, resulting in a loss of 4,000

cars and $27.7 million. This was the

fourth strike since 2008 at Hyundai’stwo plants in Sriperumbudur.

In fact, labour issues have forced

It’s simplified...Beyond Market 21st Nov ’116

Hyundai to consider the option of

moving production of some of its i20

superminis from India to an existing

factory in Turkey.

Manesar-based auto ancillary makers,

Sunbeam Auto and Rico, have also

lost money in strikes in the past. In

2010, Hero Group

promoted-Sunbeam lost `65 crore

because of a 52-day strike and a

45-day strike at RICO Automotive

Industries, which forced shutdowns at

Ford Motor Co and General Motors

Co in North America.

In fact, the largest roadblock to

India’s ambition of becoming a global

small car production base is very

likely to be labour disputes, saidmarket research firm JD Power, in its

report titled, ‘India Automotive

2020: The Next Giant from Asia’.

“The risk of union-related labour

problems is omnipresent in India

since many labour unions are

affiliated with political parties. As a

result, local politics frequently

interferes with business operations,”

the report said.

According to the report, unions use

their influence to promote manual

labour rather than automation in

Indian plants to create more

employment, resulting in longer

production cycles, greater variability

in quality and more cost outgo.

Not surprisingly, because of all these

reasons, India is way behind other

nations in terms of labour market

efficiency, ranking 92nd among 139nations in the World Economic

Forum’s Global Competitiveness

Index 2010-11.

Industry experts warn

disputes could spread

manufacturing sectors su

goods and chemicals, wh

large number of people.

Experts say such sectors

probability of labour trou

the industries require a la

of trained workforces, fo

hire contract workers at l

Experts say labour disp

manufacturing sector ar

companies tend to emp

number of contract worke

In some cases, the share

workers is 60% to 90%

workforce. Indian labovery rigid. In India,

workers cannot be hired

Beyond Market 21st Nov ’11



easily and are protected by the

Industrial Disputes Act, 1947, which

mandates that firms with over 100

workers (permanent) have to obtain

government permission for any

layoffs, retrenchments or closures.

Manufacturing companies, therefore, prefer to hire contract workers, who

can be fired more easily than

permanent workers, if there is an

economic slowdown.

The problem though is that once

hired, contract workers want the same

benefits and job security enjoyed by

permanent workers.

Considering that manufacturing

companies tend to have a largenumber of contract workers, any

dispute between contract workers and

the management can bring production

to a complete halt.

In the case of Maruti also one of the

primary reasons for the labour dispute

was that the company had a large

number of contract workers. The

contract workers were paid lower

wages compared to permanent

workers although they were doing thesame amount of work.

Experts say that such labour disputes

are more likely in industries, which

employ high skilled labour and are

growing at a fast pace. For instance,

Nokia has faced at least three labour

disputes so far.

The most recent was in July ’10,

when more than 1,000 workers went

on strike demanding a revision inwage settlement and reinstatement of

60 workers who were suspended in

January ’10 on charges of

misconduct. Production at Nokia’s

Sriperumbudur factory, outside

Chennai, was severely disrupted for

three days.

The strike ended after the Nokia

management revoked the suspension

of 60 workers and the union agreed to

a long-term wage settlement.

However, the demand for higher

wages is not always the reason for

employees going on strike. Strikes

also happen when there are multipleunions and each one wants to be

recognized by the management.

For instance, in the case of Foxconn, a

mobile phone accessories

manufacturing company, employees

of the company went on strike in

September ’10 at its Sriperumbudur

plant demanding recognition of a

second union.

Strikes have also become common inthe aviation sector. It first started in

2009 when pilots and other

employees of Jet Airways and Air

India went on a strike demanding

higher wages.

More recently, more than 100 Air

India pilots have threatened to resign

over alleged discrimination by the

airline’s management.

In a letter to Air India’s chairman andmanaging director Rohit Nandan, 101

pilots represented by the Indian

Pilots’ Guild, which represents

pre-merger pilots of Air India, said

they were considering “seeking

employment elsewhere”.

The pilots claimed in the letter that

their peers at Indian Airlines have

received favoured treatment, “leading

to a complete stall of our career

progression”. Air India managementis now holding talks with the pilots to

prevent their resignations.

India is not new to labour problems

and the country has seen several

labour unrests in the 1970s and in the

1980s as well. While there is no one

solution to labour disputes, the

management could make things easier

by keeping communication channels

open. Several experts have also called

for a relook at India’s labour laws.

One of the changes that is required is

linking pay with performance, which

will put an end to wage-related

disputes. The other problem thatneeds to be looked at are laws that

pertain to governing of trade unions.

The Trade Unions Act allows for

multiple unions, which gives more

bargaining power to the unions. This

is, however, terrible for companies

because more often than not, what

happens is that an agreement reached

by the management with any one

union is not agreed upon by the other,

as seen in the case of Foxconn.

The other nasty reason for strikes is

alleged political conspiracy by some

political parties to incite industrial

unrest. In many cases, labour unions

are affiliated to political parties.

For instance, Nokia India Employees

Progressive Union, which went on

strike at Nokia’s plant, is under the

control of the Labour Progressive

Front, a union that is affiliated to theruling Dravida Munnetra Kazhagam

party in Tamil Nadu.

Again, in the case of the Maruti strike,

the government of Haryana has

consistently claimed the strike was

instigated by the Left parties to

disrupt industrial growth in the state.

Labour dispute could be caused by

any reason be it the demand for higher

wages, recognition of the union or reinstatement of workers, the bottom

line is that labour unrest results in

heavy losses for companies.

In many cases, companies are forced

to give in to labour demands and in

some rare instances the company

could be forced to shut down its plant

and move to a new locatioN.



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While seasonality played a role (due

to monsoons), the impact of monetary

tightening by the Reserve Bank Of

India (RBI) led to an additional

increase of 50 bps - 75 bps in key

interest rates, directly or indirectly

impacting various sectors.

With most of the quarterly results

being disclosed, it is time to check

how certain individual sectors

performed in the quarter and what the

future looks like for them.

Private banks and the Information

Technology (IT) sectors have done

well in the second quarter, while the

metals, capital goods as well as the

power sectors have been nothing but

disappointments for the markets.

AUTOMOBILE

Despite road blocks in the form of

higher input costs, high interest rates

and fuel price hikes, auto companies

registered a steady sales momentum

in the quarter, as disclosed by the

Society of Indian Automobile

Manufacturers (SIAM) for the second

quarter of FY12.

However, the volumes were skewed

towards the two-wheeler,

three-wheeler, and light commercial

vehicles (LCV) segment and the

tractor segment. Therefore,

companies that cater to these

segments did well at the top line

levels in the quarter.

The demand for passenger car and

medium and heavy commercial

vehicle (MHCV) segments remainedsubdued. It was a quarter best

forgotten for a company like Maruti

Suzuki India Ltd as labour unrest at

its Manesar plant in Haryana severely

impacted operations, leading to a

decline in volumes.

Moderating demand scenario has led

to a weakening pricing power and

discounts offered by major

automobile companies in order to

boost their sales, weighs on the

margins for many companies in the

passenger cars segment.

Going forward, a correction in base

metals in recent times will help thecompanies in this sector to lighten the

input cost pressure.

BANKS

Given the pessimism surrounding the

banking sector since the beginning of

the second quarter of this financial

year, Indian banks were able to put a

better show in the quarter.

Most banks have posted better profitnumbers despite fears over the asset

quality, especially on any stress in the

infrastructure sector (read power

sector: owing to defaults by state

power utilities) and weak advances

due to the high interest rate scenario.

As expected, Public Sector

Undertaking (PSU) banks, led by the

State Bank of India (SBI) reported

higher slippages, while some of the

public sector banks reported higher NPAs due to the migration of banks to

system-based calculations.

On an average, both net interest

income (NII) and net interest margins

(NIM) for public sector banks

improved during the quarter mainly

on account of an increase in the base

rate. Private banks on the other hand,

were able to put a better show. Loan

growth was in line with expectations

across sectors.

Commentary on capital infusion of

`3,000 – `4,000 crore by March ’12

for the SBI lifted some tension over

adequacy norm adherence by the

public sector bank.

Going forward, savings rate

deregulation that was recently

announced by the RBI, increasing

cost of funds and lower advances

would put some pressure on NIMs.

Deteriorating asset quality will also

be a big cause of concern.

AVIATION

Companies in the aviation sector

posted disappointing numbers for the

second quarter. The traditionally

weak July-September quarter for the

aviation companies was made more

challenging by the depreciating

Indian rupee, rising fuel prices,

intense competition and mounting

wage bills.

The sector has not found favour with

investors for quite some time now.However, the performance of few

airlines in the past few quarters

offered promises of a turnaround in

the aviation sector.

But, the challenging macro

environment and inability of airline

companies to control costs added to

the gloom surrounding the sector.

INFORMATION TECHNOLOGY

Industry analysts had expected a

mixed quarter for the IT companies

based on their hedging levels and the

timing of wage bills. As has been the

case since the past few quarters, Tier I

companies like Infosys, TCS and

HCL Technologies did not see any

major outperformance in their

revenue growths.

A hanging sword in the form of the

gloomy western world, which is amajor geography of sales for

companies, did not throw any

negative surprises as companies did

not witness any cancellation or delays

in orders.

The depreciating Indian rupee helped

expand margins for some companies.

The slightly lower-than-expected



volume growth of IT bellwether

Infosys was offset by the

higher-than-expected FY12 guidance.

HCL expects CY12 IT budgets to

remain constant, with some budget

cuts from their clients.

Wipro’s positive commentary ongrowth was also a key takeaway from

the sector. Revenues were mainly

driven by the banking, financial

services and insurance (BFSI) as well

as manufacturing verticals, while the

retail and telecommunication sectors

remained subdued. Healthcare also

picked up traction in the second

quarterly earnings this year.

Coming to Tier II companies in the IT

sector, their earnings were boosted bythe depreciating rupee. Going

forward, the progress in the western

world and IT budgets of companies

there will determine the future course

for this sector.

MEDIA

Media companies are reeling under

softness in advertising revenue for

quite some time and the second

quarter of the current fiscal year wasno different.

Media companies (split into print and

broadcasting) were impacted by slow

growth in ad-spend while their profit

growth took a hit due to foreign

exchange losses on their foreign

currency loan.

A 25% rise year-on-year (y-o-y) in

news print cost, a majority of which is

imported from countries like the USand Europe, among others,

pressurized margins for companies in

the print segment.

Going forward, the media industry in

the country expects improved

performance in 2HFY12 and is

expecting a higher uptick in

advertising revenue in the third

quarter on the back of spending

during the festive season.

METALS

It was a difficult quarter for

companies in the metal space.

Pressures on margins were quiteevident on account of higher raw

material prices during the quarter for

companies in this sector.

Availability in terms of quality and

quantity of coal and iron ore remained

a major challenge for steel companies

in the second quarter, especially after

the mining ban was imposed by the

Supreme Court of India, in Bellary

region of Karnataka.

The poor demand for long products

due to a weak macro-economic

environment globally affected the top

lines of most companies in this sector,

while some demand for flat products

in the automobile industry saved the

day for certain companies.

For companies in the non-ferrous

segment, realization remained muted

and proportional to the prices of base

metals on the London MetalExchange, which has been on a

downward spiral for a while now.

Going forward, a fall in the prices of

coal (as per media reports) would

help margins of companies as they

would not pass it to the customer

since they are still at elevated levels.

At the same time the companies will

compensate for the lower demand of

their products due to the overallweakness in the macro environment.

The following sectors had more

company-specific activities in the

second quarter this financial year

POWER

Key takeaways from the second

quarter results of power companies in

the current financial year were

shortage of fuel, increasing fuel

prices, falling merchant tariff and

poor financial positions of state

electricity boards (SEBs).

Generation of power was also quitelow mainly due to seasonal factors

and outages at the plants.

In terms of numbers, most of the

companies posted numbers which

were below expectations.

According to the managements of

power companies, they are all looking

at ascertaining fuel supply from

domestic or overseas companies, but

they expect uncertainty in the near term and await broader policy from

the government.

REAL ESTATE

In a cyclical quarter for the sector due

to the monsoons, sales were expected

to be low on account of weak demand

due to high interest rates and elevated

property prices.

Though the activity remainedcompany-specific, residential

volumes remained lower while

commercial rentals in some pockets

picked up.

Revenues for some real estate

companies were largely driven by the

sale of plotted land and execution of

existing projects.

Going forward, weak demand, delays

in execution of projects undertakenand the impact of the land acquisition

bill remains a cause of concern for the

real estate sector.

CAPITAL GOODS

Lower-than-expected industrial

capital expenditure as is evident from

the orders placed to the companies in



this sector, partly due to unfavourable

domestic and overseas conditions and

partly due to a higher interest rate

scenario, took a toll on the capital

goods companies.

Comments regarding the execution of

projects and a positive guidance were being keenly watched by experts from

this sector.

However, L&T, India’s largest capital

goods company, slashed order book

guidance on slowing investments and

rising competition, giving a vague

picture about the sector.

INFRASTRUCTURE

In an otherwise weak seasonal quarter due to monsoons, high interest rates

and rinsing cost of commodities

threw their own challenges at the

infrastructure sector.

Like it has been the case for the past

few quarters slowdown in order

inflow, (except road segment, there

has been no award activity from other

segments in the quarter) has directly

impacted the top line.

Operating margins were under

pressure for the quarter. The

management’s remarks on the impact

of the land acquisition bill were also

watched, which is likely to impact the

earnings of companies in this sector,

going forward.

CEMENT

Analysts had expected slower growth

in dispatch for cement companies inthe July-September period mainly

because of monsoons and slowdown

in the housing, infrastructure and

industrial segments.

High interest rates had its own impact

on the housing and industrial projects,

in turn, impacting the overall demand

for cement.

Cement companies in the second

quarter this year saw a meagre growth

of 5% in dispatches as against the 3%

growth in the same period last year.

This could have been higher, analysts

believe, as extended monsoons and a

week-long truckers strike in south

also impacted movements.

Despite lower growth in dispatches,

the cement companies were able to

put a better show for the quarter

mainly due to higher realization and

price discipline.

During the quarter, cement companies

had raised prices by `10 to `20 in the

northern, eastern and western regions,

while prices in south remained stable

in the quarter. For the quarter, cement prices on an average, were around

`260 per bag versus the price of `230

per bag last year.

Cement major Ultratech’s dispatches

grew by 2.6% mainly because of

revival in northern India and posted a

huge growth of 140% in net profits as

against the same quarter last year.

Dispatches of ACC and Ambuja grew

by 19% and 6% and their net profits

rose by 67% and 13%, respectively.

The price hike helped companies

from this sector to absorb higher input

costs, especially coal, in the quarter

and sustain margins.

Though the numbers are robust on a

yearly basis (as corresponding quarter

of last year was weak and forms a

weak base for comparison), figures

were lower on a sequential basis.

Going forward, sector analysts are

skeptical about a further hike in

cement prices as demand is yet to pick

up proportionally, while input costs

are showing no signs of cooling off.

Going forward, the availability of

coal will be an issue as majority of

coal has been diverted to meet the

huge shortage at power plants, while

the overall slowdown in construction

activity and higher freight costs will

offer their own challenges.

FMCG

The July-September quarter iscyclically a better quarter for FMCG

companies. The FMCG companies

posted higher volumes and bottom

line numbers.

While gross margins declined for

most companies due to higher raw

material costs and fuel charges, net

margins were higher due to cut down

in ad-spends and a broad-based price

hike in the quarter.

However, unlike last year, the quarter

witnessed fewer product launches.

Being a safer and non-volatile sector,

FMCG companies have also

performed well on the bourses in the

recent past.

Overall, the performance of

companies across sectors has been

rather lukewarm. And market experts

are hoping for a revival in earnings in

the coming quarter S.

Note:

Quarterly numbers are only a way of

appraising a company’s performance.

But long-term performance over few

quarters is a true yardstick to measure

the capability of a company. No two

companies are the same even if they

fall under the same sector.

Distinguishing factors like brandimage, quality of human resource and

operating efficiencies do play a major

role in forming a perception about a

company among investors and the

valuation it commands in the market.

Only a few top companies from a

sector are taken into consideration to

get a trend regarding sectors

performance over the quarter.



Pink Slips Loom LargeOver IndiaPink Slips Loom LargeOver India

The risk of cut in wages or job

losses cannot be ruled out as

volatil ity in the Indian economy is

forcing companies to put their

expansion plans and hiring on hold

ighten your seat belts as

the job market could face

tough times owing to thelikely slowdown in the

Indian economy. In fact, talks are rife

that the situation in the job market

could go bad and hiring may also take

a beating.

Consumption and investment cycles,

the two propellers of the Indian

economy, are already showing signs

Tof a slowdown and may slacken

further as general sentiments turn

bitter due to interest rate hikes by theReserve Bank of India (RBI) and

persistently high inflation, which is

forcing consumers and companies to

defer or reduce spending.

For any economy consumption and

investment are two important factors

that drive growth and create more

employment. In fact, this is what




results in higher demand and creation

of new capacities, leading to more

demand for labour.

During the past economic downturns,

including the ones witnessed in

2001-2003 and 2008-09, jobs were

lost and employees were asked to takea cut in their salaries. Although the

situation is not as bad as it was then,

the initial signs are not very

encouraging, now.

THE CAUSE AND EFFECT

In a bid to control inflation, the RBI

raised interest rates in October for the

13th time since 2010. The RBI raised

its policy lending rate or the repo rate

by 25 basis points to 8.5%.

This also led the banks to raise

borrowing rates, which are currently

hovering in the region of 12% to 14%.

These levels were only seen before

the financial crisis of 2008-09.

With the rising interest rates and

persistent inflation or cost pressures,

it is becoming increasingly difficult

for consumers to borrow.

Consumer and corporate credit,

including loans for home and

automobiles have already become

costlier, leading to moderation in

credit growth for both retail and

corporate sectors.

Not just retail loans, even loans taken

by corporates is seeing a dip at these

rates, especially in the light of

demand-side issues. It is evident from

the fact that industrial capex or corporate spending on new or existing

projects have reduced. It is difficult to

borrow at higher rates and generate

enough returns to reward

shareholders or generate good

internal rate of returns.

The projects in the infrastructure

sector like power, construction and

housing have already been stalled and

many companies have postponed

their plans.

News reports suggest that several

infrastructure projects have been

delayed and there are very few takers

for new projects, considering thathigh interest rates have impacted the

economics of the projects.

In fact, several existing projects have

turned unviable at current interest

rates, which can be gauged from the

recent quarterly results wherein

several companies reported a decline

in profits.

If consumers are not spending,

corporates are not investing andgovernment is not showing any

willingness to invest in the economy

as a result of fiscal imbalance and

inflation, then the growth could be

hit, which will be visible in the

coming months.

In this scenario, it is obvious that

economists and the RBI are expecting

some moderation in economic growth

in the months to come. The RBI has

cut down its economic growthforecast for the fiscal year ending

March to 7.6% from 8% earlier with a

downside bias.

Many sections or sectors of the

economy have already begun seeing

moderation in growth. The

manufacturing growth was nearly

stalled in September, which is the

weakest since March ’09, led by

slowing output and growth in the

number of new orders.

CURRENT STATE OF HIRING

Early signs of weakness in the job

market are already visible. Reports

suggest that there were fewer jobs on

offer in the month of October this

year. According to job search sites

and other agencies, there was a

decline of roughly 16% in recruitment

in the month of October as compared

to September.

The decline was witnessed across the

board except telecom and to some

extent, the services sector. Interest

rate-sensitive sectors likeconstruction and auto too reported a

significant decline of about 20% to

25% in recruitments.

In the case of IT, banking, oil and gas

and pharma sectors, the fall in

recruitment is considered to be in the

region of 13% to 19%, which is not a

good sign at all.

Industry watchers attribute this to

slow demand and uncertainty in theglobal and domestic economies.

Further, on the back of the prevailing

economic scenario, corporates are

adopting a cautious approach to

hiring as well as hiking salaries of

their employees.

General sentiments are pointing

towards further weakness in the job

market as many experts believe that

the impact of the last hike in petrol

prices and key interest rates is yet to be seen.

The cascading impact of these two

factors will hit the financial

performance of most corporates in the

days to come and that will restrict

them from expanding or recruiting

with the risk of cut in wages and

salaries if the situation worsens from

the current levels.

According to estimates, theunemployment rate in India in the

year 2008 was around 7.2%, which

shot up to nearly 11% in the year 2009

and 2010 as a result of the global

financial crisis and contraction in

economic activities across the globe.

This estimate does not include

unemployment in rural areas and the

agricultural sector.



SERVICES: BIG DANGER

There is one more aspect to this.

Typically, the slowdown in the

manufacturing sector percolates to the

services sector with a time gap which

could be in the range of six months to

nine months.

Considering these reasons, it was

only in the month of September that

the initial signs of moderation in the

services sector was witnessed.

This is apparent considering that if

corporates and consumers do not

spend as desired there will be fewer

need for services, especially in the

luxury segment, which will be hit the

most in the downturn.

For instance, companies in the hotel

or hospitality industry and those in

the aviation sector generate a large

part of their revenues from domestic

as well as foreign arrivals. A cut in

consumer and corporate spending

could lead to lower growth for some

of these sectors.

For instance, in financial year 2009,

the foreign passenger traffic grew by

a mere 10.3% as against 20.5% in

fiscal 2008 as a result of the

slowdown and lower tourist arrivals

in the country.

Around this time, the hotel industry

and the aviation industry too suffered

in terms of occupancies and

utilization of capacities dropped too.

EXTERNAL SECTOR: NO

SAVING GRACE

There is not much support from the

external sector as well, because

export markets have and are further expecting moderation due to lower

demand in the western world.

The Information Technology sector is

already in focus, which is quite

logical given that most large Indian IT

companies generate almost 80% to

90% of their revenues from

international markets, especially the

developed markets like the US and

Europe, among others.

Economic instability and uncertainty

in the Euro zone and expected

slowdown in the US economy are

likely to impact the demand for the products and services of Indian

companies. Also, since these

international companies employ a

large workforce, the impact of the

slowdown on the Indian job market is

expected to be immense.

VULNERABILITY INDEX

The odds are definitely not in favour

of new job creation. In fact, there is a

high probability that one might notsee an increment in salaries this year.

What is even worse is that high

interest rates, inflation or consumer

prices and unemployment could have

more serious implications on the

general public, whose impact will be

seen in the months to comE.



Although a new concept, shareholder

activism is gaining popularity, forcing

companies to get their act right

Now, CompaniesAnswerable

To Stockholders, Too

hareholder activism in

India is few and far

between. The good thing

is that from baby steps it

is now taking youthful strides. To put

things into context you need to

answer a few questions. What would

you do as an investor if a portfoliocompany passes a resolution that

surprises you on the negative side?

What would you do if you are not

comfortable with the salary hikes

taken by CEOs, especially if he is a

promoter or if the company gets

involved in inter-group transactions?

What would you do if the company

Smakes moves which are deemed

shareholder-unfriendly?

There is no easy answer to this,

especially if you have invested in an

Indian scrip. There are few options in

front of you. Sell the stock and move

on. Be loyal and hold on to the stock and let the company win its way even

if it is against the shareholders. Or

take the road less travelled and reach

out to the management and raise the

pertinent issues.

Shareholder activism which was

dormant for decades in India is

evolving. Although the last option

was not aggressively pursued by

Indian investors earlier, things are

changing for the good as many

shareholders are standing up to their

role of active investors.

Take the case of the recent labour

strike at Maruti’s Manesar plant inHaryana. Not only was the company

negotiating with the workers to call

off the strike, even LIC, its big

investor, was trying to call for a truce

between the management and the

errant labour force.

Recently, minority investors forced

Crompton Greaves to give a




commitment to investors that it would

process the sale of a `270 crore jet to

an unlisted group company, which

was bought during the year when

Crompton reported disappointing

profit numbers.

Also LIC, the country’s largestinstitutional investor, found itself at

the receiving end of Voices of

Tobacco Victims, an NGO working

for cancer patients, which raised

questions over the ethics and irony of

the state-owned life insurance

company for investing up to `3,500

crore in various tobacco companies.

Another example of such activism in

recent times is the stiff opposition to

erstwhile Satyam’s plans to mergeMaytas, a group company.

Post the Satyam crisis, investors in

Maytas - IL&FS and IFCI - also urged

the government to supersede the

company’s board. Further, there was a

huge investor uproar at Siemens when

the company board planned to hive

off its IT services arm.

These issues raise a pertinent question

as to what shareholder activism is andwhy such activism in the country is

yet to see the best days like its

western counterpart.

CORPORATE GOVERNANCE

AND SHAREHOLDER ACTIVISM

Ever since the liberalization of the

economy in the early 1990s, several

Indian companies have attracted

foreign players.

Foreign institutional investors (FIIs)

in the form of pension funds that

demanded greater professionalism in

corporate activities, professionalism

in the form of better disclosures of a

company’s financial position and so

on. All these and many other related

developments have brought the issue

of corporate governance to the fore.

Corporate governance is all about

commitment to values and ethical

business conduct. It is about how an

organization is managed, its culture,

policies and the manner in which it

deals with various stakeholders,

including shareholders, employees,

government and other agencies.

Corporate governance means timely

and accurate disclosure of

information regarding the financial

situation, performance, board

constitution, ownership of the

company, maintaining high levels of

transparency, accountability and

equality in all areas of its operations

as well as in all interactions with its

various stakeholders.

In the Indian context, companies are

mainly run by promoters unlike

professionals in the west. They have a

higher presence in the board and a

better say in a company’s resolution.

Companies do err or make moves for

their own advantage, putting minority

shareholders at the receiving end.

Hence, there is a need for better

corporate governance and active

participation by shareholders.

Active participation in a company’s

operation ensures better management,

less frauds and better governance. If

the management knows that it will be

questioned for its actions, it will

always be on its feet.

The active involvement of

stockholders in an organization is

shareholder activism. Even as things

change, shareholder activism in Indiahas remained dormant because of the

following reasons.

- In India, most investors are focused

on short-term gains.

- There is limited institutional

ownership with promoters including

government, holding majority stakes

followed by retail investors and then

institutions.

- India suffers from the problem of

too many regulations. High costs

involved in litigation and

manipulative ways adopted by the

promoters of companies aresometimes deterrents for any sort of

shareholder activism.

- Lack of awareness regarding

shareholder’s rights and duties is also

a deterrent.

Shareholders can ensure that the

company follows good corporate

governance practices and implements

beneficial policies. They can resolve

issues laid down in the annual generalmeetings and other such general

meetings. They can also raise

concerns over financial matters or

even social causes such as protection

of the environment, etc.

For this, the shareholders of the

company can participate actively in

the meetings of the company and

establish a dialogue with the

management on issues of concern.

Shareholder activism can be

exercised through proxy battles,

publicity campaigns, shareholder

resolutions, litigations and

negotiations with company

managements in courts. They can also

use the Internet and mass media as

they are effective tools in building

pressure on the management.

Shareholder activists include public

pension funds, mutual funds, unions,religious institutions, universities,

foundations, environmental activists

and human rights groups.

The law in each country gives rights

to shareholders. For example, in

India, shareholders have been granted

certain rights under the Companies

Act, 1956.



NEW BREED OF ADVISORY

COMPANIES IN INDIA

There is a new breed of companies

called proxy advisory firms, that

advice shareholders and help them

take informed decisions, and, in turn,

improve corporate governance byhighlighting critical issues.

Proxy advisory firms are independent

investment advisory firms that

provide stiff appraisal of corporate

conduct and give unbiased vote

recommendations to their clients,

which are typically institutional

investors who want to take informed

investment decisions over a

company’s resolution. They foster

institutional shareholder activism

through corporate governance and, at

times, also vote for their clients ingeneral meetings.

The recently launched Institutional

Investors Advisory Services (IIAS)

and InGovern Research Services are

firms that fall into the category of

proxy advisory firms. Their western

peers are firms like Institutional

Shareholder Services, the biggest

proxy advisory firm in the US.

SIGNIFICANCE OF

SHAREHOLDER ACTIVISM

Shareholder activism can do wonders

in implementing corporate

governance. It can influence

corporate culture and increase general

awareness on social and human rights

issues concerning organizations toO.

Crude Oil $98/barrel

Nickel$28,000/tonne

Pepper `

25,000/quintal

Silver $32/troy ounce

Zinc $2,100/tonne

Aluminium $2,450/tonne

Chana `2,500/quintal

Copper $8,500/tonne

Jeera `

14,000/quintal

Cardamom `1,000/kg

Gold $1,500/troy ounce

Guar Seed `3,200/quintal

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Anomalies in governance and

accounting policies of asset

reconstruction rms has forced

the RBI to assess the problems

he asset reconstruction

industry, thoughless-than-a-decade old in

India, is under the

scanner of the banking regulator

because it has been found that the

country’s largest and oldest asset

reconstruction firm, Asset

Reconstruction Co (India) Ltd (better

known by its acronym ARCIL) has

some anomalies in governance as

well as accounting policies.

It is has been found that this assetreconstruction firm is not driven by

its board, but its major shareholders

who are three major banks – State

Bank of India, ICICI Bank and IDBI

Bank. Now, this is a conflicting

scenario as these banks are supposed

to be in the business of selling off

their bad loans to asset reconstruction

companies themselves.

TOne would imagine that in a country

like India when the banking regulator and the top bankers are waxing

eloquent about the worrisome

situation of rising NPAs (non

performing assets or bad loans) the

country would have a robust asset

reconstruction industry. Globally,

there are asset management

companies who perform this function.

They flush bad loans out of the

system by tackling bad assets as a

one-time phenomenon.

To prevent the commercial banking

system from being negatively

impacted, the AMCs bear the burden

of bad loans, for which they get fiscal

and administrative support from the

government. Typically, an AMC buys

bad assets from a bank at a discounted

price and issues bonds against them.

The government, in turn, guarantees

IN URGENTNEED OF REPAIRS

these bonds and protects any erosion

of value from the books of the banksthat are making the sale of the

stressed assets.

But unfortunately, in India, it is not

like this. The banking system is

sitting on a pile of bad loans

amounting to approximately $20

billion, a quarter of which is held by

the largest bank of India, the State

Bank of India alone.

At a time when interest rates have been rising and the economy is

slowing down, corporates are

expected to default on bank loans.

Yet, about a dozen asset

reconstruction companies recount

their horror stories about how

difficult it is get a bank to make a sale

of its stressed assets and how in most

cases a deal falls through because of



unrealistic expectations of a bank

even after an elaborate auction

process is carried out.

As a result the industry that showed

much promise in the years 2003-2004

can best be classified as an

opportunity lost. A lot of foreigninvestors coming in to the country to

take a slice of the distressed debt pie

have all but disappeared. Let us

analyze what has brought about this

situation upon the banking industry.

THE PROBLEM AT HAND

In India this is how the system works.

The ARCs are empowered to buy bad

assets from banks either by paying

cash or offering security receipts or SRs that can be redeemed later. But

mostly banks are unwilling to sell

their stressed assets or even if they do

agree they ask for higher valuations

while accepting SRs or very steep

discounts for all cash deals, which

ARCs find unrealistic. As a result, the

deals fall through in most cases. But

banks can’t be blamed entirely

because of the regulatory diktats that

they have to follow.

First and foremost while making the

sale of a stressed asset to an ARC, a

bank is required to make a full

provision on its books for the book

value of the loan and the value at

which it is being sold to the ARC.

This takes a toll on the bank’s

profitability which it obviously tries

to avoid. On the other hand, if they

carry the bad assets on their books for

three to four years, they can postpone

this negative impact as they can makefull provisions over this time period

and no fresh provisioning will be

required. After this is done the bank

can always sell it to an ARC as the

last option.

Secondly, operationally banks enjoy

much of the same powers as an ARC

as far as recovery of bad assets is

concerned. So, they would first

attempt to recover a bad asset on their

own. In fact, a head of an ARC that is

sponsored by a leading private bank

recalls how frustrating it gets

especially when public sector banks

ask their specialist team ‘what is it

that you can do, that we can’t doourselves?’ What they often lack is

the recovery skills or the know-how

about the industry, which ARCs

spend years studying, he says.

Thirdly and most importantly,

perhaps, is the process of the sale and

price expectations. The driving factor

is the cost of funds. To quote an

example: if they want to recover `70

from an asset valued at `100 over

three years, ARCs tell them that it isonly possible to recover `40. Besides,

the banks flatly refuse to pay the

management fee that a bank has to

pay to an ARC that varies between

1% and 2% of the size of the asset in

case of the sale of an SR.

The other glitch is the process of

auction itself. Banks auction bad

assets to ARCs but do not provide any

floor price. Thus, price discovery

mechanism in nipped in the bud. Infact, most banks after receiving bids

from the ARCs, withdraw from the

auction themselves and start

negotiating one on one with the

borrower using the highest bid as a

floor. These practices are rampant,

leaving Indian ARCs high and dry.

WHAT NEEDS TO BE DONE

It was in 2002 that the government

passed the Securities andReconstruction of Financial Assets

and Enforcement of Security Interest

(SARFESI) Act. But the banking

regulator, RBI took seven long years

to empower ARCs and that too was

done in a truncated manner. ARCs can

take over the management but cannot

lease its business, which they find

restrictive. Besides, there are cases in

which defaulting borrowers delay the

process by taking the ARC to court.

This is a palpable issue that needs

immediate attention.

Moreover, there are other loopholes

in the system. For instance, banks

complain that the assets that they sellto ARCs cannot be mixed in a pool.

This means that ARCs have to set up

separate trusts that hold these bad

assets under them. ARCIL alone is

known to have over 300 trusts that are

only seller specific. Apart from this,

there is the issue of a clear conflict of

interest mentioned earlier in the case

of ARCIL.

Banks, as shareholders of ARCs,

makes them sellers as well asinvestors in SRs. Their representation

has to be curbed immediately as has

been done in the case of credit

information bureaux. Banks should

not be involved in the process of

recovery and should be incentivised

to sell their bad loans to the ARCs.

Finally in the case of SRs, there has to

be a wider participation. Currently,

only banks and insurance firms can

subscribe to SRs and foreigninvestment is capped at 49%. Besides,

no FII can hold more than 10% in an

SR. Foreign investors should be

encouraged to participate in the

recovery process as they have

significant experience in distressed

debt, which can really benefit the

asset reconstruction industry.

In India, banks are reluctant to let go

of their stressed assets and ARCs are

restricted in the operations, whichmakes it a difficult situation overall

and has almost hammered the last nail

in its coffin, with ARCIL coming

under the scanner. However, if the

regulator takes heed at this point in

time and paves a clear path of

recovery for ARCs and specifies that

banks comply with their functions,

resurrection is possible even noW.



When

Idleness

Is Good

The recent decision of the RBI to

deregulate savings account interest rates

spells good news for customers whose

surplus money was fetching negative real

returns amid higher ination

ringing in reforms is a

c h a l l e n g i n g

proposition. Until they

are implemented,

arguments about their importance and

relevance are made repeatedly. After

they come into practice, questions

about the timing of the implications

and implementation arise.

B



The bankers were taken by surprise

when the Reserve Bank of India

(RBI) in its last quarterly review of

the monetary policy announced the

deregulation of saving account

interest rates. This was RBI’s second

and final step towards deregulating

the saving account interest.

Earlier, the RBI had raised the cap on

the saving account interest rate from

3.5% to 4% along with calculating the

interest on a daily basis. While the

banks are coping with the effect of the

previous move, the new act came as a

surprise. If nothing else, its timing

surely did.

Most bankers wonder if it is a good

time to bring in the regulation in anenvironment when interest rates are

actually on the higher side.

But RBI Governor D Subbarao has a

clear take on this. At a post policy

briefing, he reasoned, “On timing

question the answer is a standard one

because whenever we do it, people

will say why now?”

Subsequent to indicating in its

quarterly monetary review in November ’10, the RBI prepared a

discussion paper on “deregulation of

savings bank deposit interest rate”

and posted the same for public

comments and suggestions in April

’11, which spelt out both the pros and

cons of deregulating.

Subbarao said the Reserve Bank has

examined the suggestions received

and weighed the pros and cons of

deregulation of the savings bank deposit interest rate.

“On balance, it is felt that the time is

appropriate to move forward and

complete the process of deregulation

of rupee interest rates,” elaborated the

chief of the central bank.

Accordingly, the RBI has decided to

deregulate the savings bank deposit

interest rate with immediate effect

whereby banks are free to determine

their savings bank deposit interest

rate, subject to two conditions.

Firstly, each bank will have to offer a

uniform interest rate on savings bank deposits up to `1 lakh, irrespective of

the amount in the account of the

holder within this limit.

And second, for savings bank

deposits over `1 lakh, the bank may

provide differential rates of interest if

it chooses to.

However, the RBI has mandated that

there should not be any

discrimination from customer tocustomer on interest rates for similar

amount of deposit.

So, how bad is the move? Not at all

bad for depositors whose surplus

money was fetching negative real

returns amid higher inflation.

At a time when inflation is hovering

over 9%, the 4% interest that the

balance in savings account fetch

means a notional loss of 5% for thesavings account holders.

But for banks this move will mean an

increase in their costs, especially the

ones with high percentage of

Current-Account-Savings-Account

(CASA) deposits.

“The market-allocated premium to

banks with high CASA ratios might

witness some re-rating,” said an

analyst. Traditionally, while currentaccounts do not add to interest costs

of banks, the cost of interest on

savings accounts has been barely 40%

of the average lending rates of banks.

Currently, savings accounts constitute

over 22% of the banking systems’

total deposits and experts believe that

banks’ opting for differential rate of

interests would lead to an increase in

the industry’s cost of funds and thus

impact their net interest margins as

well as profitability.

However, experts also believe that the

reform would not be too disastrous on

the banking sector too.

According to a theoretical exercise by

HSBC, while everything else remains

the same, a 100 basis points (one

percent) increase in savings account

interest rate could see between 1 to 24

basis points compression in margins

and a 0.8% to 13% impact on profit

before tax (PBT) for private banks.

While in case of PSU banks, the

margin compression could be in therange of 17 to 27 basis points and the

impact on PBT would be between

14% to 30%.

According to HSBC, at this juncture,

the situation is still evolving, with

most bankers either expecting savings

rates to remain largely the same or to

increase to 45 - 60-day deposit rates,

which are in the range of 5% to 6%.

Also, most private banks are talkingabout increasing the transaction fees

for all savings account transactions

and are looking to pass increases to

the borrowers.

“Accordingly, when all is said and

done, they might end up experiencing

only a marginal impact or no impact

on profit,” HSBC said in its report.

“However, PSU banks may be slow to

pass through cost increases in terms

of fees and higher lending rates, andtherefore, they appear likely to see

some impact on their profits.”

The larger picture which could unfold

going forward is the likely migration

of retail depositors to banks offering

higher rates.

But HSBC does not see that



happening in the near term due to the

inertia of retail depositors who would

barely shift to another bank that is

offering 50-100 basis points higher

than the banks they have been

previously serviced by.

“Empirical evidence of the past 10years suggests that banks that have

better service levels and that offer

products that tie in CASA have far

better prospects to attract incremental

CASA deposits,” says the HSBC

report pointing at the success of

HDFC Bank and Axis Bank in

developing a sound CASA base in the

past decade versus the declining

CASA ratios of PSU banks.

“Therefore, over the longer term, we believe that private banks will largely

be able to protect their CASA, while

PSU banks may see some erosion,

especially if some private banks offer

higher savings deposit rates,” the

report adds.

And the move has already begun with

Yes Bank increasing its saving

deposit interest rates by 2% to 6% for

all its customers on the day when the

RBI announced the plan.

“This (saving interest hike) also gives

a significant opportunity to Yes Bank

to leverage its 300-plus branch

network to accelerate mobilization of

retail deposits - one of the key

objectives of its Version 2.0 Strategy

for building its retail banking

franchise with an unprecedented

service and innovative experience,”said Rana Kapoor, Founder,

Managing Director & CEO of Yes

Bank, in a release.

The move is unlikely to affect Yes

Bank’s bottom-line in a big way given

that savings accounts currently

account for just 2% of its total

deposits. And with just 0.7% market

share, the move is unlikely to shake

the industry up in a very big way.

Competition among banks cannot be

ruled out because empirical evidence

shows that unlike in metropolitan

areas, savings deposits in rural,

semi-urban and urban areas are

responsive to interest rate changes in

savings deposits and could attract

competition from banks.

Will the competition get unhealthy?

The RBI does not think so. Citing the

case of deregulation of term depositinterest rate, the RBI in its discussion

paper had highlighted: “The

experience with deregulation of term

deposits interest rate suggests that

deregulation resulted only in a

marginal shift of deposits from public

sector banks and foreign banks to

private sector banks.

Thus, if deregulation of term depositsinterest rate is any guide, deregulation

of savings deposit interest rate may

not result in an unhealthy competition

and a large shift of deposits from one

bank to another.”

The impact of the move will reflect in

the ensuing quarters because the

deregulation has happened at the peak

of the interest rate cycle – the gap

between the fixed deposit rates and

saving account interest rate (4%) iscurrently the widest.

However, while competition among

banks to retain their saving deposits

will stem up, leading to improvement

in their product quality and service.

And given that the rate is now

deregulated, its behaviour will map

the larger interest rate environment

similar to the fixed deposit rates. Your

idle money will make more moneylying idle when the liquidity scenario

is tight and the other way round toO.

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FRAGILEhandle with careEven as the logistics industry is

besieged with a host of issues, the

players are innovating by doing

more with less to beat competition

hile transportation

in India has

i m p r o v e d

considerably, as a

business, the industry is yet to be

organized and generate enough

business to attract large number of

corporations. Logistics, an integral part of the transportation industry (it

constitutes around 40% of the road

transportation business), continues to

be in a bad state.

The industry’s growth has been

marred by inconsistent taxes and poor

infrastructural facilities. These factors

continue to be chief obstacles for

Wdismal financial performance of most

companies in the sector.

The logistics industry has been facing

a wide range of challenges over the

years and certain recommendations

by experts can bring about growth in

the industry.

The logistics industry is quite

unorganized. Broadly, the industry

can be classified into seven

categories: rail freight, Container

Freight Stations/ Inland Container

Depot, Multi-modal Transport

Operator, coastal shipping, trucking,

warehousing and express logistics.

These categories include services

such as plain vanilla transportation of

goods by roadways, transportation by

air, outsourcing of goods, and stations

for unloading and packaging of

goods. It is estimated that outsourced

logistics form a substantial part of the

industry. In this, organized playershave just 5% access to this.

There is competition in the road

transportation segment of the

industry, where small players have

mushroomed. According to certain

estimates, the overall costs of the

logistics industry is estimated to be

14% of India’s gross domestic




product (GDP), which is translated as

US $141 billion if one considers

India’s GDP to be $1 trillion.

CHALLENGES

Despite such a huge stake and

investment, the industry is far fromconsolidated and companies are

struggling to secure handsome returns

on their investments. Obstacles such

as poor infrastructure, inconsistent

tax system, rail haulage rates,

wastages in truck transport due to

congestion, octroi duty on truck

transportation and no tax incentives

plague the industry.

All these factors have stunted the

growth of companies in the sector.Take for instance, moving of goods

by roadways. It is estimated that close

to 45% of road freight traffic is

through roads.

Huge traffic jams and labyrinthine

documentations have resulted in

delays and spoilage of certain goods.

In contrast to this, vehicles in western

parts of the world move much faster

and have swifter and easier

documentation. These factors have propelled the emergence of strong

brands such as Safexpress.

A report suggests that vehicles in the

western parts of the world run at three

times the speed of vehicles in India.

Besides this, immense irregularities

in the tax system have added to the

woes of companies in the sector. A

company has to pay multiple taxes in

a state. To evade this, companiesresort to strategies like the hub and

spoke model.

A hub and spoke network is a

centralized, integrated logistics

system designed to keep costs down.

Hub and spoke distribution centers

receive products from many different

origins, consolidate the products and

send them directly to destinations.

A centralized warehouse helps them

to take into account multiple taxes

levied by the government. Most

companies do not have huge

warehouses in every state. Instead, to

ensure their presence in certain states,the companies erect small warehouses

with bare minimum facilities.

Experts believe business-friendly

policies by the government, including

tax incentives and a single Goods and

Services Tax (GST) need to be

promoted, which would attract

investments and ensure smooth

facilities for transportation in the

logistics industry.

MEASURES

Industry experts are of the opinion

that if India has to emerge as a strong

and deep-rooted manufacturing hub,

the development of its roads is of

utmost importance. They are

expecting the inconsistent tax system

to be abolished soon.

Even as these developments

materialize, players in the industry arecoping with the present system. Take

for instance, the hub and spoke model

of distribution pioneered in express

logistics segment of the industry -

cargo business.

Few airline companies have begun a

facility in a state, which serves as a

hub for its operations. This, in turn, is

connected to other metros and tier-II

and tier-III cities.

Such a model ensures there is enough

reach through franchisee network for

airline companies. Outsourcing

aircraft from bigger airlines, works

better for those companies with a

small fleet of aircraft.

Road transportation is the only

segment where most experts are of

the opinion that development must

take place rather swiftly. Though the

National Highway Authority of India

has been awarding projects

consistently, the present state of roads

is quite dismal. Hence, basic

improvement of roads is the key for

the future growth of the industry.

Of the seven categories of the

industry, experts feel that Multi-nodal

Transport Operators will do well in

the coming years, considering the

inherent better returns due to the light

asset model of the business. These

operators derive returns on equity in

the range of 15% to 20%.

It is believed that growth in the future

lies in two major segments of theindustry: 3PL Logistics and Express

Logistics. 3PL Logistics involves

bundling of various logistics services

such as warehousing, inventory

management, transportation, freight

-forwarding and packaging.

Due to such amalgamated services,

experts believe this segment would

generate high margins in the coming

quarters. Some analysts believe that

companies in the 3PL Logisticssegment would have Earnings Before

Interest Depreciation Tax and

Amortisation (EBIDTA) in the range

of 10% to 12% in comparison with

5% in pure truck services.

Express Logistics, on the other hand,

involves handling of two types of

consignments: documents and

non-documents. It is estimated that

documents account for 60% of the

organized sector’s revenues, whilenon-documents account for 40% of

the organized sector’s revenues.

Considering extensive network and

premium quality services, this

segment has presence of organized

players. In this segment, organized

players have been able to capture

65% of the market shar E.



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Taking Pharma

To The MassesIf the government’s proposed

initiative becomes a realit y,

consumers will be able to choose

the cheapest medicine from a l ist of

alternatives, through an SMS

o make the prices of

medicines cheaper and

affordable to commoners,

the government, through

the National Pharmaceutical Pricing

Authority (NPPA), some time back proposed to launch a new initiative,

which is a technology-advanced

programme enabling them to choose

the cheapest brand of drug prescribed

by doctors.

Under the plan, a person or a patient

can get an SMS reply with a list of

brands of the same medicine along

Twith their prices providing him or her

the option to choose the cheapest

brand. This is an extension of the

government’s initiative to have

‘ janaushadhi stores’ across India to

make generic drugs available to thecommon man.

At present, more than 122 such stores

are operative across the country. The

drugs for these janaushadhi stores

will be supplied by the Bureau of

Pharma PSUs of India (BPPIs), which

will manufacture them at modest

profit margins.

PROS AND CONS

While all seems good at this point,

experts are divided on the efficacy of

the plan. Some say the consumers will

have the right to opt for a cheaper alternative as against the one

prescribed by the doctor, which is

quite often unaffordable. Many a time

doctors receive incentives or gifts

from pharma companies to prescribe

their brand of drugs. And since most

consumers are unaware of the fact

that they can seek an alternative, they

take the doctor’s word as final.




measly 1% of the GDP, and expand

health insurance.

Besides, transaction costs are so high

that they result in increase in prices of

drugs. The transaction costs in Indiaare the highest, about 40%, compared

to other developing countries.

This includes dealer’s and retailer’s

margins, taxes such as VAT, excise

duty, octroi in certain states and other

inter-state levies. Hopefully, GST

(Goods and Service Tax), if and when

implemented, will harmonize all

these taxes.

Moreover, the government also needsto ensure that it obtains the updated

MRP of drugs being sold over the

counter (OTC) by using a real-time

platform so that they can avoid

discrepancies in information that is

passed on to the consumer.

But, the government’s job does not

end with the implementation of the

project. It also needs to learn the scale

and efficiency of the programme. But

when this programme comes into

force, manufacturers will be

incetivised to support their customers

with competitive pricing and developnew strategies to survive in the

evolving market place.

This, in turn, will compel stockists

and pharmacists to keep a variety of

drugs and not give preference to

certain pharma companies. Doctors

will get the added responsibility to

justify or give options of drugs in

their prescription.

Finally, consumers will be able tosave money by purchasing generics.

Many pharmaceutical companies are

ready to support this unique campaign

on an on-going basis to help improve

the system and work past any hurdles

that may be encountered along the

way. Till this programme takes shape,

all we can do is adopt a

wait-and-watch approacH.

Further, a devious practice goes on

unhindered. Sometimes drugs are

priced so high that when they are

sold, margins or bonus are offered to

the retailer.

There have been instances where

margins as high as 400% to 500% or more are given to the retailer, fleecing

the patient and only benefiting the

middle man. Obviously in such cases,

the retailer is likely to push a brand

which gives higher margins.

Others are of the opinion that while

the drugs might be cheaper, the

quality is likely to be compromised.

They say substitutes or cheaper

alternatives could have a disastrous

impact on the patient seeking potentdrugs such as antibiotics, hormones,

steroids, etc, since aspects such as

quality, efficacy and bioavailability

are likely to be jeopardized.

Some might counter argue that if a

drug is manufactured by a company

having drug manufacturing license

from the US FDA or UK MHRA or

any other respective authorized

regulatory authority, the quality issue

would not be significant.

However, given the varying enforcing

standards of state FDAs across India,

this debate does not hold ground.

ROLE OF THE GOVERNMENT

The government’s plan looks good

but will not make any sense unless the

benefits trickle down to the end

consumer. The government needs to

focus on improving access andreducing transaction costs.

With only about 35% of the

population of the country having

access to modern medicines, such

peripheral actions will only have a

marginal impact. The government

should improve health infrastructure,

increase healthcare budget, which is a

WHAT IS NPPA?

NPPA is an organization of the government of India which was established, inte

to fix/ revise the prices of controlled bulk drugs and formulations and to enforce

and availability of the medicines in the country, under the Drugs (Prices Control)

1995. The organization is also entrusted with the task of recovering am

overcharged by manufacturers for the controlled drugs from the consumers. I

monitors the prices of decontrolled drugs in order to keep them at reasonable lev

Functions Of NPPA

accordance with the powers delegated to it

steps

individual companies, profitability of companies etc, for bulk drugs and formu

pharmaceuticals

and procedures laid down by the government

to the drug pricing



AVIATION’S

WHITE ELEPHANT

Touted to be the next

big thing in the aviation

sector, low-cost carriers

are no longer aordable

for most players




he customer is king and

this is what gave birth to

low-cost carriers (LCCs)

like Air Deccan (now

Kingfisher Red), SpiceJet, Indigo

Airlines and GoAir in India.

But with new airports coming up andcrude oil prices also spiralling

upwards, the cost of operation in

terms of aviation turbine fuel (ATF),

parking and landing charges are

rising, thus putting pressure on

margins of these airlines in this

quarter as well as the fourth quarter.

Additionally, full-service carriers are

also lowering their fares to increase

load factors.

Experts say capacity addition will benefit low-cost airlines, which

control around 40% of the domestic

airline market. But at the same time it

will find itself in a tight spot owing to

higher ATF prices and intense

competition among peers.

Further, during the festive season

most airlines sell a bulk of their seats

in advance to big agents and

consolidators and a miniscule 20%

are sold at a premium. So, the thirdquarter margins are expected to take a

hit with this type of strategy, said an

expert who did not wish to be named.

While in the first quarter Jet Airways,

Kingfisher Airlines and SpiceJet

reported losses due to varying tax on

ATF, in the second quarter the

margins are expected to be lower on a

year-on-year (y-o-y) basis.

However, airlines managed to pass onthe increase in ATF prices by

increasing fuel surcharge in the

second quarter, analysts said.

The ATF, which constitutes around

40% of the operating cost, has gone

up by around 7% in the first half of

this fiscal which has severely

impacted the margins of low-cost

Tcarriers and full-service carriers. “The

prices are expected to go up further

due to volatile market conditions in

Europe,” analysts informed.

According to a study, a full-service

product generates higher yields and

load factors than the extremely price-sensitive low fare segment.

That is the reason why Kingfisher

Airlines has decided to close down

the low fare Kingfisher Red

(erstwhile Air Deccan) soon.

Kingfisher had acquired the

loss-making Air Deccan at a

whopping price of `550 crore from

Captain GR Gopinath in 2007, which

continued to burden its balance sheet

due to high operating costs and lower revenues as compared to its economy

class service.

On the contrary, Indigo Airlines

reported a net profit of `650 crore in

2010-11 due to operational

efficiencies and steady earnings from

sale and lease-back of aircrafts.

Even full-service carriers like Jet

Airways, Kingfisher Airlines and Air

India have not been spared from themenace of high operating costs. But

since these airlines charge higher

fares as compared to low fare carriers,

the high operating cost is taken care

of to some extent.

The Federation of Indian Airlines

(FIA), the lobby group of domestic

airlines, has asked the central

government to intervene and resolve

the problem of high fuel tax, parking

and landing charges, levied by oilmarketing companies as well as

airport operators.

Experts say that as more and more

airport infrastructures are getting

developed, the cost of operating low

fare airlines will go up, thereby

putting pressure on margins of LCCs.

Further, capacity addition by LCCs is

also expected to lead to over capacity

and a price war between full-service

carriers and LCCs.

Unlike in 2004-05, when full-service

carriers placed huge orders for

wide-bodied aircraft, the Indian LCCs

in recent months have placed ordersfor over 250 aircraft.

A major portion of the order is spread

between all the LCCs - Indigo

Airlines, GoAir and SpiceJet. In fact,

Indigo Airlines has placed the largest

order of 180 aeroplanes, which

includes the 150 A320neo and 30

A320 aircraft.

Interestingly, the LCCs of these

airlines have now started flying oninternational routes, which to a

certain extent helps them to offset

high ATF prices. GoAir has, however,

thought the other way and decided to

concentrate on domestic routes.

With continuing economic growth,

business related travel is increasing

significantly after a slowdown in

2009-10. Businessmen and

executives prefer to fly with

full-service carriers because thetickets are refundable and they can

avail of the frequent flyer benefits and

other conveniences offered to them.

“They are willing to pay extra and this

segment is not as price-sensitive as

the low cost or low-fare segment

where there is a lot of discretionary

travel involved,” an analyst said.

A recent survey on Low Cost Airlines

World Asia Pacific 2012 found thatLCCs will grow at the expense of

full-service and legacy carriers.

Meanwhile, Kalanithi Maran

-promoted airline SpiceJet is focusing

on short-haul domestic routes.

SpiceJet has started its operations in

the southern part of the country with

Bombardier Q400 NextGen



turboprop aircraft. “In the long run, it

is these low-cost carriers that will

sustain in the short-haul domestic

routes,” an analyst said. SpiceJet has

placed an order for 30 such aircraft.

Not only that, Maran has pledged his

shares to pump more equity into theairline. The company also issued 35.9

million preferential shares to Maran

through which SpiceJet received over

`95 crore.

Similarly, GoAir has decided to focus

on the hub and spoke model for

growth in India rather than going

international. With India’s GDP

growing at a brisk rate of around 8%

per annum, GoAir is expecting a great

future ahead for the aviation sector.

As part of its strategy, GoAir is

planning to fly those who currently

don’t fly. GoAir has placed an order

for additional 72 aircraft worth

`32,400 crore or US$ 7.2 billion.

The Kingfisher Airlines, which is

promoted by Vijay Mallya, had said

that operating costs of so called low-

cost carriers and full-service carriers

in terms of fuel, airport charges,

engineering and maintenance as well

as crew costs are similar.

The airline further said that full-service carriers incur additional costs

on global distribution, in-flight

catering, ground amenities and the

frequent flyer programme. These

additional costs are more than

recovered through higher yields.

For full service carriers also, the

quarter is going to be very bad as

compared to last year because of

supply addition by low-cost airlines,

competition, high fuel prices andrupee depreciation, an aviation

industry expert said.

Sales tax ranging from 4% to 20%

across the country is further affecting

margins of LCCs. Civil Aviation

Minister Vayalar Ravi has urged the

state government to bring down the

tax on ATFs in order to help airlines

connect major destinations, which at

present, are refraining from flying to

such locations.

Air India, which lost a significant

market share due to its operational

inefficiencies in the last two years,has cut ticket prices significantly to

increase its market share in the

domestic aviation space.

However, other full-service carriers

like Jet Airways and Kingfisher

Airlines have approached the central

government to intervene as this

strategy of Air India will start a price

war and lead to further losses for

airlines which are already making

huge losses.

Meanwhile, the central government is

contemplating on increasing foreign

direct investment in the aviation

sector and also raising the investment

limit to 49%, which will help carriers

to raise funds and bring down their

debt burdeN.

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With a well-diversied product portfolio and

presence in all price points, BEL is able to

maintain an edge over its competitors

ajaj Electricals Ltd (BEL) is a 72-year-old

company with diversified business interests inconsumer durables, lighting and engineering

& projects. It’s appliance business unit (BU)

offers a range of domestic appliances like water heaters,

mixers, food processors, microwave ovens, air coolers,

steam and dry irons, electric kettles,water filters, etc.

During the fiscal year ended 31st Mar ’11, the company

sold approximately 6.13 million pieces of appliances. The

fans BU has a range of ceiling, portable, fresh air and

industrial air circulators. The luminaires BU markets a

range of luminaires ranging from commercial to industrial

lighting and flood lighting to street lighting.

BEL has been growing strongly at a CAGR of 26% in the

last four years on the back of robust growth in the

consumer segment and steady growth in other divisions.

The company is a dominant player in small appliances,

second largest player in luminaires and third largest in

fans. Owing to its renowned brand name, collaboration

with strong foreign players, wide distribution network and

a strong vendor base, it has an edge over its competitors.

INVESTMENT RATIONALE

A Well-Diversified Product Portfolio With A Presence In

All Price Points

With its comprehensive product portfolio, the company is

present across segments and various price points. Over the

past seven decades, BEL has established a strong presence

in the value-for-money segment of consumer durable

products. To strengthen its product portfolio, it entered the

premium segment through tie-ups with global brands.

B

LIGHT

YEARSAHEAD



BEL also launched its own premium sub-brand called

Bajaj Platini to further explore the fast-growing premium

segment, apart from being present in the premium segment

under the brand Morphy Richards.

BEL enjoys 15% to 30% market share in various product

categories like oven toaster and griller (30%), irons (26%)

and water heaters (23%). Apart from appliances, BEL is

one of the top three players in fans (16% of the organized

market), lighting (8%) and luminaires (17%).

and 4,000 authorized dealers.

Its products, ranging from bulbs and lamps to fans and a

wide range of domestic appliances, are sold through over

4,00,000 retail outlets. BEL has created a strong presencein pan India with a network of 19 branch offices and over

282 customer care centers.

With the economy growing and the demography changing,

the market is expected to get more organized in the coming

years. Further, with its diversified product portfolio and

presence in all price points, BEL will benefit the most from

the same.

Introduction Of New Products At Various Price Points

Backed by its R&D efforts and global collaborations, thecompany has been able to launch newer products across

various price points/segments. The company is re-entering

the pressure cooker sector after a gap of 25 years. The

company has completed successful test marketing in

Orissa and West Bengal and is planning to launch it pan

India in 2011.

The company is also planning to foray into the water

purifier segment for rural as well as urban markets.

Besides, BEL is also planning to launch DG sets after

test-marketing in Tamil Nadu and Kerala.

The company is also trying to consolidate its position in

the water lifting pumps after being in the market for two

years. BEL is planning to introduce microwave ovens

under Morphy Richards brand in the near future.

With aggressive marketing, robust distribution network,

strong brand equity and various launches of new categories

in the last 1–2 years, its products will start contributing

substantially to the top-line and bottom-line of BEL.

Source: Company, Nirmal Bang Research


Global Tie–ups

Strategy

Fans

Fans

Appliances

AppliancesLuminaires/ Lighting

Luminaires/ Lighting





TPW fans (table, pedestal and walls)

For children

For premium appliances

For gas appliances and cooking rangeFor premium technical lighting

For LED lighting

For street lighting

For alarm system

For access controls and building management

For sports lighting

Segment Global Tie-up

Midea

(World’s largest fan company)

Walt Disney

Morphy Richards, UK

Nardi, ItalyTrilux, Germany

RUUD, US

Disano, Italy

Securiton, Switzerland

Delta Controls, Canada

Abacus, UK

ce: Company, Nirmal Bang Research

Market Share Of BEL

Competitors

ans

ghting

uminaries

ppliances

igh Masts/

ower Projects

ghting,

umination,

ural Electrification

Crompton Greaves (24%),

Usha (17%), Orient, Khaitan,

Polar, Havells

Philips (26%), Surya (12%),

Crompton, Wipro,

Osram, Havells

Philips (23%), Crompton (13%)

Philips, Usha, Kenstar, Preeti,

Prestige, Maharaja, Inalsa, Pigeon,

Black & Decker, Tefals, Delonghi,

Braun, Kenwood, National

Philips, Crompton, BP Projects,

Utkal Galvanziers, KEC,

Kalpatru, L&T, Jyoti

Philps, GE, Crompton,

IVRCL, KBL, Kalpatru

Segment Market

Share

Market

Position

16%

8%

17%

15-30%

organized

NA

NA

3rd

3rd

2nd

NA

NA

NA

Nationwide Distribution Network With Wide Urban And

Retail Penetration

We believe the consumer durables market is highly

fragmented, with stiff competition from regional and

national players. BEL sells its products - spread over five

business verticals - through a network of 1,000 distributors



Vendor-Driven Outsourcing Model

BEL derives huge benefit from its vendor-driven

outsourcing model. Most of the product manufacturing is

outsourced to third party vendors, who manufacture

products according to the specifications provided by the

company. This approach provides flexibility in operation

and competitive pricing.

The company has built a strong base of 200 vendors to

outsource its manufacturing jobs. More than 70% of the

vendors are dedicated and have been associated with the

company for several years. BEL has prompted several of

its dedicated vendors to move production base to backward

areas in Himachal Pradesh and other similar locations for

cost-effective production.

BEL is outsourcing 20% of appliances and fans and 5% of

luminaires from China. Apart from enjoying competitive

pricing, the company has also been able to effectively facecompetition from Chinese companies. With such a set-up,

BEL is an asset-light entity. BEL has more time and

resources in its core competency of R&D, marketing as

well as distribution.

illumination design and development of accessories. The

division’s portfolio also includes signage, flag mast and

night raider mobile light towers.

Special Projects: The division’s competency areas are

power plant lighting, stadium and monument lighting, as

well as rural electrification work. Under the rural

electrification work, the company has selected only centralutilities and works with NTPC and NHPC. The company

does not have any projects from State Electricity Boards

(SEBs) in this segment.

Transmission Line Towers: The company has a

galvanizing plant with a capacity of 30000MT. BEL gets

projects from the Power Grid Corporation, private players

like Sterlite and SCB for laying of transmission lines.

The company’s revenues from its E&P business unit

increased to `831.2 crore in FY11 from `305 crore in

FY07 with a CAGR of 28%. BEL’s EBIT rose to`73.57

crore in FY11 with a CAGR of around 19.5% over a span

of four years.

The Engineering & Projects division of the company has

also started exporting high masts, towers and poles to

Kenya, Uruguay, the Caribbean, Sri Lanka, Mauritius and

the Maldives. BEL has also undertaken few street lighting

projects in the Middle East and Ethiopia. All these

export–related activities are carried through its group

company – Bajaj International.

BEL registered 2.5% revenue growth in the E&P businessduring Q1FY12 due to slower executions. During the

quarter, the company had taken special initiative to close

down the lingering projects pending on account of some

last mile activities. Consequently, the company had to

incur additional costs, which will free up the working

capital stuck in these projects.

This had resulted in a negative margin of 6.7% in Q1FY12.

BEL has started the cleaning process by bringing down the

number of projects from the current 82 level to ~50

projects by the end of the year. The cleaning process was

broadly completed in Q2FY12 and margins are expected toimprove, thereafter.

Compared to the first quarter of FY12, BEL posted better

numbers in the E&P division in Q2FY12, mainly due to the

closure of 8 out of 30 sites where more than 95% work has

been completed, to avoid fixed overheads. This has

resulted in improvement in EBIT margin in Q2FY12 of

3.8% as compared to negative 6.7% margin in Q1FY12

and 3.1% in Q2FY11.


Product Information

Manufactured In-house/ Outsourced

Appliances

Fans

Lamps and Tube lights

CFL Lamps

Luminaires

High Masts, Poles

and Towers

- Outsourced to dedicated vendors in Noida,

Delhi and Himachal Pradesh

- Imports from China (~20%)

- Own plant at Chakan near Pune- Outsourced to dedicated vendors

Hyderabad and Himachal Pradesh

- Imports from China (~5%)

- Manufactured by its UP-based sister

concern Hind Lamps

- Manufactured by its Nasik-based sister

concern Starlite Lighting

- Outsourced to dedicated vendors in

Daman and Himachal Pradesh

- Imports from China

- Own plant at Ranjangoan and Chakan

near Pune

Product

Engineering & Products Business Is Strained, But Is

Expected To Improve

The Engineering & Projects (E&P) segment has three main

divisions:

High-mast & Street Lighting Division: BEL entered into

the high-mast and street lighting business in 1983.

Currently, it also undertakes civil, structural and



The management has also guided to control capital

employed in the E&P business through a calibrated growth

(selective order book) with 8% to 9% margin.

We believe that going ahead, BEL will be able to post a

better result in H2FY12E owing to the cyclical nature of

the business where the last two quarters are the best

quarters in terms of revenue collection and fixed costspread out. This gives us confidence that the E&P business

will post better results in FY12E.

The major concern posed in the E&P business is the

shrinking order book, though the management is aiming at

a sustained order book position of `1,000 crore in the

coming months. Currently, the order book stands at `742

crore, down 14% q-o-q due to a) government delay in order

finalization, which continued amid decision making

paralysis, and b) execution of existing orders.

BEL has achieved a revenue of `300 crore in the last two

quarters and the management has targeted to achieve `950

crore by FY12E. The management is confident of

achieving the said target due to the strong pipeline of

projects and is awaiting issuance of new contracts. We

have projected `934 crore in FY12E and have taken a

muted growth in FY13E due to nonclarity in the order

book position for FY13E.

FY12E Remains Positive For The Company

BEL reported poor performance in Q1FY12 as the

consumer business faced poor market conditions (reporteda moderate growth of 15.5%) and the E&P business

showcased a meagre growth of 2.5% against last year. The

consumer business was affected badly as the markets for

fans and room coolers were extremely depressed in the

quarter because of shorter summer season this time.

However in the E&P business, BEL reported a negative

EBIT margin of 6.7% as the company had to incur

additional costs to close down its several old/stuck projects

to free up more working capital and to bring efficiency in

employee costs.

To improve the E&P business, the company is in the

cleaning process and it plans to reduce the number of

projects from 82 to ~ 50 levels. The cleaning process has

been broadly completed in Q2FY12 and margins are

expected to improve, thereafter.

The various initiatives undertaken by the management

have resulted in better performance in the E&P business,

where the E&P division posted a positive EBIT margin of

3.8% in Q2FY12 as compared to the negative EBIT margin

in Q1FY12.

We expect the H2FY12E result to be excellent on account

of better performance by the E&P business and the

consumer durables business. BEL expects to register a

growth of 24% in the business in FY12E.

Being a strong leader in most segments it operates, the

company enjoys a pricing power. The company has

resorted to several price increases to counter the negative

effect of high raw-material prices. These raw-materials

(copper, aluminium, zinc, plastic and steel) have softened

in the current quarter. We expect BEL to benefit from the

hike in prices and softening of raw-material prices.

MANAGEMENT GUIDANCE

BEL intends to bring down the number of projects from

82 to ~ 50 projects in the E&P division. This will aid in bringing down the cost, check inventory management,

improve working capital position and its balance sheet,

going forward.

The management expects the EBIT margin to improve

in the E&P division from negative 6.7% in Q1FY12 to

10%+ by Q4FY12, indicating a full-year margin at 8% to

9% approximately.

BEL expects to clock a growth of 22-24% in the

consumer durable business in FY12E and also expects to

maintain the margin of FY11.

The management is confident that it will be able to

recover margins in the consumer durables business to

normalized levels through the combination of a) price

hikes in the coming quarters, b) reduction in discounts, and

c) softening of copper and aluminium prices (account for

10% of total cost). The management maintains that price

hikes are undertaken judiciously and consistently to protect

its margins on an annual basis.

KEY RISKS AND CONCERNS

A sharp increase in the price of raw materials like copper,

zinc, aluminium, plastic and steel will impact the

company’s margins.

The company’s inability to hike prices further to mitigate

the rise in raw material prices will impact its margins.

Any sharp decline in the market share due to the rise in

competition or increase in advertisement expenses could




Financials

EBITDA EBIDTAM

(%)

PAT PATM

(%)

EPS

(`)

PE

(x)

P/BV

FY10

FY11

FY12E

FY13E

242.7

258.0

287.3

332.3

10.90%

9.40%

8.90%

9.40%

117.1

143.8

160.6

184.4

5.30%

5.20%

5.00%

5.20%

12.0

14.5

16.1

18.5

15.6

12.9

11.6

10.1

3.8

3.1

2.5

2.1

Growth

(%)

26.30%

23.00%

18.00%

9.90%

Net SalesYear

2228.6

2740.8

3234.5

3553.2

IN A NUTSHELL

We believe the steps taken by the management to reduce fixed overheads will help BEL to post better margins by end

FY12E. We expect its E&P segment to improve margins in the H2FY12E compared to H1FY12, and we also expect the

consumer durables segment to post 24% growth and maintain its EBIT margin in FY12E. Given these factors, the stock is

available at an attractive value at current levels and offers a potential upside from these levelS.

adversely affect the earnings of the company.

Any slowdown in the economy may cause de-growth in

the real estate sector. That may impact business growth of

the company.

Rising interest rates, environmental clearances for

various projects and land acquisition issues lead to delay ininvestments in the T&D space. We believe severe delays in

the execution of these projects and further delays in the

closure of projects could negatively impact the company’s

E&P division.

FINANCIAL ANALYSIS

We expect net sales to clock a CAGR of 13.9% and PAT of

13.2% from FY11 to FY13E on account of slowdown in

the E&P segment and steady growth in the consumer

durables and lighting and luminaries segment.

Further, we have assumed a contraction in margin during

FY12E as it will not be easy to pass on the increase in raw

material cost and margin contraction in E&P.

Historically, BEL has been able to pass on the hike in raw

material prices with a lag. We have assumed a 50 bps

contraction in EBIDTA margin in FY12E as compared to

FY11 on account of high volatility in global commodity

prices, company’s inability to pass on the abnormalincrease in raw-material prices to customers immediately

and low margins of the E&P business segment.

However, we expect some respite in the E&P segment

where the company has given guidance in E&P to be

selective about orders to protect margins, going forward.

BEL has started reducing the project level from 82 to 50,

which we feel, will improve the working capital

management and upgrade margins, going forward. We

expect the margins to again bounce back in FY13E to 9.4%

on the back of stability in the E&P business and consistentmargins in the consumer durables business.

regular investments keep worries away

an apple a day keeps the doctor away

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the nation’s insular political class

about the stakes involved. He called

on the lawmakers to form a broad

coalition in support of the former

European Commissioner MarioMonti, which would be able to push

through urgent economic measures.

Going forward, we expect gold prices

to remain buoyant as we have not

seen any major liquidation in the ETF

holdings. Strong ETF holdings

suggest that the investment interest is

still strong in the yellow metal. We

recommend going long in gold at

$1,750-$1,760/ounce on the COMEX

at which we see actual value buyingfor the metal for a target of above

$1,825/ounce on the COMEX until

the next fortnight.

INDUSTRIAL METALS

Industrial metal prices edged higher

to reach their multi-week highs on all

major exchanges of the world.

Positive industrial production, retail

sales and expansion in PMI from

China led to some fresh buying inindustrial metals. Also, the CPI was

reported positive at 5.5%, easing the

chances of further monetary tighten-

ing in China.

China, being the highest consumer of

base metals, any positive economic

activity is expected to support metal

prices. Also, supply concerns in major

copper mines kept prices upbeat.

Copper prices once again managed to

test $8,000/tonne on the LME and onMCX, it tested `400/kg.

The world’s number one copper

producer, Codelco, cut the physical

copper premium to its Chinese buyers

by 4.3% to $110/tonne for 2012,

traders said.

Kazakhstan’s refined copper output

rose by 1% year-on-year (y-o-y) in

January-October ’11, while zinc

production grew by 0.3%, the data

released by the State Statistics

Agency showed.

Zinc producers and traders continue

to push for 2012 contract premiums

of 7.5 cents/lb, even as consumers

resist paying almost double the levels

of 2011 and hold out for lower offers,

industry sources said

Term premiums on aluminium

shipments to Japan for January-

March is likely to ease as domestic

demand is slowing after the devastat-ing floods in Thailand caused many

Japanese firms to curb output of

consumer goods using parts made in

Thailand, traders said.

Going forward, we expect the same

trend to continue in industrial metals.

China’s demand for metals is still

strong as import numbers suggest.

Copper imports in China climbed by

more than 13% in October. We expect

copper and zinc prices to remainstrong until the next fortnight.

CRUDE OIL

Crude oil rallied to a 15-week high of

$99/barrel in the previous fortnight.

The upside was majorly supported by

good recovery in the US job market

and easing Chinese inflation data.

Also positive signs of progress in

Italy and Greece boosted the demand

for riskier assets. A drawdown in oilinventories and threats about the

nuclear weapon in Iran also pushed

oil prices up.

The outlook for crude is still bearish.

We expect prices to fall in the coming

fortnight as slow economic growth

and uncertainty in the markets will

weigh on the demand of crude oiL.

FORTNIGHTLY OUTLOOK FOR COMMODITIES

All international

commodities reversed

their losses due to

easing debt concerns in

the Euro zone. Highly volatileinternational currencies made it

difficult for investors to take a call on

the US dollar. Because of recent

positive US ISM manufacturing data,

good Chinese industrial production

and retail sales data, we saw fresh

buying in almost all metals, and crude

oil in the previous fortnight.

Gold prices too reversed all its losses.

A weaker rupee against the dollar also

supported the price of metals on theIndian exchanges. Base metal prices

were steady on account of positive

data points from China. Even crude

oil prices were well supported with

the overall risk appetite in the

financial market.

PRECIOUS METALS

After being under pressure, precious

metal prices rallied sharply in the

previous fortnight. Gold prices onceagain managed to test $1,800/ounce

on the COMEX after touching

$1,600/ounce in the previous month.

On the Indian exchanges, it is close to

its all-time high as a weaker rupee

against the US dollar provided

additional support.

Silver prices too climbed, but rather

steadily. Silver prices once again

crossed $35/ounce on the COMEX.

The change in the political leadershipin Italy and Greece rekindled hopes

about the Euro zone’s resolution to

the debt crisis, fuelling risk appetite in

the markets.

Italian President Giorgio Napolitano

gave a tough speech aimed at reassur-

ing investors about the country’s

commitment to the euro and warning



Looking ahead, this enthusiastic

mood is unlikely to last long. Deficit-

reduction plans are certainly a right

step, but they may take a long time to

be on track.

The effective implementation of these

plans is truly a matter of concern for

investors. Over the near term, the tone

will be set by Italy’s austerity vote

over the weekend. We are bearish on

the euro. It may test the levels of

$1.3300 against the US dollar.

The British pound is still at its level of

$1.60 and is sitting tight at $1.59 on

the lower level, despite weak funda-mentals of the UK economy.

The Bank of England’s quarterly

inflation report highlights the biggest

event risk for the pound, and we are

likely to see the central bank striking

a dovish tone on the monetary policy

as the region faces the increased risk

of a double-dip recession.

Retail spending is projected to

weaken 0.3% in the coming fortnightand the batch of negative develop-

ments is likely to weigh on the

exchange rate as market participants

see more quantitative easing since

growth is likely to deteriorate in the

coming quarter.

We remain bearish on GBP for the

coming quarter, with expected levels

of $1.5550 against the US dollar.

In the last fortnight, we were bullishon USD/JPY due to the intervention

of Japan. The country is trying to

devalue its currency to help exporters

of the economy.

Meanwhile, the Japanese economy

showed immense improvement for

Q3 GDP numbers and industrial

production (IIP) data.

Consensus estimated quarterly GDP

to be at the levels of 1.5%, a dramatic

contrast from the previous read of

-0.5%. IIP numbers also showed an

improvement, which made theJapanese currency more attractive

over the US dollar.

Investors will be closely eyeing the

Bank of Japan interest rate decision

and although there are no expecta-

tions from the central bank to move

on rates, officials may see scope in

increasing the size of their asset

purchases as deflationary concerns

continue to dictate policy.

We might see another round of

intervention in the coming fortnight

as the appreciated currency of Japan

is vulnerable for Japanese exporters.

We are bullish on USD/JPY and are

expecting it to test the levels of

78.75-79.10.

The Indian rupee traded with a depre-

ciation bias for the last fortnight

because of risk aversion in the global

financial markets.

A bounce in the euro did not help the

rupee to reap the benefits against the

US dollar. The RBI was also dovish

with its tone for another rate hike; it

commented that this might be the last

rate hike. The INR was also under

pressure because of the widening gap

on the trade front.

Going forward, we see the Indian

currency depreciating further againstthe backdrop of the broad weakness

in Asian currencies.

Rising crude oil prices will also

weigh on the rupee as inflated dollar

bills will trigger demand from import-

ers. We expect the rupee to be range-

bound within 50.00 to 51.00 with a

positive bias in the coming fortnighT.

FORTNIGHTLY OUTLOOK FOR CURRENCIES

Currencies witnessed

another round of extreme

volatility in the fortnight

gone by. The data and

event risk from the US did not guidethe greenback as much as the health

of the global financial markets did.

The development in Europe was the

major driver for the market and

consistent news flows from Europe

ruled the markets, causing extreme

volatility in the financial markets.

Italian bonds were in the limelight for

the latter half of the fortnight as yields

rose to the levels of 7.22 basis pointafter a strong sell-off in Italian bonds.

If we take a broad view of the world

markets, the general trend will be a

greater sensitivity to risk aversion.

The IMF warned global economies

that they could witness another

recession, yields soared for the risky

bonds and the banking sector across

the globe is in severe pain of credit

crunch with default swaps makingnew highs.

The response to any negative devel-

opment will dampen the reaction to

any positives. Hence, we remain

bullish on the US dollar against

several major currencies.

The euro ended the fortnight on a

bright note, posting the largest daily

rally in the last two weeks. Optimism

emerged after Greece finally settledon Lucas Papademos as its new Prime

Minister. Italy is headed by former

EU Commissioner Mario Monti.

This offered a ray of hope to Europe

as many expect the new ministers to

quicken the process of austerity

measures, budget planning and calm

the financial markets.



Investors can consider long-term debt funds

in a falling interest rate scenario

xtreme volatility in the

domestic as well as

global equity markets

has left retail investors

puzzled and confused, forcing many

of them to stay on the sidelines andwait for the right opportunity to invest

in equities. But with interest rates in

India on the verge of decline in the

months to come, retail investors can

make decent gains from the same.

Fall in interest rates can come with

immense prospects for smart

investors who can invest in long-term

E bond funds, such as medium- and

long-term funds. This is the right time

for retail investors to look at some of

the long duration bond funds since

when interest rates decline, the prices

of existing fixed income investmentinstruments rise. Conversely, when

interest rates rise, the value or prices

of existing fixed income investment

instruments decline.

Recently in the mid-year policy

review of the Reserve Bank of India,

its Governor D Subbarao indicated

that the possibilities of a rate action in

the next policy would be low.

Market players also believe that once

inflation eases down in the weeks to

come, the RBI will not hike interest

rates as it did in the past. Since thestart of last year, the RBI has hiked

key policy rates over a dozen times,

but now experts believe that the worst

is behind them and from the start of

the next calendar year, interest rates

will start cooling off.

Despite this, no one is sure enough

when interest rates will actually begin



to fall. So, it makes sense for retail

investors to take a partial exposure to

long-term bond funds at this juncture

to earn better returns. Many fund

managers have already started

advising investors to put their money

in few long-term debt funds.

Not only are they advising, they also

believe that interest rates have more

or less peaked-out, so they have also

started taking exposure to debt scrips

with longer tenures for their

long-term bond funds. Several fund

houses have started increasing their

average maturity periods to three to

seven years, up from just about 12-16

months of maturity, few months ago.

If investors want to take a little risk for the chance of getting better

returns, long-term bond funds are

right for them.

As these funds are marked-to-market

and open-ended, any fall in interest

rates will benefit the schemes. While

a rise in interest rate poses the risk of

loss in the price of bonds in the

secondary market and in the NAVs

(net asset values) of bond funds, a fall

in interest rates on the other handleads to appreciation in the prices of

bonds and NAVs of bond funds.

For many investors, a bond fund is

also a more efficient way of investing

in the Indian debt market. Bond

mutual funds are just like stock

mutual funds, where you put money

into a pool with other investors and

fund managers invest that money

where the best opportunity is present.

Some bond funds aim to give similar

returns as the broad market, investing

in short- and long-term bonds from a

variety of issuers, such as the Indian

government and government agencies

or corporations.

Long-term bond funds invest in many

different securities, often buying and

selling according to market

conditions, and rarely holding bonds

until maturity so it is an easier mode

to attain diversification even with a

small investment. In bond funds,

dividend payments are made

half-yearly or yearly, differing from

fund house to fund house.

The aim of such funds is to provide

regular and steady income to

investors. Such schemes usually

invest in fixed income securities like

bonds, corporate debentures,

government securities and money

market instruments. They are less

risky compared to equity schemes.

However, long-term investors need

not bother about these fluctuations

due to interest rate movements.

Long-term bond funds are specially

meant for investors with relatively

less appetite for risk and seek to earn

returns higher than what they would

earn from other avenues like Fixed

Deposits (FDs) that are considered

safe. So, safety and return both are of

equal concern for those investing in

bond funds.

However, long-term debt mutualfunds are more sensitive to interest

rate movements than short-term debt

funds; but with interest rates falling,

they stand to gain more. Investors

with 2-3 year investment horizon can

invest in long duration bond funds,

which might give them better returns

than other debt products.

The performance of a bond fund is

determined by the performance of its

underlying investments (bonds in thecurrent scenario), but there are a few

specific factors such as volatility in

interest rates and other domestic

factors that might affect its

performance and your investment.

Debt mutual funds are in a way

considered suitable for retail

investors, who with a small

investment amount want to diversify

their portfolio and benefit from

various highly rated and

high-yielding debt instruments.

In the last one year, when benchmark

indices have given a negative return

of 15%, long-term bond funds havegiven an average of 4%, with many

funds even giving returns in the range

of 6% to 8%.

A bond fund’s total return measures

its overall gain or loss over a specific

period of time. The total return

includes income generated by the

underlying bonds and (both realized

and unrealized) price gains or losses.

Investors should focus on the total

return when evaluating the performance of bond funds.

On the taxation side, it is better to put

money in long-term funds as dividend

income in the hands of investors is

tax-free and long-term capital gains

tax (investments over 1 year) is 10%,

and 20% with indexation.

Investors are charged as per their

income tax slabs if they redeem their

investments before one year.However, the investor will pay a

dividend distribution tax of about

16.84% if he opts for the dividend

option instead.

Though inflation is expected to come

down, there is no single answer as to

how soon it will drop. The non-food

manufacturing inflation is above the

comfort zone of the RBI and, hence,

the central bank may wait for this

number to fall before pausing.

However, one has to keep in mind that

early exit from the scheme in case of

emergency can bring in exit loads in

long-term bond funds. Typically, in

long-term bond funds, the fund

houses charge exit loads anywhere

between 1% if there are withdrawals

before one-year of the investmenT.



CHANGE IN PRICE AND OPEN INTEREST

Nifty Futures

Bank Nifty

ACC Ltd

Ambuja Cements Ltd

Axis Bank Ltd

Bajaj Auto Ltd

Bharat Heavy Electricals Ltd

Bharat Petroleum Corporation Ltd

Bharti Airtel Ltd

Cairn India Ltd

Cipla Ltd

Coal India Ltd

DLF Ltd

Dr. Reddy's Laborator ies LtdGAIL (India) Ltd

Grasim Industries Ltd

HCL Technologies Ltd

HDFC Bank Ltd

Hero MotoCorp Ltd

Hindalco Industries Ltd

Hindustan Unilever Ltd

HDFC Ltd

I T C Ltd

ICICI Bank Ltd

Infosys Ltd

IDFC Ltd

Jaiprakash Associates Ltd

Jindal Steel & Power LtdKotak Mahindra Bank Ltd

Larsen & Toubro Ltd

Mahindra & Mahindra Ltd

Maruti Suzuki India Ltd

NTPC Ltd

ONGC Ltd

Power Grid Corporation of India Ltd

Punjab National Bank

Ranbaxy Laboratories Ltd

Reliance Communications Ltd

Reliance Industries Ltd

Reliance Infrastructure Ltd

Reliance Power Ltd

Sesa Goa LtdSiemens Ltd

State Bank of India

Steel Authority of India Ltd

Sterlite Industries (India) Ltd

Sun Pharmaceutical Industries Ltd

Tata Consultanc y Services Ltd

Tata Motors Ltd

Tata Power Co Ltd

Tata Steel Ltd

Wipro Ltd

Company Name Price

(`)

Open

Interest

Price

(`)

Open

Interest

Change

in Price

(`)

Change

in Price

(% )

Chan

in Op

Intere

(%)

Change

in Open

Interest

5291.40

9869.05

1192.35

155.80

1135.60

1728.45

321.75

633.90

397.85

300.40

291.10

332.30

236.05

1624.05426.70

2509.00

432.10

485.50

2156.35

136.50

385.45

688.55

210.10

901.25

2859.85

132.25

76.40

560.35508.65

1395.40

841.00

1131.40

178.85

279.90

104.60

1012.70

508.90

78.00

868.25

450.30

95.20

208.80851.80

1906.50

111.55

124.35

509.40

1113.80

193.95

101.55

466.85

375.45

28903650

1845475

1328250

10194000

7706750

1443250

12196000

1312500

11965000

13805000

4572000

9112000

21601000

9002502815000

567750

2743000

17710625

1112000

26902000

13821000

9615500

32518000

13892000

3632750

21210000

36116000

47615004371000

6522000

4767500

3243750

16738000

11158000

9020000

4053750

2925000

26040000

15679750

4729500

17604000

11957000716000

6463375

9124000

25568000

3546000

5608750

49519000

12204000

21735000

3578500

5078.20

9080.65

1211.75

161.35

1012.95

1719.90

310.50

539.75

403.55

309.25

307.25

318.05

207.35

1620.65409.30

2467.00

424.50

471.45

2169.15

125.65

392.10

660.40

211.50

792.50

2803.90

114.70

70.10

537.10491.20

1292.65

762.15

1006.40

170.65

259.35

103.75

898.65

467.95

77.50

863.95

415.80

94.20

199.65788.30

1733.45

99.20

113.80

506.05

1125.60

181.25

98.85

400.80

383.95

30108850

2220325

1262500

10768000

8117500

1282500

11460000

1749500

16788000

12923000

4289000

10021000

24984000

8972502757000

598625

3006000

18187500

1027500

26636000

14409000

9349000

38076000

15715500

3587750

27380000

36532000

48715004731500

7220750

5220000

3179250

23048000

12708000

9352000

5240750

3130500

27374000

15015250

4950500

24278000

12962000743750

8539125

12040000

26780000

3589000

6251250

51181750

11951500

23843500

3886500

-213.20

-788.40

19.40

5.55

-122.65

-8.55

-11.25

-94.15

5.70

8.85

16.15

-14.25

-28.70

-3.40-17.40

-42.00

-7.60

-14.05

12.80

-10.85

6.65

-28.15

1.40

-108.75

-55.95

-17.55

-6.30

-23.25-17.45

-102.75

-78.85

-125.00

-8.20

-20.55

-0.85

-114.05

-40.95

-0.50

-4.30

-34.50

-1.00

-9.15-63.50

-173.05

-12.35

-10.55

-3.35

11.80

-12.70

-2.70

-66.05

8.50

1205200

374850

-65750

574000

410750

-160750

-736000

437000

4823000

-882000

-283000

909000

3383000

-3000-58000

30875

263000

476875

-84500

-266000

588000

-266500

5558000

1823500

-45000

6170000

416000

110000360500

698750

452500

-64500

6310000

1550000

332000

1187000

205500

1334000

-664500

221000

6674000

100500027750

2075750

2916000

1212000

43000

642500

1662750

-252500

2108500

308000

-4.03

-7.99

1.63

3.56

-10.80

-0.49

-3.50

-14.85

1.43

2.95

5.55

-4.29

-12.16

-0.21-4.08

-1.67

-1.76

-2.89

0.59

-7.95

1.73

-4.09

0.67

-12.07

-1.96

-13.27

-8.25

-4.15-3.43

-7.36

-9.38

-11.05

-4.58

-7.34

-0.81

-11.26

-8.05

-0.64

-0.50

-7.66

-1.05

-4.38-7.45

-9.08

-11.07

-8.48

-0.66

1.06

-6.55

-2.66

-14.15

2.26

4.1

20.3

-4.9

5.6

5.3

-11.1

-6.0

33.3

40.3

-6.3

-6.1

9.9

15.6

-0.3-2.0

5.4

9.5

2.6

-7.6

-0.9

4.2

-2.7

17.0

13.1

-1.2

29.0

1.1

2.38.2

10.7

9.4

-1.9

37.7

13.8

3.6

29.2

7.0

5.1

-4.2

4.6

37.9

8.43.8

32.1

31.9

4.7

1.2

11.4

3.3

-2.0

9.7

8.6

01 Nov'11 15 Nov'11

CHANGE IN PRICE AND OPEN INTEREST OF THE NIFTY 50 COMPANIES

Source: NB Research



fter starting the November expiry on a

bullish note, the Nifty Futures lost around

3% on the back of negative global cues. The

Nifty moved in line with other equitymarkets around the world due to a weak global economic

outlook as the European Union struggles to cope with the

sovereign debt crisis in the weaker European nations.

Back home, the IIP numbers for September are less than

expected at 1.9% compared to 6.2% in the corresponding

period last year. The growth in industrial output touched its

low in September this year as compared to the monthly

growth in the last two years. This decrease in growth is the

cumulative effect of interest rate hikes by the RBI - which

has not been a very effective tool to tame inflation - and the

weak global demand. The weak IIP numbers, sluggishsecond quarter corporate earnings and high inflation rates

paint a gloomy picture of the Indian equity markets.

On the Put Call Ratio (PCR) open interest (OI) front for the

Nifty, the continuous decrease in its value from 1.37 to the

current level of 1.21, suggests an increase in call activity,

which is expected to be dominated by sellers.

The increase in open interest by around 4% and a fall of

more than 2% in the Nifty Futures in the last two sessions

(14th and 15th November) suggest a negative outlook for

the Nifty. This is also supported by a decrease in the NiftyFutures premium, coming down from the level of 30 last

week to the level of 7, currently.

On the Options front, additions in the Call open interest at

the 5,100 level and above suggest that Options traders are

expecting further weakness. But market participants

expect this downward movement to be limited to the 5,000

level as the highest build-up for Put is seen on that strike to

the tune of 11.77 million.

The current trend is cautious and negative as the Nifty is

trading below its long-term moving averages. RSI andMACD, the two key technical oscillators have given a

negative divergence, indicating weakness in the near term.

Currently, the Nifty has corrected almost 7% from its

recent top of 5,399 in a very short time span but a major

sell-off was seen in broader mid-cap stocks, which are

down 20% to 40%. A strong support is seen in the range of

4,925-4,880 on the Nifty and fresh sell-offs can be seen

only below these levels. On the higher side, the level 5,060

A

has to sustain with a positive market breadth for a rally to

emerge. If we hold this level, then the Nifty could rally up

to the 5,200 level for the November expiry.

As far as institutional activity (in cash) is concerned, we

usually notice that at every fall the FIIs are net sellers and

DIIs actively buy in the markets. Now the question that

arises is whether to buy with the FIIs or sell with the DIIs.

Let us analyze this with data from 2010 and 2011 to date.

TECHNICAL OUTLOOK FOR THE FORTNIGHT

FII DII High/Low (Nifty)Year

2011

2010

-17017

60493

21175

-19806

6157/4728

6301/4757

The table shows that FII investments were over `60,000

crore in the year 2010, pulling the markets comfortably

above the level of 6,300. On the contrary, DIIs turned out

to be net sellers of `21,000 crore near the peaks.

But this year (year-to-date), the markets have plunged from

their peaks above the level of 6,000 to the bottom of the

4,700 level. FIIs sold nearly 30% (over `17,000 crore) of

their 2010 investments, whereas DIIs bought over `20,000

crore, which is more than what they had sold last year.

As per month-to-date (November expiry), FIIs have beennet buyers in the cash segment to the tune of `3,415 crore

(as on 15th Nov), whereas DIIs have sold worth `2,653

crore. Now the question is: is this a sign of a bear market?

India VIX, which measures traders’ perception of

immediate risk in the market, has cooled off recently since

last month’s high of 39.02 (as on 4th Oct) to the recent low

of 20.7 (as on 8th Nov). One can expect the VIX to not

breach the recent lows of 20, which is expected to be the

bottom of the new trading range.

STRATEGY

One can initiate a short strangle on the Nifty by selling the

5,100 December Call and the 4,900 December Put,

fetching a premium inflow of over 250 points. The

break-even for this strategy will be the 5,350 level on the

upside and the 4,650 level on the downside. The maximum

the initiator can earn is `12,500 (250*50) if the December

expiry expires between the 4,900 and 5,100 levels. The

loss remains unlimited beyond the break-even rangE.

(` in Crs) (` in Crs)



MUTUAL FUND, FII ACTIVITY AND NIFTY

Source: NB Research

Date MF Net*

01 Nov'11

02 Nov'11

03 Nov'1104 Nov'11

08 Nov'11

09 Nov'11

11 Nov'11

14 Nov'11

15 Nov'11

FII Net *

-393.20

-48.80

150.60199.50

-46.60

-176.60

-240.00

-40.20

--

481.40

33.50

194.1077.90

215.90

503.40

421.70

212.60

215.90

5257.95

5258.45

5265.755284.20

5289.35

5221.05

5168.85

5148.35

5068.50

Nifty

*Net activity in Equ

This graph and data represent the Mutual Fund and FII activity that took place

the last fortnight, whether the Fund Houses were buyers or sellers.

MF Net , FII Net & Nifty

MF FII NIFTY (RHS)

BULK DEALS

Ex Company Client

Price

Date Quantity % of EqTrade

BSE

BSE

BSE

BSE

BSE

BSE

BSE

BSE

BSE

BSE

BSE

BSEBSE

BSE

BSE

BSE

BSE

BSE

BSE

BSE

BSE

BSE

BSE

1 Nov'11

1 Nov'11

1 Nov'11

1 Nov'11

2 Nov'11

3 Nov'11

3 Nov'11

3 Nov'11

3 Nov'11

3 Nov'11

4 Nov'11

4 Nov'118 Nov'11

8 Nov'11

8 Nov'11

8 Nov'11

8 Nov'11

14 Nov'11

14 Nov'11

14 Nov'11

14 Nov'11

14 Nov'11

14 Nov'11

Kirloskar Pneumatic Co Ltd

AIA Engineering Ltd

AIA Engineering Ltd

Pasupati Fincap Ltd

Nu Tek India Ltd

Unimers India Ltd

R Systems International Ltd

VMS Industries Ltd

Krishnadeep Trade & Investments Ltd

Birla Pacific Medspa Ltd

Spectacle Infotek Ltd

Kailash Ficom LtdLGS Global Ltd

LGS Global Ltd

Prakash Woollen Mills Ltd

LGS Global Ltd

Raj Oil Mills Ltd

Rain Commodities Ltd

Rain Commodities Ltd

Infotech Enterprises Ltd

Infotech Enterprises Ltd

BGIL Films & Technologies Ltd

Pasupati Fincap Ltd

PCA Securities Investment Trust Co Ltd

Nalanda India Equity Fund Ltd

Reliance Capital Trustee Co

Pasupati Olefin Ltd

Butterfly Commotrade Pvt Ltd

Choice International Ltd

GE Capital Mauritius Equity Investment

Madhuvan Vincom Pvt Ltd

Hotel Polo Towers Pvt Ltd

Rupak Trading Pvt Ltd

IFCI Financial Services Ltd

Dash Pharmaceuticals Pvt LtdProbus Capital Ltd

Batt.Mar Fin Mgmt

Atoz Steels Pvt Ltd

Batt.Mar Fin Mgmt

Associated Capsules Pvt Ltd

HSBC Bank (Mauritius) Ltd

Oxbow Carbon & Minerals Llc

General Atlantic Service Company

Morgan Stanley Mauritius Company Ltd

Rapid Credit & Holdings Pvt Ltd

Pasupati Olefin Ltd

Buy

Buy

Sell

Sell

Buy

Sell

Sell

Sell

Buy

Sell

Sell

SellSell

Buy

Buy

Buy

Sell

Buy

Sell

Sell

Buy

Sell

Sell

256335

1200000

1200000

50000

3945433

445400

230000

255286

36000

1167818

600000

1125001154821

615909

85100

461928

598973

9250000

9250000

2600000

2600000

148800

50000

2.00

1.27

1.27

1.06

2.55

2.80

1.87

1.55

1.13

1.04

1.17

1.064.54

2.42

2.04

1.82

1.66

2.61

2.61

2.33

2.33

2.32

1.06

Traded

475.00

310.00

310.00

16.65

1.36

10.93

110.00

24.50

167.46

17.90

12.53

31.0990.00

90.00

5.10

90.00

14.09

29.25

29.25

121.00

121.00

5.66

18.95

MAJOR BULK DEALS WHERE OVER 1% OF EQUIT Y WAS TRADED FROM 1st Nov’1 1 TO 15th Nov’11

Bulk deals take place from normal trading windows that brokers provide and can be

any time during trading hours. In a bulk deal, the total traded quantity exceeds 0.5%

of the number of equity shares of a company.

Source: NSE and BSE

4950

5000

5050

5100

5150

5200

5250

5300

5350

-500

-400

-300

-200

-100

0

100

200

300

400

500

600

01 Nov'11

04 Nov'11

11 Nov'11



Scheme Name

Absolute %

(Point to Point)

2 Weeks

NAV

(15th Nov'11)

MoversDSPBR World Gold-Reg(G)

Birla SL CEF-Global Prec Metal-Ret(G)

JPMorgan JF ASEAN Equity Off-shore Fund (G)

Fidelity Global Real Assets Fund (G)

AIG World Gold(G)

Laggards

HSBC Small Cap(G)

Escorts Leading Sectors(G)

Escorts Tax(G)

HSBC Midcap Equity(G)

HDFC Infrastructure(G)

20.8373

14.9743

10.381

12.733

16.772

8.6052

8.8431

36.934

16.207

9.224

5.6562

5.5309

4.8374

4.5402

4.5375

-9.5769

-8.5729

-8.4950

-8.0449

-7.9441

Equity Schemes

MOVERS AND LAGGARDS IN MUTUAL FUND SCHEMES

Debt SchemesMovers

Canara Robeco InDiGo(G)

DWS Gilt Fund-Reg(G)

Religare STP-A(G)

JM G-Sec-Reg(G)

ICICI Pru LT FRF-C(G)

Laggards

Escorts Income Bond(G)

FT India Life Stage FOFs-40(G)

Fidelity Wealth Builder-B(G)

FT India Life Stage FOFs-50(G)

ING OptiMix Income Gth Multi FoF-30%-A(G)

12.0639

11.412

13.9224

31.8538

10.2868

30.0281

23.2982

13.0327

18.9226

12.9926

2.0410

1.4211

0.6659

0.6032

0.5985

-1.5821

-1.0007

-0.9952

-0.7745

-0.7676

Balance SchemesMovers

Peerless MF Child Plan(G)

Reliance Arbitrage Advantage(G)

Axis Triple Advt-Reg(G)

Taurus MIP Advt-Reg(G)

SBI Arbitrage Opportunities(G)

Laggards

Tata Young Citizen [>3Y-7Y]

Tata Young Citizen [After 7Y]

Escorts Balanced(G)

HDFC Prudence(G)

UTI Balanced(G)

10.9869

10.943

11.0225

10.8644

14.195

12.4659

12.4659

53.8855

198.603

73.54

1.0661

0.7300

0.6823

0.5972

0.5418

-17.8589

-17.8589

-5.8418

-4.0741

-3.8441

Source: NB Research



PORTFOLIO REBALANCING

Portfolio rebalancing is an

important tool for eective

risk management and helps

maintain the desired asset

allocation mix

n financial terms, a portfolio

is nothing but a collection of

financial assets like stocks,mutual funds, bonds, fixed

deposits, precious metals like gold,

real estate and even cash, among

other things.

A portfolio is created on the basis of

the risk-taking capacity of an

individual and his financial goals and

objectives and the time frame by

Iwhich he wants to achieve these

financial goals.

Although there is no set rule for a

model for an ideal portfolio, a general

financial planning rule states that the

number arrived at after subtracting

your age from 100 should be your

equity portfolio and the rest should be

invested in debt.

So, if your age is 30 years, then your



equity exposure should be (100-30) =

70% and the remaining 30% should

be invested in debt instruments that

are relatively risk-free.

The premise of this is that when you

are young and in your earning years,

your exposure to riskier assets can bemuch more as even though the

promise of high returns comes with

an equally high risk of capital erosion,

the loss-bearing capacity at a young

age is quite high.

But as you grow older and closer to

the age of retirement, your main focus

at that point in life should be

preservation of capital and a steady

stream of income with much lesser

exposure to riskier assets.

Debt instruments can be further

sub-divided into bank fixed deposits,

company fixed deposits, post office

saving schemes, public provident

funds (PPFs) and even liquid and debt

mutual funds.

Equity instruments can be further

sub-divided into small-cap, mid-cap

and large-cap stocks as well as

diversified mutual funds, sectoralmutual funds and index funds, among

other instruments.

PORTFOLIO REBALANCING

Portfolio rebalancing means

fine-tuning or adjusting your

investment portfolio from time to

time to restore your original asset

allocation and maintain the

risk-return profile.

A portfolio may also be rebalanced if

your financial goals and time

horizons have changed due to the

change in your risk-return profile

because of factors such as age, job

loss, inflation, etc.

To better understand rebalancing let

us consider a simple illustration. Say

you have a portfolio of `1 lakh out of

which 60% of the amount, that is,

`60,000 is in fixed deposits (FDs)

while the remaining 40%, that is,

`40,000 is in equities.

Now at the end of one year, assume

that your equities have had a great runand have increased in value, moving

up to `55,000.

Then, now even though you are in

profit and the initial amount of your

portfolio of `1 lakh has is worth

`1,15,000, the original debt-to-equity

ratio of 60:40 has actually become

52:48 (Debt : Equity).

This means that a much greater

portion of your portfolio is nowinvested in riskier equity assets. This

is a signal for you to rebalance your

portfolio to achieve the original

allocation of 60:40 ratio.

You can rebalance your portfolio in

a number of ways:

a. Liquidate or sell a part of the equity

and invest that money in debt

instruments.

b. Invest fresh amounts into the debt

side of the portfolio.

c. Start a systematic investment plan

(SIP) that focuses more on debt

instruments.

THE ADVANTAGES OF

REBALANCING A PORTFOLIO

1. The main advantage of rebalancing

is instilling disciple and ensuring thatyou don’t allow your risk profile to

deviate significantly from your

original plan.

In other words, it takes the emotional

factor out of investment.

2. By selling a part of the equities

from the investment portfolio that has

increased and investing it into debt,

you ensure that you are booking your

profits, which would otherwise

remain invested in the same asset

class and be under the constant threat

of turning into losses if the stocks

were to reverse.

3. Conversely, if the value of equities

has fallen considerably, rebalancing

the portfolio forces the investor to

buy more equities which will bring

down the original cost of acquisition

of the stock mainly due to averaging

and give much better profit potential

to the investor.

4. Bringing in additional funds to

rebalance your portfolio also helps to

increase the total value of your investment portfolio.

5. Starting an SIP ensures that you

buy more when the value of the asset

is down and buy less when the asset

price is high, thus ensuring that the

overall buying cost comes down

drastically while at the same time

allowing you to accumulate a sizeable

chunk of the asset.

THE APPROACHES TOREBALANCING A PORTFOLIO

1. Rebalancing By Time

Rebalancing of the portfolio by time

involves reviewing your investment

portfolio at predetermined time

frames such as on a monthly,

quarterly or yearly basis. Most people

follow an annual rebalancing regimen

to mitigate taxation issues.

While time rebalancing takes away

the hassle of constant monitoring of

the portfolio, if the time interval is too

long, then there could be a significant

deviation in one or the other asset

class away from your original asset

allocation which will require a

large-scale rejig of the investment

portfolio by you.



2. Rebalancing By Performance

To understand rebalancing of a

portfolio on the basis of the

performance of the portfolio, let us

assume that you were expecting a

maximum return of around 20% on

your equities in a span of one year,and true to your perception your

stocks achieved that target.

Therefore, now you need to rebalance

your investment portfolio by selling

shares that are equal to the additional

returns and invest that amount in

other underperforming assets or other

fixed instruments.

3. Rebalancing By Percentage

Bands

Rebalancing the investment portfolio

by setting percentage bands means

assigning a percentage to each and

every instrument in the portfolio and

rebalancing it once an asset class

deviates or moves out of this preset

percentage band.

Say you have kept a band of +/- 10%

for your equities. If your equity

allocation at present is 40% and over a period of time it becomes 51% or

more on the upside or 29% or less on

the downside, it is an automatic signal

for rebalancing.

You should either sell some stocks or

buy some stocks from the portfolio as

the case may be, to achieve the

original allocation percentile.

We shall now study an important and

complex strategy of portfoliorebalancing commonly known as

Constant Proportion Portfolio

Insurance (CPPI).

CONSTANT PROPORTION

PORTFOLIO INSURANCE

Suppose you are looking at investing

a total amount of `1,00,000 for a

period of say 3 years and the

maximum loss that you can bear

without losing your nerves is

`30,000.

Then, we now have a floor for your

investment which is `1,00,000 -

`30,000 =

`70,000 (floor).

Therefore, you cannot let your

portfolio to fall below `70,000.

Now, let us assume that the maximum

expected decline in equities over 3

years is 40%. Thus, we get an

investment multiplier or “m” of 2.5

(the inverse of expected decline

1/0.40 = 2.5).

The formula for CPPI isEquity investment

= m * (Asset – Floor),

where “m” is the investment

multiplier

= 2.5 x (1,00,000-70,000)

= 2.5 x 30,000

= `75,000

Hence, you should invest `75,000 in

equities and the remaining `25,000

can be invested in debt.

Now, after a period of 1 year, if the

equity portfolio falls by around 10%,

that is, 10% of `75,000 = `7,500.

Hence, now your equity portfolio will

stand at `75,000 - `7,500 = `67,500.

At this point, your debt still stands at

`25,000.

Your total investment will now

become `67,500 + `25,000 =

`92,500.

Applying the previous formula,

Equity Investment

= m * (Asset – Floor),

where “m” is the investment

multiplier

= 2.5 x (92,500-70,000)

= 2.5 x 22,500

= `56,250

So now only `56,250 should be

invested in equities and you should

sell shares worth `11,250 (that is,

`67,500 - `56,250) to rebalance your

investment portfolio.

This is how the CPPI method enables

you to calculate how much equityexposure your investment portfolio

should have according to your

loss-taking capacity.

THINGS TO AVOID

1. Avoid rebalancing your portfolio

on a frequent basis because the

transaction cost and taxes could be

quite high and they could eat into

your returns.

2. Do not over diversify your

portfolio because it will be much

harder to keep track of all your assets

and rebalance them effectively.

3. Do not be greedy and postpone the

decision to rebalance your portfolio

simply because a certain asset class is

fetching good returns. Stick to your

original plan.

4. Do not try to time the markets.That is, do not rebalance a portfolio

just because a few stocks or the

markets are down. Focus on your

allocation percentages.

5. Do not hesitate to seek help from

professionals such as certified

financial planners or portfolio

managers if you are unable to monitor

or rebalance your portfolio actively

either due to lack of knowledge or

lack of time.

It is very important to remember that

without proper rebalancing and

practicing inactivity, your investment

portfolio can either start becoming

extremely risky or extremely

conservative, both of which can be

quite injurious to your long–term

financial healtH.



DATE: 15th Oct, 2011. VENUE: ITC Gardenia, Bengaluru.



Beyond Market Visits Bengaluru

Nirmal Bang Securities Pvt Ltd had organized an investor education camp in association with ET Now at ITC Gardenia

in Bengaluru on 15th Oct ’11.

Veterans from the industry such as Rahul Arora, CEO – Institutional Equities at Nirmal Bang Equities Pvt Ltd; Deven

Sangoi, Head – Equity at Birla Sun Life Insurance and Mitesh Thacker, Technical Analyst addressed the audience with

the aim to impart necessary knowledge to enable them to take informed decisions about the equity markets.

ET Now anchor Niraj Shah introduced the speakers to the gathering and told them how important it is to seek profes-

sional guidance in volatile market conditions such as the one we are facing currently.

Shah said the current scenario is one of uncertainty. The interest rates are high and there is no clear understanding as to

what steps the RBI is going to take in the future. There is uncertainty regarding global macroeconomic cues, which will

impact FII inflows. There is uncertainty regarding earnings too.

However, talking about the positives, he said interest rates may peak-out post-December, which will give the RBI the

much needed leeway to decrease interest rates. He added that there could be a co-ordinated global action, which will be

a huge positive for India.

Niraj Shah said investors must not expect a stock to perform every single month. They should also avoid keeping

extremely short-term horizons. They should be aware of stocks that are available at cheap valuations as this would be an

opportunity for investors to buy stocks at a lower price. Further, he said

they must stick to quality stocks from various companies even if they are

in the same sector. “The key rule is to buy businesses and not just

stocks,” he said.

Reminiscing an incident involving Infosys chairman emeritus N R

Narayana Murthy, Rahul Arora, the first speaker of the day, said whenhe had asked Murthy why he did not go ahead with the deal with Axon,

the founder of the Indian software company had replied that as important

as it is to know what you are going after, it is equally important to know

when to walk away. The corollary of this idea applies to the market

participants too. Arora said, “A similar attitude is needed while investing

in the stock markets.”

Quoting market mavens he said traders and investors should be careful

about who they are taking the advice from. “Many people buy stocks on

expectations, rather than facts. Some buy stocks because their relatives

or friends have bought the same stocks,” elaborated Arora.

He said there are two kinds of forecasters: one who do not know and

others who do not know that they do not know. He quoted Mark Twain

and said, “October, is one of the peculiarly dangerous months to specu-

late in stocks. The others are July, January, September, April, November,

May, March, June, December, August, and February.” According to

Arora, although the share of the cash market is low, there are quality

stocks to buy from.

“People must remember that the stock market, like any other market, is

Rahul Arora

CEO – Institutional Equities, Nirmal

Bang Equities Pvt Ltd

Rahul Arora is CEO – Institutional Equities at Nirmal

Bang Equities Pvt Ltd. Prior to this, he was stocks

editor at Bloomberg UTV for two years. He has over 7

years of experience and expertise in research. At

Nirmal Bang, Rahul is responsible for setting up a

team for institutional sales and research which caters

to domestic as well as foreign institutional clients. His

previous stints include CNBC-TV 18, UBS

Investment Banking and PricewaterhouseCoopers

Industry experts assist market

participants in taking informed

decisions about the equity markets



determined by demand and supply and, hence, they will lose money. One cannot expect the markets to give them

positive returns only. There have been a few hedge fund managers who have been wiped out completely and have

returned to the markets to make a decent amount of money. Equity has given the highest capital appreciation over the

long-term vis-à-vis other asset classes, he said.

According to him, one of the biggest risks that people take is that they invest in news instead of fundamentals. One must

do a little homework over the weekend and read up on companies. They must also look at the management of a

company. In fact, they must look for a company with good management and a good track record.

Arora feels that there are two things that can go wrong in the stock market. Either the business can go wrong or the

promoter can go wrong. If the business goes wrong, it will be a cycle that will turn. But if the promoter goes wrong, one

must exit the stock.

Speaking about global issues, Arora said the US may still not be out of the woods. Europe is a big problem and one

cannot figure the entire extent of the problem. Referring to the bailout package that France and Germany have agreed

upon, he said that bailout is not a solution. As far as India is concerned, it is in tandem with the rest of the world.

Despite this, a host of problems, which he refers to as India’s PIIGS, plague our country, said Arora. Some of them are

political problems, interest rate and inflation, GDP growth and social inequality. As far as the political issues are

concerned, all eyes are on the UP elections in 2012. “I do not expect the government to undertake any major economic

reforms,” he reiterated.

Further, the inflationary phase had started as a supply driven inflation. And constant interest rate hikes is not the

solution. “Now, inflation is cost pushed inflation. The cost of manufacturing a good is still higher than the cost of selling

it,” he reasoned. Moving on to the issue of GDP, Arora said that the country’s GDP has been on a steady decline since

the second quarter of FY ’11. Finally, social inequality is rising at a great pace as the rich are getting richer and the poor

are getting poorer.

Arora expects the Sensex to touch 14,700 points and the Nifty 4,400 points by December this year. He said the downside

risks to earnings persist. However, FY13 may be better for the markets.

He advised traders and investors to consider certain stocks that seem

attractive buys.

The next speaker Deven Sangoi said the only place where the demand

elasticity does not apply is the stock market. “Market participants must

realize that value is what you get and price is what you pay,” he said,

adding that if the prices are low, there is never good news. Finding value

is what differentiates a good investor from a bad one. He cited the

example of Warren Buffet who always bought when people sold.

He said the Indian stock market is a part of the global market and global

turmoil will have a negative impact on prices. This negative impact will

create an opportunity for investors. “The Indian economy has not lost

steam and that the growth story is for real,” said Sangoi.

He further expects wealth to shift from the developed nations to the

emerging markets. “Today, India is not a large export-oriented nation.

We have less than 20% of our GDP coming from exports. The rest is

domestic investment and consumption. The GDP growth is driven by

investment and consumption,” explained Sangoi.

He said central bankers have many tools like cutting interest rates and

increasing money supply, to revive growth. And this is an excellent

opportunity for foreign investors to turn towards India.

Deven Sangoi

Head – Equity, Birla Sun Life Insur-ance

Deven Sangoi is Head – Equity at Birla Sun Life

Insurance and has been with the company since

August ’09. Prior to this, he was associated with

ICICI Prudential AMC as Head of Equity. He has

over 14 years’ experience in the equity markets,

including 9 years in fund management. His

earlier stints include Birla Sunlife AMC and

Alchemy Shares & Stock Brokers Pvt Ltd.



While everyone is talking about negatives like inflation, rupee depreciation, issues of corporate governance and no policy

actions, they must also see the positives, he insisted. The positives include the global fall in commodity prices, which will

bring inflation down. He said the situation in Europe will improve. The government has taken some positive action.

Sangoi expects the markets to deliver in excess of 15% in the long term. “The markets have become cheap and there will be

huge volatility. But in the long term, there will be a boost in prices. Also, the commodity prices will cool off and that food

inflation will also ease due to the recent robust rainfall,” maintained Sangoi. “The Sensex and gold have given similar

returns,” he said.

The last speaker for the day, Mitesh Thacker opined that market participants

must choose and know what they want if they have to make money in the

stock markets. “A person must not be an investor and then pretend to be a

trader by booking early profits, or vice versa,” said Thacker.

He dwelt upon trading with support and resistance levels. He defined support

as the price point or the level where the force of demand is expected to be

stronger than the force of supply. And resistance according to him is the price

point or the level where the force of supply is expected to be stronger than the

force of demand.

A support level guides one in initiating long positions. It helps one in keepinga stop loss in the long exposure. Similarly, resistance guides one to initiate

short positions. He used charts to explain this. He said support and resistance

levels are determined by market participants, which means they should

carefully study the levels and initiate trades.

One way to fix levels is through price consolidation. This is done if price

fluctuates within a range. The other way is through the study of historical

price points of companies. This is done by noting the price of the stock at the

fag-end of a bull or a bearish market. Then there are moving averages and

trend lines, he said.

After the panelists shared their views, the event was thrown open for a round

of questions and answers where the audience got the chance to clear theirdoubts and interact with the expertS.

Mitesh Thacker

Technical Analyst

Mitesh Thacker is a postgraduate in management

with specialization in finance. He has been

tracking the equity markets since 1999. It was his

love of numbers that drew him to the stock

market and made him develop a technical

approach to trading and investing. He is regularly

invited by TV channels and business magazines

to share his views on stocks and indices and

provide market t ips. He has also been a visi ting

faculty with the Bombay Stock Exchange & National Stock Exchange on the subject.

The next Beyond Market camp will be held at Kolkata on 10th Dec ’11.



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Beyond Market - Nov 2011

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Transcript of Beyond Market - Nov 2011