Lame April F&O expiry; Sell in May and go away

Riken Mehta

Lame is the best word to describe the April F&O expiry.

Nifty, the barometer index of stocks, ended the expiry with modest gains of 0.3%. Bank Nifty, the second most traded index in the F&O market, outperformed the Nifty with 1.9% gains. However, the upside was restricted after rating agency S&P downgraded 10 major Indian banks on Wednesday.

Adding to the market woes, FIIs have turned net sellers for the April series to the tune of Rs 800 crore. FIIs had bought stocks worth Rs 40,000 crore in Jan-Mar period.

Surprisingly, the Nifty VIX closed at 18.74 down around 1%, unusual for an expiry day. On the whole, it was a tepid F&O expiry.

Star performers

April series left traders with mixed feelings, with two heavyweight stocks hogging limelight.

News of JLR IPO, coupled with eye popping monthly sales, took the Tata Motors to an all-time high, giving a cool 15% return for traders in the series.

On the flip side, Infosys left traders in doldrums after the IT major reported another set of disappointing quarterly results.

Poor FY13 guidance, muted growth in Q4 and management’s inability to use huge piles of cash to generate extra income resulted in a 15.5% decline in stock price.

What lies ahead?

With the policy paralysis continuing to plague North Block, traders will closely monitor the ongoing fourth quarter earnings season all through the May series. 

In this backdrop, chances of the Wall Street phenomenon known as "Sell in May and go away" might hold true for Indian markets also. 

Nifty (71.86%) rollovers were strong compared to last month’s percentage rollover of 58.46%. But if one closely analyses absolute open interest in Nifty May series and compare it with similar OI witnessed in Jan 2011 and Aug 2011 series, then both of these expiries saw market retracing significantly from start of the series.

The overall market saw a rollover of 85.00% against its three-month average of 78.50% on the back of average cost-of-carry of 8.90%.

Bank Nifty (70.68%) rollovers were in-line with its average but substantial addition in open interest signals short positions were created at higher levels following S&P downgrade.

Shifting focus to Nifty options data, Open Interest buildup indicates range for the Nifty from 5000 to 5600. Nifty historical volatility shrinks to 21.52% from 22.77%. Nifty put and call options Implied Volatility (IV) were down to 18.75% and 18.42% from 26.36% and 28.22% respectively. Market-wide, most of the rollover seems to be on the short side. Nifty Open Interest Put Call Ratio at the beginning of May series was 1.1. Important to note that May expiry is prolonged one and coupled with low implied volatility is a bearish sign. Angel Broking advises traders to buy at the money puts. The broking firm believes Nifty will not be able to hold 5150-5200 support. 

A quick analysis of how Nifty performed in May series in last 10 years. In 2009, the market was locked at upper circuit for 2 consecutive days after UPA came into power, not sure we will witness the same reaction in 2014. Barring 2009, Nifty has lost more than 3% in May series in last 4 years. 

Year	Open	High	Low	Close	% Chg
2011	5766	5775	5328	5570	-3.40
2010	5278	5279	4842	5086	-3.64
2009	3479	4509	3479	4449	27.89
2008	5265	5299	4802	4870	-7.50
2007	4089	4307	3981	4295	5.03
2006	3558	3774	2996	3071	-13.68
2005	1903	2092	1898	2087	9.67
2004	1796	1838	1292	1484	-17.39
2003	931	1014	931	1007	8.15
2002	1085	1137	1020	1029	-5.16

Why you should buy your wife a silver spoon than a gold bar

Sagar Salvi & Riken Mehta
moneycontrol.com

"Buy yourself some silver chopsticks or some silver cutlery...you will be very rich in 5 or 10 years." Well, that was investment guru Jim Rogers' call at the start of 2011. Rogers is chairman of Rogers Holdings. 

In 2011, however, silver prices remained somewhat flat as oppose to 2010, when prices surged 77%. Last year, though inflation had remained high, commodity prices could not take off due to government's all out efforts to rein in inflation. In addition, absence of the much-anticipated QE3 from US Federal Reserve Bank has taken the sheen off precious metals further, especially in the short-term.

Nevertheless, a strong bullish case can still be made for silver over the long-term (read: next 3-5 years) on simple demand and supply factors. A major underlying aspect, which will drive up silver prices, is its industrial uses. In some cases, the widely used raw material cannot be recovered, which makes it that much dearer.      

Moreover, we do not have an alternative to gold and silver for now.

Gold Vs Silver

Silver performed much better than gold in 2010 with prices rising by an astounding 80% which is two and half times the rise in price of gold. Along with being deemed a safe investment, the relatively low supply of the metal as compared to the high demand has also contributed to the steady increase in price. In the first three months of 2012, silver price increased at a steady 13.9% compared to gold's 4.8% jump. Historically silver has outperformed gold year-after-year, with a high risk-reward ratio.

* Annual returns based on USD Gold and Silver prices

3 scenarios when Gold/Silver rally

1) When US dollar (dominant currency) declines, gold and silver prices see moderate gains-inverse correlation.
2) When US dollar strengthens, rupee falls, which leads to firming up of gold/silver prices domestically.
3) When demand for precious metals rise due to festive/social demand, prices escalate.

Recently, China has outpaced India in terms of gold consumption. So there is a fair chance that even if the US economy comes out of its recessionary-type situation leading to a stronger dollar, the growing Chinese consumption may keep prices of precious metals up.

Gold-Silver ratio

To better understand the potential for rise in silver prices, we need to take a look at the gold-silver price ratio. For most of the nineteenth century, the white metal traded at a ratio of 15.5:1 (in USD terms).

Over a century or so the mean gold-silver ratio has been 45.69 :1  and at present the ratio is 52:1 (Gold price/Silver price)

Based on this assumption, here's how gold-silver ratio pans out at various gold prices.

If Gold prices touch USD 10,000 per ounce, then silver price may touch USD 192, USD 222 and USD 645 per ounce with respect to Gold-Silver ratio of 52:1, 45:1 and 15.5:1. The above table indicates that silver is currently undervalued compared to gold and is in a position to generate returns substantially greater than investing in the yellow metal.

However, this is not a bearish indicator for gold, but a strongly bullish sign for silver. Even if gold prices were to fall by 20%, and even if silver assumed a 20:1 ratio instead of 15.5:1, this would still mean silver will rally more than 100%  from its current price.

Therefore, it makes sense to stock up on that silver cutlery your wife always wanted!

Premarket buzz: Are fund managers selling IT stocks?

Wall Street stages a modest recovery to post decent gains led by strength in materials & industrials. Despite successful bond auctions, European markets closed lower on disappointing US economic data.

On US economic data front, Weekly claims for unemployment benefits gained more than expected, climbing by 24,000 to a seasonally adjusted 399,000, the highest in six weeks. Retail sales rose a disappointing 0.1 percent in December, the weakest pace in seven months. Business inventories gained 0.3 percent in November.

Asian markets rise in opening trade as concerns over euro zone's funding problems ease. The SGX Nifty points to a modest start for the Indian markets

In the currency space, the euro hits a one-week high versus the dollar after European Central Bank President Mario Draghi said policy makers have averted a credit shortage and Spain sold almost twice its maximum target at a note auction. The euro was steady at 1.28 to the dollar.

In other asset classes oil drops after uncertainty over EU negotiations on Iran sanctions. Nymex Crude slips below 100 dollar mark. Gold inches higher to above USD 1645 levels.

Shares of Infosys and TCS marked their highest delivery based selling after poor guidance by the former IT bellwether. Stocks worth more than Rs 800 cr were sold by Infosys shareholders. This was the highest delivery recorded in last 3 quarters on the day of Infosys earnings. Around 51 lakh delivery based selling happened in TCS shares yesterday. Rupee has also appreciated close to 5% in this week perhaps indicating fund managers are getting out of IT stocks.

LIC has set aside a corpus of nearly Rs 10,000 crore to buy a part of the shares owned by SUUTI. The government has informally sounded out LIC about the impending dilution of SUUTI that owns more than 11% in ITC, around 8% in L&T and over 23% in Axis Bank.

News reports suggest steel makers have hiked prices once again, the third hike since the start of January and this time the price increase is 500 rupees per tonne.

A leading newspaper reported Apollo Tyres has paid 5.7 million dollars as fine to the Competition Commission of South Africa after found guilty in a tyre cartel.

Leela has put its upcoming Chennai resort on the block. Sources say Leela is looking to raise almost Rs 930 crore from the sale of this beach resort. Buyer can be NRI Ravi Pillai, who had bought Leela's Kovalam Property last year for Rs 500 crore.

Sources also indicate that Unitech and Telenor continue to disagree on rights issue.

Results Today: CMC, Goa Carbon, Sintex, Triveni

Riken Mehta

Your Trade @ 9: Infosys Q3 + IIP Nov = Market rally?

Good Morning everyone! Today is an important day for the markets. KV Kamath's Infosys and Keki Mistry's HDFC will hit the headlines with their quarterly results. Earnings forecast from these two giants will prove to be a trend decider for the market. First, let's take a quick look at the global cues and newspaper headlines this morning.

US stocks held firm near recent five-month highs on Wednesday as investors awaited key bond market tests for Europe in the next two days that could determine the direction of the euro zone crisis.

The Dow Jones industrial average lost 13.02 points, or 0.10 percent, to 12,449.45. The S&P's 500 Index closed flat at 1,292.48.

Watch out for weekly jobless claims and retail sales data later in the day.

Europe closed lower as Fitch says the ECB must do more to prevent euro collapse.

Germany sold 3.153 billion euros of new five-year notes, drawing more demand than in a previous auction in December. Spain is all set to sell 3-4 billion euros in 3-year bonds while Italy will sell 8.5 billion euros worth 12-month treasury bills and 3.5 billion euros worth flexible treasury bills.

It was muted across Asia as investors await China's inflation numbers today. The SGX Nifty suggests Indian markets will dip close to 0.5% in the opening bell.

Meanwhile, Euro hits a 16-month low against the dollar on Europe concerns, currently stable in Asia trade, back above 1.27.

Back home, a CNBC-TV18 Poll sees November industrial output stabilising at 1.6 percent after seeing a 5 percent contraction last month as November core sector rises to 6.8%. All eyes will be on capital goods and consumer goods data.

In stock specific news, Country's second largest software services exporter Infosys is expected to report a profit after tax of Rs 2,322 crore in the third quarter of FY12, a growth of 21.8% as compared to Rs 1,906 crore in the previous quarter, according to CNBC-TV18 estimates.

Revenues are seen going up 13.9% to Rs 9,223 crore from Rs 8,099 crore during the same period while the company expects a growth of 9-11.3% in revenues at around Rs 8,826-9,012 crore in the quarter ended December 2011.

Thomas Cook puts Indian arm on the block reports the Economic Times. The newspaper further reports of companies from steel, cement and power sectors oppose Coal India's new pricing policy.

Reliance Communications, which has a USD 925 million convertible bond maturing in March and has failed so far in efforts to sell its tower unit, is in talks with China Development Bank for a loan to redeem the bond.

Results Today: Infosys, HDFC, TTK Prestige, DCB, Geojit BNP Paribas, Gruh Finance, Sanghi Industries.

Riken Mehta

Good Morning! Here are the top headlines...

US stocks climbed to a five-month high on Tuesday, led by materials stocks after an upbeat forecast by aluminum company Alcoa and strong gains in bank shares.

The Dow Jones industrial average gained 69.78 points, or 0.56 percent, to 12,462.47. The Standard & Poor's 500 Index rose 11.38 points, or 0.89 percent, to 1,292.08. The Nasdaq Composite Index climbed 25.94 points, or 0.97 percent, to 2,702.50.

The Dow and S&P 500 hit their highest intraday levels in five months. The S&P 500 close above 1,285.09 is the highest since the end of July and marked a breach of technical resistance, which could spur further gains.

German chancellor Angela Merkel is meeting IMF chief Christine Lagarde later today in Berlin to deal with the eurozone sovereign debt crisis.

Easing some concerns about Europe, Fitch said it does not expect to cut France's AAA credit rating this year, but countries under review such as Italy or Spain could be downgraded by one or two notches. Europe closed sharply higher with over 2 percent gains.

China's reported a drop in import growth triggering speculation that monetary easing is right around the corner adding to the worldwide stock rally.

Asia was firm in opening trade. The SGX Nifty suggests Indian markets will open flat after stellar rally in last trading session.

Shifting focus to commodities, tensions in Iran give a boost to oil prices with Brent above 113 dollar levels. Gold too surged over a percent to 1634 dollar levels.

In the currency space, the euro holds flat at around 1.27 to the dollar ahead of ECB policy meeting tomorrow and crucial debt auctions from Spain and Italy this week. The Indian currency rose to a 5-week high on the back of strong FII flows & the strength in the equity markets.

In stock specific news, 100 percent FDI in single brand retail becomes a reality. Also mandatory sourcing from SMEs will kick in once FDI crosses the 51 percent mark. Retail stocks will remain on buyer's radar in the short term.

The impression of bankers who met RBI officials ahead of credit policy hints RBI is comfortable with current liquidity and hopes of a CRR cut are dim. Rate sensitive stocks will remain in focus today.

A big blow for national carrier Air India as lenders refuse to convert loans into preference shares as they doubt the airline's capability to pay dividend on these shares.

GTL Infra Director Prakash Ranjalkar steps down.

Genus Power will consider restructuring proposal today. 

Riken Mehta

Dalal St Week Ahead: Infy earnings & guidance, Nov IIP nos to stay in spotlight

The opening week of 2012 was won by the bulls with the Nifty closing above the 4700-mark, notching over 2% gains for itself. However, the focus now shifts to the third quarter earnings and guidance from the Indian companies and the November IIP numbers.

The season will be kicked off by IT bellwether Infosys.  All this and much more events are lined up for the next week. Let's analyse them and gear you up for trading.

There is no doubt that Indian markets have failed to decouple itself from global cues. So let’s take a look at list of global and domestic events first.

January 09: Chinese GDP, Chinese CPI

January 10: IndusInd Bank, Amtek India Results

January 11: Europe GDP data

January 12: Germany, ECB Interest rate decision, US Retail sales, US Initial Jobless Claims, ECB President Draghi Speaks, Gruh, HDFC, Infosys, Geojit BNP, TTK Prestige, DCB results. IIP November (Expected 1.90%, Prior -5.10%)

January 13: Canada, US Trade Balance Data, Michigan Consumer Sentiment Index, CMC, Sintex Results.

Chart Check

Back home, Nifty was trading in the range of 4700-4800. Edelweiss Securities is of the view, "In the medium term directional oscillator ADX is still trading very negative and the Nifty continues to form lower top and lower bottom. Thus the medium term trend is still negative. Nifty has support in the range of 4700-4645, and in the coming days if Nifty starts trading below the above mentioned support range then we can witness further downside till 4580/4530. Near term Nifty has resistance at 4800."

Sectors to watch

When money talks, everyone listen. The key trigger for next week is going to be where the rupee heads and of course the corporate earnings forecast. In view of this, the sectors that are likely to see movement are IT and pharma. A couple of private banking stocks will announce the quarterly results which will set the tone for the entire banking sector. Capital goods, however, remains the laggard in the entire pack. The joker in the pack is sugar stocks.

Stock Pick

Edelweiss picks Dr Reddy’s Laboratories with a target price of Rs 1840. Time horizon is for 3 months. “Dr Reddy's revenue guidance of USD 2.7 bn by FY13 offers 23% upsides (USD 300- 400 mn of potential sales) from consensus and our estimates at USD 2.2-2.3 bn. The guidance is based on fair visibility on base case, which implies 27% CAGR in revenue and 45%, 40%, and 15% incremental contribution to growth from US, EM & PSAI and EU, respectively. We believe, with improved operating performance and enhanced visibility of niche launches in US, there are strong possibilities for estimates upgrades across the Street.”

F&O Wrap

Futures data suggests long build up in Index futures were created by the FIIs last week. India VIX was down 6.09%, a positive sign. Nifty Open Interest Put Call Ratio is up at 1.18 compared to 1.06. Long build up was seen in banking, IT and pharma stocks. Short covering was seen in Capital Goods stocks.

Rupee Corner

Edelweiss Currency report says, "Indian rupee is expected to open slightly weak against the US dollar next week tracking multi months drop in higher beta currencies. However, in immediate short-term, 52.50 act as a major support - long-term trend line as well as 34-day moving average support, breach of it would form a lower top lower bottom amid opening a major move on the downside. On upside, 53.25-53.32 resistance area looks vulnerable on hourly chart targeting further up move to 53.58.

Commodity Outlook

“The rally from the lows has put gold in a much better near-term situation with a close above the 200-day moving average at $1634 signaling further upside potential. Only a weekly close below $1545 would shatter this projection and lead to a deeper correction. Crude Oil is taking resistance at $104, from last few days and is not able to sustain above it. But whenever it does, we will see price rally to $114.

Base metals will, despite a deteriorating outlook for new supply, continue to struggle through the early parts of 2012 on growing concern of a recession in developed markets, combined with emerging markets slowing down. The long-term prospect however remains positive as lower prices should meet restocking demand, especially from countries like China.” says Edelweiss Commodity report.

Strategies

-Buy MCX Gold (Feb) above 27950 SL 27450 TGT 28550.

-Buy MCX Crude Oil (Jan) above 5430 SL 5325 TGT 5560.

-Sell MCX Copper (Feb) around 405-406 SL 412 TGT 395.

(With inputs from Edelweiss Research Reports)

-Riken Mehta

FCCB: A saga of Fancy Companies Crazy Borrowing

The year 2010 saw the Indian currency get its very own symbol and in 2011, the rupee was the symbol of the countries ailing condition. The Indian rupee holds the dubious distinction of being Asia’s worst performing currency, depreciating close to 20% in last five months. Reactive rather than pro-active RBI policies have left people in dilemma with ample rate hikes and little intervention in the forex market.

The current scenario of high interest rate, thanks to RBI, was a repetition of the 2006-2008 situation wherein companies shifted focus to raising money via external commercial borrowings (ECBs). It was a prudent option for the companies since it would lead to equity dilution without much impacting the financials of the company. However, these companies never expected a credit crisis to unfold in US and later in Europe, or the steep depreciation in the rupee.

What are ECBs?

External commercial borrowing is a medium by which Indian companies can access foreign funds for various purposes. These include loans, terms of credit, notes, fixed rate bonds, etc. Probably the most common instrument used is an FCCB.

Foreign currency convertible bonds, or FCCBs, are debt instruments issued by companies in a foreign currency. It is a hybrid security, with both debt and equity features, meaning the FCCB has the option to be converted to the issuing company’s equity at the time of maturity.

The main advantage of an FCCB is that it allows the issuer to raise long term finance at lower interest rates. However, in turbulent times, if the share price of the equity doesn’t reach the conversion price, the company will have to refinance its debt so as to redeem the bonds.

Another method of raising finance from foreign markets is through foreign currency exchangeable bonds. FCEBs are bonds issued by an Indian company to foreign investors, however, they are not exchangeable into shares of the same company. The equity shares offered are of a company that is under the same group of companies.

For example, company X, the issuing company, issues FCEBs, which on conversion will give the bondholder equity shares of company Y, the offering company. Now, both company X and Y are under the same umbrella, which means that X is selling off a portion of its stake in Y so as to raise finance. However, under this method, there is dilution of a promoter’s equity stake in the offering company. 

FCEBs are currently the less popular means of raising foreign funds in India because it is not allowed freely. An approval is required from the RBI or from the foreign investment promotion board (FIPB) prior to issuance of FCEBs. Another drawback of the FCEB-medium is that individuals and other non-corporate entities are not allowed to invest in them.

Impact on companies:

Since FCCBs and FCEBs are funds raised in foreign currency, the company also faces the uncertainty of currency fluctuations on repayment. Sometimes it may be to the benefit of the issuer. However, due to the current strength in the dollar, companies will have to shell out more in terms of rupees.

Let’s take the case of Reliance Communications. The telecom giant issued FCCBs worth USD 1 billion on 12^th March 2007, with the conversion price set at Rs 661 per share for bondholders. However, due to bearish market scenario and negative company newsflow, the current market price of the stock is languishing in double digits. This means that there is no real chance for the outstanding FCCBs worth USD 925 million being converted by maturity date. What will happen next? RCOM will have to repay its outstanding loan to bondholders.

The effect of the rupee in this scenario is with regards to the amount of cash outflow RCOM will face while replaying its outstanding bondholders. With the rupee near its lifetime high against the dollar, RCOM will have to shell out more in rupee terms so as to repay its outstanding FCCBs worth USD 925 million. For a company that is already facing several problems, this is a double whammy.

According to an IIFL report, 2012 is going to see FCCBs totaling USD 5.3 billion due for redemption. However, the actual redemption value is a whopping USD 7.2 billion, the highest ever amount yet. With stock prices of almost 90% of FCCBs significantly below conversion prices, a vast majority of companies are in for a difficult year ahead. 

- Anisha Mappat, Riken Mehta

Is India's most expensive stock...really expensive?

Not many may have heard of Orissa Minerals Development Corporation or OMDC, oddly enough, considering it is India’s most expensive stock in absolute terms at Rs 29,000 a piece. But here’s the real leap-out-of-your-seat fact: OMDC’s life high is Rs 92,220 a share, which it scaled on November 15, 2010. While it’s all-time low is Rs 20,475, which it made on August 4, 2010.

And strangely not many of the major brokerages are tracking OMDC.

Let’s start with the basics. The company's trailing 12 month EPS is Rs 257.49 on a low equity base of 6 lakh shares. This translates into P/E of 106 compared to industry average of 5, way too expensive. The face value per share is Rs 10. The book value of the stock is Rs 13,325, converting it into P/BV of more than 2.

Rashtriya Ispat Nigam, is the parent company with 50% stake, followed by LIC, second largest shareholder with 15% stake. A major trigger for RINL could be its listing once the cloud of uncertainty over the sector fades away. RINL is likely to top the list of government’s divestment to-dos. 

Major concerns

All six mines of the OMDC are shut owing to lease expiry. It also needs further clearances from the government for the same. Its sponge iron plant production, a joint venture with East India Minerals Ltd, is at a standstill due to non-availability of iron ore.

But the main concern, going forward, could be the draft mining bill that is likely to erode profits, if becomes a reality in its current form. 

The board of OMDC deferred stock-split proposal twice in last one month. Earlier, the board at a meeting held on November 9, 2011 deferred stock-split proposal, citing absence of government nominee director at the board meeting. Liquidity is a key issue, so stock split/bonus will be an ideal option for the company to increase liquidity and affordability for investors.

OMDC shining?

If one had to go by the management say its latest annual report, then OMDC share can reach mind-blogging valuations ahead.

“All the six mines are currently inoperative and it is expected that one mine, namely Kolha Roida, may come in operation in third quarter of the current financial year 2012 and all remaining five mines may be operative by the end of the financial year, so main benefit will accrue in next financial year, 2013,” the report said adding, “These achievements will lead to expected productions of 10 MTPA of iron ore and 1 MTPA of manganese ore in near future. It is also planned to set up 2 MTPA iron ore beneficiation plant and 2 MTPA pelletisation plant.”

Based on the management talk, the cash EPS for FY13 works out close to a staggering Rs 24,000. 

FY13E	Iron Ore	Manganese
Production	10 MTPA	1 MTPA
Realisation (in Rs per tonne)	Rs 4000/tonne	Rs 8000/tonne
Sales (Rs in Cr)	4000	800
OPM (%)	50%	50%
Gross Profit (Rs in Cr)	2000	400
Interest (Debt-free)	-	-
Tax rate @ 40%	-800	-200
Net Profit (incl Depreciation)	1200	200
Shares	0.06	0.06
Cash EPS (Rs)	20000	3333
Other Income (Rs in Cr)	50
EPS on other income	833
Total Cash EPS (Rs)	24000

 

OMDC is a debt free company. Also, it has reserves of close to Rs 800 crore of which Rs 700 crore are in fixed deposits. The other income is the interest earned on fixed deposits assuming an annual interest return of 8%. The realisation figures are based on polls of various analysts.

Adding two and two- reserves of Rs 800 crore and FY13 expected profit of Rs 1400 crore, the total reserves comes to be Rs 2200 crore. Considering the current market-cap is Rs 1800 crore, the stock is trading at a mind-boggling discount to future estimates. 

In simple terms, the company is up for grabs at almost no cost as returns are going to be far greater in the future.Again, the whole valuation parameter is based on the management comments. Therefore, one should not jump the gun and start buying in lots.

An investor should wait for further clarity on news of mining license clearance and then take a call.

The company clocked an EPS of Rs 3030 in FY09. Assuming conservative industry P/E of 5 on FY13 expected EPS of Rs 24000, one can do the math on the target price. However, in the present gloom and doom scenario, shareholders of the company can just hope for the best. 

-Riken Mehta, Sagar Salvi

Chart Check: Hindalco Vs Aluminium prices over last 11 yrs

As seen in the charts, Aditya Birla Group's flagship company, Hindalco has a very positive correlation with LME Aluminium prices. An investor both long-term or short-term should check trend of LME aluminium prices going forward before buying Hindalco.

Hindalco is Asia's largest integrated primary producer of aluminium. Bauxite and power cost are two key components for aluminium producers. Hindalco has an advantage over its peers with captive power plant and smelter production plant situated in Orissa, one of the largest states with bauxite reserves.

Note: Data Period: Jan 2000 to Dec 2011. Monthly Average Prices of LME Aluminium (in USD)and Hindalco

-Riken Mehta

Looking to build a portfolio? Check out holding companies

In a volatile market scenario like the present one, everyone is looking for an investment which holds the promise of decent returns without being too risky.

Holding companies are a good bet for investors with a medium-risk-medium-returns approach. A holding company is one that owns sizeable stake in companies within same group, to the extent that it has influence over the policies and management of that company.

The benefit of investing in a holding company is that you indirectly own the shares of the group companies. For example, if you buy into Bajaj Holdings, you get the advantage of investing in Bajaj Auto, Bajaj Electrical and Bajaj Finserv as well. This is because Bajaj Holdings owns close to 9 crore shares or 31.49% in Bajaj Auto. So when the share price of Bajaj Auto moves higher, so will Bajaj Holdings, in theory at least.

Another positive is that the share price of a holding company is less volatile. Due to the nature of the auto sector, Bajaj Auto may see adverse moves. While this will affect Bajaj Holdings, the price change will not be as sharp.

However, it is the same on the flip side also. Even if the fundamentals of the holding company are good, it may not be a good investment if it owns majority stake in a sick businesses. For example, debt-laden Kingfisher affected the prices of other stocks under the UB group.

How to check it?

Investors should check out the latest annual reports available on the company’s website. One should go to Balance Sheet section and hunt for Investments. A detailed schedule of investments made by the company in equities, fixed deposits, mutual funds, government bonds will be available.

The Schedule will further classify Investments into Quoted and Unquoted. Quoted means the companies which are listed on the bourses and vice versa, so an investor should only consider quoted investments value. Also one should subtract debt value from the current market value. Reason is if the company borrows money and invests in another company, then it makes that investment non-viable.

Below is a list of 10 prominent business groups who hold substantial stake in other companies listed on the exchange.

- B K Birla, Aditya Birla: Pilani Investment
- Adani: Adani Enterprises
- Bajaj: Bajaj Holdings
- Aditya Birla: AB Nuvo
- United Breweries: UB Holdings
- Tata: Tata Investment
- Binani: Binani Industries
- Jindal: JSW Holdings
- Baba Kalyani: Kalyani Investment
- Kirloskar: Kirloskar Brothers Investment
- Godrej: Godrej Industries

Penned by Anisha Mappat, Riken Mehta

Corporate fixed deposits: Friend or foe in volatile market?

Investing in the stock market is not for the weak hearted, more so in today’s volatile scenario.

A year back, investor X—who prefers risky bets for high return—had invested Rs 1 lakh in JP Associates. Investor Y, cautious by nature, invested Rs 1 lakh in JP Associates’ fixed deposits scheme offering a fixed annual interest return of 10.50%.

Now, assuming the FD matures today, Mr Y would have made Rs 10,500 (pre-tax) on his investment, while Mr X, who had bought the share at Rs 112 apiece, will be staring at a 40% loss on his investment.

How do corporate fixed deposits work?

Corporate fixed deposits are unsecured loans that do not guarantee anything to an investor in case of a default. When you invest in a bank fixed deposit, the Deposit Insurance and Credit Guarantee Corporation ensures that Rs 1 lakh per bank is repaid to you in case of a default. But there is no guarantee for deposits with companies and NBFCs.

Popular instruments of investment

Corporate fixed deposits (FDs) have gained a fancy among investors because of high fixed returns that these products offer. Typically a corporate fixed deposit offers much higher return than a bank FD; however it comes with a high risk tag.

Why does a company raise money through fixed deposit schemes?

This is usually done when other modes of funding dry up. The stock price may be too low for the promoter to offer shares to new investors. Or it is possible that banks may not be willing to lend money, and if they are, the interest rates would be very high.

In the past, there have been instances wherein companies like Panjon Pharma, CRB Capital, Morpan Laboratories offered high returns but defaulted. Even today there is a noise that one of the real estate companies is not making timely repayment to its fixed deposit investors. However, that does not make corporate fixed deposits a bad destination to park your funds. Just like any other investment, you need to study the company, its credit rating and other parameters, before investing in the FD.

Speaking to Moneycontrol.com, Umesh Rathi, CFP, Arihant Capital has listed some of the key parameters to review the corporate fixed deposit before making your investment.

1. The issuing company should have a strong goodwill and track record in the market and should be running its business for at least 15- 20 years.

2. Only invest in FDs of profit making companies that have a constant dividend paying track record for last 5 consecutive years.

3. Credit rating is one of the important parameters while selecting corporate fixed deposit. The NBFCs that offer corporate fixed deposit has to get themselves rated by the rating agencies such as CARE, CRISIL, ICRA etc., but manufacturing firms have no such compulsion. Assuming a company is rated then invests only in a company having AAA or AA rating and if company is not rated then one should deeply study financial statements of the company. If you are not able to understand financial statement then you can take help of financial advisor or avoid investment in unrated companies.

4. The sector outlook in which the company runs its business should be positive. Avoid troubled or high risk sectors like real estate or microfinance.

5. One should avoid company which is offering unusually high interest rates because generally companies offer higher interest rate to compensate high risk.

6. Check the history of the company, how they have paid the principal and interest to the investors.

Credit rating is your most important deciding factor while selecting a fixed deposit. Understanding different ratings can be difficult for a layman as they may not be well-versed with various jargons and rating numbers. The ratings will be in the descending order, where AAA is the best rating while D is the worst.

-Riken Mehta

Interest Cover: What you need to know about leveraged cos

Given the high interest rate environment, investors will be keenly watching companies’ ability to meet their interest payments. This is one data point that investors should analyze while looking at the fundamentals of a company, and the interest coverage multiple does exactly this.

The interest coverage multiple or the interest coverage ratio is calculated by dividing a company's earnings before interest and taxes for a particular period by the company's interest expenses for the same period.

The higher the multiple is, the better the financial position of a company.

Interest coverage multiple less than one indicates the company is not generating sufficient revenues to meet its cost of debt. A ratio above 1.5 is considered to be good. However, a good or bad multiple depends on the industry the company operates in. For instance, infrastructure and realty companies have a lot of debt on their books. But debt in itself is not a bad thing, as long as the company is able to service it

Speaking to Moneycontrol.com, fundamental analyst at Kotak Securities, Dipen Shah, said “We do consider the interest coverage ratio to be an important parameter. A ratio of almost 1 or below 1 is not preferable.”

-Anisha Mappat, Riken Mehta

2 non-Tata stocks that may react to Mistry's appointment

Cyrus Mistry currently Managing Director of Shapoorji Pallonji Group is the name and face we all will be hearing and looking in the media for the next few days atleast. That’s because, he is all set to take over mantle of leadership from Ratan Tata as the Chairman of India's largest conglomerate, the Tata Group.

The Board of Directors of Tata Sons has appointed Cyrus Pallonji Mistry as Deputy Chairman. Mistry will work with Ratan Tata over the next one year and take over from him when Tata retires in December 2012.

Who is Cyrus Mistry?

Cyrus Mistry, has been a Director of Tata Sons since August 2006. He is a graduate of Civil Engineering from Imperial College, London, and has a Master of Science in Management from the London Business School.

How will stocks react to his appointment?

It’s a no brainer that Tata group stocks will react to the news of a new chairman. There are around 100 companies, listed or unlisted, of the Tata group.

Below we have attached the entire list of Tata Group companies. However, there are two stocks which may also react to Cyrus Mistry’s appointment. The two unheard names are Gokak Textiles and Forbes Gokak .

Why so?
As per latest BSE Shareholding data, Shapoorji Pallonji & Company Ltd holds 73.56% and 72.06% stake in Gokak Textiles and Forbes Gokak respectively. The stake is valued at Rs 23 crore and Rs 371 crore respectively.

Cyrus Mistry is the younger son of Shapoorji Pallonji Group. The group's business interest covers construction (including residential, commercial, industrial and infrastructure), real estate, infrastructure (comprising coal mining, power, ports and roads), biofuels and agriculture, consumer products, electro-mechanical and MEP services, facades and interiors, engineering, textiles, business automation and shipping and logistics.

With over 23,000 employees and a group turn over of USD 2.5 billion, it is a name quite familiar in the India Inc.

Gokak Mills is engaged in yarn spinners, dyed yarns, canvas, terry towels, knitted garments and other downstream products.

For the quarter ending September 2011, Forbes Gokak reported net profit of Rs 0.02 crore on turnover of Rs 66.37 crore. Gokak Textiles bottomline was deep in red. The company posted net loss of Rs 11.02 crore.

-Riken Mehta

Jet, Kingfisher margins likely to crash on falling rupee

A falling rupee against the dollar has proved to be a double edged sword for ailing airlines struggling to fly in the black.

The aviation sector has already seen its operating cost go up significantly for the three months to September quarter as airline companies incur 30% expenses in dollar denomination. Secondly, the weak rupee could compress EBITDA margins to 3% from 12.3% Y-o-Y due to the weak rupee, say analysts

After falling to Rs 50 to a greenback few days back, the rupee is now at Rs 48.86 sending shockwaves to airline operators who are already reeling under losses for the past two quarters. While country’s largest private carrier Jet Airways had posted a net loss of Rs 123 crore for Q1, Kingfisher too posted a net loss of RS 263 crore on high fuel bills.

Jet Airways and Kingfisher Airlines officials with whom moneycontrol.com talked to have said that their Q2 topline has been dented as the rupee started to depreciate against the greenback by almost 12% when compared with the three months to June quarter.

"A sharp fall in the value of the rupee pushed up our external borrowing cost, lease rentals and salaries to expat staff. A falling rupee has bloated out operational cost by around 10% for the September quarter," says an official from a full service carrier.

Sample this:

Jet incurred Rs 361 crore towards employee salaries, Rs 207 crore on lease rentals and Rs 214 crore on interest payments on loans taken domestically and in dollar denominations when the rupee stood at Rs 45 against the greenback during Q1 of FY12. Now, with the rupee inching towards Rs 50 against the dollar, airlines will have a tough time maintaining costs, say analysts.

Also, while Jet has dollar denominated loans of around Rs 9,000 crore, its rival Kingfisher has a debt of around Rs 6,000 crore of which a significant amount is in dollar denomination. Fall in rupee will also increase the principal amount of loans for these companies.

Sharan Lilaney from Angel Broking explains, “Airlines are already making losses for the past two quarters and with lower purchasing value of the rupee, airlines are likely to report more losses this quarter.” He further adds that though Jet Airways and Kingfisher Airlines receive revenues from international operations in dollar terms, the impact will be offset by other larger expenses which they incur in dollar currency.

Though crude prices have slipped to $109.45  from $113 a barrel Q-o-Q, the weakening rupee has toned down the impact, say experts.

-Riken Mehta & Shaheen Mansuri

Setco Auto aims to triple revenues to Rs 1000 cr by 2015

Ranked among the world's top five clutch makers, Setco Auto , has set its sight on becoming Rs 1,000 crore turnover company by 2015.

"In about four year’s time, we see exports contributing 15% to total sales from the current 8%," Senior Finance Officer, Mohsin Virani told moneycontrol.com.

Setco Auto reported a jump of 39% in revenues at Rs 73 crore for the quarter-ended June 2011, YoY. During the period, company's bottomline almost jumped by 35% to Rs 7.07 crore.

"We were able to pass on the rise in commodity prices with a time lag of 3-4 months. This helped us combat high raw material prices effectively," Virani said.

The company gets around 47% of its revenues from Original Equipments Manufacturer (OEM) segment, while 42% comes from the replacement market.

"The replacement market garners 10% margins higher than OEM," Virani explained. 

The remaining 8% comes from exports, he said adding, "…nearly 60% of revenue is generated from Tata Motors alone. Top three clients from India contribute 85-87% of total revenues."

The company's current inventory turnover ratio is three times. "The outstanding loan book was Rs 90 crore, which includes term loan plus working capital. The average interest cost is 12.5%." Virani said.

The company expects to post Rs 70 crore topline and Rs 1.5 crore as bottomline from its two international subsidiaries. It is also planning to set up a clutch assembly facility in Africa to take advantage of the lack of organized players in that continent.

"We will start exporting to African countries by end of Q4FY12," Virani informed.

The favourable policy changes late last year helped Setco to add 10-12% realisations this year.    

"The company will be able to maintain OPM of 18-20% and NPM of 10-12% going forward despite slowdown," Virani said.

Shares of auto component maker were trading marginally higher at Rs 175.45, up 0.46%.

And you thought falling crude was good for Indian equities?

The widely held belief is that falling crude oil prices is good for India. That may hold true for the economy. But for the stock market? The chart below shows that lower crude oil prices need not necessarily trigger an upswing in stock prices.

Since 2005, Indian equities and global crude oil prices have more or less moved in the same direction. Indian shares did well even as crude prices were soaring to new highs, and declined when oil prices cooled off. Will the same pattern be repeated this time too? Only time will tell.

Riken Mehta

Order book stands at Rs 1035 cr: Bajaj Electricals

Topline performance has been good for the company in terms of volume growth. Topline has grown by 16.4 % from Rs 365 Cr to Rs 425 Cr. In terms of segment wise performance 30% growth in appliances; 22% growth in fans; 20% growth in lighting & 26% growth in luminaires business. 11% growth in E&P segment was better as compared to the last quarter of 8%. Consumer Durables & E&P businesses have shown better profitability in this quarter.

Segment wise performance:

Lighting: Net profit grew from Rs 7.7 Cr to Rs 8 Cr

Consumer Durables: Net profit grew from Rs 15.95 Cr to Rs 18.6 Cr

Engineering & Project Business: Net profit grew from Rs 12.7 Cr to Rs 17 Cr

The interest cost has gone up significantly from Rs 7.7 Cr to Rs 10.9 Cr; a rise of 41%. The total outstanding order book of the company stands at Rs 1035 Cr. No order cancellation was witnessed in this quarter. Order Book Break-up:

Special projects of Lighting & Rural Electrification Rs 500 Cr

Galvanised Poll: Rs 62 Cr; a rise of 15% in this segment

Street Light: Rs 60 Cr

Transmission lines tower: Rs 420 Cr

Since the company’s products are sold on cash system basis & not on loan system it is better insulated from the slowdown compared to its peers. The replacement sales are also doing well for the company. Bajaj Electricals still maintains the guidance of Rs 1700 Cr topline for FY09. With major commodities hitting multi year lows, the consumption of raw materials has gone down by 7% of sales. However purchase of goods has gone up from 70% to 73.4% of sales.

Also with lower commodity prices, the company has passed on the discount to consumers. A 3-4% price reduction in Fans segment was done while going forward the company will reduce the prices of mixer grinder as well. Inventory has considerably dried down by the company. A 7% increase in inventory compared to its 24% growth in the turnover of consumer business is reasonably well. However, in the E&P business, the inventory at the company level has gone up by 22%

The outstanding for the company has gone up by 6%. The total working capital deployment has gone up by 9-11% compared to its growth in turnover of 22%. The Luminaires segment witnessed margin pressures on bottomline in this quarter. In the Building Management System; the company may finalise some initial contracts in the near term. Bajaj Appliances has recently launched its new application named Platina in the northern region. It is witnessing good response from there & the company will soon launch it in other parts of India.

Bajaj Electricals is also implementing ERP solution from Oracle for better productivity across its enterprise. The company is also deploying strategy of assigning super distributors to sell some of its products in Haryana, Uttar Pradesh & Rajasthan. These distributors will sell more products in the rural areas going forward where the company has very little coverage. It is not seeing any pullback in the rural areas in consumer spending. The import comprises 4-5% of the company’s turnover. The rupee depreciation will not impact much to the company’s bottomline.

-Riken Mehta