Falling markets makes most stocks look attractive this Diwali

In yet another attempt to salvage a sinking stock market, market regulator SEBI has made it easier for promoters with over 55% stake in companies to increase their holdings through creeping acquisition. However, though stock prices are at their extreme lows, it’s unclear how many promoters would use this opportunity, given the liquidity crunch and turmoil in financial markets.

SEBI has now allowed promoters to buy up to 5% stake every year to increase their holdings up to 75%. In order to ensure that such buying is reflected in the stock prices and provides an opportunity for retail investors to exit, the regulator said that such share purchases should be in the open market. “This is aimed at bringing in the promoters as natural buyers. In the absence of buyers, even a small offloading by FIIs is difficult for the market to absorb,” said a senior investment banker.

Also, promoters are automatically exempt from SEBI regulations for a 5% increase in stake annually as a result of a buyback by the company. This again will make it easier for companies to carry out stock buyback.

SEBI announced the relaxation on Monday, when the Sensex broke yet another psychological level, slipping below the 8,000-mark intra-day before recouping a major portion of losses. The rupee dipped below Rs 50 a dollar intra-day, but closed higher following RBI intervention and dollar selling by a large US bank. The Sensex plunged to a three-year low of 7,697.39, before bouncing back to close the day at 8,509.56, down 191.51 points, or 2%, from the previous close.

The 50-share Nifty closed at 2524.20, down 59.80 points, or 2.3%, from the previous close. Bears were clearly unruffled by reports that the regulator was analysing data to find out attempts to hammer down prices. It is also becoming obvious by now that the ban on overseas lending of Indian shares by FIIs is not having the desired impact. As per provisional data, FIIs pulled out a net Rs 1,027 crore on Monday. However, the only silver lining is that domestic institutions still appear to be flush with funds: they bought shares worth Rs 916 crore net on Monday.

With the markets continuing to fall, valuations have now lost all meaning. The mood in world markets too continues to be grim, as investors appear to have reconciled themselves with a global recession, notwithstanding efforts by central banks and governments to halt the rout in financial markets.

South Korea cut interest rates by a record 75 basis points on Monday and pledged more spending and tax cuts next year, yet investors remained unconvinced. The centre of the storm in Asia was Hong Kong, with the Hang Seng index falling over 12%.

Money market rates in London were little changed as concerns of a global recession overshadowed efforts by policy makers to stimulate bank lending. The yen rose more than 2% against the dollar for the second day, trading near a 13-year high, as tumbling stock markets prompted investors to sell higher-yielding assets funded with Japanese loans.

PE ratios of blue-chips at historic low

The stock market is in bad shape & share prices of most companies are tumbling as if there is no tomorrow. In the last nine months, things seem to have moved from irrational exuberance to irrational pessimism . Nothing illustrates this better than the level of share prices relative to their underlying earnings.

This ratio is what in market jargon is referred to as the price-earnings (P/E) multiple. In essence, the P/E ratio of a share tells you how many rupees you have to pay for every rupee worth of net profit of the company. Thus, if a company has one crore shares and a net profit of Rs 100 crore, each share commands a profit of Rs 100. If you have to pay Rs 200 per share, the P/E ratio is 2. In other words, for every two rupees you invest, your effective return is one rupee per year.

Of course, you might actually get in hand only a part of this since only the part of profits that is distributed as dividends is handed over to the investor, but even the rest is reinvested in the company, thus adding to the value of your share. It should be clear that this is a fantastic rate of return, considering that to earn one rupee a year from a bank fixed deposit you would need to invest about Rs 10.

Today, share prices have fallen so much that in many cases, the P/E ratio is down to 2 or even lower. That means if you are investing Rs 100 to buy a share of such a company, your investment will earn Rs 50 or even more in one year.

For those who are skeptical about whether the reinvested portion of profits really helps them, here’s the opinion of Warren Buffet, one of the world’s richest men and widely regarded as among the most savvy investors. Buffett believes companies that reinvest the entire amount back are a better bet to put your money in. He has argued that you buy a share because it gives you betters return than investment in other instruments.

If a company is growing, it will need to invest in the future and hence distribute little or nothing as dividend . Such a company is actually enhancing your returns for the future. On the other hand, a company that gives back the entire earning in the form of dividend is effectively telling you it cannot find anything to do with the money , which means it is unlikely to grow and hence likely to yield low returns in future.

On average, good companies with a healthy future tend to earn returns of around 20% on their total investment as against a return on bank deposits of around 10%. In normal times, P/E ratios of blue chip companies would of the order of 20, though in cases where future earnings are expected to be much higher you could have correspondingly higher P/E. (Of course, it varies from industry to industry, which is why it makes more sense to compare P/Es of companies within a certain industry rather than across industries.)

That brings us back to the abnormally low P/E ratios for several blue chips in the Indian market today (see chart). Take the example of Hindalco Industries. Its annualized net profit on the basis of its first quarter result for 2008-09 would be Rs 2,787 crore. It has 122.65 crore shares. Therefore, every share of the company has an underlying profit Rs 22.64. But a Hindalco share could be bought on Monday for just Rs 40.40. That means, an investment of Rs 40.40 could earn a net profit of Rs 22.64 in one year, a P/E ratio of 1.78. That’s an annual rate of return of over 56%.

Similarly, Tata Steel’s P/E ratio of 2.11 at Monday’s closing price means buying the share gives you an annualized return of over 47%. Including these two, there are at the moment seven Sensex scrips that are trading at P/E multiples of less than 5. In other words, the underlying return on investments in these scrips would be over 20% per annum. Of course, there is a caveat to be added here. These calculations are all assuming that results declared so far are a good indicator of annualized earnings . If earnings in the remaining quarters do not match up to what was achieved in the first quarter, then P/E multiples would be higher even at the same share prices.

Even if the P/E multiples rise to say 10, it would make sense to invest provided the company is growing in the long run. After all, when you invest in equity you are looking not only at returns from earnings, but also at potential capital appreciation.

Unitech to sell stake in its telecom arm

Real estate major Unitech has finalised its deal to offload stake in its telecom arm Unitech wireless to Norwegian telecom giant Telenor. Unitech will inform the stock exchanges later oday. Unitech is likely to sell its 43% stake for around 1 billion dollars.

The deal will value Unitech's telecom arm at over 2 billion dollars. Just last month another start up telecom firm- Swan Telecom had offloaded 43% stake to Etisalat for 900 million dollars. Unitech is likely to get a higher valuation as it has licences to operate in all 22 service areas and expects to roll out services in the first quarter of calendar year 2009.

The company had earlier said it would invest rs.20000 crores in its telecom operations. TElenor already operates in Pakistan and Bangladesh and is the second largest non-asian operator in asia after vodafone.

5 Investment Ideas for Long Term

As Buffett says, “you should be fearful when others are greedy and greedy when they are fearful.”

Our advice: Hold the greed and begin nibbling at stocks slowly from here on.

Perhaps you will think us as contrarians, asking yourself, are they really recommending buying stocks when everyone else is saying don’t touch the stock markets with a barge poll? But then you can’t build wealth by going with the herd, can you?

By now almost everyone is sure stock markets are not going anywhere in a hurry; at least not up in a hurry. We could also be in for a prolonged period of slowdown and dull stock markets- yet, we are saying, if you have the cash you are king and it’s time to start building a portfolio which could return serious wealth in 5 years from now.

And 5 years it will take for any good stock strategy to work.

That does not mean that you put all your money into the stocks we are recommending tomorrow. But begin to track these stocks. Start understanding their businesses, read all the news you can get and then buy in small bites.

Buy 10-15-20 shares at a time- put a small fraction of your money into the shares you like and go on buying till there is value or you feel you have invested a large enough slice of your share pie. So the mantra today is small meals frequently.

So, to begin with, how have we chosen the 7 stocks. These are the parameters:

# Market cap greater than Rs 250 crore
# 10 per cent year on year growth for 3 years in net sales
# 10 per cent year on year growth for 3 years in net profit
# No dip in profits or sales in the last 2 quarters
# Steady or growing Operating Profit Margin in the last 3 years
# Steady or growing Operating Cash Flow in the last 3 years
# Other ratios kept in mind: Return on Equity, EPS, Cash EPS, PE

So which are the ones which have passed this stringent test?

Here’s a Stock List:

# Indraprasta Gas
# Bharti Airtel
# KS Oil
# Mphasis
# HDFC Bank
# Bank of India
# Titan Industries

Indraprastha Gas

All that is gas, need not always be bad. Indraprastha Gas has proved it. This is the company that makes CNG available to you and me in and around Delhi. Those who use piped gas in Delhi and those who see and stand in long lines at CNG stations know the product- gas as fuel. It’s time you looked at the stock. For long lines that irk the consumer causes the investor in you to grin.

A few facts about the company:

# Aggressively increased its gas distribution network in and around Delhi

# Squeezing efficiency out of the company which shows up in the rising margins

# This shows up on the returns on the equity- one of the key ways to look at the fundamental strength of a company- that has been growing and is now at 33 per cent. Obviously IGL is not growing by throwing in more capital, but is using its capital more productively

Stock Pick : IP Gas

# Net margins are rising : 20 per cent in FY 07-08 - that means on Rs100 of sales you make Rs 20 pure profit.
# Cash EPS is rising: at almost Rs 15- each share has Rs 15 cash free for the company to spend on reinvestment, dividend or investment.

# ROE is rising and is now at 33 per cent.
# At a price of Rs104, we get a PE of just 8.

This is an amazing story- go get it!

Bharti Airtel

This is India's largest telecom company which has created serious wealth for investors. What we like about Bharti particularly is the increasing net profit margins; the company is getting more and more efficient and its shows in the net margins which have gone up from 17 per cent to 24 per cent in the last 3 years. And any company which is efficient will stand well in times of a slowdown and emerge stronger at the end of it.

Alas, telecom penetration in India is low and volume growth will continue in rural India and Bharti is best poised to take advantage of that. So summing up, why Bharti?

Stock Pick: Bharti Airtel

# High operating margins: 40 per cent in FY07-08
# Increasing net margins
# High cash EPS: Rs 55
# At Rs 667 its PE is Rs18

Considering the high growth of the company and the overall sector, we are confident that it will command higher valuations in the future and makes an attractive buy now.

KS OIL

Peter Lynch says that the more boring the business, the shabbier the corporate HQ, the better the business. He in fact would hold it against the company to spend huge amounts on doing up corporate offices.

In the edible oil business, KS Oils sells branded mustard, soybean and palm oil. If you live in the northeast and eastern region of the country, there is no way you would have missed this brand. Central and north India will see it on the shop shelves soon.

Incidentally, the company is also an OLM NDTV Profit award winner for investor returns in 2008.

# Sales growth more than 90 per cent in the last two quarters as a result of its focus on retail push and bringing efficiencies in supply chain management.

# To keep the input prices from giving sudden shocks, KS has backward integrated into buying oil seed plantation abroad.

Stock Pick: K S Oil

# Return on equity is still high at 30 per cent
# Sitting on cash of Rs 150 crore
# The price of Rs 45 discounts earnings by 11 times
# Little known company, but obviously this oil is greasing some portfolios with profits

Clearly, there is money in oil.

Mphasis

In the IT space, we like Mphasis; it’s a global IT outsourcing and BPO company. The company has grown in excess of 40 per cent for last six quarters, while profits have grown in excess 50 per cent in last six quarters, expect for March 2008 where appreciation of rupee affected the margins. The best part is the stock is currently available at 12 times earnings.

Stock Pick : Mphasis

# Expanding operating margins from 16.83 per cent in Q4 March 08 to 22.32 in Q2 of FY 09
# Growing return on equity : from 13.5 per cent to 22 per cent in last 2 yrs
# Depreciating rupee should help improve margins....
# At Rs181 trading at PE of 12

HDFC Bank

Reasons for liking this stock:

# Net profit growth of more than 30 per cent for 32 straight quarters
# FII stake up to 27 per cent from 25 per cent September 08 over 07
# As ROI falls, bond portfolio will give a return kicker
# Prudent norms will prevent a big hit on defaults

PE of 23 still high, but it is holding its head over water.

Why HDFC Bank?

# Net margins at 13 per cent still good for FY 08
# Net profits growth 37 and 45 per cent in the last 2 Qs
# Cash EPS at Rs 590
# ROE at 18 per cent
# Price of 1,048 gives a PE of 24 time, bit expensive, but looks good

PSU Bank of India looks great too. The results that came earlier this week were very good- net profits are up almost 80 per cent in the September quarter.

# Solid performance: 30 per cent growth in net profits in the last 13 straight Qs
# Bank has held its head above water in the market meltdown
# Fall in interest rates will benefit bond portfolio
# As funds are difficult to get in the global markets, demand for credit will go up for domestic banks

Pull Points:
# Net margins rising and at 14 per cent in FY 08
# Cash EPS of Rs103
# Net profits have grown 24 and 60 per cent in the last 2 Qs
# Return on equity of 24 per cent
# Is available at a mouthwatering PE of 5 at Rs181

But do remember that there is still a downside in the market, so go carefully and don’t even think about doubling your money in a month.
Titan Industries

This home grown consumer brand has corrected over 40 per cent in the meltdown now making it affordable for stock portfolios.

All the segments that Titan is present in are growing in strong double digits- watches, jewellery and precision engineering and eyewear. These have grown at 30-50 per cent in the last six quarters. Its net profit grew at higher rate indicating that the company has improved its margins on the products that it sells. This gets reflected in its operating margin which has grown significantly over last six quarters from 4.87 per cent to 11.68 per cent. It will be surprising if all of you out there don’t visit a Titan or a Tanishq store when looking for a watch or jewellery. So the company has build a formidable brand. So we recommend it at even at a PE of 20 due to its strong business fundamentals, efficient management and future growth outlook.

Stock pick: Titan Industries
# Double digit sales growth in all 3 segments
# Growing operating margins over 6 quarters
# At Rs 930 stock trading at PE of 20

Now as an investor you need to have a stock strategy which essentially defines the kind of stock investor you are.

Strategy 1:Buy and hold forever investor
# This strategy has worked very well for some of the best investors in the world like Warren Buffett.
# You do need excellent and expert choice in companies and managements
# You also need to monitor annually the performance of your company
# But you will need to steel yourself to ignore temporary fluctuations if you are this kind of an investor
# Closer look needed when nearing end of term

Strategy 2:Profit booking
# Have a target price in mind
# Revise target if needed, up or down
# Don't hold on, be ready to sell
# Try to minimise losses
# Needs frequent monitoring

So do your check and get going.

So in summary, you can delve into good value stocks in small quantities and of course we have said buy only if you can keep them for 3 to 5 years because markets could take that long to recover and give adequate returns.

Now, what if you've never been a stock investor at all?

What do you need to begin investing?
Demat account
# How do you open a demat account: select company, fill form, submit documents
# Depending on where you open with a bank or broking house your charges could be Nil- Rs400 to open an account
# There are other annual and transaction charges which you need to look into
# What do you need to be careful about. High maintenance charge, 'other' charges, website speed, service quality

Next you need a trading account
# How to open: several registered broking houses, ensure of course it’s registered and preferably go with the reputed one
# What it costs: Varies. Can be nil, or a fixed amount or a percentage of trade value
# Do watch out for the fine print which varies quite a lot from broker to broker
- Service assurance
- Broker's liability
- Charges

Where to buy from:
# Yourself or through broker
-Through a broker
# Can be done offline
# Actual buy/sell order may be placed at a different price
# Not much control on time of buy/sell
# A broker can help as well as unduly influence decision-making

Apart from these stocks another thing a first time stock buyer can do is to focus on sectors that they are familiar with. For example, if you are a doctor, you would have a view on the hospital and pharma stocks. Those in software can possible see a company that is doing well.

Source: Internet

Onmobile Global Ltd - Buy

Stock Market Listing Details:

Current Market Price: Rs. 209
PE Ratio: 56.00
Market Capitalization: 2563.93 Crores

Company Overview:

OnMobile Global is India's largest value added services (VAS) company for mobile,landline and media service providers. Incorporated in the year 2000, OnMobile is the first Indian telecom VAS company to go public. It made its debut on the two prominent Indian Stock Exchanges in Feb 2008. OnMobile is headquartered in Bangalore, India where it has a large R&D center and network operations center. OnMobile also has offices in Mumbai, Delhi, Singapore, Paris, Jakarta, London, Kuala Lumpur, Seattle and Sydney. OnMobile has employee strength of over 900.

Stock Price Movement Chart for OnMobile Global:



Investment Rationale:

• OnMobile is one of the largest VAS companies in India and is a high growth company. The topline for the company for FY 08 grew by 77.0% to Rs. 230.7 crores. This kind of growth for the company is expected to go on considering the robust growth in the mobile market in India.

• OnMobile has a very wide array of products and services including mobile technologies like voice,SMS,WAP,USSD and On-Device portal. The acquisition of French data products company Voxmobili has further strengthened the product portfolio with products like Phone Backup, Network Address Book & Mobile Paparazzi. With such wide offerings its one of the best integrated players in the industry and is lkely to have a huge share of the industry growth pie in the future.

• OnMobile already has some of the best customers it is offering serivces to. Its client list includes prestigous companies like Airtel,Aircel,Idea,MTNL,Reliance,Vodafone,ESPN,AOL, Star Tv, Sony, Adlabs,Fame,PVR and Nokia to mention a few. This ensures steady revenue flow for the company and also increased revenues from each client as their customer base increases.

• Mobile penetration in India still has a long way to go. There is also an increase in standards of living and all this adds to the attractiveness of the mobile VAS markets.

• OnMobile is not only growing organically but also through the inorganic route. The company has already made some major acquisitions and would be looking for more in the near future. This will ensure rapid growth for the company both in the local markets and in the global markets where it has made some major acquisitions.

• OnMobile has incurred huge capital expenditure in the yer FY 07 and FY 08. These investments will reflect in the future financials of the company supporting its robust growth. The company also has a good balance sheet position with minimal amount of debt. This places OnMobile in a good spot to use leverage,if needed for its future growth and acquisition.

• The company has the backing of perstigous investors like Argo Global capital,Infosys Technologies ltd, Deutsche Bank,Goldman Sachs and Polygon investment partners. This not only ensures back up for capital needs but also a good management team in place always as these investors would look to maximize their gains through investment in this company.

All these factors make OnMobile Global a good investment theme to consider for long run. The company had made a high of Rs. 744 on the exchange but has been beaten down in the recent carnage. The current PE of 46 still looks high but considering the growth potential the company holds one can invest in small numbers and invest more on corrctions.

Disclaimer: Investors and Readers are advised to do their own research before taking positions in any stocks mentioned in the blog. The author of the blog may or may not have positions in the stocks discussed in the blog.

Fundamentally Strong Stocks With Huge Cash Reserves

Good cash flow position is one of the most important parameters for selecting a company and a healthy cash flow means the company has sufficient cash to fund its future expansion plans and also to distribute to the shareholders. A good cash flow position also ensure that the company does not have to rely on debt to fund its expansion plans. Listed below are some fundamentally strong companies in good sectors with a healthy cash flow position. These companies can be outperformers in the long run giving good capital gains to its investors.

1)Engineers India Limited - FY 2007 cash and cash equivalents at the end of the year was 941.42 Crores.

2)Steel Authority of India (SAIL) Ltd - FY 2008 cash and cash equivalents at the end of the year was 13759.44 Crores.

3)NTPC Ltd - FY 2008 cash and cash equivalents at the end of the year was 14933.20 Crores.

4)Reliance Industries Ltd - FY 2008 cash and cash equivalents at the end of the year was 4280.05 Crores.

5)Bharat Heavy Electricals Ltd - FY 2008 cash and cash equivalents at the end of the year was 5808.91 Crores.

6)Oil & Natural Gas Corporation Ltd - FY 2007 cash and cash equivalents at the end of the year was 19280.79 Crores.

EIL can be a multibagger - Buy

Stock Market Listing Details:

Current Market Price: Rs. 362.40
PE Ratio : 11.34
Market Capitalization: 2492.66 Crores
Promoter Holding : 90.40%


About Engineers India Ltd:

Engineers India (EIL) was established in 1965 to provide engineering and related technical services for petroleum refiniries and other industrial projects. However today Engineers India Limited is diversifying into several new areas of business including highways and bridges, IT, Airports, Mass rapid transport system, water and urban development projects and areas such as renewable energy sources.

Thus, EIL's fields of activities include:

• Petroleum Refineries
• Pipeline
• Oil and Gas Processing
• Petrochemicals
• Offshore Structures & Platforms
• Ports & Terminals
• Metallurgy
• Fertilizers
• Power
• Highways & Bridges
• Airports
• Non Conventional / Renewable Energy Sources
• Intelligent Buildings & Urban Development

Financial Analysis:

• Engineers India is a company with strong fundamentals and its year on year sales has witnessed robust growth. The FY 08 EPS of the company was Rs. 34.74 while its cash EPS was Rs. 36.49.

• The company has a strong balance sheet with no equity dilution over the past 4 years and huge reserves and surplus. This also makes it a likely bonus candidate in the near future. The company also has almost zero debt and this is a great advantage in this high interest rate scenario. This also means that the company can leverage itself in the future if required for growth.

• The FY 08 cash and cash equivalents for the company stood at Rs. 1252.6 Crores which is indicative of the good health of the company. Moreover the company has robust operating cash flows which was at Rs. 312.3 Crores at the end of FY 08.

• The stock is current trading at a PE of 13 which suggest decent valuations considering the long term growth prospects of the company. The current economic scenario might bring in some revenue slowdown but long term prospects remain bright.

Business Growth Drivers:

• The current financial turmoil and a period of deleveraging globally means slowdown for the world economy. But in the long run the major part of the growth story for India is yet to come. Growth is however not possible without proper infrastructure and this will engine the growth of the company which is into major infrastructure segments of business.

• Engineers India is also looking into airports as an area of diversification. The huge number of airport modernization projects will help the company get good revenue boost in the near future. Being a government entity it stands to gain from these government issued projects.

• The company is also looking for entry into high growth business areas like renewable energy sources and water related projects. These areas will be the major ones which would fuel revenue growth for the company.

Why Engineers India is a safe Bet:

Companies with high FII holding are the ones which have seen maximum dowside in the recent past. The relentless selling by FII's has clobbered stocks with high FII holding. However, its not the case with Engineers India where the FII holding as on 30th June 2008 was just 1.18%. The promoters hold 90.4% of the company stake and this is the reason why this stock has relatively outperformed in the markets. Being 90.4% stock in the hands of Government, it is one of the best picks as and when Government wants to offload its holdings, it will become a multibagger for all its shareholders.

So with good fundamentals, this stock is also a safe bet and should give good capital gains with a 3-5 year investment perspective.

Disclaimer: Investors and Readers are advised to do their own research before taking positions in any stocks mentioned in the blog. The author of the blog may or may not have positions in the stocks discussed in the blog.

BSE Sensex Stock analysis & their earning outlook

The BSE Sensex 30 Stock Index represents the Indian stock market and containes some of the biggest corporate names from all major sectors of the Indian Economy. The BSE Sensex stocks are all fundamentally strong and give a good investment opportunity after the recent stock market carnage. However in the near term some of these stocks will dissapoint with their earnings and hence investment decision needs to be taken accordingly. Presented below is a chart for the BSE 30 Stocks and what can one expect from them in terms of earnings.

What The Colors Represent


Where Earnings Will Dissapoint:

• The metal and mining sector will be hit the most as the global slowdown which is turning out to be a sharp one will lead to a much lower demand for industrial commodities. Thus lower prices and lower margins will be seen in these sectors.

• The housing related sector will also see a sharp downward revision in earnings. This is main because loans will be harder to get and the speculative money is out of real estate now. Also funding big projects will be an issue.

Which Sectors can give Positive Surprises:

• The FMCG sector can spring some positive surprises and the latest results of HUL suggest the same. The FMCG goods should not see big demand destruction. There is also a huge untapped market in this sector and thus it should keep growing.

Why IT Sector Outlook is still Uncertain:

• This is because the BFSI sector is one of the major clients for the Indian IT companies. The recent carnage in the financial sector has still not shown its effect on the IT sector but can play a major role in big earnings downgrades in the months to come. So its a sector to just stay out of and watch.

Has the Sensex discounted all the Earnings downgrade Factors:

• The markets and some stocks in the Sensex are trading at very cheap levels at current PE. But one needs to consider the forward EPS and hence forward PE to determine if the Sensex is actually trading at very cheap levels. However, for now the markets are surely trading at oversold levels.

Conclusions:

• Many Sectors representing the BSE Sensex will see earnings downgrades. The slow earnings can be for most of 2009 and even in 2010 depending on how the global situation changes. So one can easily expect that the markets would not make major moves in the next 1-2 years.

The stock markets usually bottom out before the economy does. So hopefully it has reached close to its bottom and unless the financial crisis worsens we should not see a very big downside from here. Another 5-10% downside however is very much on the cards. But being oversold there might be some relief rally.

Sensex seen retracing to 6000, oil at $50 and gold $55

The Reserve Bank of India has moved swiftly to “maintain the domestic macroeconomic and financial stability in the context of the global financial crisis”. First, by slashing the cash reserve ratio by 150 basis points to 6.50 per cent on Oct 11 and today, by reducing the repo rate by 100 bps to 8 per cent. 

The move comes just three days ahead of half-yearly monetary policy review on Oct 24. 

The Indian central bank has already taken a number of measures over the last one month to augment domestic and forex liquidity. 

However, the global financial situation continues to be uncertain, and India too is experiencing the indirect impact as reflected by some signs of strain in our credit markets in recent weeks, the RBI said. 

On Sunday, the South Korean government announced a rescue package for its financial system by assuring $100 billion of lenders' foreign-currency debts and providing $30 billion in US dollars to banks. 

Markets are reacting positively as and when authorities announce financial relief packages, but the positive effect is always short-lived. 

Economists and analysts expect global market volatility to continue in the weeks and perhaps months ahead, because of the tremendous weakness in the world economy. 

Investors are taking every opportunity to stay liquid on concerns the credit expansion will fail to stem the crisis and may not avert a recession. Traders, on the other hand, are profiting from the increased volatility. 

However, the outlook is important to long-term investors who adopt a buy and hold strategy in the stock market. They are likely to suffer an extended period of low or zero growth. 

CLSA has reduced India's GDP growth outlook to 6.5 per cent in view of considerable decline in the IIP for last couple of months. 

India's Index of Industrial Production for August slipped to a 10-year low at 1.3 per cent compared to 10.9 per cent in the year-ago period. 

So where will we head now?

“Sensex has breached through 10000 levels which was a psychological support for the markets. Failure to take support at 10000 on closing basis for couple of trading sessions would test 9000 in short term. Declining money flow signals strong selling pressure. In the long term, failure of 9000 would offer a target of 6000 where we have seen double bottom in 2005," said Shyam Bhagwat, fund manager at Spark Fund Management. 

“The Dow Jones displays a sort-term pennant, signalling continuation of the down-trend. Massive volatility reflected by the wide range of 8000 to 10000. Downward breakout would test the 2002 low of 7300. In the long term, the band of support between 7000 and 7300 represents the 50 per cent retracement level for Fibonacci followers. The money flow is downward. But be wary of bullish money flow divergence if it accompanies a sharp V-bottom on price chart," Bhagwat added. 

Speaking on the precious metal, Akansha Dohi, analyst at Flexion Capital Management Services, “spot gold broke through medium-term support at $820 per ounce. Failure to test the upper border of the descending broadening wedge warns of a downward breakout. The money flow is signalling strong selling pressure. The target for breakout below $700 is the June 2006 low of $550.” 

Meanwhile, crude oil is 50 per cent off its speculative July high. According to the bulls, emerging economies like India and China are still in second innings of the consumption cycle. But with oil fields impossible to find these days, the bears argue that a weak global economy reduces demand and sends prices lower. 

“Crude oil is testing the band of support at $70 per barrel. Expect a short retracement, but the level unlikely to hold as the global economy heads towards the recession. Failure would test the 2007 low of $50 a barrel," said Anand Panchal, CEO-Globe One Advisory. 

Do the global leaders continue on the same road as before and attempt further monetary stimulation and credit expansion to soften the landing? Or do they allow the market to find its own equilibrium interest rate and allow the necessary fall in prices--deflation--in order to restore market stability? 

The first option may soften the landing, but will also raise inflation, prevent the restoration of market stability, and condemn us to a lengthy period of stagflation (low growth accompanied by high inflation) that could last for decades. 

The second is more desirable, because it would herald the return to responsible fiscal policy and a relatively stable business cycle, without the exaggerated boom-bust of recent years.

Who murdered the financial system of economies globally?

Leftists claim that the global financial crisis was caused by reckless deregulation and greed. Rightists blame half-baked financial regulations and perverse incentives. Actually, the financial sector is deeply regulated, with major roles for both the state and markets. It was not one or the other that failed but the combination. 

The best metaphor for the mess comes from Jack and Suzy Welch, who recall Agatha Christie’s Murder on the Orient Express. In this novel, 12 people are suspects in a murder. And 12 turn out to be guilty. What starts as a whodunit concludes as an everybody-dun-it. In the same spirit, allow me to present the 12 murderers of the US financial system. 

The Federal Reserve Board 

Alan Greenspan, Fed Governor in 1987-2006, was once hailed as a genius for keeping the US booming, but is now called a serial bubble-maker. He presided over bubbles in housing, credit, and stock markets. He said it was difficult to identify asset bubbles in advance, so anti-bubble policies might be anti-growth. It was better to let bubbles build, and sweep up after they burst. Bernanke, like Greenspan, ignored the US housing bubble till it burst. 

US politicians 

Envisioning a home for every American, regardless of income, they provided excess implicit and explicit housing subsidies. One law forced banks to lend to subprime poor borrowers. Legislators created Fannie Mae and Freddie Mac, government-sponsored entities that bought or underwrote 80% of all US mortgages, and enjoyed exemption from normal regulations. Politicians ignored Greenspan’s warning that such a dominant role for two under-regulated giants posed a huge financial risk. 

Fannie Mae and Freddie Mac 

They resisted regulation, and spent over $2 million lobbying legislators against any tightening of rules. As mortgagers of last resort they should have been especially prudent. But they bought stacks of toxic mortgage paper — collateralised debt obligations (CDOs) — seeking short-term profits that ultimately led to bankruptcy. 

Financial innovators 

Their ideas provided cheap, easy credit, and helped stoke the global economic boom of 2003-08. Securitisation of mortgages provided an avalanche of capital for banks and mortgage companies to lend afresh. Unfortunately the new instruments were so complex that not even bankers realised their full risks. 

CDOs smuggled BBB mortgages into AAA securities, leaving investors with huge quantities of down-rated paper when the housing bubble burst. Financial innovators created credit default swaps (CDSs), which insured bonds against default. CDS issues swelled to a mind-boggling $60 trillion. When markets fell and defaults widened, those holding CDSs faced disaster. 

Regulators 

All major countries had regulators for banking, insurance and financial/ stock markets. These were asleep at the wheel. No insurance regulator sought to check the runaway growth of the CDS market, or impose normal regulatory checks like capital adequacy. No financial regulator saw or checked the inherent risks in complex derivatives. Leftists today demand more regulations, but these will not thwart the next crisis if regulators stay asleep. 

Banks and mortgage lenders

Instead of keeping mortgages on their own books, lenders packaged these into securities and sold them. So, they no longer had incentives to thoroughly check the creditworthiness of borrowers. Lending norms were constantly eased. Ultimately, banks were giving loans to people with no verification of income, jobs or assets. Some banks offered teaser loans — low starting interest rates, which reset at much higher levels in later years — to lure unsuspecting borrowers. 

Investment banks 

Once, these institutions provided financial services such as underwriting, wealth management, and assistance with IPOs and mergers and acquisition. But more recently they began using borrowed money — with leverage of up to 30 times — to trade on their own account. Deservedly, all five top investment banks have disappeared. Lehman Brothers is bust, Bear Stearns and Merrill Lynch have been acquired by banks, and Morgan Stanley and Goldman Sachs have been converted into regular banks. 

Rating agencies 

Moody’s and Standard and Poor’s were not tough or alert enough to spot the rise in risk as leverage skyrocketed. They allowed BBB mortgages to be laundered into AAA mortgages through CDOs. 

The Basel rules for banks 

These international negotiated norms provided harmonised regulatory checks on financial excesses across countries. The first set of norms, Basel-I, was widely criticised as too rigid and blunt. So countries agreed on Basel-II, which allowed banks to use credit ratings and models based on historical record to lower the risk-ratings of many securities. This dilution of norms led to excesses everywhere. Iceland’s banks went bust holding loans/securities totalling 10 times its GDP. The dilution of risk-rating in Basel-II helped inflate the financial bubble. 

US Consumers 

Their savings used to be 6% of disposable income some time ago, but more recently has been zero or even negative. They have gone on a huge borrowing spree to spend far more than they earn. This excess is reflected in huge, unsustainable US trade deficits. 

Asian and OPEC countries 

They undervalued their currencies to stimulate exports and create large trade surpluses with the US. They accumulated trillions in forex reserves, and put these mostly into dollar securities. This depressed US interest rates, and further fuelled borrowing there. 

Everybody 

Consumers, corporations, banks, politicians, the media — indeed everybody — was happy when housing prices boomed, stock markets boomed, and credit became cheap and easily available. Bubbles in all these areas grew in full public view. They were highlighted by analysts, but nobody wanted to stop the lovely party. Everybody liked easy money and rising asset prices. This trumped prudence across countries. 

So, forget the Left-versus-Right or regulations-versus-markets debate on the financial crisis. States, institutions, markets and everybody else was guilty. 

These actors will for some years don sackcloth and ashes, adopt stiffer regulations, and listen to lectures on the virtues of prudence and restraint. But after seven-to-ten years of the next business upswing, I predict that we will once again have a new generation of bubbles, evading whatever new checks have been put in place. When everybody loves bubbles, they are both irresistible and inevitable.

Markets crashed 11% to close at 8701

October 24, 2008 is one day that investors would want to forget as soon as possible. In one of the worst trading session, investors helplessly saw their investments being wiped out. Those who were praying for a pull-back were left in a lurch as determined bears tore the market apart. 

Bombay Stock Exchange’s Sensex plunged 11 per cent or 1070.63 points to close at 8,701.07. The index touched a low of 8566.82. 

National Stock Exchange’s Nifty ended at 2,557.25, down 13.11 per cent or 386 points. The broader index touched a low of 2,525.05. 

BSE Midcap closed 8.38 per cent lower and BSE Smallcap Index ended 7.66 per cent down. 

DLF (-23.96%), Ranbaxy Laboratories (-17.83%), Hindalco Industries (-17.82%), Tata Motors (-16.54%), Reliance Industries (-16.44%) and Mahindra & Mahindra (-16.04%) were the worst hit. 

None of the stocks in the 30-share index could survive the meltdown. 

Market breadth on BSE collapsed with 2322 declines against 260 advances. 

Market breadth was extremely negative on the BSE with 2322 declines and 260 advances. 

(All figures are provisional)

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Today's News

Moody’s lowers Tata Steel outlook to negative. (ET)
NTPC plans to raise US$1bn to fund expansion plans. (ET)
TVS Motors to reduce investment by 20% and cut production. (BS)
Ashok Leyland to cut its vehicle output in second half of the current financial year. (BS)
Jet, Kingfisher likely to reduce flight. (ET)
Singapore based PE firm buys into HDIL and Indiabulls Real Estate. (ET)
SAIL to set up steel processing units in Himachal Pradesh and Rajasthan. (DNA)
DLF emerges as sole bidder for developing Mumbai rail land. (BL)
Elder Pharma buys 3 small Bulgarian-based pharma companies. (ET)
Areva T&D bags Bhilai Steel order worth Rs2.2bn. (BS)
Tata Tele Services to roll-out services in J&K and North East region from November. (FE)
JSW Steel and Georgian Steel Holding Group have closed US$28mn debt financing for setting up steel plant in Georgia. (DNA)
Crompton Greaves is considering cutting down its capex budget for this year. (DNA)
HOV services open facility in North California. (BS)
DLF enter into an agreement with Italian apparel brand Alcott and Paris based SIA group to launch them in India. (ET)
HDFC Bank opens a branch in Bahrain. (BS)
Honda India and Hero Honda ventures to jointly source auto parts. (BL)
LIC to launch credit card with Corporation Bank. (FE)Government may pump Rs30bn into 7 public sector banks to shore up their capital adequacy ratio to 12%. (BS)

Government may miss FY09 budget targets for fiscal and revenue deficit. (ET)
Government allows airlines to clear fuel dues owed to oil companies, totaling about Rs30bn in six EMIs. (ET)
Indian Banks ask RBI to ease norms on reserve requirements. (ET)
RBI eases norms on overseas borrowing for Indian companies. (ET)
DoT faces 3G spectrum crunch in 9 other circles. (ET)
Petroleum secretary says government has no immediate plans to cut fuel prices. (ET)
SEBI plans to review direct market access facility rules. (ET)
Government may import 100mn ton of coal to meet the projected demand in the 11th five year plan. (BS)
DoT to meet defence ministry on Oct24 to discuss the issue on spectrum vacation. (DNA)
Banks unlikely to extend credit support to airlines. (BL)

Result of Educomp Solutions Ltd

Educomp Solutions Ltd has reported the result for the quarter ended on Sep 30, 2008. (Rs in Crore) 

Period	30-Sep-08	30-Sep-07	30-Jun-08	% YoY	% QoQ
Net Sales	98.13	44.94	69.41	118.36	4138
Other Income	5.52	3.67	2.69	50.24	105.43
Total Income	103.65	48.62	72.10	113.21	43.77
Expenditure	-47.43	-22.06	-31.54	115.04	50.39
PBTD	54.50	25.81	39.14	111.18	39.23
Depreciation	-15.67	-6.94	-13.46	125.63	16.37
Tax	-13.44	-5.25	-8.91	156.20	50.94
Net Profit	25.39	13.62	16.77	86.46	51.36