The risk of the unknown has led to risk averseness in the global financial system, resulting in price correction in all risky assets including equities, commodities and currency

Rajesh Kumar, Mint 15/5/12

The stock market is getting beaten down; the BSE Sensex lost at least 2,200 points from the highs of February. Global factors, primarily emanating from the euro zone, high fiscal and current account deficit and no move on the policy front back home are some of the factors the markets are reeling under.

The postponement of general anti-avoidance rules (GAAR) by a year, which was proposed in the Union budget, failed to lift the market mood; neither did the clarification calm the frayed nerves of foreign institutional investors (FIIs). Though some buying activity was seen on the day the government postponed the implementation of GAAR, it very quickly got overshadowed by pessimism and uncertainty in the global environment.

The future course of the market will, therefore, depend on both domestic and global factors.

The ongoing sovereign debt crisis is believed to have reached a critical juncture with voters in two countries—Greece and France—rejecting political formations supporting austerity as a way out of the current crisis. While it is still to be seen how policy shapes up in France, the possibility of Greece leaving the single currency union has gone up significantly in the last couple of weeks.

Risk of the unknown: The risk of the unknown has led to risk averseness in the global financial system, resulting in price correction in all risky assets including equities, commodities and currency.

Says Andrew Holland, CEO, investment advisory, Ambit Capital Pvt. Ltd: “The biggest risk is from Europe and people don’t know what is really going to happen.”

The possibilities: There are two scenarios that one can anticipate if Greece decides to leave the single currency. First, if Greece exits euro suddenly, there will be mass selling of financial assets in the global market and banks with exposure to the Greek government debt may find themselves in trouble. Very quickly government bonds in other weaker links in the region, including Portugal, Spain and Italy, will come under fire, leading to deeper problems in the banking and financial sector in the region. The chain reaction could possibly lead to an outcome similar to what was witnessed after the collapse of Lehman Brothers in 2008. The BSE Sensex sunk to 8,100 in March 2009.

Second, if Greece leaves the euro in an orderly way, damage in the financial market will be restricted. However, political decisions are not always based on sound economic principles, hence the uncertainty.

If Greece continues to remain in the euro, things are unlikely to look up in any case.

The domestic environment is not supportive for the market either. The growth in the Index of Industrial Production (IIP) for March (figures released on 11 May) showed a negative reading of 3.5%, pulling down the full-year growth for FY12 to 2.8%. This could mean that the gross domestic product (GDP) for FY12 may now come below the anticipated 6.9%. Then, with slowing economic growth, it will always be difficult for markets to scale up.

Says Jagannadham Thunuguntla, strategist and head of research, SMC Global Securities Ltd, a financial services firm: “Growth is like red carpet, once the carpet is removed, lot of dust starts getting visible.” He explains that India always had governance issues and current account deficit, but everybody was attracted by growth. But if growth slows, things will get difficult. And there is sufficient indication of falling investment and growth.

The combination of both external and internal risks has significantly increased the downside risk in the market. Thunuguntla puts the near-term target on Sensex at 15,000. Agrees Harendra Kumar, managing director and head (institutional equities and global research), Elara Capital Plc, putting a similar number on Sensex. Kumar believes that earnings will bottom out around the third quarter of the current fiscal.

Apart from the levels of the Sensex and the Nifty, markets are also worried about the fate of the rupee. The Indian rupee hit a new low of 53.96 against the US dollar on 14 May. A weakening rupee, apart from creating uncertainty on the macroeconomic front, works as a disincentive for FIIs investing in India as they get fewer dollars against the same level of rupee realizations. Says D.K. Joshi, chief economist, Crisil Ltd, a global analytics and ratings firm: “The rupee will remain volatile and in the near term can go down further. But fundamentally, our medium-term call is that rupee will appreciate to 49 by March 2013.” He further explains that it’s not risk but uncertainty that is playing in the currency market.

Waiting for the right levels should not be an option for equity investors since it is difficult to catch the bottom.

“We think this new bout of risk aversion may continue until there is some clarity on the European issues, implying that the risk of further sell-offs remains high. However, continued weak investor sentiment may turn the commodity price factor in India’s favour along with prospects of further global liquidity easing,” according to a recent note from Macquarie Capital Securities India. Pvt. Ltd, a financial services firm. The note further mentions that it may be a good time to add fundamentally good stocks that have corrected.

Holland adds the market has ignored positives, including correction in oil prices, which will help inflation and rupee, and the fact that there has been no major FII outflow. Even in terms of valuation on trailing basis, Sensex is currently trading at 16.6 times compared with a five-year average of 19.64.

Direct equity investors should pick fundamentally strong stocks with reasonable earnings visibility. Investors taking the mutual fund route should continue their systematic investment plans.

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We often hear how companies swindle public money by fraudulently window dressing the accounts and balance sheets.

We found this interesting note which will help you how to deduct possible manipulations.

Click the link to download the file: http://downloads.vridhi.co.in/WarningSigns.pdf

The file will be available for future downloads on the Right Hand side of this website under the “Knowledge VRIDHI” tab

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Govt may cut lock-in under Rajiv Gandhi equity scheme to 1 yr

Financial Chronicle, 5/4/12

source: http://www.mydigitalfc.com/news/govt-may-cut-lock-under-rajiv-gandhi-equity-scheme-1-yr-763

The government is likely to reduce the lock-in period under the Rajiv Gandhi Equity Scheme for new equity investors to one year from three years proposed in the Budget 2012-13 and a circular to this effect could be issued within a month, official sources said.

"We discussed the issue of reduction of the blanket lock- in period to one year. We will meet the stock exchanges again and finalise the modalities," they said after meeting the representatives of BSE, National Stock Exchange, MCX-SX and other exchanges.

Retail investors, they said, would be allowed to invest in top 100 listed entities in BSE and NSE under the scheme which was unveiled by Finance Minister Pranab Mukherjee in the Budget 2012-13.

The Minister had announced 50 per cent tax deduction to retail investors with annual income of less than Rs 10 lakh for investment up to Rs 50,000 in a year with a lock-in period of three years under the Rajiv Gandhi scheme.

It was later clarified that a retail investor can avail of the scheme only once in a life time. This is the first- ever tax benefit scheme announced by the government to encourage retail investors participation in the equity market.

Such a type of scheme was first introduced in Belgium, followed by France and some East European countries.

scheme was highly successful in France and had helped in increasing retail participation in equity market from 7 per cent to 17 per cent, sources said, adding it was also appreciated by IMF Managing Director Christine Lagarde in her meeting with Mukherjee last week.

By offering this scheme, the government aims at channelising household savings into stock markets.

Besides, Mukherjee in his Budget had also proposed to cut the Securities Transaction Tax (STT) from 0.125 per cent to 0.1 per cent with effect from July 1 to reduce transaction cost for equity investment.

Our Service: We at VRIDHI will prepare a complete presentation on how one can benefit from the Rajiv Gandhi Equity Tax Savings Scheme once the guidelines are announced. We will also help investors avail the benefits of the scheme by giving right advice to the investors.

Thanks

VIVEK KARWA, CPFA., CFP^CM

Financial Planner & Wealth Manager

Office Mobile: 98405-40575

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Rajiv Gandhi equity scheme aims to attract 1.5 cr new investors

SHISHIR SINHA, Business Line 18/3/2012

Investment may be restricted to top 100-200 companies

The Rajiv Gandhi Equity Saving Scheme, announced in this year’s Budget, is eyeing 1.5 crore new investors for the equity market. But, investment under the scheme may be restricted to top 100 or 200 shares on the Bombay and National Stock Exchanges.

A senior Finance Ministry official told Business Line, “Among all the taxpayers, there are nearly 1.5 crore people, with income up to 10 lakh, who do not have a demat account. There would be enough attraction for these people to invest in the equity market.”

The new scheme will allow for income tax deduction of 50 per cent to new retail investors who invest up to Rs 50,000 directly in equities. It will have a lock-in period of three years, and will allow one-time deduction. The scheme is not for existing investors.

The official said that to provide a safer environment, investments under the new scheme may initially be allowed only in the top 100 or 200 companies (on the basis of market capitalisation) listed on various stock exchanges. “Since investors have burnt their fingers mainly in mid-cap, small-cap and penny stocks, it is best to encourage them to invest first in bigger shares. Once they taste profit and feel that their money is safe, they can go for more investments,” he added.

The Economic Affairs Secretary, Mr R. Gopalan, in an interview with Business Line, confirmed that restricting the investment in bigger shares was being considered. A decision in this regard and final details about the scheme were expected by the middle of this year, he added.

Meanwhile, the Finance Ministry is working on a provision for early exit. “For an investor who wants to book profits and exit before completion of the three-year lock-in period, we are thinking of making a provision with a strict condition,” he said. He clarified that under such a provision, the investor may be asked to return the benefit (deduction of Rs 25,000 for calculation of income tax) to the Government.

The new scheme is being designed to encourage flow of savings in financial instruments and improve depth of the domestic capital market.

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Also Read: http://economictimes.indiatimes.com/personal-finance/mutual-funds/analysis/budget-2012-keeping-mutual-funds-out-of-rajiv-gandhi-scheme-doesnt-make-sense/articleshow/12323461.cms

Also Read: http://www.deccanherald.com/content/234966/rajiv-gandhi-equity-scheme-pep.html

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VRIDHI’s View:

There is nothing great in the budget presented. It lacks vision and stimulus which can bring back the slagging growth on track. But the Rajiv Gandhi Scheme seems interesting. Old timers may remember similar kind of scheme was there earlier and Rajiv Gandhi Equity Scheme does not look too different.

But here are the reasons why it looks interesting:

1. There are around 4 cr demat accounts in India. Assuming just 25% are non replicating we will have 1 cr demat account eligible to invest in RGES. Assuming 50% holders may have income above 10 Lacs we still may have around 50 Lac eligible investors in RGES.

If these people invest then expect a flow of Rs.25000 Crores! (50,00,000 x Rs.50000)

If this flow actually comes in, the money would work like a FII in itself. The best part is it would be for minimum 3 years! The procedural formalities are still awaited. VRIDHI will help you in this.

2. The above article mentions  1.5 Cr new investors may come to invest in the market. If it really happens, it will not only increase the retail participation but would also result in huge inflow into stock market.

Even if 1 Cr new investors come in, expect a flow of Rs.50000 Crores.

If we total up both the above figures, expect a flow of Rs.75000 Crores! It would be great boon for the market if the scheme really takes off. Time will only tell how successful it is.

The best reward for the investors would be if the guidelines are announced immediately since the valuations now are on the lower side we can expect better returns if the money is invested now.

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Jitendra Kumar, Business Standard, 7/10/11

source: http://business-standard.com/india/news/one-updalal-street-/451700/

While many are sweating in the current environment, Rakesh Jhunjhunwala’s portfolio has done well and seen new additions.

Even as the markets are weighed down by global and domestic concerns, Rakesh Jhunjhunwala has been relatively busy churning his portfolio. He has bought stake in three companies, increased and shed holding in some others, while sitting tight on the rest. Among the most successful investors in India, he recently bought stocks of Pipavav Shipyard, Sterling Holidays and Subex. While exploring the reasons that led the much-reported investor to buy these companies, we also look at the past to gauge his strategy.

DRIVING HIS ATTENTION
Jhunjhunwala has often been quoted that his investment strategy rests on identifying good companies with a scalable business model and good management (and, importantly, staying invested even if there are disappointments in the interim). Notably, says an investment expert, “Most of the holdings are in the mid-cap and small-cap companies. In fact, he looks for companies which could over time grow big and become part of the Sensex.” (Click here for table THE BIG BULL’S PORTFOLIO)

To take care of the risk involved with smaller companies, Jhunjhunwala has spread his investments over a host of companies, across sectors and themes– a few multi-baggers typically would help offset an unsuccessful or sub-par investment in another company. This has helped him to make a fortune, which he now owns in various forms, including the 30-odd stocks worth nearly Rs 3,900 crore. Among his most successful investments are Crisil, Titan, Lupin, Praj and VIP, which together account for a little over 60 per cent of his portfolio’s estimated value. In all these cases, he has held on to the stock for a long time, riding on the company’s growth. The expansion in valuation multiples have provided further boost to the portfolio.

Says another expert, “He typically buys into a company at a very early stage. For instance, he entered VIP Industries at Rs 55-65 (in 2009-end, when it was loss-making and had concerns over debt), whereas foreign institutional investors and others started accumulating it at Rs 650.” Among things that seem to get his attention is the macro theme (size of opportunity), which should typically be huge. Additionally, the companies should possess strengths that set them apart. An example, albeit old, is that of Praj Industries, an industrial machinery maker and an early mover in the ethanol equipment segment. Jhunjhunwala bought the stock in early 2004 around Rs 100 (unadjusted price), citing the emerging opportunity in the ethanol space. The stock rose to over Rs 1,000 in less than two years—since then, there has also been a 1:1 bonus, a 10:2 stock split and another 1:1 bonus.

PARING STAKE
Jhunjhunwala has also experienced some investments not working for him or earning below-par returns. Besides, at times he may have also decided to take some profit; he’s never hesitated in selling stocks. For instance, he cut his holding in Lupin (bought in 2002) from 3.22 per cent in the March 2011 quarter to 1.73 per cent recently, though the reasons are not known. In the December 2010 quarter, he exited Punj Lloyd, when the company was in the news over demand concerns, as well as its huge debt.

To know more on his recent buys, read on:

Sterling Holiday Resorts
Sterling Holiday, a vacation ownership company (like Mahindra Holidays), has 15 resorts at key tourist destinations, including Darjeeling, Goa, Manali, Mussoorie and Ooty (total inventory of 1,258 rooms). Though Sterling had a first-mover advantage to capitalise on India’s growing consumption demand and changing consumer habits, it also got saddled with problems. However, its suffering on account of debt has eased, with new investors and private equity investing in the company. Additionally, a new and experienced management has been put in place to drive future plans. After falling in 2009-10, revenues are increasing at a fast pace (58 per cent in June quarter), with a turnaround expected by 2012-13.

Subex
Subex, which provides operations and business support system to telecom companies across the globe, saw its stock fall almost 95 per cent from its peak of Rs 730 in January 2007. This can be attributed to worry over the telecom space and its excessive debt (almost 2.6 times equity in FY11). The restructuring of its FCCBs, improvement in the internal cash flow and fund raising has, to some extent, alleviated the debt concerns. Analysts expect its debt-equity to fall to 0.87 times by 2012-13. It recently also sold a non-core business (which should improve profitability) and won a few orders.

Pipavav Defence & Offshore Engg
Pipavav Defence is among the most recent buys of Jhunjhunwala, who has bought convertible warrants (conversion at Rs 78 per share). With its world-class shipbuilding capacity, the company is well positioned to gain from the huge opportunities in the Indian defence space. It recently entered into an agreement with Mazagon Dock to help the latter hasten implementation of its big order book of Rs 100,000 crore. While the deal opens a window of opportunity to partner with the largest defence shipbuilding company, it will also help diversify revenue stream and improve utilisation of facilities.

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