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Sunday, September 16, 2007

Art of Trading

How much can you rely on the laws of chance? A coin-toss has equal chances of heads or tails. However, as cricket fans know, there can be long consecutive sequences of heads (tails) and knowing the formula doesn’t make it possible to predict the next drop.

Stock market fluctuations are far more complex and random. They cannot be accurately modeled. A stock moves in three possible directions – up, down, or sideways. So far as a trader is concerned, he loses on two out of these three movements.

The moves are not equally likely. A sideways move (no change, or change lower than brokerage payable per trade) is least likely. Over the long-term, there is an upwards bias. But there are also long downtrends. Every move has different magnitudes. Frequency distributions of price change have been mapped. But no formula exists to predict direction or magnitude of change.

Successful trading starts with a mental estimate of maximum possible gain or loss. Contrary to popular opinion, good traders are not much better than amateurs at divining price direction. But they are much better at maximising gains and minimising losses. There are certain techniques that all good traders appear to have in common. One is the stop-loss.

Before entering a position, the trader will decide how much he can afford to lose and set a stop. Even more importantly, if the stop is hit, he will have the discipline to cut his losses. An extension of the stop-loss is the trailing stop. This is designed to lock in profits in a winning position. Once a position goes into the black, the trader moves up the initial stop. He will reiterate this while the stock trends up. When the trend reverses, the trader books a profit.

A third technique most good traders seem to follow is pyramiding. In a profit-making position, they commit more resources. That way, if the trend holds, the absolute returns are higher (though the return on capital employed drops).

If strictly followed, these two-and-a-half techniques cure the most common trading errors. The biggest losses come when a trader averages down in a losing position rather than cutting out when a stop is hit. The discipline of pyramiding only winning positions ensures good money doesn’t disappear chasing the bad.

The other big mistake traders make is mistiming profit-booking. The nervous sell too early; the optimistic hang on until long after the trend reverses. A trailing stop takes care of both tendencies.

However, where does one set stops? If you’re trading a stock with an assigned limit, it’s easy. You know the maximum swing in a given session. So, you can calculate stops in terms of the number of maximum losing sessions you are prepared to absorb.

If you’re trading F&O stocks, there is no mechanical limit. You can try the value-at-risk formula, which exchanges use to calculate margins. But there is a danger to VAR, which is well articulated by Nassim Nicholas Taleb.

VAR assumes price-changes have normal distributions. This is not quite true. A normal distribution assumes price-change will be within one standard deviation of average about 68 per cent of the time. It will be within average plus/minus two standard deviations about 95 per cent of the time and within three standard deviations 99 per cent of the time.

Given roughly 250 trading sessions per annum, even normal distributions suggest about three annual sessions of extra volatility. With volatile stocks, the standard deviation may be greater than the average but that isn’t the worst problem. The issue is that moves of average +/- 3 SD occur much more often – price volatility distributions have long tails. Such swings can be magnitudes larger.

Take the Nifty for example. Since January 2000, in 1935 sessions, it has an average daily price change of 2.04 per cent with a standard deviation of 1.34 per cent. That means a session with a price swing of 6.06 per cent should not occur more than 18-19 times.

In reality, the Nifty has registered 35 moves of greater magnitude! It has registered double-digit moves twice and 9 per cent moves on three more occasions. If you’re on the wrong side of that in a margin position, you’re dead and buried. Managing stops in such scenarios is a gray area where trading becomes an art rather than a science.

India Real Estate

India Real Estate

Aditya Birla Nuvo

Aditya Birla Nuvo's diverse businesses provide a natural hedge to investors.
Companies having diversified business portfolios are generally better off than those that are in a single business as an economic downturn in one business can be compensated by growth in other businesses.
Besides, there is always a possibility of unlocking value in future by demerging or having a separate subsidiary.
One such company worth looking at is Aditya Birla Nuvo (earlier Indian Rayon). Aditya Birla Nuvo (ABN), not only provides numerous businesses in one basket, but its strategy of investing in relatively new and high growth potential businesses such as life insurance, asset management, telecom and branded apparel retail apart from IT and BPO services also puts the company into a different orbit altogether.
Despite being a major out-performer in the past year, the stock still has a potential to give a robust upside of roughly 30 per cent in next one and half years according to the consensus estimates of sum-of-parts valuation done by major broking firms.
A truly diversified play
The company, which started off with rayon business in 1956, has entered into many businesses in the last five decades, some of them either through acquisitions or mergers. It has divided its numerous businesses into two areas-value and growth.
In value businesses, it has rayon (including viscose filament yarn), carbon black, textiles (linen yarn and fabrics), fertilisers and insulators.
Its growth businesses include life insurance and asset management (in a JV with Sun Life, Canada), telecom (Idea Cellular where it has a 32 per cent stake), apparel retail (brands like Van Heusen and Allen Solly), IT (PSI Data Systems) and BPO services (Transworks and its subsidiary, Minacs).
The company does not have any plans of value unlocking though it is open to the idea at the right price.
Says Bharat Singh, managing director, ABN, “The company’s growth businesses are still at an investment phase and value unlocking is feasible once a business achieves a certain scale as in the case of telecom.”
Dominant position
Besides diverse businesses, ABN has also created high entry barriers and achieved leadership in some of its businesses, new and old, which shows that it has not lost focus.
For example, in its value businesses, the company is the world’s third largest and India’s largest producer of insulators; the world’s fourth largest and India’s second largest manufacturer of carbon black; the largest manufacturer of linen fabric and India’s second largest VFY producer.
In a short span of time, the company has emerged as one of the dominant players in its growth businesses.
For instance, its BPO business is among the world’s top 15 BPO companies and in India’s top three; its telecom business is among India’s top five mobile services providers; it is the sixth largest life insurance player and the seventh largest mutual fund.
Says Singh, “The company has successfully positioned itself from a pure manufacturing company to a branded player and a services company.”
Share of growth business to rise
ABN wants to take the share of its growth businesses to 86 per cent in the next three years from the current 66 per cent and 35 per cent in FY03.
This is another positive as all the newly entered businesses are less penetrated in India and offer tremendous potential for growth.
For example, the life insurance penetration in India is low at 4.8 per cent to GDP against the world average of 7.5 per cent. Similarly, mutual fund penetration is below 10 per cent of total savings in the country.
Also, the tele-density in India especially in rural areas of less than two per cent and addition of 7 million subscribers every month augurs well for telecom players including Idea. BPO and branded garments are also high growth areas.
Not that its traditional businesses are on a weak wicket. Carbon black and insulators are doing well due to strong demand from auto and tyre industries and power sector respectively.
Huge investments lined up
Sensing these opportunities, the company has plans to spend Rs 1,000 crore over the next three years to grow its branded garments, apparel retail and BPO businesses.
The company is aggressively expanding its financial services and retail businesses. While it is adding 200 branches to the existing 139 this month for life insurance, ABN plans to double its distribution presence to 100 at the end of this fiscal.
Further, the company has already locked in retail space of 2.5 lakh sq ft this financial year, which will take its retail space to over 5 lakh sq ft which will double in the next three years.
Financials to improve
Though the company has witnessed a growth of 47 per cent and 68 per cent a year in sales and net profit over the last four years, its year-on-year quarterly performance especially since December 2006 has not been encouraging as its margins (both operating and net) are on a decline.
In the June 2007 quarter, operating margins were affected by factors like appreciating rupee impacting its export intensive businesses like textiles, garments exports and IT services, plant shutdown for maintenance in fertiliser and carbon black segment, low margins in its overseas BPO business, loss-making life insurance business and escalating costs, especially employee costs.
Net margins were further affected by higher interest outgo mainly due to acquisition of Minacs and investments in Idea Cellular.
Going forward, the company believes that volumes will be robust though margins may remain thin. Life insurance will break even in FY10 and direct employee costs are unlikely to go up further.
Enam Securities expects a top line and bottom line growth of 20 per cent plus over the next two years. The consolidated debt-equity ratio of about 1.4 is likely to remain constant as the money needed for investments have already been locked in.
A decent upside
Based on a sum-of-parts valuation for FY09 by Edelweiss Securities and Enam Securities, investors can expect a decent return over the next year.
Telecom, life insurance and apparel retail are expected to be the biggest growth drivers.
Investors who are looking to tap the growing Indian opportunities due to changing demographics, higher aspiration levels and rising income levels can consider investing in the stock.

Kouton Retail IPO

Koutons Retail's public offer looks attractive based on FY09 earnings.
For the believers of the retail boom story, it is difficult to not have faith in the apparel business. This is because apparel retailing forms 40 per cent of the retail business, and is growing at an annual rate of 30 per cent a year.
Thus, it is worthwhile looking at companies focussed on this business. With its IPO, Koutons Retail India will be added to this list of apparel retailers.
Koutons, a Delhi-based integrated retail company, plans to raise Rs 95-106 crore with the issue of 2.6 million equity shares in the price band of Rs 370-415 besides an offer for sale of 0.92 million shares for expansion of stores and capacities.
In the past, the company has raised money from institutional investors such as UTI Ventures, Agronaut Ventures and Passport India Investments. Fidelity picked up 4.16 per cent stake at Rs 430 per share.
An aggressive retailer
Koutons, by far, has the largest retail network among the organised apparel retailers with 999 exclusive brand outlets (EBOs), 8.4 lakh sq ft and a presence in 221 cities, concentrated in the North.
The company plans to open 140 additional stores in the next two years and expand its presence across the country. The company has two brands: Koutons (the flagship brand with 566 stores as on August 20) and “Charlie Outlaw” (with 433 stores).
The company also manufactures a wide range of apparel---shirts, trousers, denims, suits, blazers, T-shirts, cargos and sweaters catering especially to men.
The company has plans to introduce a new line of women’s wear (Les Femme brand) and kids’ wear (Koutons Junior). Its manufacturing and finishing capacity stands at 12.4 million pieces and 22.9 million pieces respectively at present with 18 in-house manufacturing or finishing units and 14 warehouses, in and around Gurgaon.
Koutons’s retail presence is wider than even the more established and renowned players like Raymond and Madura Garments (having brands like Allen Solly, Van Heusen and Louis Philippe).
However, it has ramped up its own retail operations in a short span of two years and its number of stores has multiplied from 74 in March 2005 to 999 now. This has also boosted its financial performance as its sales and profits have leapfrogged in the last three years.
Moreover its strategy of positioning its products as “Value for Money” and catering to the young and the middle class population augurs well as the target markets are growing at a robust pace.
Some risks but not alarming
The risks involved in investing in Koutons outweigh its strengths though they are not alarming. The first risk is that 99 per cent of its stores, albeit exclusive, are owned and operated by franchisees.
Thus, Koutons does not sell directly to its end consumer but is involved in manufacturing, warehousing, advertising, branding and inventory control. The store-owner will seek the highest return on his investment, so the strength of the brand has to be maintained in terms of revenues.
The Koutons management says that it has managed to retain most of its franchisees over the past three years. The second risk is that brands like Raymond, Peter England and Allen Solly, have a better brand recall, while Koutons is an emerging brand, with not as much awareness.
Koutons records its sales when products are sold actually to the consumer. According to analysts, this is risky though they commend the conservative approach of valuing the sales.
The company has huge investments in inventory, which has led to negative cash flow from operations in the last two years, and its inventory turnover ratio has declined over the last three years, which is not a good sign for a retail player.
The company attributes this inventory pile-up to new stores, which are increasing briskly, but sales in the new stores will take some time till they get established.
Though the opportunities are aplenty in the Indian organised apparel retail industry, the sector is highly competitive, fragmented, working capital intensive and seasonal in nature.
Moreover, finding suitable locations at competitive costs is also a major challenge, but Koutons, which goes through the franchisee model, is not affected as much.
Lastly, the company’s expansion plans are going to materialise in the first quarter of FY10, which is a long period though the recent ramp up will support the sales and profit growth till that time.
Skyrocketing growth
Koutons has reported the fastest growth in its sales and profits among its listed and closest peers partly due to a smaller base. Sales have grown by 135 per cent a year, while profits went up over 200 per cent every year in the last three years.
But, how far is this growth sustainable? Growth rate will be lower in terms of percentage as the base effect will have an impact though they will be good in absolute terms. This is because the stores were ramped up only in the last two years and are expected to contribute more aided by additional capacity.
A long term play
The company had an 8.6 per cent net profit margin in FY07. However, they are still lower than its closest but a smaller peer–Kewal Kiran Clothing–which enjoys a higher net margin of 14 per cent.
At the given price band, Koutons is trading at 30 times and 33.5 times for FY07 earnings respectively. Assuming that the net profit grows 100 per cent in FY08 and 50 per cent in FY09, it trades at 16.4-18.3 times and 10.9-12.2 times respectively.
This is higher than Kewal Kiran which trades at 16.7 times, 13.7 times and 10.5 times respectively for FY07, FY08E and FY09E. However, it should be considered that despite being a late starter, Koutons has managed to achieve higher sales and profits than Kewal Kiran.
The offer looks attractive on FY09 basis. Long term investors can invest in the company.
Issue opens: September 18
Issue closes: September 21

Niche Picks

Companies with unique business models are typically rewarding investments.

There are two kinds of businesses. The first one fights tooth-and-nail in trying out to be the next big thing in an already crowded universe of businesses. The second kind attempts something different and tries to succeed.

Some of these niche players aim for leadership even if it is a small industry segment. These companies demonstrate a strong growth both in their top lines as well as profitability, as their niche grows in size. Some niches grow large enough to support more than one player.

Consequently, the stocks of these companies earn fabulous returns and their valuation commands a scarcity premium. Although we came across quite a few companies which operate in market niches that are unparalleled, here are some interesting ones.

Some of these companies have a first-mover advantage, which prohibits competitors from entering their specific niche. In a few cases, certain technological capability may give them an edge.

In others, it is simply the business model that works favourably. Hence, we look at those companies which have a combination of a product or a service to offer that has a market different from the run-of-the-mill players in the industry. Read on.

No bar
A first-mover in the radio frequency identification (RFID) solutions and smart cards markets, Bartronics is the largest smart card manufacturer in India with a capacity of producing 80 million smart cards a year.

Add to this, it also provides a range of solutions comprising of the hardware and software required to automate inventory management and tracking for its various types of clients, which include retail chains, warehouses, manufacturing companies and the like.

Bartronics has reported increasingly strong numbers year after year, and maintained high profitability. “We are looking at an overall target (top line) of around Rs 200 crore for the current financial year,” says Sudhir Rao, MD, Bartronics.

At around Rs 255, the stock trades at nearly 19 times and 11 times estimated FY08 and FY09 earnings which is not expensive, even after the recent rally in the stock. For starters, the stock has earned 40 per cent over the past month.

Tried and tested
First, it was packaging research that brought Bilcare into limelight, and now its foray in clinical trials and related services to big pharma, which puts the company on a high growth trajectory.

Bilcare is also considering inorganic growth. “We are looking at technology and R&D focussed pharma outfits for potential acquisitions,” says Vineet Mehrotra, CFO, Bilcare.

Over the past three fiscals, Bilcare’s revenues have grown at over 50 per cent y-o-y. Going forward, the clinical services vertical which contributes nearly 20 per cent to the top line at present is expected to account for half of FY11 revenues.

Bilcare’s operating margins are decent at 28 per cent. Add to this, its new clinical research training venture, Bilcare Academy, is a cash rich business.

At 21 times estimated FY08 earnings and 17 times estimated FY09 earnings, there appears to be room for an upside, if one factors in the potential of the training business.

Action ahead
The only listed player and an early mover in the direct-to-home arena, Dish TV has already made a strong foothold with 2.1 million subscribers so far.

Even though the company is yet to break even since it is investing heavily in acquiring subscribers, the large subscriber base will give it an edge once the competition steps up. The industry is likely to witness entrants like Bharti, Sun Astro and Reliance ADAG.

At present, Dish TV has a market share of 75 per cent. With the market expanding rapidly, the growth is not likely to dampen.

Further, Dish TV already has an established 400 strong distributor network and nearly 35,000 dealers across India, keeping it on top of the pack.

Considering the current demand scenario, analysts estimate the company to turn profitable by FY10, and expect the subscriber base to grow at a compounded annual growth rate of over 25 per cent by FY12.

Despite the gestation period involved, the annuity nature of business coupled with a large customer base makes a good case of strong cash flows. At present, the stock is trading not too far from its 52-week low of Rs 69.40. Looks like it’s time to enter the counter.

Ride the learning curve
One of the rare educational content creation and delivery players listed on the bourses, Educomp Solutions boasts a strong order book for its online education solutions.

During FY07, Educomp signed on 2,819 government schools as compared to 613 a year earlier. For the first quarter of FY08, it added 2,800 more schools.

With this high-paced client acquisition, low capital expenditure, Educomp’s profitability is likely to expand dramatically this year.

The company is expected to continue to raise the bar as it comes up with newer service offerings and initiatives to leverage its capabilities further.

And that is the reason it trades at an expensive multiple of 90 times estimated FY08 earnings. Educomp is no longer a lone star on the bourses; the recently listed Everonn Systems is in the same business.

Fire and dry ice
Nitin Fire Protection, a leading player in fire protection, safety, security and intelligent building management systems has interests in high pressure cylinders, fire extinguishers and fuel dispensers.

Since the demand for each of its products is growing exponentially, the company has been in an expansion mode, which went on-stream recently.

Analysts estimate its revenues to grow at 90 per cent a year till FY09, while net profit growth will be faster at 120 per cent.

At Rs 457, the stock trades at 20 and 11 times estimated FY08 and FY09 earnings respectively. Compare this with another promising pick, Everest Kanto Cylinder, which trades at a discount to Nitin Fire, mostly due to its less diverse business mix.

Airport power
So far a diversified infrastructure player across sectors such as power, roads and airports, GMR Infrastructure seems to have found its comfort zone in airports. It already has the Hyderabad and New Delhi airports up its sleeve, and recently, it won a contract to develop one at Istanbul, Turkey.

It has strong operational partnerships with Malaysia Airports, Germany’s Fraport AG and Turkey’s Limak for its airport forays.

Compared to its other build-operate-transfer (BOT) projects, airports are usually a high return business. Again, in its BOT projects, even though the upfront capital expenditure is huge, the returns are spread over a longer horizon.

Although valuations appear expensive, the stock has slid significantly from its 52-week high of Rs 1005 to Rs 768. One may enter at dips.

Cultivating profits
Micro-irrigation, a relatively unheard of segment, is set to grow leaps and bounds due to the renewed impetus on agriculture in the country. Jain Irrigation is the only listed player focused on drip irrigation systems.

To spread its presence, the company acquired a 50 per cent stake in NaanDan of Israel, the world’s fifth largest micro-irrigation company. It also has a presence in food processing and exports.

At around 20 times estimated FY08 earnings and 16 times estimated FY09 earnings, the stock is valued reasonably, given the company’s prospects of growing at a compounded 40 per cent annually over the next three years.

Shining arrays
One of the few players in the light emitting diode (LED) business globally, and the only listed player in India, Mic Electronics is looking at a huge market of LED lighting for billboards and video walls for advertising, signalling systems and industrial lighting.

Mic has an order book of Rs 150 crore as on June 2007 and is now investing Rs 75 crore in capacity expansion as well as marketing from the money it raised via its IPO.

Robust financials promise an earning per share of an estimated Rs 26 in FY08, and Rs 35 in FY09, which results into fairly low price-earning multiples of 22 and 16, respectively.

Optical zoom
Opto Circuits makes medical devices such as sensors and pulse oximeters, and products for non-invasive surgery such as catheters and stents, used in procedures such as angioplasty.

Since the products are innovative, the segment poses significant entry barriers for new players. Again, the company’s cost efficiencies allow it to earn an operating profit margin of almost 30 per cent consistently.

The company has a track record of rapid inorganic growth across geographies. Growing demand for its products make Opto Circuits attractive irrespective of its price-earnings multiple based valuation.

Further, there is hardly any comparable benchmark. Since the company is taking off from a small base, there still remains ample headroom.

Zicom Electronic is another one-of-a-kind pick which is engaged in security products such as close circuit televisions (CCTVs), alarms and monitoring and surveillance systems for home, commercial and industrial use.

Although the company created no buzz for a long time, recently it announced its plan to open 180 exclusive retail outlets across the country over the coming two-three years.

A retail foray, imminent product launches and the planned expansion abroad are likely to be the growth drivers for the company. At nearly 24 and 21 times estimated FY08 and FY09 earnings, the stock may appear expensive, but one may enter at declines.

Bias remains positive

The Sensex came very close to its all-time peak last week, but eventually the rally fizzled out and the index ended on a flat note at 15,604, up by 14 points. The index had begun the week on a sour note and dropped to a low of 15,364. A recovery thereafter saw the index rallying to a high of 15,825, up by 461 points from the day’s low — just 44 points shy of its all-time high of 15,869.

Following the recent upmove, the index has now formed a higher base around the 15,300 level. Tuesday’s Fed meet outcome is likely to weigh on the market sentiment and play a major role in determining the future trend.

Bias continues to remain positive and if the Sensex is able to surpass its recent high of 15,869, the index could very well rally up to 16,050 level. Above this, the index may target 16,400-16,500 in the short term.

This week, the index may face resistance around 15,780-15,835-15,890, while in case of a downmove, the index is likely to find support around 15,430-15,370-15,315. A break of 15,300 could see the Sensex testing its crucial support zone of 14,935-14,650. The Nifty moved in a range of 130-odd points last week. From a low of 4,453, the index surged to a high of 4,583, and finally finished with a gain of 9 points at 4,518.

This week, the Nifty may face resistance around 4,565-4,580-4,600, while on the downside, the index is likely to find support around 4,470-4,450-4,435.

The Nifty is likely to find considerable support around 4,450, below which the index may drop to 4,320.

The mid-term (50-day) moving average for the Nifty is currently at 4,415 and the short-term (20-day) moving average is at 4,380. The long-term (200-day) moving average is at 4,121.

Worlds Worst Polluted Places 2007

Via Blacksmith Institute

Rakesh Jhunjhunwala - the Indian bull

It is 12.30 pm at RaRe Enterprises, Nariman Bhavan. There are five monitors showing more red than blue. The market is facing a blood bath. The Sensex is falling. In the thick of the action, Rakesh Jhunjhunwala turns from these screens, he is unruffled.

There is a massacre happening as investors lose wealth but Mr Jhunjhunwala looks at you almost bored and says “lets not discuss the markets”. The biggest investor in India is chewing paan as he loses wealth on his screens. He lights a cigarette. He loosens his white shirt. He has not worn a tie for the last five years.

“I know I am losing wealth but should I let this bother me? I don’t think so. I would be crazy to look at my wealth like this. I believe that India stands on strong fundamental grounds and over a period things are only positive. But please do not interpret this as Rakesh Jhunjunwalla is saying that the Sensex is going to touch 40000. Some day it may touch. But who knows when?”

For a man who purchased Tata Tea for Rs 5000 when he was only fifteen years old, Rakesh Jhunjhunwala has a total networth of ap-proximately Rs 6000 crore along with his wife Rekha Jhunjhunwala. The exact value of the portfolio is something he doesn’t like to talk about.

He doesn’t have any rules for his science of investing. But his ap-proach is fundamental and takes a long-term view thus he is also re-ferred as the Warren Buffet of India. Jhunjhunwala has never met Warren Buffet but admires and even follows his style of investment.

“Don’t insult the great man by comparing me to him. I am young and I’m constantly learning. There is so much to learn from others.” He pauses and refuses a phone call from a big corporate house in India. “But at the end of the day I want to be only Rakesh Jhunjhunwala and nobody else”, he says.

Retail investors, analysts and fund managers always want to know what he is buying. Everybody wants to be a part of Rakesh’s stocks. He knows that. He leans back and looks at you and tells you that he is not an advisor or a fund manager.

He and his wife came into the limelight with Crisil Limited. At the end of April 2005 he was holding 14.26% of the company, accounting for Rs 70 crore. In the same year the couple made Rs 27 crore after they sold out to the S&P open offer at Rs 775 per share. Today his in-vestment in Crisil is worth more than 200 crore and the holding accounts for 7.63% of the entire company. In all the companies that he has invested, it is this investment that has given him his famed mo-ments.

In India, bull runs have been associated with certain individuals. In the nineties it was Harshad Mehta and in early 2000 it was Ketan Parekh. But Jhunjhunwala does not like to be associated with any booms. He believes that the market is above individuals. Individuals can be associated to excesses in the markets, but not to the phase of the markets itself, he believes. It is like if the market is at a P/E multiple of 20, an individual might just make investors believe that the P/E should be 22. He thinks that individuals who believe that they are bigger than the markets do not last for a long time.

“The market is rational. An individual can never be smarter than the market”, he says and his phone rings. Someone wants to sell him a credit card or personal loans. He politely refuses and drags on his cigarette.

“The market is about greed and fear. Sometimes there is too much greed and sometimes there is too much fear. It has a lot to do with the psychology of the market. You have to sometimes read the market like you read an individual”, he adds.

But Mr Jhunjhunwala has not taken any courses in psychology or behaviorial finance to understand the psychology of the market. He has always believed that psychology cannot be learnt in classrooms. He has learnt his lessons in finance by practicing them and never believed in borrowed wisdom. He has liked his experience first hand. “I have experienced the markets from its core. You know I was there during the day of the bomb blasts when it happened. I have seen ups and downs so my understanding of the market is from being in there”.

That is probably why international fund managers like to spend time with him to understand the Indian equity market. He meets at-least two international fund managers a week. Probably that is where he markets or tries to sell the India story to the global equity fund managers. He doesn’t like it when he is referred in this context.

“How can you sell the Indian equity to the global fund manager? Is it an FMCG product like toothpaste or a shampoo? These fund managers are here because they believe in the fundamentals of the country. Not because a Rakesh Jhunjhunwala wants them to buy Indian equity”. He gets slightly excited.

Incidentally, foreign investors are selling Indian equity as global markets are facing a liquidity crisis. Those who have purchased the India story are jittery. Highly leveraged funds that invest into global markets based on borrowed money are facing the heat. They have purchased assets that they are not able to value. They don’t even un-derstand the nature of these assets.

As the ground beneath their feet starts to shake, Rakesh Jhunjhunwala sits firm. He was in Lonavala watching movies when the crisis was very severe. He is patient and knows that this shall also pass. The red on the screen will turn to blue. The market will once again be the winner. Mr Jhunjhunwala will remember this. His greatest fear - he might fall prey to his own philosophy. The market will remain above all individuals.

At a time when the market is going through volatility and an uncertain phase, Jhunjhunwala has no advice for the investors. “I don’t advice anybody. I don’t manage anybody’s money. I manage my wife’s money because I don’t have a choice.” He smiles and stubs his cigarette

Koutons Retail India

Koutons Retail India (Koutons) designs, manufactures and retails apparels. Products are market under the Kouton" and Charlie Outlaw brands through 999 exclusive brand outlets (EBOs), on 20 August 2007, across India.

With 18 in-house manufacturing / finishing units and 14 warehouses spread across various locations in and around Gurgaon, Koutons had an annual finishing and manufacturing capacity of 22.92 million and 12.36 million pieces of apparel, respectively, end March 2007. The company’s brands are marketed through three outlet models (a) company owned / leased and company operated (COCO); (b) company owned / leased and franchisee operated (COFO); and (c) franchisee owned / leased and franchisee operated (FOFO). The company had 17 outlets, 124 outlets and 858 outlets under COCO, COFO and FOFO models, respectively, on 20 August 2007. The Koutons brand had annual sales of Rs 372.69 crore in the year ending March 2007 (FY 2007).

Recognising the vast untapped potential in organised apparel retailing, Koutons plans to utilise Rs 41.22 crore from the IPO to opening 140 new EBOs by FY2009. The company has already opened 3 EBOs and signed MOUs for another 78 EBOs. The new stores would either be under COCO or COFO model. It is currently scouting for locations for the remaining 59 planned EBOs. About 13,000 sq meters of land has been acquired in Gurgaon where an integrated manufacturing facility at a cost of Rs 30.19 crore is to be set up. Koutons also proposes to infuse Rs 10 crore to increase its finishing and manufacturing capacity and Rs 5.58 crore to improve its IT infrastructure.

Promoters DPS Kohli, BS Sawhney and GS Sawhney are also selling their 9,16,542 equity shares (3% of post-IPO equity) through the open offer along with the present IPO.


A semi-integrated player with capabilities across a large part of the value chain: manufacturing and retailing. In–house manufacturing and finishing have helped to improve operating profit margin on a sustainable basis: from 1.4% in FY 2003 to 17.5% in FY 2007.

Enjoys a strong brand-presence in north and north-west India. Of the 999 EBOs, 531 EBOs were present in northern on 20 August 2007. As a result, this region accounts for around 65-70% of the total revenue. To reduce the risk arising from geographic concentration, operations are being expanded in other parts of India. West and east India had 29 and 38 stores, respectively, and none in southern and central India end March 2006. However, EBOs in these regions were 178 (west), 193 (east) and 97 (south and central India) on 20 August 2007.


Seems to keep inflated price for its products for most part of the year and then resort to large end-of-the-season discounts to generate annual sales. Recorded 48% and 43% of total sales in FY 2006 and FY 2007 in the last quarter of the fiscal year on end-of-the-season sales and on recording sales only after the receipt of sales report from respective consignee agent.

Bears the risk of inventories and keeps inventories on its books till sales to retail customer. This not only increases risks of large-scale returns in future/ major write-down of unsold inventories, but also locks up huge working capital. Though sales stood at Rs 402.40 core, inventories increased Rs 276.11 crore (to Rs 373.84 crore) end FY 2007. As a result, cash flow from operating activities was a negative Rs 201.25 crore!

Franchisees contributed 99% of the total sales in FY-2007. However, off late, has started building own COCO network of EBOs. Had 17 such outlets on 20 August 2007. Going forward, intends to increase the number of such EBOs. This may give rise to conflict of interest with franchisees, hampering growth.


Recorded 154% increase in net sales to Rs 402.40 crore and 161% increase in net profit to Rs 34.49 crore in FY 2007. On post- issue equity of Rs 30.55 crore, EPS works out at Rs 11.30.

At the offer price band of Rs 370 – Rs 415 and on FY 2007 earning, P/E is 32.8 (on the lower band) and 36.8 (on the upper band). P/E of other comparable listed players are: Raymond (12), Kewal Kiran Clothing (16), Zodiac Clothing (14), and Provogue (63, the high P/E is due to its subsidiary developing malls).

LIC to invest more in equities

Gone are the days when LIC, at the behest of the government, used to anchor troubled stock markets. Today, the life insurer has a mandate from ULIP investors to buy shares.
Life Insurance Corporation of India has already purchased equity shares worth Rs12,000 crore in the markets this fiscal, with 80% of its new business premium coming from unit linked insurance products (ULIPs).
“Our investment in equity has been Rs12,000 crore this fiscal and Rs32,000 crore in debt as on August 31, 2007,” LIC’s Chairman T. S. Vijayan said on Friday after presenting the bonus and financials for 2006-07.
Birla Sun Life Insurance pioneered ULIPs in India just four years back and LIC’s first ULIP product was introduced in early 2005.
Driven by ULIPs, LIC’s investment in equity markets is set to double this fiscal if current demand continues.
Meanwhile, the total purchases of LIC in the stock market this year had already touched Rs19,700 crore as compared to Rs24,000 crore in the entire fiscal of 2006-07.
Besides total ULIPs fund investment of Rs14,000 crore in market this fiscal, another Rs5,700 crore exposure in markets represented traditional products.
Under ULIPs, up to 80% fund gathered by LIC could have exposure to equity markets in contrast to only 8 to 10% exposure taken for traditional products.
LIC’s total investment in the capital market as on March 31 stood at Rs1,24,643 crore.
ULIPs unlike traditional products offer the option of investment under four different funds that take exposure in bond and equity market as per the risk appetite of an individual.
The policy holder has the option to choose any one of the four funds called bond, secured, balanced and growth funds.
To a query that traditional products had taken a hit with the ULIPs popularity soaring, Vijayan said, “LIC was planning to give a strong push to its traditional products” too.
In all, LIC has 48 different products of which only three were ULIP products but their share in new business premium was 80%.
The two new ULIP products introduced by LIC last month are Profit Plus and Fortune Plus with 5 to 20 years terms.
With a healthy growth in its businesses this year LIC planned to invest around Rs1 lakh 17 thousand crore this year in equity, central and state govt. bonds, infrastructure securities as compared to Rs90,000 crore last year.
However, insurance giant’s market share was getting eroded with private insurance companies eating the pie.
Last year LIC market share was 74.18% with a premium collection of Rs55,934.6 crore while the private insurers’ together had a total share of 25.82%.
In terms of number of new policies however LIC enjoyed a much better market share of 82.83% with 3.82 crore new policies.

Weekly Watch - Sep 15 2007

Weekly Watch - Sep 15 2007

Weekly Technicals, Track Report

Weekly Technicals, Track Report

Stock News

On a larger front……….
Goldman Sachs & Co initiated coverage on the country's steel industry and gave it an “attractive” rating. The report said that the access to high-quality, low-cost iron ore reserves offers Indian steel companies an edge over regional and global peers. It also said that the robust steel prices will be sustained as demand momentum remains buoyant enabling global steel producers to pass on the costs from tight raw material and freight markets.

HSBC Holdings Plc raised its ratings on India to “overweight” from “underweight” meaning that investors should hold more of the nation's stocks than the representation in the benchmark indices. The report stated that India offers the lowest earnings volatility in global emerging markets, a number of interesting structural growth stories like consumption, infrastructure, telecommunications and service outsourcing. It also said that the economy should be fairly resilient to a US slowdown.
The Centre for Monitoring the Indian Economy (CMIE) raised its GDP forecast for FY08, from 9% to 9.1%. The RBI and government are confident of an 8.5% growth.

Index changes…
Indian Petrochemicals Ltd (IPCL) will be amalgamated with RIL. Hence, from October 5, 2007, there will be changes in the indices on which it is included.

Nifty: IPCL will be replaced by realty firm Unitech.

BSE 100 / BSE 200: IPCL will be replaced by realty firm DLF Ltd.

BSE 500: Sun Pharma Advanced Research Co Ltd to replace IPCL

Company specific …………
RIL was in the news. It secured government approval to sell natural gas. It is also the world's largest polyester maker and this week expectations were high that the acquisition of the assets of Malaysian-yarn maker Hualon Corp will help boost fabric exports.

ABG Shipyard, the country's biggest shipbuilder outside government control, said it plans to add four dockyards to repair vessels as demand for sea transport increases.

SBI plans to raise Rs 10,000 crore in a share sale this year but is yet to decide on whether to sell stock to the public or target only existing investors.

Indian construction company Gammon India faces criminal charges after an overpass being built by it in Hyderabad collapsed.

L&T said it won a Rs 762 crore order jointly with Germany's Outotec GmbH.

The state-run electric power transmission company Power Grid Corporation of India, witnessed a stupendous response to its IPO. The issue is aimed at meeting the capital requirements for the implementation of 15 identified transmission projects and for general corporate purposes.

Diamond Cables announced that they have secured orders for 2750 transformers.

IPCA Labs announced that it has acquired Australian Dossier Registration Company.

Dr Reddy's Lab announced that they have received USFDA approval for Ranitidine (Zantac).

Lupin announced that they have won Ramipril product patent challenge at the Federal circuit.

BPCL and Videocon Industries Ltd are to acquire a stake in a Brazilian oil exploration company owned by Canada's EnCana Corp.

Reports stated that Essel Propack (Indian maker of laminated tubes and packaging) plans to buy the packaging unit of Alcan Inc.

Tata Steel is supposed to be setting up a 5mn-tonne steel plant in South Africa.

Alchemist announced that they would acquire a majority stake in Kaiser Hospital.

Idea Cellular's board approved a plan to put its wireless towers and other infrastructure into a separate company.

Rallis (agrochemicals company belonging to the Tata group) plans to bid for Japan's Arysta LifeScience Corporation.

Cairn announced that it has secured government approval to build a pipeline.

Bharti Airtel secured a license from Singapore to offer global connectivity.

Reliance Communication announced that they have started blackberry Service in India.

IFCI Update

N Balasubramanian, chairman of ailing industrial lender IFCI which is looking for a strategic partner for stake sale, has resigned citing his conflicting role as adviser to one of the bidders.

The development would not affect the process of 26% stake sale by IFCI as financial bids from interested parties were yet to be invited, a key company official told PTI.

Balasubramanian, who resigned with immediate effect before Expressions of Interest (EoI) from 10 entities were opened yesterday, is no longer IFCI Chairman, the official said, speaking on condition of anonymity.

The board would ratify his decision, besides taking up "other routine issues" at its meeting scheduled for September 20. The board meeting will be followed by shareholders' meeting the next day, the official added.

Balasubramanian was also adviser to Standard Chartered Bank, one of the entities in a consortium, that has submitted EoI. A consortium-led by WL Ross, including Standard Chartered Bank, Goldman Sachs and HDFC has submitted the EoI.

Efforts to revive IFCI moved ahead after Balasubramanian assumed charge of the office in early August this year. EoIs were invited from August 13.

Besides a consortium-led by WL Ross, nine other companies and consortia have evinced interest in picking up stake in IFCI.

Of them, seven are stand-alone including domestic financial institutions IDFC, Kotak Mahindra Bank, GE Capital, Cargill, French banking company Nataxis, US-based private equity fund managers Blackstone and Newbridge.

Updated at 1845 hrs: As many as 10 domestic and foreign financial institutions and consortia have evinced interest in picking up 26% stake in IFCI, the expressions of interest for which were opened today.

Out of 10 suitors, seven are standalone including domestic financial institution IDFC, Kotak Mahindra Bank, GE Capital, Cargill, French banking company Nataxis, US-based private equity fund manager Blackstone and Newbridge, an IFCI official said.

The interested parties also include three consortia including one between W L Ross, Standard Chartered Bank, Goldman Sachs and HDFC, and another between Punjab National Bank with Shinsei Bank of Japan and US-based investor JC Flowers, he added.

Besides, Morgan Stanley in consortium with Sterlite Industries has also evinced interest in the picking up stake in the financial institution.

As on March 31, 2007, Morgan Stanley and Goldman Sachs had 2.5% and 3.3% stake respectively in IFCI.

The company will evaluate the EoIs and announce the shortlisted investors on September 25.

Thereafter, the shortlisted entities would be asked to undertake due diligence and submit bids indicating the price they would be willing to pay for the 26% stake.

Based on the technical and financial bids, the board would finalise the name of strategic partners. Request For Proposal (RFP) would be floated by October 1.

The pre-qualified investors will need to submit sealed financial bids by November end.

Ernst & Young (E&Y) had been appointed by IFCI as consultant to find a strategic partner for reviving the financial institution.

US Market Update

Wall Street expects Federal Reserve policy-makers to cut interest rates next Tuesday to help ease a global credit squeeze, a much anticipated event that spurred stock prices higher this week and could boost them next week. Investors expect the Federal Open Market Committee to cut the federal funds rate in response to growing concerns that the US economy is slowing and may be heading into recession.

Short-term interest rate futures on Friday indicated investors believe a half a percentage point cut in the federal funds rate is slightly more likely than a quarter percentage point cut when the FOMC meets.

Some investors say the stock market has priced in a quarter-percentage point rise, limiting any upside. But if the past is a guide, investors will react to the actual event, said David Bianco, chief US equity strategist at UBS in New York.

“I think the market's going to have a positive reaction to it, I really do,” said Bianco, who expects a 25 basis point cut in the federal funds rate and a 50 basis point cut in the discount rate. “It will signal a response to what's going on, to try to prevent credit market troubles from spreading to the real economy,” he said.

Polls showed on Thursday that economists see about a 30% chance that the US enters recession in the next 12 months should the effects of a housing slowdown continue to seep into the wider economy.

Major US stock market gauges moved up this week in anticipation of a rate cut, with the Dow Jones industrial average posting its best week since April. For the week, the Dow rose 2.5%, the benchmark Standard & Poor’s 500 Index gained 2.1% and the Nasdaq Composite Index rose 1.4%. On Friday, the Dow closed up 17.64 points, or 0.13%, at 13,442.52; the S&P 500 closed up 0.30 points, or 0.02%, at 1,484.25, and the Nasdaq closed up 1.12 points, or 0.04%, at 2,602.18. Investors will want to see if the subprime mortgage trauma has worsened for four big investment banks — Lehman Brothers, Morgan Stanley, Bear Stearns Cos. Inc. and Goldman Sachs Group Inc. — when they release fiscal third-quarter earnings results over three days next week. The release of third-quarter earnings for most companies doesn’t begin in earnest until October.

The banks have diversified business models and are able to profit from worldwide economic growth, which will alleviate any downdraft of credit market issues, said Michael Cuggino, CIO of the Permanent Portfolio family of funds in San Francisco.

Volatility is likely to intensify at week’s end because of the expiration of four different options and futures contracts, a quarterly event known as “quadruple witching.” Investors also will be parsing inflation data for August, information on housing starts and building permits, also for August, and unemployment claims for the week ending September 15.

According to economists, producer prices, which are a measure of prices paid at the farm and factory gate, are expected to decline 0.2% in August when the Labour Department releases data on Tuesday.

India Equity Strategy

India Equity Strategy

More options for speculation

For short-term investors who want to speculate and generate some quick returns on their investments, the Indian equity derivatives market has emerged as a significant platform. The sheer margin by which derivatives trading volumes has been consistently exceeding cash market volumes over the past few years, attests to the attraction of these derived markets (with contracts out to a maximum three months) as short-term investment vehicles.

This emergence of the derivatives market to a dominant position has broadly coincided with an “almost” secular bull run in Indian equities — now into its fifth year. This coincidence, in turn, has created a particular pattern of trading in derivatives dominated by single-stock futures. Single-stock futures indeed have emerged as the most widely used speculative investment vehicle for investors — accounting for as much as 60 per cent, on average, of all derivatives volumes over the past few years.

It is easy to infer from this point onwards that, in the midst of the sustained bull run in the underlying cash market, the positions in single stock futures are mainly long. Short speculative futures positions, indeed, would have been totally unsustainable in the face of the secular run-up in equities, which seems set to continue.

Quite apart from the market trend-driven trading pattern in derivatives, only the following trading positions in derivatives would be optimal or ideal from an investor’s point of view from a conceptual angle. These are: long futures and a long call option position. Only these two positions provide the combination of potentially unlimited profits as well as limiting the downside for the investor.

This combination of pay-offs results from the fact that while asset prices can theoretically rise to infinity, they cannot fall below zero. For a long futures position, therefore, the maximum mark-to-market loss will be the difference between the entry price and zero. For a long call position, the maximum loss will be the premium paid if the option is not exercised.

Leveraging derivatives

Concepts aside, it is the on-going momentum and trend that generally determine the nature of market positions. But in the bull-run context, it is interesting to note that long call option positions (and more generally options as a product class) form only around 3-4 per cent of derivatives turnover despite this product also providing the combination of unlimited upside with limited downside.

One of the unique characteristics of derivatives is that they permit leverage. That is, based on a small outlay, an investor can take exposures, the size of which is many times the initial outlay. This magnifies the profit potential. The loss potential also, of course, is magnified in relation to an investment in the cash market. But the following argument is made in the background of Indian retail investors using the derivatives markets as the prime avenue for speculation. Having chosen derivatives, between futures and options, options are a far more refined instrument of speculation and leveraging. An example will prove this point. Consider an investor who has Rs 25,000 to invest and has the following alternatives:

Investment in the stock of a company currently quoting at Rs 130, or

Buying (the nearest month) call options on the stock of the company at a strike price of Rs 135 for a premium of Rs 3.50 per option

Therefore for an investment of Rs 25,000, the investor will be able to buy around 192 shares of the company or 7100 call options on the underlying stock The Table gives the final pay-offs on maturity, say one month later, assuming t hat the stock price at maturity is either Rs 120 or Rs 140.

As can be seen, the call option position has magnified both the profit and loss positions for the investor. Compared to a loss of Rs 1,920 when the stock is bought in the cash market, the investor will suffer the loss of his entire Rs 25,000 (premium paid) had he invested the money in buying call options. This is because at a final price of Rs 120, the call option will expire worthless as the underlying stock is worth less than the strike price (Rs 135) on the option.

On the other hand, the profits on the call option position if the market moves in the investor’s favour are several times that from the cash market. If at maturity the stock quotes Rs 140, the investor can exercise his call option @ Rs 135 and book a profit of 5*7100 options = Rs 35,500. Net of the premium Rs 25,000 paid, the profits will be around 50 per cent on the investment of Rs 25,000 in a period of 1 month only. That is the effect of leverage. Against that, the profit on the underlying cash market position will be only Rs 1,920.

Futures vs Options

The investor can also go long on futures on the underlying stock by putting up the necessary margin. Assume that the lot size on derivatives (common for both futures and options) on this stock is 2,950 shares. The margin on the futures position will be around 15 per cent of the contract value – which is the product of 2950 and the futures price locked in. Assuming a price of Rs 135, the margin in fact will work out to around Rs 55,000 – which is more than double of what the investor can put up.

(All prices given in the above example are ruling market prices on a particular company’s stock / derivatives).

The contract specifications on futures, by itself, can or should be a deterrent to speculating through futures. On an on-going basis, the mark-to-market mechanism, in case the market moves against the investor’s position, could be an additional drain on the cash flow. On the contrary, options would be a far smoother and more efficient way of speculating as they do not involve marking-to-market and, therefore, would not involve intervening margin calls.

If, despite these advantages, options have not taken off as a speculative vehicle, it just points to the amount of work needed to be done on creating awareness about this product in the retail investor community. Investors have to note that a margin put up on a long futures position is quite the same as the premium paid for a long call option position. Both are investments. And given current regulations regarding contract specifications on futures, investments in options would appear to be more efficient and capable of more smoothly generating the benefits of leverage that derivatives provide.