Beyond Market - Issue 65beyondmarket.nirmalbang.com/issue65/Download/magazine.pdf · V-Guard Industries Ltd: Victory March Strong brand building and an effective business model will

CURBING THE

LOAN RUSHThe RBI has come up with norms to curb

the formation of a bubble in the gold loan segment and prevent a repeat of the infamous MFI story

For Pr ivate Circulat ion Volume 1 Issue 65 17th Apr ’12

It’s simplified...Beyond Market 17th Apr ’12 3

DB Corner – Page 5

A Collective VoiceThe fourth annual BRICS summit aimed to shield itself from the aftereffects of the crisis in the Euro zone and boost trade between the member nations – Page 6

Tax Evaders BarredAlthough the government’s intentions regarding the implementation of GAAR are noble, they are bound to cause hardships to genuine tax payers, if the loopholes in the law are not fixed – Page 9

Making Room For ChangeStock exchanges should put in place appropriate mechanisms for tackling conflicts of interest before listing, as per SEBI – Page 12

Curbing The Gold Loan RushThe RBI has come up with norms to curb the formation of a bubble in the gold loan segment and prevent a repeat of the infamous MFI story – Page 16

Putting The House In OrderThe proposals put forth in the budget are expected to pump life into the ailing airline industry – Page 18

Edging ForwardL&T Finance takes in-organic growth route in the mutual fund industry, acquires fidelity investment – Page 20

Steering Through TurbulenceEven as fortunes of shipping companies continue to plummet due to falling demand and rising operational costs, the companies are trying to sail through troubled times – Page 22

Nowhere To Go But UpDespite the drop in sales of new homes, the sharp rise in construction and funding costs will increase costs for builders, preventing the reduction in prices of homes – Page 26

V-Guard Industries Ltd: Victory MarchStrong brand building and an effective business model will enable V-Guard to penetrate into the northern market and thus boost profitability and financials of the company – Page 29

Now, A Debit Card Linked To Your Mutual FundReliance Any Time Money Card combines the benefit of investment along with the convenience of a debit card – Page 33

Natural Choice For Tough TimesSIPs, SWPs and STPs are three important tools that investors can employ to invest in volatile market conditions – Page 36

Technical Outlook For The Fortnight – Page 39

Pillars Of StrengthSolid foundation, pricing power and low or no capex form the foundation on which good businesses rest – Page 40

Lost In TransitionWhen a market is neither witnessing an uptrend or a downtrend, it is most likely to be a sideways market, also known as a directionless or a flat market – Page 44

Volume 1 Issue: 65, 17th Apr ’12

Editor-in-Chief & Publisher: Rakesh BhandariEditor: Tushita NigamSenior Sub-Editor: Kiran V Uchil

Art Director: Sachin KambleJunior Designer: Sagar Padwal

Marketing & Operations:Divya Bhurat, Afsana Tamboli

We, at Beyond Market welcome your views, comments and feedback. Do help us to grow better as per your liking. This is our attempt to reach you better while crossing horizons...

Web: www.nirmalbang.com [email protected] No: 022 - 3926 8047

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

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

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

It’s simplified...Beyond Market 17th Apr ’124

Controlling The Spread Of Yellow Fever

Until some time back, NBFCs and public as well as private sector lenders ruled the roost. These institutions were leaving no stone unturned to lure commoners to gold loans by making them pledge the gold they owned, which was lying idle either in their homes or bank lockers.

Due to aggressive marketing, people began making a bee line to these lenders to seek gold loans. Moreover, those with limited access to financial products like personal loans, started pledging gold in lieu of cash to meet their short- to medium-term liquidity needs. Further since banks have strict prudential norms, people found it easier to approach NBFCs and other lenders to meet their financial needs.

Sensing the likelihood of a bubble formation in the gold loan segment, India’s central bank, the Reserve Bank of India (RBI) stepped in and formulated rules and regulations for NBFCs which they have to adhere to while giving out loans against gold to individuals. The cover story is an account of the new rules and regulations introduced by the RBI to keep the segment under check.

Apart from this, there are articles on the recently held BRICS summit where the main focus was to protect BRICS nations from the aftermath of the crisis in the Euro zone as well as to boost trade among the member nations, the implications of the implementation of General Anti-Avoidance Rules (GAAR), which was raised in the Union Budget this year, the recommendations of the Bimal Jalan committee for norms on the ownership and governance of market infrastructure institutions (MIIs) and the buying out of Fidelity Investments’ Indian arm by L&T Finance.

Among sectors, there is an article on the beleaguered airline industry and what the government is doing to bail the sector out; the shipping industry, which is also facing trouble since a while now and the real estate sector where property prices are showing no signs of cooling off.

The current issue of Beyond Market also introduces Reliance Mutual Fund’s recently launched ‘Any Time Money’ Card in the Beyond Basics section. It is a debit card which is linked to mutual fund schemes of the fund house, thus allowing investors to instantly access their investments.

The Beyond Learning section in this issue features two interesting articles. One of them is on different fundamentals that investors can look at while picking the right stock and the other is on tips to trade in a sideways markeT.

Tushita NigamEditor


The markets are likelyto remain range-bound

and look good on declines.

Disclaimer It is safe to assume that my clients and I may have an investment interest in the stocks/sectors discussed. Investors are required to take an independent decision before investing. Investment in equity is subject to market risk. Our research should not be considered as an advertise-ment or advice, professional or otherwise. The investor is requested to take into consideration all the risk factors including their financial condition, suitability to risk return profile and the like and take professional advice before investing.

Nifty: 5,207.45Sensex: 17,094.51(As on 13th Apr ’12)

he last fortnight saw a flurry of activities in the international markets. While sovereign bond

yields rose significantly in Europe, indicating that the crisis in the Euro zone is far from over; the US economy showed signs of flattening and stagnation in growth.

The domestic markets were no different during the fortnight gone by.

The IIP (Index of Industrial Production) data for the month of February has been lower than expected. The IIP number stood at 4.1% as against the expected figure of 6.7%. It is much lower than January’s data of 6.8%.

The earnings season began with the release of the quarterly earnings result of IT bellwether Infosys, which were, however, weak. This could reflect poorly on the upcoming results of other IT companies.

Industry experts are keeping their fingers crossed over the corporate results, which they are expecting to be rather subdued.

T On the other hand, crude oil prices saw a marginal correction in the previous fortnight, which may prove to be good for the Indian economy as many are expecting prices to come down further.

The markets are likely to remain range-bound and look good on declines. The Nifty has support at the 5,150 level and upper-side resistance at the 5,520 level.

Market participants can consider stocks like Dena Bank (LTP: `96.45), Yes Bank Ltd (LTP: `363.10), Tata Motors Ltd (LTP: `289), Tata Motors-DVR-A-Ordy (LTP: `159.65), Reliance Power Ltd (LTP: `114.70), Aditya Birla Nuvo Ltd (LTP: `958), Atlas Cycles (Haryana) Ltd (LTP: `351.15), MRF Ltd (LTP: `10,660.10), Vivimed Labs Ltd (LTP: `419.70), Bajaj Finance Ltd (LTP: `879.55) for investment as well as trading purposes.

The monetary policy review by the RBI will be the key event to look out for in the coming fortnight. The street is expecting the RBI to reduce CRR and slash interest rates. If this

happens, then it will be a positive for the markets. If not, then a correction seems likelY.

ACOLLECTIVE

VOICEThe fourth annual BRICS summit aimed to shield itself

from the aftereffects of the crisis in the Euro zone and boost trade between the member nations

he recent summit of BRICS - an acronym that refers to the emerging economies of Brazil, Russia, India,

China and South Africa, began on an empathetic note and promised a plethora of well-meaning measures. These measures when implemented

T with the earnestness and faith in which they were announced can pave the way for holistic and comprehensive growth of these member nations.

This year’s theme was: Stability, Security and Growth. It captures the

common wave of motives and goals of people in these nations. These goals include significant change in the governance of these nations for the greater good of the people. And this change would encompass political and economic aspects of the common man also. This message



sheds light on the rising discontent among people in these nations over the way their respective economies are functioning.

Consider the Indian economy at present. From a growth rate of close to 7% demonstrated in the past, the country’s growth is now estimated to be close to 6.1%. An array of factors have contributed to such pessimistic growth estimations.

Although a variety of reasons can be enumerated, the chief reason is the lack of political stability. Hence, the forum for BRICS nations discussed some recommendations to address certain common problems that ail their economies.

This article endeavours to provide key points and recommendations that were discussed at the forum of BRICS nations.

The summit touched upon various issues at hand: funding of projects, currencies and providing and creating a congenial environment for smooth trade among the five countries.

The first summit included only four nations - namely Brazil, Russia, India and China. These nations met on 16th Jun ’09 at Yekaterinburg in Russia. The meeting began with a series of high-level discussions about how to understand each other in a better and a comprehensive way.

The meeting also focused on ways and means to improve the global economic situation and reforming financial institutions.

Keeping the mentioned factors in mind, the meeting also discussed about how the four countries could co-operate better and how each country can be meaningfully involved in global affairs. The Yekaterinburg summit spelt out the need for a new

global reserve currency, that would be ‘diversifiable, stable and predictable’.

In December ’10, South Africa became a member of BRIC nations and the acronym changed to BRICS representing Brazil, Russia, India, China, and South Africa. Two BRIC summits were held in 2009 and 2010. The first five-member BRICS summit was held in 2011. The recent summit took place in India on 29th Mar ’12

BANKING ON EACH OTHER

One of the biggest agendas of the summit was the creation of a new development bank. This idea was put forth by India.

The reason discussed for the setting up of a new development bank representing all five countries is to increase its influence in global decision-making.

Various political dignitaries and experts present at the summit discussed the need for a new development bank in the following context: funding development and infrastructure projects in developing and less-developed countries, lending for the long term in times of global financial crises such as the Eurozone crisis and issuing convertible debt, which could be bought by central banks of all member states and, hence act as a vessel for risk-sharing.

It was discussed that the BRICS bank would not require substantial amount of capital for its establishment. The bank would also come handy in addressing funding issues of regional development projects, which would in essence improve efficiency and transparency in the system. It is also likely to serve as a powerful financial tool to improve trade opportunities among the five countries.

The discussion also brought to the

fore an important point that the proposed bank must not be considered as a step that would negate or belittle the existence of global financial institutions. It was discussed that the bank should be considered as a trigger born out of the present economic necessities.

CURRENCY

The summit also touched upon the currency aspect in respect of the relationship among the countries. The member countries signed the Master Agreement on Extending Credit Facility in Local Currency and the Multilateral Letter of Credit Confirmation Facility Agreement to replace the United States dollar as the main currency of trade among them.

It was pointed out that tightening of trading or business deals among the five countries would serve as a solution for the debt crisis like the one in Europe.

A few political leaders also pointed out to the fact that it is important that countries stop accumulating risks. This will ensure that trading and making money will be carried out within a tight framework.

Take for instance India’s banking system. As opposed to the United States, which fell prey to the sub-prime crisis due to opaque transactions between banks and its customers, India’s banking system provides less room for any default.

To avoid this, political leaders said countries should work closely with each other to adopt newer and effective ways of minimizing glitches in the system. The summit also discussed about the decline in demand in the European markets.

Amidst all these issues, members of the five countries agreed to float a


benchmark equity index derivative that would allow investors in one country to trade on the performance of the stock markets in the other four countries without risk of currency.

The members discussed about the cross-listing of indices in the stock exchanges of the five nations.

A LOOK BEYOND HOME: VARIOUS INITIATIVES The two giants of Asia - India and China through the summit launched ‘India-China Friendship and Cooperation.’ Various political dignitaries stressed on smooth bilateral ties and spelt out a five-point proposal to improve strategic ties between the two countries.

A Chinese leader pointed out that China hopes to work with India to seize development opportunities, step up development, jointly respond to challenges and make greater contribution to peace and prosperity in Asia and beyond.

The leaders agreed to initiate dialogue over issues in West Asia, Central Asia and Africa. They discussed border disputes for maintaining peace and stability. For business, the leaders discussed about facilitating exports and investments in manufacturing and infrastructure sectors.

Also the five countries stressed on the need for the international community to maintain development projects in Afghanistan for 10 years.

The panel of members condemned the Western world’s pressure tactics on Iran to make other countries adhere to their restrictions on trade ties and said dialogue alone could resolve the nuclear issues. The group added that the 2011-12 Syrian uprising could only be resolved through dialogue.

The panel also expressed concern over military intervention in Syria by the West or by Israel in Iran. It was mentioned that a war against Iran would have “disastrous consequences” especially concerning

the world economy. The panel expressed concerns over Iran becoming an issue that needs to be addressed as soon as possible within the purview of the United Nations resolution.

Though these recommendations and growth-enhancing measures are well-meaning, their implementation and adherence to good faith would be crucial in its longevity.

Experts are of the opinion that forming a common currency might entail the risks involved in the Euro zone crisis in which one country’s burden becomes the responsibility of other countries.

However, there are other countries who believe that a common currency representing the developing economies signals the rise of a powerful clout in the international markets. All in all a significant amount of trading and business materialized during the summiT.

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

analysis, where we focus on the smallest of details and turn them into

an advantage for you.

Over the years, the analytical approach coupled with decades of

experience has helped us maximize returns for our investors and

thereby inspire con�dence in them.

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

REGD. OFFICE: Sonawala Building, 25 Bank Street, Fort, Mumbai - 400 001. Tel: 022 - 39267500 / 7501; Fax: 022 - 39267510 CORPORATE OFFICE: B-2, 301/302, Marathon Innova, O� Ganpatrao Kadam Marg, Lower Parel (W), Mumbai - 400 013. Tel: 022 - 39268000 / 8001; Fax: 022 - 39268010BSE SEBI REGN No. INB011072759, INF011072759 & INE011072759, NSE SEBI REGN No. INB230939139, INF230939139 & INE230939139 DP SEBI REGN. No NSDL: IN-DP-NSDL-136-2000, CDS(I)l: IN-DP-CDSL-37-99, AMFI REGN. No. arn-49454 NCDEX REGN. NO. 00362, FMC Code-0075, MCX REGN. No. 16590, FMC Code-MCX/TCM/CORP/0490, MCX SX-INE260939139, PMS-INP000002981

Disclaimer: Insurance is a subject matter of solicitation. Mutual Fund investments are subject to market risk. Please read the scheme related document carefully before investing. Please read the Do’s and Don’ts prescribed by Commodity Exchange before trading. The PMS Service is not o�ering for commodity segment. *Through Nirmal Bang Securities Pvt. Ltd. ^Distributors #Prepared by Research Analyst of Nirmal Bang Commodities Pvt. Ltd.

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

ax planning or tax avoidance is the question that a recently proposed tax law called GAAR or

General Anti-Avoidance Rules seems to be asking. GAAR which found a mention in this year’s Union Budget along with the ‘retrospective’ clause, proposes to empower tax authorities to intervene in cases where they think the primary motive of the transaction was to avoid taxes.

Aggressive tax planning, though legal, has led to tax mitigation, hurting the tax base of the government and posing serious threat in the form of vicious round tripping of black money.

While this seems to be the reason behind the introduction of the new law, lack of a clear road map and its ambit is forcing people to interpret it in different ways.

Even the stock markets behaved jitterily. They expected a sell-off as it was feared that P-notes -instruments that help foreign investors to preserve their anonymity on choice or are incapable to register due to regulatory hurdles - will have a non favourable tax treatment in the proposed rule.

However, Finance Minister Pranab Mukherjee’s statement that it has no

T

TaxEvadersBarred

TaxEvadersBarred

Although the

government’s

intentions regarding

the implementation of

GAAR are noble, they

are bound to cause

hardships to genuine

tax payers, if the

loopholes in the law

are not fixed



intention to tax P-note holders, lent some clarity and helped reduce the volatility in the stock markets.

In the Indian context, GAAR first appeared in the draft direct tax code (DTC). While DTC in totality has been put on the back burner by the government, GAAR was included as a part of the Finance Bill, 2012 and is now being tabled in front of the parliament for its approval.

GAAR is a very important amendment to the Income-tax Act of 1961 with a wide felt implication. It will change the way foreign players invest in India. Vehicles for mergers and acquisitions will also alter. Quantity and quality of money flowing from different geographies is also likely to see a change, post the implementation of GAAR.

While news reports flow every single day, a clarification from the finance minister on the scope of the new law is awaited. The controversial clause of ‘retrospective’ amendment, which will bring all the earlier transactions open for scrutiny, seeks clarification. This article focuses on the need for this proposed law and the implications of the same.

NEED FOR GAAR

While advocating the need for the introduction of GAAR, Pranab Mukherjee told the Parliament: “This House gave me the mandate in the debate on black money to not only bring back black money stashed outside, but also take steps to prevent the generation of black money. GAAR is one such path.

“What we are saying is that sometimes we see investments coming from ‘no tax’, ‘zero tax’ or ‘tax haven’ countries and I do not mind if these investments come from prospective investors who have their

regular business.

“But when I find that there is no establishment or office and somebody is making huge investments and getting concessions on the capital gains tax, and that the address is of a chartered accountant or a tax advisor or a tax consultant, should I not prevent it?” he asked.

With increasing globalization of economies and growth in cross border transactions, corporates along with their advisors - lawyers and tax consultants - have been very innovative in dealing with tax affairs. They have been avoiding taxes under the garb of tax treaties that the Indian government has signed with the tax havens abroad.

The modus operandi is quite simple. Open an office in countries like Mauritius or Singapore with whom the Indian government has inked the double taxation avoidance agreement (DTAA). Due to this agreement between the tax havens, any income arising from the sale of assets in India will be taxed only once - either in India or in the corresponding country.

However, these tax havens have a zero tax structure. Hence, the transaction gets cleared without paying any taxes. The establishments set up in Mauritius or Singapore are post-box offices set up only to take advantage of the tax treaty. They do not have a regular business. There are no employees and the office exists only in form and not in substance. Sometimes the address mentioned in the form is that of a lawyer or at times a tax consultant.

In order to avoid the proliferation of such table-and-phone offices, the Indian government has asked the respective tax havens to issue tax residency certificates (TRCs) for the purpose of authentication.

But it is not performed in full spirit in some nations which leave the scope for further doubts about the quality of money flowing in from those regions and the casualty is the tax base for the Indian government.

The law allows minimizing tax obligation by ‘tax planning’, which is legal. However, in the process, entities completely end up paying no tax, thus hurting the revenue of the state by taking advantage of the loopholes in the tax treaty. The Vodafone case in which the government lost a sizable sum of money as tax is a classic example and was the last straw, which forced the government to seriously think about such tax-avoidance transactions.

Hence, there is a need for the law. GAAR is a concept in line with the global trend, which generally empowers revenue authorities in a country to deny tax benefits of transactions or arrangements, which do not have any commercial substance or consideration other than achieving tax benefit.

Internationally, Australia has adopted GAAR since 1981, while China adopted it in 2008. Mature economies like Canada, New Zealand, Germany, France and South Africa have also introduced GAAR.

NITTY-GRITTIES OF GAAR IN INDIA

In India GAAR will be discussed in the Parliament and is likely to be applicable only from May this year. The exact form depends upon the details put up in black and white in the respective sections of the Income-tax Act. There are various checklists to invoke GAAR. It can be invoked if the main purpose of an arrangement is to obtain a tax benefit and one of the


other conditions is satisfied - these are creation of rights or obligations which would not usually be created between independent third parties where whole or part of the arrangement lacks or is considered to be lacking commercial substance, misuse or abuse of the Indian tax laws or is not for bona fide purpose.

In order to safeguard the taxpayer from arbitrary invocation of the GAAR provisions, the tax officer will have to seek approval from the Commissioner of Income Tax (CIT) as well as Approval Panel, consisting of three CITs.

GAAR provision also overrides the tax treaties. Hence, transaction from tax havens which were tax-free or were marginally-taxed earlier will now come under the tax ambit. IMPLICATIONS

It is a common practice for foreign investors to invest in Indian companies through complicated

structures of a holding company based in Cayman Islands or Mauritius for both tax evasion and business purposes. Even private equity investors use special purpose vehicles (SPV) set up in tax havens to invest in an Indian company. This will now witness a change, going forward.

GAAR will see FII and FDI money coming to India through Mauritius or other tax havens falling under the tax ambit. We might see some short-term hiccups in the form of a slowdown in FII and FDI flows.

But if GAAR is practiced in the true sense of the term, it can be a winner in the long term. In fact, higher tax revenue will help fill the large fiscal deficit that India is facing, further improving the fundamentals.

If the purpose to invest in India is beyond saving taxes and sham transactions, no foreign player will miss an opportunity due to tax considerations, considering that GAAR is an international practice.

Based on the facts of the transaction, GAAR can be invoked to prove that the transaction is a sham or to avoid taxes. For example, if a structure is used for circular trading or round tripping or to pay bribes, then such a transaction, will be taken to task.

On the flip side, if GAAR becomes a law, it is going to open doors for hordes of litigations for the tax department. As the rule gives sweeping powers to the tax authority to look through the substance of the transaction, they can disregard any transaction whose primary motive is to save tax, thus giving rise to confrontations with the revenue department. This might hurt genuine transactions and genuine tax payers.

While one can’t deny the need of having an anti-avoidance law in India, the government must, however, ensure that the enforcement of the law is smooth and that it does not cause undue hardship to the tax payer. In addition to this, genuine tax-planning should not be challengeD.

w w w.nirmalbang.com

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

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

Disclaimer: Insurance is a subject matter of solicitation. Mutual Fund investments are subject to market risk. Please read the scheme related document carefully before investing. Please read the Do’s and Don’ts prescribed by Commodity Exchange before trading. The PMS Service is not o�ering for commodity segment. *Through Nirmal Bang Securities Pvt. Ltd. ^Distributors #Prepared by Research Analyst of Nirmal Bang Commodities Pvt. Ltd.

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

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

lacks the necessary skills to trade successfully. At Nirmal Bang, our team of

seasoned analysts with years of experience and in-depth knowledge can help

you spot the underlying clues and create the investment strategies that best

suit your commodity trading requirements.

MAKING ROOM FOR

CHANGEStock exchanges

should put in place appropriate

mechanisms for tackling conflicts of interest before

listing, as per SEBI



frame of 10 years to achieve this amount of net worth. Net worth for clearing corporations and depositories is stipulated at `300 crore and `100 crore, respectively.

Analysis

With these criteria, the SEBI wants to ensure that only serious players get into the space. It would be difficult for smaller exchanges to come up with such huge net worth in a limited time frame. Hence, this move would lead to the compulsory closure or de-recognition of small exchanges like regional exchanges.

Also, the higher net worth requirement of clearing corporation clearly shows that the SEBI is concerned about the risk that a clearing corporation holds, thus avoiding any systemic risk.

OWNERSHIP

The SEBI has accepted most recommendations made by the Jalan Committee on the ownership of MIIs. The SEBI has stipulated that no individual investor will hold more than 5% stake in the stock exchange.

A stock exchange, depository, bank, insurance company or any other public financial institution can buy up to 15% stake in the stock exchange. At any given time, the public should hold a 51% stake in the exchange.

For a clearing corporation, a stock exchange should have at least 51% stake and in case the stock exchange has interest in any other clearing corporation, then the stock exchange has to limit the holding in the first clearing corporation at 51% and other clearing corporation at 15%.

The limit prescribed for individual shareholders is 5% and for banks and public financial institutions it is 15%.

The time frame given to achieve the targeted ownership structure is 3 years from the time the clearing corporation starts operations.

In case of depositories, a minimum stake of 51% will be allowed to be held by sponsors and no other entities will be allowed to hold more than 5% in the depository. A single stock exchange will, however, not hold more than 24% in the depository.

While considering the ownership of a MII, the SEBI has also asked to include any off balance sheet items if any and instruments like warrants and other equity linked instruments while calculating the ownership.

“If any shareholder has exposure more than the prescribed limit of share holding, such exposure shall have to be reduced to the permissible limit within a period, which may extend up to three years from the date of getting approval from SEBI,” said the regulator.

Analysis

The Bimal Jalan Committee had recommended the concept of an anchor investor which could be a domestic institution and could hold up to 24% in the stock exchange, a concept very similar to anchor investors in public issues.

The Committee had also suggested that the prescribed ownership should be applicable from the beginning of the operation of market infrastructure institutions. However, the SEBI ignored this suggestion and set a time frame of 3 years to achieve the necessary ownership pattern.

This is good for new exchanges, as they could start with a concentrated ownership pattern and then trim it down over the period to the prescribed levels.

he Securities and Exchange Board of India (SEBI) came out with two key guidelines recently.

The market regulator formulated norms on the ownership and governance of market infrastructure institutions (MIIs) like stock exchanges, depositories and clearing corporations and the process of exit of non-functional stock exchanges.

MARKET INFRASTRUCTURE INSTITUTIONS (MIIs)

After months of deliberations, SEBI accepted the recommendations made by the Bimal Jalan Committee. The Committee was set up under former RBI Governor Bimal Jalan in February ’10 to review the ownership and governance norms in market infrastructure institutions.

The Committee’s recommendations created strong divergent views among stakeholders. While the exchanges were against the Committee’s view that exchanges be barred from listing, there was difference of opinion on segregation of regulatory and commercial roles.

After months of deliberations, SEBI accepted the recommendations, albeit partly. It also rejected some of them right away and went ahead with measures like allowing listing of stock exchanges and depositories, however, with some riders.

Let us take a look at the various criteria set up by SEBI for MIIs on various fronts.

NET WORTH

SEBI has prescribed a minimum net worth of `100 crore for stock exchanges. The existing stock exchanges will be given three years to abide by this norm. The Bimal Jalan Committee had suggested a time

T


GOVERNANCE & REGULATIONS

This is an area where the SEBI has been the strictest. It has mandated stock exchanges to set up a conflict resolution committee (CRC) with majority external and independent members. All independent committees will have a majority of independent directors and will be headed by one of them.

The SEBI has also prescribed that the board of stock exchanges and clearing corporation will not have any trading member or clearing member representative. However, to benefit from their experience, they may have some presence in the advisory committee of the exchange.

An expert committee will be set up by the market regulator to examine the viability of introducing a single clearing corporation or interoperability between different clearing corporations.

The SEBI has further said that the long-term goal would, however, be to set up an independent self regulatory organization (SRO) at an appropriate time in the future so that the MII itself will become the primary regulator and the SEBI would then act as a secondary regulator.

The SEBI has also extended its ambit on the employment of key human resource in MIIs. “Appointment of all directors to the board of stock exchanges/clearing corporation will be subject to approval by the SEBI. Appointment of MD/CEO of the depository will also be subject to approval by SEBI,” it added.

Also, the compensation structure for key management personnel is to be based on the principles of sound compensation practices issued by international fora like Financial Stability Board (FSB).

Moreover, the variable pay component will not exceed one-third of the total pay. Of the variable pay, 50% will be paid on a deferred basis after three years. Employee stock options and other equity-linked options in the MII will not form a part of the compensation for the identified key management personnel.

The remuneration to key management personnel will be approved by SEBI. ”Also, the terms and conditions of the remuneration shall not be changed without the approval of SEBI,” said the regulator.

Other measures that the SEBI has undertaken on the governance side is that the representation of public interest directors on the board of the stock exchange will be 50% and will be two-third of the board strength of the clearing corporation. The rest of the board will constitute of shareholder directors.

By initiating these measures, the SEBI has tried to differentiate between the regulatory and commercial functions of MIIs and has given autonomy to the regulatory department to avoid any kind of conflict of interest.

Analysis

The above measures primarily reflect SEBI’s concern that the exchanges’ drive to increase profitability could compromise their regulatory role.

With the changes prescribed on employment, SEBI wants to curb incentives that result in excessive risk-taking in the short term.

However, the argument put forth by the SEBI has not gone down well with the industry. They feel that the SEBI is micro-managing the whole affair of the MII. And with riders on the compensation package, it would be

difficult to attract talent to the MII.

No representation on the board by broker members of the stock exchange has also led to protests from various quarters. Broker members or clearing members have been an integral part of the board since the inception of the BSE and sidelining them has not gone down well with the broker community.

PROFITS

Capping profits of MIIs as suggested by the Committee was the most controversial suggestion. The logic was that since stock exchanges were public entities, profit maximization should not be their motto. Profits should be capped and linked to a 10-year government bond, in addition to a risk premium.

Though the SEBI has ignored this suggestion, it has come up with an equally controversial rule. In order to bolster the risk management capacity of the clearing corporation, the stock exchanges will be mandated to transfer 25% of their profits to the Settlement Guarantee Fund (SGF) of the clearing corporation where its trades are settled.

In case of a depository, 25% of the total profits earned will be transferred to the Investor Protection Fund (IPF) of the depositories.

Also, the non-core activities of market infrastructure institutions will have to be segregated to a separate legal entity and when a related business of an MII delivers a service to another MII it will provide equal and fair access to all.

Hence, a depository or clearing corporation cannot prefer the trades made on the exchange that owns a majority stake in it, as has been the case currently.


Analysis

Transferring a quarter of profits to the SGF will make MIIs no more investor-friendly. No investor would like to park the profits for future contingencies. Even valuations are unlikely to be attractive for these market institutions.

LISTING

Listing was the most contentious issue in the Bimal Jalan Committee report as it was against the listing of stock exchanges. It had pointed out that stock exchanges are public utilities and the regulatory and commercial functions of the exchanges need not be separated (at least for now).

The report also pointed out that exchanges need only long-term investors and listed exchanges will lose credibility if the price of the stock fell sharply adding that self listing would give rise to conflict of interest at some point.

However, the SEBI gave a miss to this recommendation and cleared the decks for listing of stock exchanges and depository, but did not pave way for corporations considering its risk- bearing capacity.

The SEBI has stuck to the core of the committee report, which was that the business function and regulatory function of the MII should not overlap at any point.

To tackle this issue the SEBI has said, “The stock exchanges may be permitted to list when they put in place appropriate mechanisms for tackling conflicts of interest.”

The stock exchange will not be allowed to list on itself and no stock exchange shall be permitted to list within three years from the date of approval by the SEBI.

Analysis

Providing an exit route to shareholders would enable exchanges to raise funds for investing for the purpose of technology upgradation and investor education, thereby contributing to the development of the country’s equity markets.

While decks have been cleared for listing and existing investors would get an exit via listing, the valuations are unlikely to be attractive. With over-regulation and micro- management, it is unlikely that maximizing of revenue and profits, which should be the sole motto of a business, would be adhered to.

Hence, if anyone is expecting that the BSE would gate crash for listing, that person would he dejected as valuations would not tempt existing investors to exit.

PROCESS FOR EXIT OF NON- OPERATIONAL EXCHANGES

There was no clear rule until now

about exits of a non-operational exchange. A stock exchange without any trading platform of its own or where annual trading is less than `1,000 crore has been picked by SEBI as potential exchanges that may opt for voluntary de-recognition.

The SEBI goes on to say that if the stock exchange is not able to achieve a turnover of `1,000 crore on continuous basis or does not apply for voluntary de-recognition and exits within a period of two years from the date of notification, then the regulator shall proceed with compulsory de-recognition and exit of such a stock exchange.

With regards to the treatment of assets of the de-recognised stock exchanges, the SEBI board has decided that stock exchanges may be permitted to exit, subject to certain conditions such as payment of statutory dues to SEBI/government contribution of certain percentage of assets of the exchange towards investor protection and education fund, etc.

Analysis

The logic behind this move is that most regional exchanges have become dormant and many are looking to sell their physical assets. However, exchanges with an aim to stick on to the exchange business would boost mergers among regional stock exchanges to avoid compulsory de-recognitioN.

regular investments keep worries away

an apple a day keeps the doctor away

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

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

CURBING THE

LOAN RUSHThe RBI has come up with norms to curb

the formation of a bubble in the gold loan segment and prevent a repeat of the infamous MFI story

f you were banking on your gold jewellery to get a loan, be prepared to pledge more gold to obtain that loan. In order to

curb the rampant growth of gold loans that had become a norm over the past year or so, the Reserve Bank of India recently told Non Banking Financial

I Companies (NBFCs) to give a loan of 60% of the value of gold (technically called the loan to value ratio) that is presented to the loan seeker.

GETTING REALISTIC

This essentially means that if the

value of gold that you are pledging is `10,000, you will get a loan of `6,000 on it. Earlier, NBFCs used to lend 90% to 95% of the value of gold that was being pledged. RBI data shows that banks and NBFCs together were doling out as many as 1,20,000 new gold loans in a day.



The RBI has also barred such NBFCs from giving out advances against gold or gold coins. NBFCs whose gold loans comprise more than 50% of their assets, should mandatorily maintain Tier II capital of 12% as stipulated by the RBI. NBFCs have been given a deadline of April ’14 to comply with this norm. Also, in order to encourage transparency and to keep a tab on their operations, the RBI has now mandated NBFCs to disclose the percentage of gold loans to their total financial assets.

HOW IT ALL STARTED

Indians’ love for gold is legendary to say the least. Ballpark figures suggest that Indians privately own 18,000 tonnes of gold in physical form. Looking at this great untapped opportunity, a couple of NBFCs jumped into the fray and started doling out gold loans to retail investors. Not to be outdone, banks too joined the bandwagon soon after. The result? The gold loan business grew in leaps and bounds over the last few years especially when the financial markets were in a turmoil.

Traditionally, people turn to gold as a safe haven when the markets are uncertain. Moreover, as 2011 was a particularly bad year following the start of the debt crisis in the Euro Zone, the value of gold appreciated manifold. With borrowers realizing that they could get more money by pledging the same amount of gold, the business of gold loans rose swiftly. In 2011, gold loans worth `80,000 crore were given out to consumers. The business of gold loans was growing at an average rate of 70% for NBFCs and 35% for banks.

What was particularly alarming was the rise of Mannapuram Finance and Muthoot Finance. These two NBFCs had grown like the proverbial beanstalk and had registered a growth

of 170% and 96%, respectively. It was not long before that the credit rating agencies had started sounding off the alarm bells.

VULNERABLE NBFCs

Credit rating agency, ICRA in a report on gold loans, stated that if gold prices were to fall in 2012, by anything close to the margin that they had risen in 2011, there would be a significant systemic risk in the financial system. This is because NBFCs themselves are huge borrowers and, therefore, susceptible to much larger risks than banks. Also, with the RBI having said in the year 2010 that NBFCs will no longer be considered as priority sector lending, banks had already pruned their exposure to NBFCs.

But this did not have an impact on NBFCs giving out gold loans. Making the most of the sorry state of the microfinance industry, the NBFCs were having a dream run. And with borrowers opting for more gold loans in times of crisis, the average ticket size of gold loans was being pushed higher by lenders such as Muthoot and Mannapuram.

While there is no harm in growing the business, what RBI is worried about is the possible downside if the prices of gold start falling suddenly. Although worldwide bullion analysts are reassuring that gold as of now is the only safe haven that investors can turn to, short-term blips cannot be prevented if investors choose to sell some gold to book profits . If such a thing does happen, gold prices will drop and gold loans in India will be impacted negatively. This is because gold loans are short-term (with tenure of three to six months). Short-term loans have higher risk as compared to long-term loans as people start defaulting on short-term loans first when crisis strikes.

A BUBBLE IN THE MAKING

There are several other reasons that the RBI may have considered before proactively curbing down the business of gold loans. Firstly, bearing an uncanny resemblance to the MFI story, the gold loan story is way too concentrated in the southern part of India. Though nothing like MFIs is likely to happen in the gold loan industry, the idea of concentration in one geographic location is a cause of concern.

Secondly, the competition in the gold loan space was getting intense. When gold lenders started out, they were essentially competing with money lenders. As a result, interest rates were high and margins were lucrative. Looking at the almost instant formula for success, anybody who had a footprint in the financial domain wanted to get into gold loans.

But this kind of heady growth would have ultimately spelt doom for the industry. Excess competition would thin down margins and increase risks for lenders. This is especially true for private companies such as Muthoot and Mannapuram who had to borrow from the market at a higher cost in an attempt to fund their loan books. Muthoot Finance recently raised a non convertible debenture at 12.25%.

The RBI clearly does not want a repeat of the MFI fiasco that took place in Andhra Pradesh, and, hence, is taking proactive measures to put an end to the giddy pace of growth in the gold loans segment.

The fact that it has hit the nail on the head is evident. The stocks of both Muthoot and Mannapuram are taking a beating on the bourses. Though the outlook on gold remains bullish for the long-term, this sure seems to be an attempt on part of the RBI to stomp out a bubble in the makinG.

The proposals put forth in the budget are expectedto pump life into the ailing airline industry

he Indian airline industry is going through interesting times. While on the one hand, there are few

proposals that have the potency to enhance the operational performance of the airline companies, on the other hand there are critical obstacles, which continue to cast shadows on the fortunes of the industry.

Finance Minister, Pranab Mukherjee in the Union Budget 2012 announced two crucial proposals for the airline industry. First, he proposed to allow external commercial borrowing (ECB) for working capital requirement for the airline industry for a period of one year subject to a

T ceiling of $1 billion. Second, he proposed direct import of aviation turbine fuel (ATF).

Let us find out if these measures would prove as strong bricks through which airline companies would build bulwarks against obstacles of high crude oil prices and interest burden.

SITUATION AT PRESENT

Currently, airline companies are besieged with massive problems that have a direct effect on their operational performances. A large number of them are finding it difficult to raise funds for working capital needs. This is one of the reasons why

auditors of these companies have raised concerns over their abilities to remain a ‘going concern.’

Jet Airways (India) Ltd, the largest player in the market, has been struggling with funds to comply with its working capital needs. The company, at present, has a working capital debt of `2,000 crore and would need an additional `500 crore for 2012-13. But its strong international operations compensate for the low growth in the domestic travellers front. In addition to this, the company’s hybrid business model of promoting a low-cost carrier in times of a slowdown and banking on its premium services in times of high

Putting The House In Order



growth in number of passengers travelled domestically is benefitting the company.

On the other hand, things have been worse for Kingfisher Airlines. At present, the airline company is operating only 16 aircraft and as many as 49 aircraft have been grounded, clearly showing that the airline has reached the lowest point in its operations.

Even the recent conversion of Optionally Convertible Debentures (OCDs) into equity is unlikely to provide respite to this ill-managed airline company given its struggle to secure funds for its working capital needs and to pay off fixed expenses. The conversion of OCDs worth `700 crore, having an interest rate of 8% would help the company to save a meagre `56 crore per year as opposed to its mammoth interest expense of `1,342 crore as of FY11.

This conversion of OCDs when seen in the light of its crippling operations assumes little significance for shareholders. Now the company is in dire need of working capital of `300 crore, which it plans to secure from banks. The amount is besides the working capital it worked out after the massive debt restructuring in the last few months. This implies that the debt recast hardly served its purpose. After the debt recast, Kingfisher Airlines extended a part of its working capital loan, funds needed for daily operations. The company achieved this by converting around `297.40 crore into a term loan out of the total `590 crore of the working capital loan amount.

In addition to this, the amount of dues that the company is liable to pay is also a matter of grave concern. These are in the form of salaries to employees, lease rentals even when the aircraft is not flying and charges

to airport authorities. These two immediate fixed expenses itself amount to a huge sum, putting the company in a tight financial position.

Further, due to frequent cancellation of flights, which has robbed travel operators of commissions, the airline is likely to lose more travellers. In such a critical situation, understandably, the company has lost a significant market share to low-cost carriers. These critical facts point to a very dim future for the company. It has been making losses on the operational level.

Unlike Kingfisher, it is best being a low-cost carrier for SpiceJet in difficult times like these. Its operational costs are lesser than the two premium airline companies, namely Jet Airways and Kingfisher Airlines. At the end of the December ’11 quarter, the company’s fuel expenses as a percentage of its net sales were less than 40%. Also its focus on regional connectivity serves well for the company in terms of operational costs. However, it is not shielded from rising crude oil prices.

Hence, with Brent crude trading in the range of $100/barrel to $125/barrel due to political problems in the Middle East, there is little room left for companies to conserve earnings.

GOING AHEAD

Budget 2012 proposed some positive measures with a clear intention of improving operational performance of airline companies. These proposals include allowing direct import of fuel and External Commercial Borrowing (ECB) up to $1 billion for working capital requirements of airline companies. Both the proposals will have a direct impact on saving costs; thereby helping operations of airlines, which are struggling to meet working capital requirements.

Allowing raising of funds through the External Commercial Borrowing (ECB) route for immediate working capital requirement, would help companies to keep their operations going. As opposed to rupee-loan, which would have an interest charge of 13% to 14%, a dollar-loan would have an interest cost of around 9% to 10% even after considering hedging costs. Therefore, analysts and industry experts feel that airline companies would be able to save 5% to 6% on their overall cost of borrowing overseas.

One of the immediate benefits that airline companies can avail of is the direct import of fuel. This is the most lucrative proposal for airline companies when seen in the backdrop of rising crude oil prices.

Apart from this, the government’s proposal to raise money through ECB, which is one of the ways of raising capital for long-term needs, would also be beneficial in terms of interest expense for airline companies. Jet Airways India, IndiGo Airlines and SpiceJet are the ones, which would be successful in raising funds through the ECB route due to their stable operations. These measures would present ways to airline companies to reduce their operational costs.

Also, the proposal to allow foreign airline companies to buy equity stake in Indian airline companies is being actively considered by the government. However, experts believe that this proposal would hardly change business dynamics for airline companies. One of the reasons is the high debt of airline companies. Only those companies that focus on low-cost travellers and have a strong regional connectivity would benefit from this move. Therefore, SpiceJet and Indigo Airlines are strong contenders for this proposaL.

&T Finance, a subsidiary of Larsen & Toubro Finance Holding Company, is all set to

acquire the mutual fund business of Fidelity Investment in India.

The exit of Fidelity Worldwide Investment, an affiliate of US money manager Fidelity Investments and an old timer in the Indian mutual fund industry may not be good news for domestic mutual fund players.

However, the company had no choice but to exit following continuous losses it posted over the last few years. L&T Finance, on the other hand, is trying to turn its fortune in the mutual fund sector by acquiring Fidelity’s business.

L

EDGINGFORWARD

Fidelity AMC, incorporated in 2004, manages the 15th largest mutual fund in India with a market share of 1.3% and an average AUM for the quarter ended December ’11 of `8,881 crore (approximately 68% of its assets are equity oriented).

It has built a robust equity-oriented franchise, which has access to large HNI customers and a strong SIP portfolio. Its equity assets are the 10th largest in India with a market share of nearly 3.1%.

In the past three years, the fund’s performance has resulted in 4 of its 5 equity funds being ranked among the top 10 in their respective categories. It was also won the Lipper Award in 2011 for being the ‘Best Equity Fund House’ over the past three years. For fiscal 2011, Fidelity booked a loss of `623.9 million ($12.1 million), compared to a loss of `275.6 million ($5.38 million) in the previous financial year.

L&T Finance Holdings Ltd, the parent company of L&T Finance, came into the market last year with its IPO (Initial Public Offering). The parent company has a diversified loan

L&T Finance takes in-organic growth

route in the mutual fund industry, acquires

Fidelity Investment


The company is the second largest player in the tractor financing segment. With Indian rural growth remaining strong, the demand for these products stays high.

L&T Financial Services established its presence in the mutual fund industry through the acquisition of the mutual fund business of DBS Chola in January ’10.

Since then, L&T Mutual Fund has grown its total average AUM by a CAGR in excess of approximately 33% to approximately `4,616 crore (average AUM for the quarter ended December ’11). It has a strong debt-focused portfolio with a pan-India distribution network. L&T Finance Holdings Ltd manages nearly $900 million, mainly in bond funds.

As part of its strategy, the company is planning to expand its base in the mutual fund sector. L&T Finance is acquiring Fidelity India business for an undisclosed sum and will include FIL Fund Management and FIL Trustee Company L&T Finance Holdings chairman and managing director YM Deosthalee said, “The acquisition will help L&T Mutual Fund to expand its business, products and access to individual customers.”

He also said, “With this, I think we should be able to do more offshore funds much more aggressively than before.” The equity-focused mutual fund of Fidelity will complement the company’s existing debt focused mutual funds.

THE DEAL

Fidelity Worldwide Investment had picked five potential buyers for its India mutual fund assets. Sources close to the deal said that Reliance Mutual Fund, HDFC Mutual Fund, Pramerica Asset Managers Pvt Ltd and Birla Sun Life Mutual Fund were

amongst the names that made it to the final list.

Among bidders, Pramerica is learnt to have valued Fidelity Mutual Fund’s assets at about `600 crore, which works out to 6.9% of Fidelity’s `8,700 crore asset base. HDFC Mutual Fund and Reliance Mutual Fund have placed bids in the range of `550 crore and `580 crore, respectively, sources said.

The final deal is said to be valued at over 6.5%. This deal will help L&T Mutual Fund to scale up its assets from `4,616 crore to `13,313 crore. The acquisition which is expected to be closed later this year is subject to regulatory approvals. As of 31st Dec ’11, assets under Fidelity funds available to Indian investors, primarily in Indian stock funds, were nearly $1.8 billion.

SYNERGY

The strong equity-focus of Fidelity’s Indian Mutual Fund, when combined with L&T Mutual Fund, results in a balanced asset base. The size of the combined entity (average AUM of approximately `13,497 crore for the quarter ended December ’11, with a market share of approximately 2%) together with the backing of the ‘L&T’ brand would provide an optimal platform to improve margins and grow profitably.

The fund houses share common investment philosophies which include ‘bottom-up’ stock picking which is largely research-driven. This provides an optimal platform for the smooth and efficient integration of the two businesses.

Further, a good equity investment management team at L&T Finance will make sure that integration of the two companies goes through without any major hiccupS.

portfolio with exposure to sectors including corporate finance, retail and infrastructure, which includes power, roads, oil & gas, etc.

L&T Finance, which will acquire Fidelity’s mutual fund business, contributes almost half of L&T Finance Holdings Ltd’s bottom line. It means this deal will have a significant impact on the parent company. Hence, investors/traders who may like to benefit from stock price movement should track this deal more closely.

L&T Finance conducts both the retail finance business and corporate finance business. The retail finance group provides finance to retail customers for the acquisition of income-generating assets and income -generating activities and comprises segments of construction equipment finance, rural product finance as well as microfinance.

In addition to this, the retail finance group caters to the non-financing needs of retail customers through the distribution of third-party financial products such as insurance and mutual funds.

The corporate finance group provides financial products and services to corporate customers, comprising segments of corporate loans and leases, supply chain finance and capital market products. It contributed `1,397.5 crore of revenue in FY11, which accounted for nearly 66.08% of the total income of the parent company.

L&T Finance has a diversified loan book spreading to various sectors like construction equipment, commercial vehicles, farm equipment, supply chain management and micro finance sector, among others. Its portfolio size is `10,156 crore (FY11), which grew at a CAGR of 42% over FY09-11.



Even as fortunes of

shipping companies

continue to plummet

due to falling demand

and rising operational

costs, the companies

are trying to sail

through troubled times

the badgered shipping industry.

FLASHBACK

The year 2007 was the most exciting and rewarding one for the shipping companies. This is because in 2007 the world economy grew at 5.2%, followed by China and India, which grew at 13% and 9.4%, respectively.

During this period of high economic activity, the growth in the world trade stood at 7.3% leading to a huge demand for the shipping industry and a multi-year high in shipping rates. However, all this changed in the following years. As a result of the global economic slump, the world economy shrank by 0.7% and advanced economies witnessed a 3.7% fall in economic activities, leading to a contraction in world trade by a staggering 10.7%.

Shipping rates tumbled by more than 90% especially in the light of the fact that by the time the industry hit on the demand side there was an excess supply of ships. There were no takers for new vessels and ships. And those which were ordered to be built in shipyards were cancelled.

YET TO SAIL THROUGH

Over the last few months, the situation has changed both in terms of demand and supply equation and pricing. In 2010 and 2011 world economic activities rebounded and world trade showed signs of significant recovery.

The day rates or the benchmark shipping day rates were up in the region of 30% to 40% since January this year. Though this has come as a relief to the shipping companies globally, the pain is still not over because despite the recovery from the bottom, the rates are still 80% to 90% lower than that in 2008.

In fact they are so low that in most cases, they do not even cover the operating cost of shipping companies leading to continuous pressure on their margins.

The operating margins of Shipping Corporation of India (SCI) was 10.3% for the quarter ended December ’11 as compared to 18% in the corresponding period last year. SCI is not alone. Varun Shipping, Mercator and other shipping companies too have seen an erosion in their margins.

Further, the recent crisis in the gulf region and Iran has added more fuel to the fire. Due to higher crude oil prices and supply disruptions, shipping companies have suffered globally. India’s external trade too is not very encouraging and has been impacted by the slowdown in the US and the European economies. India’s exports grew at 4.2% in February ’12, which was the slowest growth recorded in recent months.

Though imports grew at a strong 20.6% in February, they were still lower than the average import growth last year. Apart from the demand side issue, problems persist in the supply side too, as there are a lot of spare capacities in the shipping industry in addition to the supply of new ships, which were ordered 2 to 3 years back.

NEAR-TERM SCENARIO

Despite the recent recoveries in freight rates, the shipping market is expected to remain tight or range bound as there are no immediate triggers for the world economy in addition to supply side issues. Across segments there continues to be a pile up of order book.

The upcoming deliveries in 2012 will keep the rates under pressure in the dry and tanker segments. This is

lthough a large number of industries have recovered from the perils of the financial

meltdown of 2008, the shipping industry continues to remain under pressure. The key benchmark shipping rates are presently hovering at multi-year lows. Also, the deteriorating financial condition of shipping companies and dismal share prices are adding to their worries. The key benchmark Index, Baltic Dry Index, is currently ruling around 934, which is surprisingly 90% lower than the levels seen in mid-2008. The Baltic Dry Index reflects the price movement of major raw materials shipped by sea, including commodities like coal, iron ore and grain. The situation is equally shocking in the case of liquid tankers where the shipping rates are significantly lower.

There are multiple reasons for the current state of the shipping industry. While slowdown in the global economy post the global financial meltdown of 2008 remains the main cause, the crisis in the gulf countries, higher-than-expected fleet supply and cost pressures and financial conditions of most shipping companies have added to the woes of

A



despite the expected slippages in orders and more ships going for scrap. Scraping of the older fleet, particularly those over 20 years of age are due for scrap as in the current environment of depressed rates it is becoming a cumbersome task for many shipping companies to operate old fleets with high operating costs.

Besides, with ample supply the clients have enough choice to go for vessels that are relatively more efficient and new. Industry estimates indicate that over the next two years, the demand for shipping tonnage could grow in the region of 6% to 8%. But this is far lower than the expected growth in supply of vessels which is about 10% to 16%.

Till the time the demand supply equation does not change, the supply dynamics will keep a check on the industry in terms of its early revival. Globally, shipping companies have raised rates in a bid to ease pressure on their financials, but it is yet to be seen across the industry.

Leading shipping companies like Maersk, CSAV and NOL have reported poor financial performance in the quarter ended December. This is because of their commitment to freight restoration.

Earlier Maersk reported that it had increased freight rates by $400 per teu (twenty foot equivalent container units), effective from 1st Apr ’12. This is the second hike that the company announced after $775 per teu hike in March ’12.

However, the situation appears to be improving only in cases of new ships and strong players who have successfully negotiated the prices.

WHAT IS IN STORE

Though there are issues in the near

term, the good news is that things might recover and stabilize in the next year. There is enough evidence to support this view. For instance, slightly long-term rates are negotiated at a significant premium compared to the spot rates.

Like, contracts for Capesize for the period of four to six months are negotiated at $19,500 per day while for more than one year the contracts are done at $15,700 per day. This is at a significant premium when compared with the spot rates of around $5,500 per day.

Capesize is used to describe bulk carriers rather than tankers. These vessels are typically large, having above 1,50,000 long tonnes deadweight (DWT), which includes oil tankers such as Very Large Crude Carriers (VLCCs) and Ultra Large Crude Carriers (ULCCs). They are also used to transport bulk carriers such as coal, iron ore as well as other raw commodities.

A similar trend is also seen in smaller bulk carriers like Panamax, for which four to six month contracts are being inked at $13,700 per day, which is almost 105% premium to spot prices at $6,700 per day.

In the case of contracts for one year and more, the rates are quoted in the region of $12,300 per day, which is again a good 83% premium to spot prices. This trend indicates that short-term rates are under pressure. But in the medium- to long-term, the market is pricing some sort of growth or recovery and the clients are ready to pay that much premium.

Overall, industry watchers believe that things should improve over the next 12 to 18 months. Fundamentally also there is a reason to believe that. Otherwise why is the market paying premium to long-term rates?

The International Monetary Fund (IMF) in its recent report on the global economic outlook has predicted a global economic growth of 3.9% in the year 2013 as compared to 3.3% in the current year, of which about nine months are remaining.

The economic growth in China, the United States and Europe is expected to be much higher next year compared to the current year. This seems to be good for the global and the Indian logistics industry.

Remarkably, the report by the International Monetary Fund (IMF) suggests that there will be visible improvement in the world trade, which in terms of volumes is expected to grow at 5.4% next year compared to the current year’s expected growth of 3.8%, almost a 160 basis point improvement.

WHAT IS IN THE PRICE

The shipping companies are valued on the basis of the value of their assets and what the market is paying for the same assets. On the same criteria, the indicator suggests that today the market is valuing these assets in the range of 55% to 70% lower than what they were valued at the peak in the year 2008.

However, that comparison may not sound reliable given that the year 2008 was considered to be the peak time. Even if one averages out the value of assets that the market was willing to pay for the last five years, there is still a 30% to 40% discount to the current prices.

And if the trend reverses as the long-term rates suggest then the growth predictions indicate that there is more room for the gap to bridge or the market should be paying more for the same assets than what it is paying at presenT.

February 2012 Premium 27http://magazine.premiumonline.in

SUBSCRIBETODAY!

http://www.magzter.com/IN/Premium-Speciality-Magazines-P/Premium/Business/

Like This...

Like This...

on the Net

$ 1.99per issue

12 issues

$ 14.99

Now Read Like This...

Despite the drop in sales

of new homes, the sharp

rise in construction and

funding costs will increase

costs for builders,

preventing the reduction

in prices of homes

here is bad news for aspiring home buyers in Mumbai. Real estate prices in the city are not expected to soften

any time soon.

A report from CRISIL Research says that new home prices in Mumbai will not decline in 2012. The report says that despite a 40% drop in sales of new homes since mid-2011, a sharp rise in construction and funding costs and amendments to the Development Control Regulations (DCR) will increase costs for builders, which will in turn prevent a reduction in home prices.

Talking about the 40% slump in sales of new homes between April ’11 and February ’12, CRISIL Research Head Sudhir Nair said in the report, “Through 2011, even as the number of enquiries from buyers remained strong - implying healthy latent demand - only a few enquiries translated into actual sales.”

T



new home prices will remain steady, across Mumbai, the southern and central parts of the city will stand out as exceptions.

Home prices are likely to decline by 6% to 7% in South Mumbai (Nepean Sea Road, Tardeo, Opera House, Peddar Road), and 8% to 10% in Central Mumbai (Worli, Prabhadevi, Lower Parel).

Prices in the National Capital Region (NCR) are also expected to increase. The CRISIL report says that the new houses and plots offered by the UP Housing and Development Board (UPHDB) in Ghaziabad and Loni may cost nearly 20% more with the state government agency planning to increase prices of homes in the new financial year.

An internal committee of the board has recommended a raise of 5% to 25% in the land cost in various schemes across Uttar Pradesh. This will lead to an increase of 10% to 16% in the case of majority of housing board properties.

Global real estate consultancy firm, Jones Lang LaSalle India (JLL) also agrees that prices of homes in India in the next six months will see a marginal appreciation.

A report by Jones Lang LaSalle said: “Over 60% of residential launches in the top seven cities (mostly in cities other than the National Capital Region and Mumbai) are priced in the range of ̀ 2,000 per sq ft to ̀ 4,000 per sq ft, which meets the demand of middle-income buyers.”

The report also says that since India’s central bank, the Reserve Bank of India (RBI) has given an indication of a cut in interest rates during the second half of 2012, it will improve affordability for home buyers and reduce the cost of funding for

developers. This will help increase the demand for new homes.

The demand for homes continues to be strong, even though prices could increase. Jones Lang LaSalle says that even in present conditions, prevailing absorption rates are at nearly 10% to 12 %, which translates into an average absorption period of 8 to 10 quarters for a residential project.

“This implies that at average prices, any average residential project should be sold out before construction is completed in around three years from the launch,” the report said.

Simultaneously, the condition of developers will also improve with improved cash flows in the near future. Jones Lang LaSalle says that new project launches, which were slow in Mumbai and the National Capital Region in the first half of 2011 because of approval and land acquisition issues, have now started to pick up. This should improve cash flows for developers having large land banks during 2012.

A number of builders bought land on borrowed funds. Real estate developers pay huge interest rates on debt, almost 15% to 18%, which has put a huge strain on their finances. Therefore, any improvement in off-take of homes will reduce the financing pressure.

The problem is that in spite of a slowdown and poor financial conditions, builders have not reduced prices of homes because in most parts of the country they have priced their projects at nearly cost prices. “With rising input costs, developers do not want to sell below a threshold, which does not justify their minimum replacement returns,” says JLL.

This leaves home buyers with a small window of opportunity - the next six

“Higher interest rates, slower economic growth, inflationary pressure and expectation of price correction led most buyers to defer buying decisions. In 2012, the latent demand is likely to spur a moderate 10% increase in new home sales.”

CRISIL Research expects a 7% to 9% increase in costs of key inputs in 2012, following a 25% increase in input costs last year. In 2012, CRISIL Research expects cement prices in Mumbai to increase by 5%, steel by 7% to 9% and labour costs by 10% to 15%. Funding costs too will remain high, it added.

According to the report, given constraints in obtaining a significant increase in bank funding, builders’ dependence on costlier alternative funding will continue. Recent amendments in the DCR will increase costs for builders by another 15%, on an average. DCR norms govern land development in Mumbai.

The rules, which came into effect from January ’12 have revised the method of calculating the floor space index (FSI), according to which spaces allotted for balconies, flowerbeds, terraces are now included in the FSI calculation.

The spaces usually comprise one-third of the built-up area. The revision in DCR norms will impact the total area available for sale which in turn will reduce the profit margins of most builders.

The new rules, however, permit builders to buy additional FSI of up to 35% of the current FSI, by paying a fee calculated at 60% of the ready-reckoner rate – the rate at which the stamp duty is levied. This will mean additional cost for builders, the CRISIL report stated.

The report goes on to say that while


months - when home prices should witness marginal appreciation. After six months, a second wave of high appreciation is predicted.

Buyers will have to contend with the fact that home prices in the country will always be on the rise. The Jones Lang LaSalle report points out that even during the slowdown in 2008-09, in some of the micro markets in Mumbai and the National

Capital Region, the appreciation in prices was sharp. In the last two years, in some of the markets like Gurgaon’s Dwarka Expressway, prices have almost doubled.

According to a recent economic survey report, Mumbai has seen an 87% increase in property prices in the last four years, while Pune has witnessed a rise of 63% in prices of new homes.

Property prices in other larger cities have gone up by 43% to 166%. The report says scarcity of land is one of the main reasons for the rise in home prices. In Mumbai, the cost of land is so high that it cannot accommodate the daily influx of migrants.

So, if you are thinking of buying a home, any time is a good time because property prices tend to move in only one direction - upwardS.

EQUITIES | DERIVATIVES | COMMODITIES* | CURRENCY | MUTUAL FUNDS | IPOs | INSURANCE | DP# # #

www.nirmalbang.com

QUALAT NIRMAL BANG, YOU’RE MORE THAN

JUST A BUSINESS ASSOCIATE,YOU’RE AN EQUAL PARTNER.

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

Lower Parel (W), Mumbai - 400013.

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

Disclaimer: Insurance is a subject matter of solicitation. Mutual Fund investments are subject to market risk. Please read the scheme-related document carefully before investing. Security is subject to market risk. Please read the Do’s and Don’ts prescribed by Commodity Exchange before trading. The PMS Service is not offering for commodity segment. *Through Nirmal Bang Commodities Pvt. Ltd. #Distributors

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

Strong brand building and an e�ective business model will enable V-Guard to penetrate into the nor thern market and thus boost pro�tability and �nancials of the company

-Guard Industries Ltd was set up by Kochouseph Chittilappily and commenced its operations in 1977 as an SSI unit with manufacturing and marketing of voltage

stabilizers under the brand name V‐Guard.

The company has now diversified into other products. It manufactures and markets electronic voltage stabilizers, pumps, motors, insulated electrical cables (house wiring, industrial), water heaters, solar water heaters and electric fans, among others.

It has created the widest distribution network with over 9,500 retailers, 208 dealers and 335 service centres spread across all states in India except North East and J&K.

V

VICTORYMARCH

PVC Wiring CablesL T CablesPumps & MotorsFans & Water HeatersSolar Water Heaters

21111

Coimbatore, KashipurCoimbatoreCoimbatoreKala Amb (Himachal Pradesh)Coimbatore

Production FacilitiesProduct No of Units

Own Manufacturing FacilitiesLocality

StabilizersPumpsFanUPSElectric Water Heater

60116

126

Across IndiaAcross IndiaAcross IndiaAcross IndiaAcross India

Outsourced Production Facilities

Source: Company Data, Nirmal Bang Research



INVESTMENT RATIONALE

Sustainable Growth Drivers, Infused By Rising Electrification, Urbanization And Rise In Nuclear Families

V-Guard is a leading manufacturer of consumer electrical goods in the southern market, which is spreading its wings in other parts of India as well.

The consumer electrical goods industry is leveraged to the growth of the housing market in India. We expect spending on housing to remain strong due to rising urbanization, job creation, changing social structure - increasing number of nuclear families and rising electrification.

Over the last five years, V-Guards’ revenues have grown at a CAGR of 30% and we expect similar growth to continue, going forward.

V-Guard ranks number one in the stabilizer business and is trying to create its market in other product categories too, with aggressive branding strategy making it well-positioned to benefit from rising demand.

Robust Growth Outlook For Consumer Durables

`300 billion and is expected to reach `500 billion by 2015. While the urban consumer durables market is growing at an annual rate of 9% to 12%, the rural durables market is growing at 30% annually.

consumption of electricity at 566KW as compared to the global average of 2782KW. With the improvement in per capita power availability and consumption, the demand for electrical and consumer durable goods will increase.

Extensive Investment In Distribution Network

We believe the electrical market is highly fragmented, with stiff competition from regional and national players. V-Guard has created a wide distribution network with over 9,500 retailers, 208 distributors and 353 service centres spread across all states in India except North East and Jammu & Kashmir.

In India, the dealer plays an extremely important role in the sales pitch of consumer products, which is highly fragmented by nature.

To cash in on the strong dealer and customer relationship (most of the buys are influenced by dealers’ advice and suggestions), V-Guard is planning to increase the number of channel partners, by adding more distributors, direct dealers and suppliers for outsourced products.

As a result of this aggressive strategy, the company is enjoying a dominant position in the southern market in India and will be able to penetrate into the northern market where it has to compete with the established players in the same industry.

V-Guard has been increasing its total distributor network by a CAGR of 21.4% and direct dealer by a CAGR of 163.1% from FY08 to FY12E.

We believe as the company has been able to build a wide distribution network along with a strong brand, it will be able to market its product portfolio. Also, this will enable the company to tackle the unorganized markets in a much better manner.

We believe the company is at an inflection point and is poised for growth due to entry into markets beyond its traditional area where the demand is high.

ZoneSouthGrowth %NorthGrowth %EastGrowth %WestGrowth %TotalROI (excluding South)Growth %

Distributor78

8

10

16

11234

Direct Dealer53

0

5

9

6714

V-Guard’s Distribution NetworkFY08 FY09

Distributor90

15%21

163%12

20%26

63%14959

74%

Direct Dealer265

400%103NA43

760%83

822%494229

1536%

FY10

Distributor10011%37

76%16

33%24

-8%17777

31%

Direct Dealer610

130%15752%186

333%303

265%1256646

182%

FY11

Distributor1033%57

54%24

50%240%20810536%

Direct Dealer1508147%1708%387

108%623

106%2688118083%

FY12E

Distributor1107%70

23%35

46%28

17%24313327%

Direct Dealer170013%20018%51032%80028%3210151028%



Geographical Expansion Other Than Southern Market

The company has a dominant presence in southern India, contributing 78% to the total revenue and the balance 22% coming from the Rest of India (ROI) in FY11. The northern market contributed `162 crore as revenues in FY11, which is a 128% jump from the FY10 level.

We expect the contribution from ROI to be `227 crore in FY12E, which is a 40% increase over FY11 as V-Guard increases its dealer network to tap the ROI market.

The company is planning to replicate its business model in ROI to leverage its brands and to further reduce the risk arising from geographical concentration.

V-Guard is faring well in territories like the National Capital Region, Punjab, Rajasthan and Uttar Pradesh, with encouraging results in Maharashtra and Orissa. The West Bengal and Gujarat markets are yet to pick up. The management has prioritized cash breakeven improvement in operational profitability at all locations.

The reason why V-Guard is venturing into the non-south market is because the growth of its traditional products like stabilizers, water heaters, and pumps has reached a near saturation point in the south.

Hence, the company has adopted a broad strategy of introducing newer products to its existing product line like fans, UPS, LT cables, wires and solar water heaters in the southern market and is carrying its traditional products to the non-south market.

Once the base for traditional products gets established in the non-south market, the company will launch newer products there. Thus, the focus is clearly on growth of newer products in the southern market and traditional products in the non-south market. Moreover, traditional products will continue to grow in the southern market at a steady pace.

Over the years, the company has made a strong distribution channel in the southern region and the company strives to do the same in ROI.

If we see in FY12E, the increase in distribution channel in southern India has become stagnated as compared to ROI. This shows that the company is making strenuous efforts to make its presence in ROI as a strong distribution channel and reach, along with strong brand equity will help the company in garnering market share. Thus, we expect a strong brand equity and an extensive distribution network

to help V-Guard roll out its consumer durable products and gain a strong foothold in the ROI market, going forward.

Aggressive Brand Investments And Promotions

Over the last five years, V-Guard has spent aggressively on advertisements as well as sales promotion and has thus been able to build a strong equity and brand recall in the minds of its consumers.

The company is using a Pull and Push strategy to penetrate into the northern market in India. We expect the company management to spend approximately 5% of its total revenue for advertisements and promotions alone in FY12E and FY13E.

V-Guard is also looking at launching new product lines and is examining four to five options. The management has hinted at kitchen appliances with a low SKU.

The management also expects to launch its switchgear (market size of approximately `14 billion) in the near term in Kerala and by Q1FY13 in other south Indian states. The company is also on the verge of launching new products like induction cook pots in the near future and mixer-grinders in Q1FY13 (market size of approximately `15 billion).

We believe that with the help of ongoing investment in brand building, V-Guard will not find it difficult to roll out its new products on a national level.

FINANCIAL ANALYSIS

We continue to be positive on the growth prospects of the company and the space in which it operates. We are of the view that the company will have a relatively better Q4 FY12E on account of cooling off in metal prices and extensive price hike to the tune of 3% to 8% on the various products it offers.

We feel that the company will be able to post better results for FY13E on account of improved demand in the consumer durable segment; improvement in the overall economic condition and cooling off of inflation will result in high disposable income, which will boost demand, going forward.

We believe that sales will pick up over the next 12 months as the level of penetration increases in northern India. We expect net sales to be `958 crore and PAT to be `43.3 crore in FY12E and net sales to be `1216.4 crore and PAT to be `57.6 crore in FY13E.


FY10FY11FY12EFY13E

454.1726.3958.1

1216.4

43%60%32%27%

51.874.885.6

112.2

11.10%10.00%

8.80%9.10%

25.542.743.357.6

5.60%5.90%4.50%4.70%

8.514.314.519.3

23.213.913.710.3

23.80%25.00%22.80%25.90%

FinancialsYear Net Sales

(` Cr)Growth

(%)EBITDA

(` Cr)Margin

(%)PAT (` Cr)

Margin (%)

EPS(`)

PE (x)

ROCE(%)


Growth In Net Revenues (in ` cr)

Source: Company Data, Nirmal Bang ResearchSource: Company Data, Nirmal Bang Research

13.9%

43.3%

60.0%

31.9%

27.0%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

0.0

200.0

400.0

600.0

800.0

1000.0

1200.0

1400.0

FY09 FY10 FY11 FY12E FY13E

Net Revenues Growth%

VALUATIONS

V-Guard is a strong player in the southern space for the past 30 years. The company has moved into the northern region since the past couple of years and is vying for a share of the market. We are also positive about its various marketing initiatives, which are helping in brand building and easing its foray into the non-south markets.

We are confident about the company’s business model and its ability to scale up its business in new products. Additionally, we feel that with the increase in traction in new geographies and improving the penetration of distribution channel partners in the northern region will boost the profitability and financials of the company, going forward.

At the current market price (CMP) of `193, V-Guard Industries Ltd is trading at a PE of 13.7x in FY12E and 10.3x in FY13E, whereas on EV/EBITDA the electrical company is trading at 8.7x and 5.3x in FY12E and FY13E, respectively, which looks attractive.

EBIDTA, PAT And Margins

9.9%

11.1% 10.0%

8.8% 9.1%

5.48% 5.62% 5.87%

4.52%

4.73%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

0.00

20.00

40.00

60.00

80.00

100.00

120.00

FY09 FY10 FY11 FY12E FY13E

EBIDTA PAT EBIDTA Margin(%) PAT Margin(%)

RISKS AND CONCERNS

may affect earnings.

decline in the company’s market share due to the rise in competition or increase in advertisement expenses could adversely affect earnings.

V-Guard and our earnings estimates.

which could squeeze out the company’s marginS.

Now,A DebitCard LinkedTo YourMutual Fund

hat will you do when you want to withdraw cash urgently or purchase something? Surely, you will use a debit card for the same. How about a

debit card that is linked to your mutual fund scheme?

Reliance Mutual Fund has done just that. It has launched Reliance Any Time Money Card, which is linked to the mutual fund schemes and offers investors instant access to their investments.

The card will allow investors to withdraw/spend against their mutual fund investments by providing them access in Visa-enabled ATMs and merchant outlets across the world. Essentially it combines the benefit of investments along with the convenience of a debit card.

KEY FEATURES OF RELIANCE ANY TIME MONEY CARD

The Reliance Any Time Money Card offers investors the benefit of Mutual Fund Investments along with the convenience of debit cards

It allows cash withdrawal and transaction in Point of Sales (PoS) terminals in Visa-powered ATMs / PoS terminals

The card allows balance enquiry in visa-powered ATMs

Investors have the choice to withdraw from any

WABHISHEK SINGHEL

ECTR

ON

IC U

SE O

NLY

Reliance Any Time

Money Card combines

the benefit of

investment along

with the convenience

of a debit card



scheme linked to the card in HDFC Bank ATMs

In non-HDFC Bank ATMs and PoS terminals, the transaction will take place through the primary account.

The card offers instant liquidity to the unit holder up to a permissible limit as fixed/ determined by the Bank for ATM cash withdrawals or 50% of the balance in the scheme or `50,000 (whichever is lower) as set by RMF, per day, from time-to-time.

Investors can spend up to 50% of the balance in the primary account or `1,00,000 per day (whichever is lower) at PoS terminals.

PRIMARY SCHEME ACCOUNT

The primary scheme account on the card can either be Reliance Liquid Fund – Treasury Plan or Reliance Money Manager Fund. It is mandatory to have one of these schemes as the primary scheme account in order to apply for the card.

TYPES OF TRANSACTIONS

Three types of transactions* are allowed through the card.‐ ATM cash withdrawal‐ ATM balance enquiry‐ Purchase at merchant establishments*Not valid for payment in foreign exchange in Nepal and Bhutan.

ELIGIBILITY

Primary scheme account on the card can either be Reliance Liquid Fund – Treasury Plan or Reliance Money Manager Fund. It is mandatory to have one of these schemes as the primary scheme account in order to apply for the card.

It is mandatory for the unit holder to provide mobile number and email id to the RMF in order to avail the card.

The Reliance ATM card shall be issued only to individual resident Indian unit holders, who are aged 18 years and above.

This ATM card shall not be issued to HUF, NRI, Private / Public Ltd Companies, Partnership Firms, Proprietorship Firms, Trusts or any other category of investors as defined in the offer document.

The card shall be issued only in respect of folios where holding basis is ‘Either or Survivor/Anyone or Survivor’ or Single. No card shall be issued where it is jointly operated.

The card will be issued only after realization of cheque.

Currently only one card can be issued per folio / master account. In case of multiple holders the card shall be issued only to the first holder.

GENERAL GUIDELINES

The facility will be in addition to the conventional method of redemption that is, physical redemption request through the Designated Investor Service Centers of the Reliance Mutual Fund. In other words, investors can opt for any of the redemption facilities as per their choice and convenience.

No card shall be issued for subscriptions through demand drafts or third party cheques.

Withdrawals through this alternative mode of redemption can be stopped temporarily or permanently for the want of any statutory compliance, at the directive of the RBI and/or the SEBI or any competent statutory regulatory authority.

The Trustees reserve the right to discontinue/ modify/ alter the said facility on a prospective basis subject

to compliance with the prevailing SEBI guidelines and Regulations.

The card is valid in India and abroad. But investors cannot make foreign currency transactions in Nepal and Bhutan (transactions in currencies other than local currency of Nepal/ Bhutan or Indian Rupees).

Investors should ensure that while using the card outside India, it should be strictly in accordance with RBI’s Exchange Control Regulations, as prevailing from time to time. The onus of ensuring compliance with the regulations is on the holder of the card

SEBI guidelines on uniform cut off timings for redemption shall also be applicable to the aforesaid facility of alternative means of redemption.

CARD LIMITS

At ATM: In a day, an investor can withdraw 50% of the balance in the scheme account or `50,000 (whichever is lower) from an ATM or up to a permissible limit as fixed/ determined by the Bank.

At POS: In a day, an investor can spend upto 50% of the balance in the account or `1,00,000 (whichever is lower) at merchant outlets.

APPLICATION FOR RELIANCE ANY TIME MONEY CARD

New InvestorFill a common application form to

invest in Reliance Liquid - Treasury Plan/Money Manager Fund

Apply for ATM CardKYC Form (if the unit holder is not

KYC Compliant)

Existing InvestorInvestments in Reliance Liquid

-Treasury Plan/Money Manager FundApply for ATM Card using specially designed ATM application form


Reliance Any Time Money Card Is Available With The Below Reliance Mutual Fund Schemes:

The Reliance Any Time Money Card enables investors to not only save smartly but also prevents them from compromising on accessabilitY.

Reliance Liquid Fund - Treasury PlanReliance Liquid Fund - Cash PlanReliance Liquidity FundType of Scheme: - IncomeScheme NameReliance Short Term FundReliance Floating Rate Fund - Short Term PlanReliance Income FundReliance Medium Term FundReliance Regular Savings Fund - Debt OptionReliance Money Manager FundReliance Dynamic Bond FundReliance Gilt Securities FundReliance Monthly Income FundType of Scheme: - Gold Fund of fundScheme NameReliance Gold Savings FundType of Scheme: - ArbitrageScheme NameReliance Arbitrage Advantage Fund

Reliance Equity FundReliance Top 200 FundReliance Equity Opportunities FundReliance Growth FundReliance Index Fund - Sensex PlanReliance Index Fund - Nifty PlanReliance Infrastructure FundReliance Natural Resources FundReliance Regular Savings Fund - Balanced OptionReliance Regular Savings Fund - Equity OptionReliance Small Cap FundReliance Vision FundReliance Banking FundReliance Diversified Power Sector FundReliance Media & Entertainment FundReliance Pharma FundReliance Quant Plus FundReliance Long Term Equity Fund

Type of Scheme: - LiquidScheme Name Scheme Name

Type of Scheme: - Equity

NATURALCHOICE

FORTOUGH

TIMESSIPs, SWPs and

STPs are three

important tools

that investors can

employ to invest

in volatile market

conditions



markets even if they do not have a huge amount of money to invest.

An SIP is a planned investment programme under which the investor invests a small amount of money at regular intervals. The minimum amount ranges between `100 and `500 (depending upon the fund house as well as the type of fund) and the frequency of investment is usually monthly or quarterly. This simple investment programme has a number of advantages.

Even if investors have a lump sum amount, they do not want to invest at one time. In such a situation, SIPs come handy. As investors, the investment in the stock market is spread over several months. This move might help to mitigate market risk and volatility.

We have seen record highs in 2010 and record lows too, in 2008. Now in March ’12, we are witnessing a lot of volatility in the markets. No one knows whether markets are likely to surge or see some correction given the international and domestic factors.

If investors make regular investments through SIPs in the equity markets it will pay huge dividends in the future. Past history shows that investors can reap rich rewards by investing through SIPs with a time horizon of five years and above.

The main advantage of an SIP is that investors need not time the markets. A lot of investors usually wait for the markets to go down and then invest at lower levels.

But it is said that finding the bottom of the market is a tough task, where even famous money managers and individual investors have bitten the dust. As far as retail investors are concerned, SIPs are the best way to create long-term wealth.

SIPs are also very convenient as the amount is deducted from the account every month and is invested in the equity markets. Also, the power of compounding can do wonders if investments are held for a longer tenure (at least five years). In the due course of time, a small amount can grow into a significant amount.

SYSTEMATIC WITHDRAWAL PLAN (SWP)

A Systematic Withdrawal Plan (SWP) is a facility that permits an investor to withdraw money from an existing mutual fund at fixed intervals. The money withdrawn from an SWP can either be reinvested in another scheme or it can even be used as a source of regular inflows from their investments. Senior citizens in particular can use these schemes after investing a lump sum amount in balanced or debt funds to generate regular flows.

Under an SWP, fixed or variable sums can be withdrawn at regular intervals. These withdrawals can be made on a monthly, quarterly, semi-annual or annual basis according to the wish of the investors.

In general, there are two options available to investors: fixed withdrawals (where investors get a fixed sum every month) and appreciation withdrawals (where investors get the money when the scheme gains).

Let us understand this investment tool with the help of an example. Say Mr A has 10,000 units in a mutual fund scheme. Then A can give instructions to the fund house that he wants to withdraw `5,000 every month through the SWP route.

So let us assume that on 1st January, the net asset value (NAV) of the scheme in which A has invested is

ince the last few months the Indian equity markets have remained volatile and largely in the same range.

There is a growing concern among investors over the negative returns they are earning on equity mutual funds, in the last one year.

No one knows where the markets are headed and whether the markets will see new highs in 2012 or it will remain volatile as before.

Most investors are aware of Systematic Investment Plan (SIP), which is the best mechanism to create long-term wealth. However, many investors are staying away from other options such as Systematic Withdrawals Plans (SWPs) and Systematic Transfer Plans (STPs), which also do wonders to their financial investments.

In SWP, the investor can withdraw at a decided time while in STP, one can transfer units from equity to debt or vice-a-versa.

Let us see how options such as SIPs, SWPs and STPs can be used during volatile market conditions. SYSTEMATIC INVESTMENT PLAN (SIP)

In the past few years, many investors have come across the term Systematic Investment Plan (SIP) either through newspapers or advertisements.

Although a large number of investors are aware of SIPs and invest through them, there are still plenty of those who stay away from investing in mutual funds through SIPs as many of them are unable to recognize the power of SIPs for the creation of long-term wealth.

SIPs allow investors to benefit from the growth potential of the equity

S


`40. So, A will get `5,000 and then his total units will be cut down by 125 (`5,000/40) and his total units will come down to 9,875 (10,000-125). So A will continue to get `5,000 and his units will continue to come down.

Systematic Withdrawal Plans (SWPs) are, in a way, the reverse of SIPs. So in SWP, instead of selling all the units at once, the income spreads across multiple intervals, which can lower the total tax. A systematic withdrawal plan allows the account holder a certain level of independence from market fluctuations.

SWPs also help investors to adapt to the cash flow to suit his needs (marriage, education or buying a home). However, one has to make sure that while buying an SWP it does not attract an exit load, and if it does, start the SWP after the fixed period (9 month of 12 month).

SYSTEMATIC TRANSFER PLAN (STP)

A Systematic Transfer Plan (STP) is a plan where an investor moves a fixed amount of money from one category of fund to another. Typically, it is seen that whenever markets are down, investors do systematic transfers from debt to equity funds. But whenever an investor needs money for some purpose (retirement, marriage, buying a car), systematic transfers is done from equity funds to debt funds.

Investing in equity comes with a set of risks. Investors can easily opt for an STP if they think that the markets are likely to remain volatile for few more months. Currently, investors can put a lump sum in any equity scheme and then move it to debt funds.

In such a case, the investor can also gain from the appreciation in equity markets and earn decent returns in debt funds. A Systematic Transfer

Plan helps to keep a balance between risk and return.

Investors should also look at exit loads while transacting through STPs as some funds do come with exit loads depending upon the scheme. Just like SWP, STP also has two types of plans: fixed plan and capital appreciation plan.

Some fund houses also offer different kind of STPs, where funds are transferred only when certain criteria are met (for example there will be an STP from debt to equity if the market crashes by 500 points).

An STP comes handy when investors are nearing the goals for which they have saved the money. Say Mr B had saved `20 lakh for his children’s education in one of the equity schemes and is sure that he will need that money after 16-18 months.

To put it in simple words, B can put `20 lakh into the balanced or equity scheme and transfer `1 lakh every month into debt funds. This will ensure that after 16 to 18 months, he gets the full amount and also reduces the risk as he has transferred his money from equity to debt .

Investors can also use STP to invest in an equity linked saving scheme (ELSS) and save taxes. There are minimum instalments that you have to make if you opt for an STP. The minimum number of instalments depends on the AMC and the periodic interval of the instalments.

STP is a useful risk mitigation tool, which aims to provide better returns at the same time. It is also one of the tools which can be utilized when the markets are going down and also when they are going up. It can, therefore, be considered when making investment decisions in volatile market conditionS.


he Nifty Futures traded in a tight range of 5,330-5,190 (as on 13th April) with a positive

bias in the first half of April expiry. The marginal gain in the Nifty futures in the last 15 days was mainly due to Finance Minister Pranab Mukherjee’s statement that P-Notes, which are associated with FII investments, will not be taxed in India and expectations of liquidity enhancement by the Reserve Bank of India (RBI).

At the beginning of the expiry, the RBI tried to improve liquidity in the banking system through open market operations. The RBI injected around `10,000 crore through this OMO with visible results.

Apart from this, the RBI is expected to take some more steps to enhance liquidity to tackle the slowdown in the economy, which is evident from the weak IIP numbers for January and February. India’s central bank is likely to announce these measures in the monetary policy review scheduled on 17th April.

Short covering in the beginning of the expiry, followed by long unwinding, together resulted in a 16% decrease in the Nifty Futures Open Interest (OI) in the first half of April expiry. Though the fourth quarter earnings season started on a negative note with weak earnings by Infosys, the earning season is expected to provide a positive impetus to the markets in the days to come.

The Put Call Ratio (PCR)-OI for Nifty Options has been subdued and is hovering around the 1.1-1.2 levels since the start of the April expiry. One can expect PCR-OI to stabilize at current levels and remain

T range-bound between 0.95 and 1.2.

On the Options side for April series, no aggressive positions were found either on Call or Put side. Slowly 5,200 Put have started seeing an addition in OI since the markets have started picking up, touching a low of 5,200 on the Nifty (as on 11th April). Moreover, if we look at the April expiry OI standing for Nifty Options, the highest OI for Call and Put is seen at 5,500 and 5,000 (as on 12th April), indicating a ranging market as per traders’ perception in coming days.

India VIX (Volatility Index), which measures immediate risk in the markets has remained subdued and is hovering between 20 and 23 levels. This indicates that the markets do not see huge volatile movements ahead of the Q4 earnings season.

This also implies that Options traders are not expecting much risk or downside in the markets. Going forward, we expect VIX to further come down to levels of 17-18. Hence, it is advisable not to go long on volatility (that is, one should not initiate long straddle or strangle strategies) in the month of April. The Nifty has been fairly range-bound between 5,400 and 5,200-5,150 levels since the past few weeks and continues to trade with a sideways bias. In the immediate term, the 5,170 level is the cluster support for the Nifty since it is supported by the 200-Exponential DMA as well as 38.2% Fibonacci Retracement.

Any move above the 5,363 level on the closing basis for at least two trading sessions will take the Nifty towards the 5,450/5,480 levels. Till the time 5,170-5,100 level is intact,

TECHNICAL OUTLOOK FOR THE FORTNIGHT

there is a strong possibility that the Nifty may attempt to scale higher.

However, the Nifty is facing a resistance at the 5,378 level, that is 50% Fibonacci Retracement resistance (5,621-5,135.95). Once it manages to close above the 5,378 level, at least for one more trading session, the upward trend will result for the target of 5,440/5,480 levels. In an alternate scenario, if the Nifty breaches the 5,170 level on a closing basis, then further sell-off till the recent swing low of 5,135/5,100 is likely. Below that, a downside till the 5,050 level cannot be ruled out. Traders with long positions are advised to hold on to their existing long positions and protect their capital with a strict stop loss of 5,170.

The Bank Nifty has taken strong support of the trend line in the daily chart, that is 9,940. The index has managed to breach the crucial hurdle of 10,250 level and if it sustains above this, then you can expect it to rise to 10,500 and 10,630 levels. The support resides at 10,010/9,940 levels on the downside.

STRATEGY FOR APRIL EXPIRY

With an anticipation of a stock -specific action in the second half of April, the Nifty is likely to remain in a tight range of 5,100 and 5,370. Short straddle on the Nifty would be the best rewarding strategy ahead of the April expiry scheduled on 26th April. It can be initiated by “selling 5200CE and 5200PE of the April series”. The net premium inflow comes above `170, which is also the maximum profit. The loss remains unlimited beyond the break-even range of 5,370-5,030 on the NiftY.

PILLARSOF

STRENGTHPILLARS

OFSTRENGTH

Solid foundation, pricing power and low or no capex

form the foundation on

which good businesses rest

Solid foundation, pricing power and low or no capex

form the foundation on

which good businesses rest

hat can Sachin Tendulkar’s recent record of 100th century teach us about

investing? A lot. It shows how consistency and quality is all that matters in the long run. Similarly, investors should invest in high quality companies that have been performing well consistently.

The advantage of this strategy is that while quality provides durability and allows investors to stay longer in the game, consistency helps in outperforming the indices. And in volatile market conditions like these investors should go for basics and choose high quality stocks that look

W good from a risk perspective and offer good returns too. Due to the recent correction many high quality stocks are trading at good valuations.

CHARACTERISTICS OF GREAT BUSINESSES

ON SOLID GROUND

A company should have a great business model and an excellent management. Moreover, since individuals cannot predict the future, they should delve into the past of a company to get a fair idea about its standing. Therefore, they should look into the history of a company spanning over 10 years. A 10 year time span covers almost three business cycles under which a company operates.

The historical performance of the



company answers questions about a company’s margins, returns and profitability. These will not only help in understanding a company’s capability but will also speak about the management and their ability to take right decisions.

To better understand this concept, take the year 2007-08 into consideration. During this period, a number of leading groups went on an expansion mode by acquiring companies and loading lots of debts into their books.

However, due to the financial downturn in the year 2009, many of of them suffered heavily. Only exceptional companies recovered from the shock. Tata Group’s companies like Tata Motors and Tata Steel suffered heavily. But they recovered quite well.

On the contrary, a host of companies, including those from the Anil Dhirubhai Ambani Group (ADAG) are yet to witness a turnaround. Barring L&T, many companies in the capital goods space are doing rather badly and their share prices are currently at levels similar to the crisis in 2009. There are times when things go bad, but only companies with exceptional management are in a good position to deal with them.

The true strength of a company and its management is revealed during tough times. There are many companies and businesses which have failed to recover from the economic and market shock of 2009, resulting in the permanent loss of capital.

PRICING POWER

Despite all the efforts by the government and the central bank, inflation has not come down significantly. Further, international crude oil prices continue to put

pressure on the rupee, subsequently hurting inflation. In such a scenario, companies should have the ability to pass on the price hike or possess the pricing power to stay in the business. The companies with a strong pricing power have the ability to sail through tough times. They do not lose business in an inflationary environment. However, this is easier said than done as only those companies that are leaders in the industry and have a competitive advantage, have the pricing power.

Companies like ITC, Hindustan Unilever, Nestle, Hero Motocorp, Maruti, Asian Paints and Bharti Airtel, among others have time and again exhibited these qualities. This is also the reason why the market considers them as safe investments as they have the ability to pass on the price hike.

However, not all companies can pass on the cost to the consumers. For instance, sugar companies and those from the steel and the aviation sectors are very susceptible to the rise in input costs and, therefore, incur huge losses, resulting in disappointments for investors as share prices react badly to such events.

If companies have pricing power, they can maintain margins. And if the margins are protected, then it will also protect return ratios and thus ensure that share prices do not fluctuate at a fast pace.

MORE PREDICTABLE AND LESS SUSCEPTIBLE

A risk-averse investor will probably seek growth along with stability. But stability comes from the nature of the business and its products and services. Typically, a consumer-centric business with less competition and a leading position in

the industry would tend to be stable given the nature of the business.

Companies like Colgate, Gillette, Nestle, HUL, Proctor & Gamble and even for that matter Bharti Airtel have stable businesses due to the inherent consumer-centric nature of operations they have and their leadership.

The demand for their products are more structural and to a large extent linear. Stability also brings predictability to the business, which is a must to remain invested.

There are cases where companies have almost gone bust within the first or the second year of their entry into the markets. This would remind investors of gold finance companies and micro finance companies, which got listed recently and also collapsed, within no time. The fortunes of many companies in the infra and power space too soured over night.

Predictability comes with the nature of the business. If the company is selling products and services which are more secular in demand and less susceptible to external environment, then such businesses tend to be predictable and stable.

A company which makes toothpaste, soaps and detergents, medicines, etc has a lesser chance of sudden contraction in demand because of the nature of business and the products and services that it offers. These products are needed irrespective of the external environment.

Conclusively, if a company is into the business of catering to the basic needs of our societies, then the demand is going to be more predictable.

However, this is not enough. The investor needs to ask if the company has a competitive advantage over its peers. The competitive advantage


enables companies to command and protect higher profit margins and report superior and sustainable returns on capital. State-owned telephone company MTNL is a classic case of how a stable company with almost no competitive advantage can turn unstable.

IMMUNE TO COMMODITY CYCLES

A good business should typically have sustainable and structural growth and should not be influenced greatly by external factors like commodity prices and interest rates.

A real estate, engineering and construction company can be very susceptible to interest rate fluctuations in the economy, whereas others like companies from the cement, metals, textiles and automobile sector could be susceptible to commodity prices.

The fortunes of companies whose dependence on commodities in the form of raw materials or finished goods is excessive, will be determined by the prices as well as the demand and supply situation of that particular commodity. Such companies tend to exhibit volatile earnings and financial performance, which will be reflected in their respective share prices.

LESS OR NO CAPEX

Incurring capital expenditure to expand capacities for growth is not at all a negative indicator as long as the company is allocating capital and resources which gets reasonable returns compared to the returns earned on risk-free instruments.

Hence, if a company is investing ̀ 100 crore for the purpose of expanding the business, with the ability to generate 20% returns, the investment makes

sense because if the same money is kept in the bank it would generate half the returns generated by the business. Thus, adjusting for the extra risk that investors take, expansion makes all the more sense.

Higher the returns, better it is for investors. So in this case if the company does not expand, it will continue to generate good returns but then growth will be stalled.

However, here investors need to differentiate between companies. A bank, say Yes Bank, might continue expanding its branches initially to fuel growth but the same may not hold true in the case of SBI, whose growth is largely dependent on the increase in revenue per branch or growth largely fuelled from the existing branches rather than opening new branches.

A company might expand capacities initially to reach the required scale like in the case of Yes Bank. But once a particular scale is reached, it might not require the same amount of capex.

Unfortunately, this does not hold true in all cases. This is because certain companies and sectors like steel, cement, sugar, textile and many others have to continuously expand their capacities so that the growth momentum is kept intact.

Importantly, as most companies expand their capacities during boom time, funding through high cost funds and diluting equities, they tend to suffer during adverse situations.

Additionally, in most cases companies have the do an advanced capex or the capex to meet the desired growth for say the next five years.

One will hardly hear a cement company or a steel company taking baby steps while expanding

capacities. The companies have to expand big time to achieve economies of scale.

However, this very often takes a toll on the financials of the companies as costs relating to such expansions (like depreciation, interest cost) do not correspond to the income in the initial years. The capacities could remain idle and thus erode the returns earned on investments.

On the contrary, there are also businesses that require minimal or almost no capex and yet continue to grow year after year.

Companies in the FMCG space and automobile as well as pharma companies are perfect examples of the same as they require very less capital for growth and generate very high returns on investments, leading to huge internal cash generation which in turn is paid back to the shareholders of the companies.

There are many companies including Nestle, HUL, Hero MotoCorp which are believed to have a consistent record of paying dividends. This is possible given the business model they have, which requires very less capex for the purpose of expansion.

Companies in the service sector are able to do this. Let us take the example of a leading rating agency Crisil. The company has an asset-light business model.

Once basic offices are opened and the team is in place, the business does not require much capex to grow. Except the initial capex, the company continues to drive growth from the existing resources. And whatever small amount of capex is needed is funded through internal accruals.

Coal India is sitting on a huge cash ranging between `30,000 crore and


`40,000 crore in their books because the company requires minimal capex as compared to the size of its revenue. There are many companies that have neither borrowed nor raised capital throughout their life. Even manufacturing companies are able to do this through outsourcing.

In such cases whenever there is a growth in demand, the capex is undertaken by the supplier and not the main company. In fact, in many cases it is not the shareholders’ fund which runs the business, but the money that is given by customers or dealers in the form of advances.

Many companies in the auto and FMCG space, among other sectors have a negative working capital. The benefit of having a negative working capital is that the companies do not need funds and whatever cash is generated internally in the business is either kept ideal or paid back to the shareholders. The companies in these categories can be promising and

prove to be low-risk investments. NO DEBT, LESS RISK

Companies that do not generate enough internal cash or funds require external funding to meet their capital expenditure needs, especially debt funding. Companies tend to over leverage in good times and even acquire companies or assets, which are financed through debts.

However, as business environments become difficult and interest rates rise, companies with high leveraging tend to face difficult times.

We have already seen how the share prices of companies such as Suzlon Energy, HCC, Kingfisher Airlines, Hotel Leela and Punj Lloyd, among others were hammered in the year 2010 and 2011. For a risk-averse investor, it would be prudent to avoid companies that have high debt and are not taking a call on the direction of the interest rates.

COMPANIES WITH HIGH PLEDGING, FCCBS AND EXPOSURE TO DERIVATIVES

A number of companies have done a lot of damage to shareholders and also their own credibility as a result of pleading of shares, excessive use of derivatives and huge FCCBs in the books, which are due for redemption in the near term.

Most of these companies did not have enough funds or were not prepared for the FCCB redemption. They will have to either raise more funds or take a hit on their balance sheets. There are hundreds of companies, including Suzlon Energy whose share prices are under pressure on account of worries over FCCB conversion.

Investors would be better off if they pay attention or stay away from such companies. Also, excessive pledging of shares by promoters could have a devastating result on the share prices of companies if the pledged shares are sold in the open markeT.

Registered O�ce: Nirmal Bang Securities Private Limited. 38-B, Khatau Building, 2nd Floor, Alkesh Dinesh Mody Marg, Fort, Mumbai - 400001. Tel: 3926 8600 / 01; Fax: 3926 8610Disclaimer: Insurance is a subject matter of solicitation. Mutual Fund investments are subject to market risk. Please read the scheme related document carefully before investing. Please read the Do’s and Don’ts prescribed by Commodity Exchange before trading. Through Nirmal Bang Securities Pvt. Ltd. *Through Nirmal Bang Commodities Pvt. Ltd. #Distributors investment in securities is subject to market risk. investment in securities is subject to market risk

EQUITIES | DERIVATIVES | COMMODITIES* | CURRENCY | MUTUAL FUNDS# | IPOs# | INSURANCE# | DP

The most intelligent strategy in Chess is to be ready with the next move.

Similarly, currency trading involves moves that are a combination of knowledge

and skill, backed by years of experience.

Currency Derivatives Trading with us keeps you a few steps ahead, always.

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

When a market is neither witnessing an

uptrend or a downtrend, it is most likely to be a sideways market, also

known as a directionless or a �at market

he year 2012 has been spectacular so far. We have already clocked returns in excess of 20% to 30% on

major indices with individual scrips showing gains of almost 80% to 90% in many cases.

Volumes in markets have been great and volatility has been shooting through the roof. This volatility and violent market behaviour has been aided by a host of external factors such as lowering of inflation, interest

T rate cuts, currency fluctuations, company results, global liquidity, foreign fund flows, rise in crude oil prices, elections and the Union Budget, among others.

But now, all of a sudden we seem to have run out of triggers to offer any clear direction to the markets. Hence, it is quite likely that we may witness many sessions of lacklustre trading or range-bound markets, which is more commonly known as sideways markets in the coming times.



A sideways trend will have a chart pattern which will exhibit neither the formation of clear-cut higher tops and higher bottoms nor clear-cut lower top-lower bottoms. The price keeps bouncing up and down between the support and resistance levels.

invested in small duration fixed maturity plans, short-term fixed deposits and other such assets, which have easy liquidity for hassle-free switching back in equities when the time is right.

If you still feel the need to invest in the stock market, then do so through the SIP mode so as to average out your purchases.

Also, if you are planning to buy stocks, look for good dividend-paying stocks so that you receive a regular income flow even when the stock itself is in a limbo and there is comparatively less volatility in the particular stock.

In every market there will be some sectors, which will be outperformers. Try and identify flavours of the market and tilt your portfolio in favour of these sectors.

Generally, defensive sectors such as healthcare and FMCG do not move much during a trending market, but during a sideways market, investors flock to such stocks considering them as safe haven and, hence, usually tend to do well in a sideways market.

In a sideways market, a top-down investing approach can be very useful with a long-term perspective. Starting with the macro environment, both domestically and internationally, and factors such as interest rates, inflation, growth, etc, and then eventually narrowing down to individual sectors and companies can help investors to pick up stocks that will be superstars of tomorrow.

Shifting to intraday trading can also be an option. Although a sideways market does not move much for a certain period of time, on a daily basis there might be huge fluctuations in the price of a stock. By following the daily amplitude of a scrip, one can

It is very easy to trade a market that is in an established trend - be it up or down. You just have to go with the trend. But the million dollar question is: “what should one do in a sideways market?” Let us find the answers.

WHAT IS SIDEWAYS MARKET? Trend: The direction of the movement of a stock or a market is known as a trend. When prices are rising, it is said to be an ‘uptrend’. When the prices are falling, it is said to be in a ‘downtrend’.

When the prices are moving in a narrow range or band without any clear trend, either uptrend or downtrend, then it is said to be a ‘sideways’ trend. It is also known as a directionless or a flat market.

Market experts also call it consolidation. In fact ‘sideways’ is not really a trend in itself. It is the absence of a clear trend.

A sideways market is like a treadmill: you can run a lot but at the end of it you will still be where you had started. In the same way, a sideways market can see a lot of push and pull by both bulls and bears alike.

But eventually the stock/market would not have moved much. The main sign of a sideways market is that ‘volumes’ are generally quite low.

An uptrend will have a chart pattern of higher highs and higher lows.

A downtrend will have a chart pattern of lower highs and lower lows

TIPS ON TRADING IN A SIDEWAYS MARKET

Do nothing. Remember ‘doing nothing’ and ‘being lazy’ are two very different things. Sometimes doing nothing is the best investment strategy that you can apply. In a range-bound or sideways market, opportunities to make money are few and far between.

In fact, there is an increased chance of losing money as there is lack of trend and you can only guess as what would be the direction of the next trend.

The best idea is to take a break from active trading and investing and use the time to research fundamentally strong and promising stocks which will rise when the market wakes up from its slumber.

Look at other investment avenues such as fixed deposits, real estate, gold, bonds, etc. If you have excess funds that you have earmarked for equity investments, those can be


trade the markets or a stock in both directions and make handsome sums. Also, brokerages on intraday trades are much lower than delivery trades. Therefore, market participants can leverage their positions due to margin facilities offered by most stock brokers for intraday trading.

Hedge you position. If you are buying a certain stock, hedge your position by selling futures or buying puts so as to reduce the risk.

� Be prepared to wait and do not get frustrated with stagnancy in the markets and your stocks as this can cause you to take rash and careless decisions which you might regret later on.

STRATEGIES FOR TRADING IN SIDEWAYS MARKETS

Channel Trading

A sideways market usually trades in a band or a channel. That is, when the stock reaches the resistance level (upper end of the band), the supply outweighs the demand.

Hence, the stock starts to fall and again when the stock reaches the support level (the lower end of the band), the demand increases enough to overcome the supply and the stock starts to rise again.

How To Trade The Channel?

When the price of the scrip touches the top of the channel or the resistance level, individuals should sell the existing positions or initiate fresh shorts.

When the price touches the bottom or the support level, one should start buying or square off the short positions.

When the price is in the middle of the channel, you should hold your position or refrain from taking any new positions.

Stop losses should be kept a couple of points above the top if you are going short or a few points below the bottom or support level, if you are going long.

Any breakouts from the channel on the upside should be used to go long. Any breakout on the downside can be used to go short. Breakout signals the initiation of a new trend.

Another important thing for investors to watch out for is the time spent within the channel. The longer the price trades within a support or resistance area, the greater is the opportunity for prices to penetrate either the support or the resistance line with stronger conviction.

So, if the stock has been trading in the channel for only a few days and it gives a breakout on either side, then chances are that the price of the stock might go back within the resistance or the support channel.

However, if a particular stock has been trading within the channel for several weeks or months on end, and then gives a breakout, the chances are that it will continue in the direction of the breakout.

Options Strategy To Trade In A Sideways Market

Options is the best tool to trade in a

sideways market. There are many Options strategies that can be utilized by an investor during a sideways market. Many of the strategies, however, are quite complicated and entail a huge number of permutations and combinations. What we shall study today is a very simple yet effective Options strategy for a sideways market known as ‘short strangle’.

This requires the trader to sell both - an out-of-the-money Put and an out-of-the-money Call Option of different strike prices but with the same expiration date. Since you are the seller of the Option, you get to pocket both the premiums.

As long as the market stays within the range of both the strike prices, you get to keep the premiums. Only if the market moves significantly in a single direction do you incur a loss on the strategy you have initiated.

Also, time decay works in your favour. As the time to expiration comes nearer, the Option price moves closer to zero and at expiration the Option price becomes zero and the trader gets to keep all the premium that he has received.

Word Of Caution: As a seller of Options, your income is limited. However, your loss potential can be unlimited. And also the margin requirements for the strategy could be quite high. Hence, keep the above point in mind before you start trading in this strategy.

Finally, keep in mind that in a trending market, you try and predict where a particular stock or the markets will go. On the other hand, in a non-trending market or a sideways market, only an investor has to try and predict where the stock or the market will not go and you are seT.

Resistance

Support

Such a market can be played with reasonably good results on a daily basis and will also help earn handsome returns.

DISCLAIMERIn the preparation of the content of this magazine, Nirmal Bang Securities Private Limited has used information that is publicly available, including information developed in-house. Such information has not been independently verified and we make no representation or warranty as to its accuracy, completeness or correctness. Any opinions or estimates herein reflect the judgement of Nirmal Bang Securities Private Limited at the date of this publication/ communication and are subject to change at any point without notice. This is not a solicitation or any offer to buy or sell. This publication/ communication is for information purposes only and is not intended to provide professional, investment or any other type of advice or recommendation and does not take into account the particular investment objectives, financial situation or needs of individual recipients. For data reference to any third party in this material no such party will assume any liability for the same. Further, all opinion included in this magazine are as of date and are subject to change without any notice. All recipients of this magazine should seek appropriate professional advice and carefully read the offer document and before dealing and/ or transacting in any of the products referred to in this material make their own investigation. Nirmal Bang Securities Private Limited, its directors, officers, employees and other personnel shall not be liable for any loss (financial or otherwise), damage of any nature, including but not limited to direct, indirect, punitive, special, exemplary and consequential, as also any loss of profit in any way arising from the use of this material in any manner whatsoever. The recipient alone shall be fully responsible/ are liable for any decision taken on the basis of this material. This magazine is prepared for private circulation only. Nirmal Bang Securities Private Limited, its affiliates and their employees may from time to time hold positions in securities referred to herein. Nirmal Bang Securities Private Limited or its affiliates may from time to time solicit from or perform investment banking or other services for any company mentioned in this document.

RNI Reg. No. MAHENG/2009/28962

We are humbled and honoured to be awarded the

‘Best Emerging Commodity Broker’ at the Bloomberg UTV Financial Leadership Awards 2012,

conducted through meticulous research by knowledge partner ICRA. This award is an

acknowledgement of the dedication and perseverance of our team of experienced research analysts

who have been giving calls on prominent business channels and print media that have consistently hit

bullseye, thus reinforcing people’s faith in us and encouraging us to serve them better.

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

We are humbled and honoured to be awarded the

‘Best Emerging Commodity Broker’ at the Bloomberg UTV Financial Leadership Awards 2012,

conducted through meticulous research by knowledge partner ICRA. This award is an

acknowledgement of the dedication and perseverance of our team of experienced research analysts

who have been giving calls on prominent business channels and print media that have consistently hit

bullseye, thus reinforcing people’s faith in us and encouraging us to serve them better.

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

LIVING UP TOEXPECTATIONS

Financial Leadership Awards 2012

Bloomberg UTV

Beyond Market - Issue 65beyondmarket.nirmalbang.com/issue65/Download/magazine.pdf · V-Guard Industries Ltd: Victory March Strong brand building and an effective business model will

Documents