Your Financial Advisor

Invest in gold for good reasons

2006-11-29T18:04:00.000+05:30

Ashok Mittal of Karvy Comtrade and Sunil Kashyap, managing director of Scotia Mocatta give their perspectives on how to trade in gold now and on where gold prices are headed.

Ashok Mittal expects the upward movement in gold to continue for some more time. He feels that this is the ideal time to invest in gold as people will make some good money in it. He does not expect the rupee to strengthen further hence there is not too much currency risk on the downside when the investment in gold is converted into rupee terms.

Sunil Kashyap expects gold to be rangebound for the rest of the year. He says that in the medium term, continued dollar weakness could bring some amount of strength for gold.

Excerpts from CNBC-TV18's exclusive interview with Ashok Mittal and Sunil Kashyap:

What have you been observing on the gold front and what kind of opportunities do you see in the local market to trade that commodity?

Mittal: I think like the equity market, gold, silver and crude oil are also going up. We have seen a good amount of rise in the last week in gold when it went up about USD 612 to about USD 637-638.

We expect this upward momentum to continue for some more time in gold and we are targeting international levels like $646 and $655 to come.

How would you translate that into a strategy in the local market?

Mittal: I think if somebody has to invest in gold, now he has to invest in the February contract, which is running approximately around 9380-9390 levels. So current levels or maybe some dips towards 9320 levels or so should be bought for a target of about 9460 and 9600.

The major reason behind this is that we do not expect the rupee to strengthen so much because RBI has been holding up the rupee from appreciating too much. So the currency risk is not much on the downside, when we convert the investment in gold into rupee terms.

Gold has weakened against Euro in the last one week by about 300 points or so and the data, which has come in US is not really supporting too much in terms of US economy being improved a little bit. So the outlook on US economy remains a little bit of a concern for most of the economists as well as their own Central Banks.

So I think, it is good to invest in gold, to buy and hold it for some period of time and wait for those levels to come. I think people will definitely be able to make some good money in this.

Gold has fallen from its 11-year high, what is your expectation now, where will it find its range?

Kashyap: It is still looking for some level of support. We have seen some move back and we are seeing some support this morning coming in from the fiscal markets. So we will be moving up slowly from here but it will basically be range bound, going forward for the rest of the year.

What is the expectation going forward from the dollar particularly considering the fact that there is always synergy in the kind of movement that both these commodities see, going forward?

Kashyap: The dollar has been obviously under attack for the last 5-6 sessions and there is continued dollar selling going on. Going forward, the dollar may recover somewhat as there is some technical pullback. But the medium term scenario will see continued dollar weakness and therefore some amount of strength for gold.

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Invest shares in Sobha Developers (SDL)

2006-11-29T16:49:00.000+05:30

Sobha Developers (SDL) is among the leading real estate developers in Bangalore and it is expanding into other markets like Kochi, Chennai and Pune. The company is tapping the market with an issue of 8.89 million shares in a price band of Rs 550-640. At the higher end of the price band, the issue will add up to Rs 570 crore.

The company will utilise the proceeds of the issue to acquire land and complete some of its projects currently under execution. The company hopes to scale up its operations manifold over the next few years. Given the company’s prospects and high interest in the real estate sector, investors can consider subscribing to the issue.

Profile: SDL has two major lines of business — real estate development and contractual business. As a real estate developer, the company acquires land, builds commercial and residential projects and sells them.

As a contractor, the company’s primary role is to construct buildings for others. So far, the bulk of SDL’s contractual business has come from Infosys. SDL developed 4 million sq ft of space last year; of this 1.6 million sq ft was as a real estate developer, while the remainder was on contract.

Since its inception in 1995, SDL has developed and built close to 2.98 million sq ft of space as a developer and built another 8.42 million sq ft on contract. Of the contract business, almost 90% has been for Infosys.

The company also has a manufacturing business that includes furniture and interiors. This accounted for sales of Rs 88 crore in HY07. The company recorded a net profit of Rs 89 crore in FY06 and Rs 54 crore for the six months ended September ’06.

SDL recorded a total income of Rs 628 crore in FY06, up from Rs 205 crore in FY04. For the first half of FY07, it posted an income of Rs 533 crore. The real estate and contractual businesses accounted for 80% of its turnover — this was split in the ratio of 2: 1 between own projects and contractual projects.

Prospects: SDL holds land reserves of 2,593 acres and has entered into agreements to purchase reserves of 3,456 acres. The owned reserves translate into development rights of over 118 million sq ft — the company hopes to complete these over the next 7-10 years. But execution could be a cause for concern, especially since the company plans to expand to other cities.

Valuation & Recommendation: A real estate consultancy has valued SDL’s land bank and land arrangements at Rs 6,200-Rs 7,300 crore. Based on the issue price, SDL is valued at Rs 4,660 crore at the higher end of the price band.

For the first six months of FY07, the property development business accounted for just over 50% of the company’s turnover. This will increase significantly, given its expansion plans. The realty business enjoys higher EBITDA margins of 30%, against 18% for contractual business. This could result in improvements in profitability.

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Review of buying shares of Plastiblends Plastic company

2006-11-29T16:48:00.000+05:30

Plastiblends is India’s largest producer of masterbatches for plastics. The Rs 92-crore company is part of the Kolsite group formed in 1962, which also makes plastic extrusion machinery. The latter business is carried out through a separate company called Kabra Extrusiontechnik. Masterbatches impart colours and special properties to plastic raw materials and end products.

At the current market price of Rs 170, the company is quoting at a P/E of 9.2. Its P/E is less than that of its competitor, Poddar Pigments, which quotes at 10.9 times. The company’s valuations look attractive on various financial parameters. It is a near debt-free company and its share price is quoting at a dividend yield of 3.8%.

It has grown its topline at a CAGR of 10.4% over the past five years, in line with the long-term growth rate of the plastics business. Its PAT has grown at a CAGR of 18.2% over the past five years. The company expects to grow its earnings at historical rates, going forward. EBITDA margins have stayed above 10% in the past three years.

The masterbatch business is set to grow at 10%-plus rates and Plastiblends will benefit from this growth. But the key challenge will be ‘product obsolescence’. Over 80% of its sales are from new grades of masterbatches, while the rest are more than three years old. So, there’s a need for innovation and R&D. The company has a track record of making 450 types of active grades of masterbatches and has developed 1,125 grades till date.

Business: The company produced 15,652 tonnes of masterbatches in FY06, compared to 15,385 tonnes in the previous year. Its capacity, at 24,000 tonnes a year, had a capacity utilisation of 65.2% in FY06 compared to 70% in FY05. The company has embarked on an expansion plan.

The capacity at Daman is being increased from 24,000 tonnes to 35,000 tonnes in phases by March ’07. A new unit at Uttaranchal will be operational by April ’07. Its customers among polymer producers are Reliance, IPCL and Gail, while its customers among polymer processers are Supreme Industries, Haldia Petro, Cosmo Films, Garware Polyester and Max India.

Industry: The masterbatch segment is growing faster than the plastic industry, at a CAGR of 15%. The plastics industry has been growing at a CAGR of 10% over the past 10 years.

The industry consists of two major segments — white, black, colour and additive masterbatches and antifibrillation masterbatches. Plastiblends has a market share of 12% in the white, black, colour and additive masterbatches segment.

This is a high-value segment with a market size of 60,000 tonnes, valued at Rs 600 crore. Its user industries are packaging, plastic products, pipes and films. In the antifibrillation masterbatches segment, Plastiblends has a market share of 10%.

This is a low-value segment with a market size of 1,00,000 tonnes, valued at Rs 250 crore. Demand in this segment has risen over the past 1-2 years due to increase in polymer prices and a rise in percentage loading of filler masterbatches from an average of 5% to 15-20%.

Financials: The company posted sales of Rs 92 crore for FY06. Its topline grew by only 2.8%; PAT grew 31.1% to Rs 10.4 crore in FY06. For the half-year ended September ’06, sales rose 30.9%, while PAT grew 47.5% to Rs 8.4 crore. Exports rose by 50% to Rs 15 crore in FY06. The US and Europe present outsourcing opportunities in masterbatches.

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Investing in Private equity funds

2006-11-29T16:46:00.000+05:30

Private equity (PE) investors are becoming increasingly active in the domestic secondary market. While earlier, private equity was often intended for unlisted companies 1-5 years away from an IPO, these days, there are quite a few private equity funds who mainly concentrate on only listed equity. A PE investment in a company may make the firm more attractive for ordinary retail investors as well.

PE funds typically enter a company through preferential allotments. Listed companies are allowed to issue a small portion of new equity to a select group of investors, without having to do a public issue. You may well ask — if a PE fund has to buy listed equity, why not buy directly from the market? After all, it is possible to quietly amass 5% or even more stakes in listed equity without too much impact cost, if done astutely.

PE funds avoid secondary market purchases, in line with their basic philosophy. They prefer a deeper involvement in companies they invest in, compared to other large investors who invest through the secondary market, like mutual funds (MFs).

PE funds say they like to invest in companies ‘which are in break-out stage’ — or likely to increase sales at a very rapid stage over the investment horizon of the PE fund. Since PE funds typically look at a 3-5-year holding period, they look at companies which will grow in size by 2-3 times during this period. In other words, they look for aggressive growth stories.

The other part is — these companies should also be available cheap, otherwise the PE fund doesn’t make its target return. The target rate of PE funds is typically higher than MFs. PE funds look for 25% or more annual return, whatever the state of the primary market.

MFs, on the other hand, will be happy with a return of 15% per annum. Don’t confuse this with the returns we have seen in the past 2-3 years. This is an exceptional period. The Indian equity market, in general, will give 15-20% returns. In other words, PE funds are looking for above-market returns.

How does a private placement enable this better than a secondary market purchase? The answer to this is simple — information. While even MF managers talk to companies, PE fund managers have much better access to information. They are shown growth plans in detail, including internal financial projections. Often, the PE fund manager works together with the target company to make a business plan, approves the funding required, and then participates in the funding.

The PE fund manager thus has access to private information on listed public companies. However, MF managers or ordinary retail investors do not have access to that sort of information.

PE fund managers also typically take a board seat, and are deeply involved in running the company. So, there is greater oversight.

This also serves to increase corporate performance. These days, there are PE deals every week, if not every day, in listed equity. If you get to buy at the price the PE fund manager is buying, theoretically, you increase your chances of beating the market.

However, there are caveats. Not all PE deals make money, and perhaps not all PE funds make the desired return. Data from the US clearly shows this. The Indian market is too nascent, and we haven’t come across studies of performance of PE funds which invest in secondary markets.

However, at a practical level, retail investors may want to keep an eye on PE deals. There should be a higher proportion of companies likely to give above-market returns there, compared to the overall market.

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Be safe when shopping online

2006-11-28T19:51:00.000+05:30

Marsha Colliers only shops online during the holidays. And she doesn't limit her purchases to socks: In past years she's bought $800 worth of mink coats, a yellow Chevrolet SSR shipped from Rochester, NY, to her house in Los Angles and a timeshare in Miami Beach, Fla. "I'm never that guy who stood all day in line to get the sale," she says. Colliers has also never been scammed.

Colliers, author of Santa Shops on eBay, says she can land online deals without getting ripped off because she's an extra-cautious cybershopper. "I work hard for my money, and I don't want to be at risk," she says.

Holiday season is bonus time for Internet thieves, who troll the Web for credit card numbers and passwords. Last year consumers spent $30.1 billion holiday shopping online, a 30 per cent increase from 2004, according to Nielsen/NetRatings' Holiday eSpending Report.

Analysts expect online sales to grow even more this year. Yet according to new data by Forrester Research, only 45 per cent of Americans believe online shopping is safe and even fewer trust Internet retailers.

Their instinct is correct: Customers looking for holiday deals may be most at risk, as budget brands and lesser known retailers are more likely to trade off security for low prices. Hackers embed malicious software into insecure sites, designed to steal customers' financial information. More online shopping means more credit card numbers to steal.

As more consumers do their holiday shopping online, the thieves are bound to follow. But there are things shoppers can do to reduce their risk. Here's how to avoid getting more than you asked for this holiday season.

Before you even start shopping, update your computer security. Shopping online without protection is like wearing your ATM code and bank account number on your shirt. Fend off thieves by installing firewalls, anti-virus software and security updates to your browser.

Make sure you're shopping from trusted sites, says Steve Salter, vice president of the Better Business Bureau's online division. "General purpose search engines don't filter results for quality," he says. Do that homework yourself, Salter suggests, by researching sellers on the Better Business Bureau's Web site and reading feedback left by past buyers. Look for clues on the site itself, like certifications from companies that audit online vendors like TRUSTe and Hacker Safe.

For particularly expensive purchases, Colliers will even call the store. When she found a good price for a refurbished Rolex watch, she called directory assistance to get the seller's phone number. The seller turned out to be a family-owned Florida jewelry store. Colliers talked to the owners about her purchase. "You need to know what you are buying," she says.

Ask a lot of questions, advises Megan Howie, programming director for Time Warner's AOL Shopping. If a site doesn't seem legit to you, it's probably not. No one's forcing you to buy a $1,500 computer at www.joe69sexxycomputer.net. Go to a more established vendor.

If the amazing deal seems too good to be true, it probably is. It's important to remember that you're not guaranteed to save money online. Hot--and scarce--holiday items like Sony's new PlayStation 3 or Mattel's Elmo TMX can cost more.

Even items that aren't in high demand still shouldn't sell at unreasonable discounts. Software that's discounted 75 per cent is usually counterfeit, says Neil MacBride, vice president of legal affairs for the Business Software Alliance. In general, expect online prices should be closer to 10 per cent or 20 per cent off retail stores' pricing.

Before nabbing that great deal, make sure you read the fine print. Understand the seller's return, exchange and delivery policies, and read the privacy policy to learn how the site will share your personal information.

Now that you've done your homework, it's time to spend. Never, ever send cash to anyone, no matter how good the deal. As soon as the bills are out of your hands, they're gone forever. If sellers don't offer an online payment service, like eBay's Paypal, pay with credit card, not a debit card, if possible: Credit cards give you a chance to review the charges before you pay and dispute them if necessary.

When paying, look for a sign that the website is secure. Encrypted sites show special icons, usually locks, in the browser URL window or the URL changes from http to shttp or https.

After buying save all records relating to the transaction. This way, if there's a problem, you have documentation.

All theses warnings shouldn't discourage customers from shopping online, caution experts. If you shop safely, the risks are minimal, says Howie. "Online has really grown up quickly," she says. "There's really no reason to fight the crowds."

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The Plan for Union Budget 2007-08

2006-11-28T19:48:00.000+05:30

With the Union Budget for 2007-08 less than 14 weeks away, North Block is full of Budget talk. A new team is in place in the finance ministry to steer the Budget work.

Officers are busy compiling the revised estimates of expenditure for various Central ministries. The real work on the next year's taxation proposals and the budgetary support for Central expenditure has not yet begun.

Which is why this is also the time when finance ministry mandarins have the luxury of stepping back to take a detached look at the budgetary exercise in recent times and reflect on what direction it might take in the future.

For Palaniappan Chidambaram, this will be his fourth Budget as the finance minister in the United Progressive Alliance government. If one includes the two Budgets he presented in 1996 and 1997 as the finance minister in the United Front government, his tally in Budget presentation would go up to six.

Most officers are unanimous in their view that Chidambaram would be most remembered for slashing the income-tax rates to 30 per cent - a level that all finance ministers succeeding him have acknowledged as the benchmark rate for taxing incomes of individuals and corporate bodies. Minor tinkering has happened, but the basic rate has remained stable at that level since 1997.

Chidambaram would be remembered for yet another achievement of sorts. He has brought into the statute book the largest number of new taxes in the five Budgets that he has presented so far. He started with the minimum alternate tax in 1996 to tax the companies, which were using various exemptions to report zero tax liability.

Then there was the securities transaction tax - a levy that was imposed on the sale and purchase of securities, including shares and mutual fund units. The third new tax he introduced was a levy on withdrawal of cash from banks above a specified limit. And his fourth initiative was the fringe benefit tax.

Each of the new taxes he introduced was controversial. They evoked sharp reactions from different sections of society. He made some modifications to the original proposals, but at no point did he consider dropping them in view of the criticism.

Over time, all these taxes have come to stay. In fact, these new taxes provide him handsome revenue every year. So, even while slashing tax rates, he has managed to levy new taxes to plug the revenue gaps or leakages.

This year revenue collections have been good and some officers believe that the finance minister may not be under any pressure to look out for new revenue sources. But an apparently innocuous statement from his advisor, Parthasarathi Shome, has set every officer in North Block thinking.

It is an open secret that Chidambaram and Shome enjoy a very good equation and all the key Budget proposals are largely discussed and decided by the two of them. Officers come in only to work out the details and examine if their implementation would create any procedural problems.

What Shome stated at a public meeting, therefore, cannot be ignored. The reference was to the rising flow of foreign investments and the need to look at this from the taxation point of view.

Considerable importance is being attached to this reference, as indeed there is fresh thinking on whether any tax incentives are required to attract foreign capital. There are recent World Bank papers that argue that the case for tax incentives to attract foreign investment is not compelling.

It has also been argued that tax incentives neither affect significantly the amount of direct investment nor do they determine the location to which investment is drawn.

Foreign investment inflows in India have been rising steadily in the last few years. Last year, foreign direct investments were estimated at $3.7 billion, in addition to $12 billion of foreign portfolio investments.

This year, there is a slowdown in foreign portfolio investments, but FDI flows are expected to double. With a finance minister, who has never shied away from exploring new avenues for taxation, officials in North Block are wondering if a new tax will be mooted again next February and whether that will pertain to foreign investments. If that happens, Chidambaram's tally will be five new taxes in six Budgets.

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Create a Diversified Portfolio in India

2006-11-28T19:45:00.000+05:30

George Hoguet is managing director and chief investment officer at State Street Global Advisors. State Street is the world's largest money manager. Hoguet looks into the future to plot where the global financial markets and India could be headed over the next 12 months.

He feels, "I think that Indian stocks are richly priced relative to their emerging market peers, but nonetheless long-term strategic investors should have some exposure to India."

Excerpts from an interview given to CNBC-TV18

Running as much money as you do in the emerging markets, how do you feel about the whole asset class right now after the turbulence of the last few months?

There is no question that emerging markets are facing a more difficult environment in the months to come, particularly given the uncertainties surrounding the economy and by extension the world economy. But I think the secular forces driving world economy returns are dominating, and will continue to dominate the cyclical factors.

So when you look forward to next 2-3 years, do you expect to see liquidity flows remaining robust into some of these emerging markets?

They are definitely hostage to the global economic cycle. And should we have a recession in the United States, which then adversely impacts the export volumes coming out of Asia and particularly China, which then would back up on the rest of North Asia suppliers like Taiwan, Hong Kong and so forth, that would dampen enthusiasm.

But the secular impetus is quite strong and emerging markets, which have historically been an exotic asset class has become more mainstream.

During the start of this asset class in the late 1989-90, emerging markets actually sold at a P/E premium to developed market. Now they sell at 20 per cent discount. There is scope for that price-earning multiple discount to actually be further reduced.

But we have to say that it is all subject to the evolution of the global economy and in particular what happens to the US and also commodity prices. We don't think that we will have recession in the United States but the U curve is becoming more inverted day by day.

How susceptible are emerging markets' performance to a commodity meltdown?

There is no question that it would have a negative impact on return of equity to emerging markets. Return on equity now is about 19 per cent - actually in excess of developed markets' return on equity. A lot of this has been driven by commodity prices.

So, if you look at Brazil for example, which is a major supplier of iron ore to China. India and China's demand for oil of course is well-known and other commodities like nickel are in short supply. So, the global boom that we have had which has been lead in parts by Asia and India and China has fueled this rise in commodities.

So, the question is that, as the US economy slows down will commodity prices fall sharply? We don't think so. But it is also true that there is a speculative element currently in commodity prices. We have seen the unwind that has just taken place in the past month in the United States' oil market.

If expectations were to change rapidly and there was a rapid liquidation of speculative positions in commodity prices, then it could potentially impact risk appetite with regard to emerging markets and also at a more fundamental level, should these prices remain more strained - it would effect earnings prospects for many of the companies in emerging markets.

Do you see much lower metal prices in the future? Would you be short in those stocks?

I don't think so. I think that what we have determined here is that here there is both a supply element and a demand element and there was under-investment basically in the 1990s and it takes a while to bring on new capacity and both the demand and supply curves are relative elastic, and it takes a while for these effects to pass through.

But I think one also has to be discriminating and look at each commodity in terms of its own fundamental dynamics, its global patterns of use and where demand and supply is likely to manifest itself in the months to come.

Do you find India less susceptible to these kind of commodity swings or will we behave pretty much in line with the other emerging markets?

India is what's known as a low beta market, so it is less volatile in relation to the world market portfolio - for example in relation to Turkey. So, whenever emerging markets go up one Turkey goes up two and when emerging markets fall as they often do in violent sort of moves, then Turkey goes down very rapidly.

What makes you most optimistic about India?

I actually think India is expensive in a global context. I think that the earnings growth that is expected is quite high - over 16 per cent - over the next couple of years and also there is a lot of interest in the technology sector because even though the TMT stocks (tech/media/telecom) got absolutely clobbered in 2000 selloff, this technology wave is continuing throughout the world and IT spends are growing, and is likely to grow for many years to come.

And ofcourse outsourcing is in its infancy and India is not only going through business process outsourcing but also knowledge process outsourcing and moving up the value added chain.

I think that Indian stocks are richly priced relative to their emerging market peers, but nonetheless long-term strategic investors should have some exposure to India.

You wouldn't put any fresh money into India at these prices, would you?

Emerging market equities are 6 per cent of the world's investable capitalisation measured by Morgan Stanley Capital International. Within an emerging market portfolio, I would be structurally underweight on India, by probably about 2-3 per cent simply because one can buy Brazil at seven times forward earnings and Russia is only about 11 times forward earnings, but India looks expensive. All the same, I would have some money in India based on its weighting in the emerging markets indices as a whole.

Over the next 3-4 months, do you expect to see the kind of heightened volatility that we saw in the middle of the year?

I think volatility is going to go up because there is a great deal of disagreement with regard to the Federal funds rate. Two of the most prominent securities houses on Wall Street, one of them has Fed Fund Rates at 4.25 by the end of September '07 and one of them has it at 6 per cent.

So, when you have that type of disagreement, there is potential for surprise one way or the other. We have also been in a period of extreme low volatility and after the spike we had in May-June, it came back in and the spreads came back in.

But I think, it's likely that unbalanced volatility will rise. It will take some precipitating news - if we have some shock - like some sort of confrontation with Iran or a series of terrorist events. But even in the absence of that, some economic news might raise volatility.

What would you own in India?

I would own a broadly diversified portfolio. We continue to think some of the energy stocks and (raw) material stocks are of interest, but I would be broadly diversified at this particular juncture.

Between India and China you would put more money to work in China right now?

Yes. I think the Chinese economy is more resilient to external shocks and to a change in an investor's sentiment. Chinese reserves now are close to a trillion dollars. The Chinese economy is growing more rapidly than India. China is attracting a great deal of FDI and I think the environment that we are facing, it is quite likely that China will be able to withstand strains in the global economy should they materialize, better than India.

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Protect all your money risks

2006-11-28T19:43:00.000+05:30

While risks are a part and parcel of one's life, most individuals live under the false impression thinking 'It won't happen to me.' And hence do not take adequate measures to prepare themselves against the uncertain future.

Know that simple planning can go a long way in protecting you and your family from several hardships that life can spring up. Of course, the emotional and mental trauma of an event can never be quantified or protected but you can definitely protect yourself against the financial hardships that usually accompany such situations.

1. Risk of ill-health

While advances in science and technology have been able to save lives from innumerable diseases and thereby increase the average life expectancy, change in lifestyle has resulted in several new medical problems coming up. Cases of heart attack, diabetes among others has gone up considerably and so have the expenses associated with them.

Therefore, a Mediclaim policy is a must for everyone. Know that even a minor hospitalisation could be equivalent to three to five years of premia you pay. Besides, there are group covers too wherein you can cover the entire family under one policy.

Another associated risk is that of disability, either temporary or permanent. This risk can be covered through an 'Accident Insurance policy' which is quite cheap and won't hurt your finances much. Additionally you can also avail of tax benefits for the premiums you pay.

2. Risk of untimely death

Terrorism, natural calamities, accidents and so on, resulting in the untimely death of the breadwinners is a traumatic experience for the family of the dependents.

You can secure your family by buying adequate life insurance. Two things are important here -- how much insurance you buy and which policy?

As far as the type of policy goes, get a term cover only. This is the cheapest life insurance cover available to cover pure risk. Don't look for returns from your life insurance policy. Hence don't buy investment-inefficient policies such as endowment, money back or ULIP (Unit linked Insurance Policy).

As regards the amount of cover, just estimate how much amount you would have earned till retirement and calculate the 'present value' of that amount. This would be the approximate amount you need to insure for. (Don't worry -- calculation of present value is a very simple formula).

3. Risk of loss of income

Another common risk today is that of losing one's job and hence the earnings. This, together, with the increase in life expectancy would mean increase in the non-working years. Hence, financial security becomes increasingly important.

There are no insurance policies against such a risk. You would need to build your own protection plan that suits your circumstances through proper financial planning by moving from 'saving' to 'prudent investing'.

Starting from emergency funds to short-term needs to long-term dreams, we need to design our financial road map ourselves. Therefore, goal setting, asset allocation, investment selection and investment monitoring become very important. (Again don't worry -- the terms may sound big, but it is all very simple planning).

4. Risk to physical assets

Fire, terrorism, theft, earthquakes among others expose your physical assets to risk. Such risks can easily be protected today by way of 'Home Insurance Policies'. However, take care to read the terms carefully, to see what is insured and what is not.

5. Risks related to your home loan

In the last few years, we have seen an explosion in the number of people buying homes, which are mostly financed by way of home loans. The amounts run into several lakhs and the repayment term is around 15-20 years.

These huge amounts as well as the long repayment periods pose a risk. Should anything go wrong and you are unable to repay your loan, you could risk losing your house. To take care of such risks, you can opt for a suitable 'Home Loan Insurance' and protect yourself.

It is true that the above mentioned protection will involve some cost. But then these costs would not add-up to more than what you annually spend on weekend dinners/movies or your vacations. Moreover, they are essential given the increased uncertainties in life.

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Earn high profits from stock market

2006-11-28T19:41:00.000+05:30

What is stock market, is it speculation den or place to invest and create wealth?

The answer to this lies in how we deal with it. If we consider stock market as place to make fast/quick money, it is speculation den. When equities rise most of us feel that to make money we should follow 'high risk, high return' strategy.

In reality we are following 'high return, high risk' strategy. If we push our mind we will find subtle but important difference.

Does high-risk mean high return?

If we are feeling that by taking high risk we will 'necessarily' get high return, we are kidding ourselves. Word risk means probability of loosing money. High risk means high probability of loosing money. Therefore if you are willing to accept high probability of loosing money, you 'may' get high returns.

In long run -- over a period of 7/9 years -- equity markets are place to get high return with low risk. On the other hand any kind of speculation is high risk, low (no) return game.

Are you a speculator?

Another litmus test to find out whether we are considering stock market as speculation den or place to create wealth is the way we get anxious about our investments. If our investment horizon is more than 7/9 years away, we will not panic even if equity market falls for 7 months.

On the other hand if we are speculating, 7 bad days/weeks will give us anxieties. If 7 days/weeks fall give us anxiety, we are in speculation mode.

Lastly, if we start asking anyone who even remotely uses letter 's' of stock market, his/her views on near term movement of equity market, we are in speculating mode. We want to inquire about the near term movement because - irrespective of what we say - we have purchased equity for short term.

This is giving anxiety and we want someone - whom we want to consider as an expert - give us assurance. The way no one can predict the outcome of speculation, in near term no one can predict movement of equities.

Reason to discuss above behavior is because as human beings, we are intelligent breed and we do not allow ourselves to admit we are speculators. Therefore it is important to consider above and verify whether we are considering stock market speculation den or place to create wealth.

How to earn high returns?

Rome was not built in a day. No matter how hard we try, we will not be able to create wealth quickly. It will take decades before 'stable' wealth is created.

Invest in equities if your financial goals are more than 7/9 years away.

You may either invest directly into equity markets, if you have the skill and time. Alternatively consider equity mutual funds. In last couple of years we have got equity mutual funds with varied investment philosophies e.g. index funds, large cap funds, mid-small cap funds and contrarian funds.

Soon we will have global equity funds. Mutual funds allow ease of operation, diversification, professional approach etc. You can invest in these funds either lump sum or you may also consider investing in a systematic way over a period of time.

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Best stocks in Housing and Housing finance sector

2006-11-28T19:39:00.000+05:30

Housing and housing finance have been in the news lately. With prices rising around 50 per cent across the country in the past year, home buyers are confused on the future direction of prices, and more importantly, how they will finance the purchase.

The Reserve Bank of India is worried about unabated growth of housing loans, and has also warned home loan players, whose fortunes are tied to what home buyers do.

Despite property prices having zoomed over the past three years, the housing finance industry, which comprise of specialised institutions like HDFC, Dewan Housing, LIC Housing and even the banks, has also bloomed. Or is it the other way round?

In any case, all the four parties involved--individuals, home loan lenders, real estate developers and investors have gained, and this is expected to continue though at a moderate rate going forward.

HDFC

HDFC, the biggest home loan lender of the country, with the highest RoE of about 30 per cent and an asset size of Rs 56,496 crore (Rs 564.96 billion) in September 2006. The company's disbursements grew 27 per cent year-on-year in H1 FY07.

Similarly, its margins were also intact at 2.2 per cent despite a 30 basis point increase in the cost of funds.

Says D'Souza, "We are confident of maintaining overall loan approval and disbursement growth of 25 per cent. Despite rising costs, we have been able to maintain our margins while achieving our targeted growth in approvals and disbursements."

The stock trades at 5.7x and 4.8x estimated FY07E and FY08E book value respectively after excluding the value of investments in insurance, bank and asset management. Analysts feel that the company is fairly valued and investors can look at the stock as a long term investment for over a year.

BUILDING ASSETS
Rs crore	HDFC		LIC Housing		DHFL		ICICI Bank
Rs crore	H1FY07	% chg	H1FY07	% chg	H1FY07	% chg	H1FY07	% chg
Net Interest Income	977.00	21.56	192.82	4.80	43.60	21.10	3052.00	49.70
Other Income	12.35	126.20	14.40	3.90	22.10	7.17	2847.00	29.30
Operating profit	854.00	22.00	138.47	1.38	26.50	23.30	2843.00	41.00
Net Profit	664.80	22.00	113.39	4.47	21.36	24.60	1375.00	23.90

Dewan Housing Finance (DHFL)

Unlike bigger players like HDFC and ICICI Bank, DHFL caters to less competitive lower and middle class segment in the income group of Rs 5,000-15,000 per month and urban and semi-urban areas through 60-odd service centres and 50 branches.

The company's loan book has grown at a CAGR of 28 per cent in last five years and is targeting to grow by 25-30 per cent for next few years. Similarly its profit grew 20-25 per cent in H1FY07 and is expected to be maintained.

Says Wadhawan, "We will be able to maintain the net interest margins at 3-3.5 per cent and are comfortable with a capital adequacy ratio of 13.5 per cent." The stock trades at 1.9x and 1.7x estimated book value for FY07E and FY08E respectively.

LIC Housing Finance

LIC Housing Finance is the second largest housing finance company with good presence in Tier-I cities in North and South India. Its loan book of Rs 14,690 crore (Rs 146.90 billion) as on March 2006 has grown at a CAGR of about 25 per cent over the last three years.

In Q2 FY07 though its total disbursements grew marginally, its retail loan book grew 20 per cent year-on-year and net interest margins improved 80 basis points to 2.6 per cent, thanks to the effect of interest rate hikes.

The stock trades at 1.4x and 1.2x estimated FY07 and FY08 book value respectively. Its low valuation is also because of its higher NPAs of about 2 per cent and comparatively lower return on equity of 16 per cent.

However, the company has targeted an NPA of one per cent by the year end, which is a positive development.

ICICI Bank

ICICI Bank, India's largest private bank, is also the largest player in the housing space among banks. Of its total retail loans of Rs 1.08 lakh crore (Rs 1.08 trillion), housing loan poertfolio accounts for about 40 per cent.

In Q2 FY07, its net profit grew 30 per cent due to higher net interest income and robust fee income even as NIMs remained flat at 2.5 per cent due to a 42-basis point rise in deposit costs.

Analysts expect the bank's margins to improve as the bank has raised its lending rates in the past few quarters. The bank has raised its home loan and other retail loans by 250 basis points in last 12-18 month period.

The stock trades at 2.5x and 2.2x estimated FY07 and FY08 book value respectively excluding the value of investments in subsidiaries.

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Non fuel retailing plans for Indian Oil Corporation (IOC)

2006-11-28T19:34:00.000+05:30

About two weeks ago, when Sarthak Behuria popped into the newly opened Reliance Fresh store in Hyderabad, he was not out shopping for groceries. The chairman and managing director of the Rs 183,000-crore Indian Oil Corporation, the largest retailer of petroleum products in the country, was thinking about his company's plans for a large play in non-fuel retailing.

"We are looking at opportunities in big retail...at the various options and alternatives," he says.

The company, ranked 153rd on the Fortune list, is appointing a consultant to explore the possibilities, as part of an internal due-diligence followed for any new business. Only after he has some clarity on the investments required, the possible partner and the expected returns, will Behuria take the proposal to the board.

At present, the company's initiatives in non-fuel retailing are limited to convenience stores at its pumps. Earlier this month, it tied up with The Future Group (formerly Pantaloon Retail) for setting up retail outlets at its malls, but this falls within the company's core business of fuel retailing.

Even as the company grows its refining and marketing business, it is making inroads into a new core area which promises to significantly add to its profitability ratios -- petrochemicals.

While the first steps into the sector were taken a few years ago at its refineries in Gujarat and Panipat, its largest investment is just playing out in the port town of Paradip on the east coast.

In fact, petrochemicals is where the company intends to put down the largest chunk of the Rs 55,000-crore capex planned in the next five years. The biggest investment -- Rs 26,400 crore -- has been earmarked for a greenfield integrated refinery-cum-petrochemical complex at Paradip.

The refinery will have a capacity of 15 million tonne per annum and will provide the feedstock for the petrochem plant, which will produce paraxylene, polypropylene and styrene. All approvals are in and construction work on the plant has begun. The commissioning is slated sometime in 2010-11.

Petrochem, refining, marketing, prospecting for oil, integration, diversification...these are all words that define another energy giant -- Reliance Industries. Is there a conscious attempt to mimic its strategy?

"We never looked at Reliance when we had this vision of integration," explains Behuria.

Indian Oil has been bidding for and winning blocks in India and overseas and now the company is looking at acquiring a mid-sized exploration company overseas. "We are talking to 2-3 companies," he says.

Forward integration was thought of as a solution to utilise the naphtha from inland refineries like Panipat, Mathura and Gujarat, since the only other option was to move it to the coast and export it.

"When your feedstock is with you, and you have an opportunity to add value, why not consider it," he asks.

The company targets a turnover of $60 billion by 2011-12, from $41 billion today, through organic and inorganic growth.

"We are conscious that we are the largest company in India, and we want growth to continue to remain so," says Behuria, who sees a five-fold jump in revenue to $300 billion by 2030.

The plans have been laid out. Capex has been earmarked. And internal accruals and some debt -- "though the debt equity will not be more than 1:1 (against 0.9:1 today)" -- should see the company retain its numero uno position.

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All about Money back policies

2006-11-28T19:32:00.000+05:30

At one time, money-back plans were popular because of the periodic payouts that they gave. To be fair to these products, they would have to be judged in the context of government-controlled market with limited investment options.

In fact, LIC was the only institution to offer long-term, risk-free financial products for decades. After the entry of funds and private insurance companies, investment options have increased, making these plans redundant.

Money-back plans can be defined as endowment plans that periodically return a certain percentage of the sum assured instead of waiting till the end of term. In an era of limited options, this kind of packaging and structuring was popular with investors.

But today, money-back policies look expensive. Consider this: if a 30-year-old takes a policy of Rs 10 lakh (Rs 1 million) sum assured for a tenure of 15 years, the annual premium paid would be Rs 89,670 for a money-back policy, while it would be Rs 65,070 for an endowment policy.

It gets worse if we look at buying a term policy of Rs 10 lakh and investing the difference of the premium in a risk-free PPF account that gives eight per cent return. However, for a risk-averse individual who is looking for liquidity by saving in an insurance plan, a money-back policy is the answer.

While the individual keeps getting a percentage of the sum assured during the lifetime of the policy. The percentage, the number of instalments, and the intervening period between instalments depend on the term and the policy opted for. If a policyholder outlives the term, he gets the remaining corpus with accrued additions like bonus.

If he dies before the full term of the policy, his nominee or legal heirs get the insured sum, irrespective of the number of instalments received, with the accrued benefits. Most insurance companies offer money-back polices and many package these as children's education plans to offer tailor-made solutions.

A money-back policy also takes a beating in terms of returns and performance. Look at it only as a forced saving tool and it works only if you reinvest the money returned at regular intervals. Or, use it to make big-ticket purchases that would have otherwise cost you a loan. On the insurance front, you could be underinsuring yourself by opting for one.

Tax kick: Same as for endowment policy.

PPF Rules
Rather than a money-back plan, buy a term plan for the same cover and put the difference between the two premiums in PPF
	Money Back	Term Plan	PPF
Sum assured (Rs)	8,00,000	8,00,000	Nil
Term (years)	15	15	15
Annual premium/deposit (Rs )	71,766	2,326	69,440^a
Cash inflow-5th year (Rs )	2,40,000	NA	NA
Cash inflow-10th year (Rs )	2,40,000	NA	NA
At end of 15 years (Rs )	9,20,000^c	0	18,85,000^b
Internal rate of return (%)	6	0	8
^aDifference in outflow ^bDifference invested annually in PPF @ 8% for 15 years, yields ^cBonus assumed @ Rs 50 per Rs 1,000 of sum assured

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Pensioners can invest in Fixed income instruments and equity

2006-11-28T18:32:00.000+05:30

Government said on Tuesday subscribers under the New Pension System will have a choice to invest in fixed income instruments and equity.

"It is envisaged that, under the New Pension System, subscribers will have a choice of multiple investment options with varying proportions of investment in fixed income instruments and equity," Finance Minister P Chidambaram said in a written reply to a question in Rajya Sabha.

Investment guidelines would be framed by the regulator.

"However, until the full NPS architecture is in place, in the interim, contributions under NPS are credited into the public account," he said.

Under the NPS, subscribers will have a choice of schemes with different portfolios and different risk profiles.

"One of the schemes will provide for investment of the subscriber's funds in government securities alone. Therefore, there is no element of compulsion to invest in equity," he said.

To another question, Chidambaram said Insurance Regulatory Development Authority has issued a roadmap to de-tariff all categories of general insurance business, including vehicle insurance, with effect from January 1.

"Every insurer would have to develop its own scientific basis of rating the risks, which would have to be filed with the IRDA and would ensure that the basis is technically sound," he said.

Replying to another query, Chidambaram said seven directors of Autoriders Finance Ltd have resigned during the last six years. Information about their involvement in the Rs 50 crore (Rs 500 million) UTI scam is being collected.

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Add real estate property in your portfolio

2006-11-27T18:47:00.000+05:30

Any financial planner worth his salt will vouch for the importance of diversification while building a portfolio. Furthermore, the diversification needs to work at various levels.

For example, within each asset class, it is pertinent to be invested across multiple instruments; similarly, the portfolio should be diversified across various asset classes as well.

A client whose portfolio was anything but diversified. And this wasn't his only problem. To make matters worse, he seemed to have contravened every basic tenet of financial planning, making his portfolio an ideal candidate for a makeover.

The facts of the case:

The client is 40 years of age, and the sole earning member in his family.

His wife is a homemaker and his sons are aged 10 and 5, respectively.

He is employed with a multinational corporation and his salary income more than makes up for his expenses, i.e. the monthly cash inflows outweigh outflows.

The client's investments/financials are as follows:

He has invested in 3 properties (including the one in which he resides), which account for 83% of his assets.

Equities (stocks and investments in only 2 diversified equity funds) account for 16% of assets.

The balance (1%) is held in cash/savings bank accounts.

He has opted for 2 children's ULIPs (unit linked insurance plans), the total annual premium for which is Rs 120,000.

On the liabilities front, he has an outstanding home loan and also a loan against his mutual fund investment.

As can be seen, property, i.e. real estate, as an asset class accounts for a disproportionately high portion of the asset portfolio. Furthermore, all the properties are in the same city, depriving the client of any diversification opportunity. While it is important to have property in one's portfolio, it certainly shouldn't account for such a high proportion.

Also given that property as an asset class tends to be rather illiquid (a distress sale when liquidity needs are urgent could lead to a loss-making proposition), only accentuates the unenviable situation. A downturn in property prices could spell disaster for the client.

The remedy for this situation lies in introducing other assets like equities into the portfolio and thereby converting the portfolio into a more balanced one. Studies have shown that equities as an asset class (if invested smartly) can outperform others like real estate, gold and fixed income instruments over longer time frames.

Considering that the client's needs (planning for retirement and providing for children's education) are long-term in nature, the presence of a higher equity component should be treated as vital.

The solution -- put on hold any plans to buy more property. At Personalfn, we maintain that each individual should be invested in property to the extent that it can provide for inheritance. With 3 properties, the client has adequately taken care of that.

The surplus cash inflows should now be utilised to beef up the portfolio's equity component. But the same needs to be done in a planned manner. Sadly, the client has not even set himself any concrete objective in terms of planning for retirement or providing for children's education. In other words, it's yet another case of investing randomly without setting any objectives. To complicate matters, the client has erred by investing nearly Rs 30 lakh (Rs 3 million) in just 2 diversified equity funds, again pointing to lack of diversification.

The solution -- set tangible objectives (in monetary terms) and then invest in well-managed equity funds in a disciplined manner for achieving the same. This will help on various levels.

First, the enhanced equity component will ensure that the portfolio becomes well-diversified across asset classes. Second, it will make the equity investments diversified across multiple schemes. Finally, it will aid in gainfully utilising the surplus monies.

On the insurance front, the client is woefully underinsured. Considering that he is the sole earning member in the family, the ideal choice would have been to opt for a term plan. Term plans are pure risk cover plans; they offer the opportunity to obtain a high insurance cover at relatively lower premiums. After getting himself adequately insured, savings-based products like ULIPs should have found place in the portfolio. The client should rectify the anomaly by buying a term plan and fortifying his insurance portfolio.

The liability side could do with some rework as well. While the home loan can aid in tax-planning (interest and principal repayments qualify for deduction from gross total income), we aren't quite convinced about the loan against mutual fund investment.

The client is sufficiently liquid and certainly doesn't need to shoulder the burden of a redundant loan repayment. He would be better off paying off the loan at the earliest.

The client's financial status and condition make rather interesting reading. On the surface, we have an individual, whose income streams more than make up for his expenses, whose asset portfolio seems rather well-stocked. In other words, it's a seemingly picture perfect situation. But scratch the surface, and a radically different picture emerges.

The investments are lop-sided in favour of a single asset class (i.e. property). Despite the needs being long-term in nature, the client is virtually unprepared to meet those needs; in fact, he hasn't even quantified his needs -- which should be the starting point for the exercise.

He doesn't have an adequate insurance cover and has in his books avoidable liabilities.

The case only underscores the difference between 'having finances' and 'being financially sound.' And missing out on the latter could well mean that one is headed for a financial disaster.

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e-banking services offered by different banks

2006-11-23T15:14:00.000+05:30

Penalty due to non-payment of bill is not new to anyone of us. And quite obviously, who likes the long procedure of writing a cheque, standing in a long queue and then ensuring that the particular amount is available in your bank account? Similarly, Mr Sharma, who is on business tour for at least 25 days a month, finds it difficult to clear his dues on time because of his busy schedule.

He, like many of us, was possibly not aware of the online services, banks are offering these days. With just a click, all his dues would have been cleared long back. However, it's never too late to mend.

Indian banks are trying to make your life easier. Not just bill payment, you can make investments, shop or buy tickets and plan a holiday at your fingertips. In fact, sources from ICICI Bank tell us, "Our Internet banking base has been growing at an exponential pace over the last few years. Currently around 78 per cent of the bank's customer base is registered for Internet banking."

To get started, all you need is a computer with a modem or other dial-up device, a checking account with a bank that offers online service and the patience to complete about a one-page application--which can usually be done online. You can avail the following services.

Bill payment service

Each bank has tie-ups with various utility companies, service providers and insurance companies, across the country. You can facilitate payment of electricity and telephone bills, mobile phone, credit card and insurance premium bills.

To pay your bills, all you need to do is complete a simple one-time registration for each biller. You can also set up standing instructions online to pay your recurring bills, automatically. One-time standing instruction will ensure that you don't miss out on your bill payments due to lack of time. Most interestingly, the bank does not charge customers for online bill payment.

Fund transfer

You can transfer any amount from one account to another of the same or any another bank. Customers can send money anywhere in India. Once you login to your account, you need to mention the payees's account number, his bank and the branch. The transfer will take place in a day or so, whereas in a traditional method, it takes about three working days. ICICI Bank says that online bill payment service and fund transfer facility have been their most popular online services.

Credit card customers

Credit card users have a lot in store. With Internet banking, customers can not only pay their credit card bills online but also get a loan on their cards. Not just this, they can also apply for an additional card, request a credit line increase and God forbid if you lose your credit card, you can report lost card online.

Railway pass

This is something that would interest all the aam janta. Indian Railways has tied up with ICICI bank and you can now make your railway pass for local trains online. The pass will be delivered to you at your doorstep. But the facility is limited to Mumbai, Thane, Nashik, Surat and Pune. The bank would just charge Rs 10 + 12.24 per cent of service tax.

Investing through Internet banking

Opening a fixed deposit account cannot get easier than this. You can now open an FD online through funds transfer. Online banking can also be a great friend for lazy investors.

Now investors with interlinked demat account and bank account can easily trade in the stock market and the amount will be automatically debited from their respective bank accounts and the shares will be credited in their demat account.

Moreover, some banks even give you the facility to purchase mutual funds directly from the online banking system.

So you need not worry about filling those big forms for mutual funds, they will now be just a few clicks away. Nowadays, most leading banks offer both online banking and demat account. However if you have your demat account with independent share brokers, then you need to sign a special form, which will link your two accounts.

Recharging your prepaid phone

Now you no longer need to rush to the vendor to recharge your prepaid phone, every time your talk time runs out. Just top-up your prepaid mobile cards by logging in to Internet banking. By just selecting your operator's name, entering your mobile number and the amount for recharge, your phone is again back in action within few minutes.

Shopping at your fingertips

Leading banks have tie ups with various shopping websites. With a range of all kind of products, you can shop online and the payment is also made conveniently through your account. You can also buy railway and air tickets through Internet banking.

Internet banking versus traditional method

Inspite of so many facilities that Internet banking offers us, we still seem to trust our traditional method of banking and is reluctant to use online banking. But here are few cases where Internet banking will turn out to be a better option in terms of saving your money.

'Stop payment' done through Internet banking will not cost any extra fees but when done through the branch, the bank may charge you Rs 50 per cheque plus the service tax.

Through Internet banking, you can check your transactions at any time of the day, and as many times as you want to.

On the other hand, in a traditional method, you get quarterly statements from the bank and if you request for a statement at your required time, it may turn out to be an expensive affair. The branch may charge you Rs 25 per page, which includes only 30 transactions. Moreover, the bank branch would take eight days to deliver it at your doorstep.

If the fund transfer has to be made outstation, where the bank does not have a branch, the bank would demand outstation charges. Whereas with the help of online banking, it will be absolutely free for you.

As per the Internet and Mobile Association of India's report on online banking 2006, "There are many advantages of online banking. It is convenient, it isn't bound by operational timings, there are no geographical barriers and the services can be offered at a miniscule cost."

Security Precautions

Customers should never share personal information like PIN numbers, passwords etc with anyone, including employees of the bank. It is important that documents that contain confidential information are safeguarded. PIN or password mailers should not be stored, the PIN and/or passwords should be changed immediately and memorised before destroying the mailers.

Customers are advised not to provide sensitive account-related information over unsecured e-mails or over the phone. Take simple precautions like changing the ATM PIN and online login and transaction passwords on a regular basis. Also ensure that the logged in session is properly signed out.

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Buying home for NRIs is now easy

2006-11-23T15:10:00.000+05:30

In recent years, India has been witnessing unprecedented growth in the real estate sector fueled by the increased business activity.

Real estate development in India is estimated at $12 billion and growing at 30% every year. Though all segments of real estate business such as corporate, retail and residential have been driving this growth, investment in residential property itself constitutes 80% of this sector.

Non-Resident Indians (NRIs) are one of the key contributors to the growth of the real estate industry and considering the immense potential in India, they are likely to step-up the investment in future.

In this article, senior tax professionals with Ernst & Young -- Gaurav Taneja and Rajesh S -- provide an overview of the key exchange control and tax implications that should be considered by NRIs while investing in house property in India.

Exchange control regulations

The Indian government has considerably eased the restrictions relating to investments by NRIs in house property. There is virtually no restriction or approval required for an NRI to invest in properties in India from funds received in India through normal banking channels or held in Non-Resident External (NRE) account/ Foreign Currency Non-Resident (FCNR) account (B)/ Non-Resident Ordinary (NRO) rupee account.

However, investment in agricultural land / plantation property / farm house is currently prohibited. The recurring rental income earned on letting out of property is also freely repatriable.

Sale/ Repatriation

An NRI can freely sell or gift his/ her property to another Indian resident or NRI or person of Indian origin. However, there are certain restrictions imposed on repatriation of sale proceeds.

In case of investments made from inward remittances or out of NRE account or FCNR account (B), the repatriation of sale proceeds is permitted only up to the amount of initial investment.

In case the repatriation is made out of balances held in NRO rupee account (balances include sale proceeds of house property), then an amount of $1 million per calendar year can be repatriated.

One of the significant restrictions placed on repatriation is that the NRI can repatriate the sale proceeds only up to two residential properties. This could dampen the interest of NRIs in residential property, as investors would like to have free flow of capital while making such investments.

Income tax

The income tax implications on house property income in India would be dependent on whether the property is kept vacant or let out. In case an NRI has only one property in India and if it is kept vacant, then it would be possible to say that there should not be any rental value for such property as the NRI was not able to occupy the same owing to his employment, business or professional carried out at any other place.

However, if he owns two properties and both of them are kept vacant, then he is required to pay income tax on one of the properties as if the property had been let out. The tax laws do not provide clear guidance on how the rental value is to be determined for such property.

It simply states that the annual rent should be the sum which the property might reasonably be expected to let from year to year. Though there are judicial precedents that are available which suggest adoption of municipal value/ fair rent, there could be some practical difficulties in ascertaining such value in the ever increasing rental market.

In case of let out properties, the actual rental income (after reducing the municipal taxes) would be subject to tax. The tax law allows a general deduction of 30% on the rental income and also allows for deduction towards interest subject to certain conditions.

Tax payments

Under Indian tax law, the payer is required to withhold tax on rental income paid to a non-resident @ 30.6% where the income of the non-resident does not exceed Rs 10,00,000, otherwise at 33.66%.

In case an NRI wishes to have a lower rate, then he has to apply to the tax authorities in a specified format for obtaining a certificate for deduction of tax at lower rate. The NRI would be required to file a return of income at the end of the year if the taxable income exceeds Rs 100,000.

In case the NRI is taxed in the home country on the rental income derived from India, then he could consider claiming exemption or tax credit in the home country based on the double tax treaty agreement entered into India with such country, if any.

Other aspects

It is common practice to have joint ownership of properties by a husband and wife. However in case an individual intends to split the income between himself and his wife for tax purposes, then it is important to establish that both of them contributed for the investment in property and the share of ownership is clearly outlined.

In case the entire investment is made by one person, then in all likelihood, the entire income would be taxable in that individual's hands on account of the clubbing provisions that exist in India though the property may be jointly held.

Wealth tax

Tax implications are not restricted only to income tax and NRIs have to keep in mind the wealth tax implications as well.

Wealth tax is levied on the value of specified assets in excess of Rs 15,00,000. Specified assets include house property. However, the Wealth Tax Act provides an exemption in respect of one house property. In case of more than one property, the NRI would have to pay wealth tax @ 1% on the value (value determined based on the prescribed valuation rules) in excess of Rs 15,00,000 and file the required return.

There is a specific exemption available for returning Indians in respect of investment made in house property out of money brought from outside India or from balances held in NRE accounts as on date of return to India.

The value of such house properties would be exempt from wealth tax for a period of seven consecutive years starting from the year when he/ she returned to India. This exemption is available only if the NRI has come to India with the intention of 'permanently residing in India.'

As may be discerned from the above, the liberalised exchange control regulations provide unrestricted access to NRIs to invest in house property in India, thereby helping them to capture the great potential available on such investment.

There are, however, some restrictions imposed on the repatriation of sale proceeds. NRIs also need to understand the tax implications in India on their proposed investment both from an income tax and wealth tax perspective, to ensure full compliance with the statutory requirements.

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Know all about Medical Insurance

2006-11-23T14:30:00.000+05:30

Health is wealth. That's old wisdom. We do not know if it is true in today's world. What we do know is that the corollary holds. For, if you lose your health, your treatment can be a major drain on your resources and leave them severely crippled.

And, given that healthcare costs are rising at more than 15 per cent a year, you should try to guard against such a hit. "It should no longer be a choice, but a necessity in view of the escalating cost of medical treatment," says Antony Jacob, managing director, Royal Sundaram Insurance Company.

Says Shreeraj Deshpande, assistant vice-president (health insurance), Bajaj Allianz General Insurance: "With increasingly stressful lifestyles, even the young are prone to illnesses such as heart attacks. Health insurance provides adequate protection during medical exigencies." A Kolkata-based businessman, Pabitra Das, 56, understood the utility of the cover and got one early in his life.

Better safe than sorry: Das took his first medical insurance from Calcutta Hospital and Nursing Home Benefits Association in 1977. It turned out to be one of his most prudent moves.

In the past 29 years, all major medical costs for his family -- mother, wife and two children -- have been covered. For a current premium of just Rs 12,000 a year, Das has been able to cover hospitalisation costs of up to Rs 50,000 each time in two consecutive years.

What's on offer: In India, general insurance companies sell stand-alone health policies though life insurance companies are beginning to offer these too. In the past, they covered hospitalisation costs, but now private insurers offer products that also pay pre- and post-hospitalisation expenses. Some policies, like Health First from Tata AIG Life, pay a fixed amount for every day of the hospitalisation, apart from the medical expenses.

These policies have become much more convenient than in the past with the advent of cashless settlements. Also, large hospital chains now have tie-ups with companies which help policy-holders get free outpatient visits to the consultants in their hospitals, besides cashless claims like Max Healthcare's tie-up with United India Insurance.

You can also get cover for critical illness under riders that come with life covers from life insurance companies. They provide up to 30 per cent of the sum assured for illnesses such as renal failure, stroke, paralysis and heart attack. Unlike general insurance policies, where treatment has to be in specified hospitals, for critical illness riders, you can get treated anywhere in the world.

Define your needs: Given the variety of offerings, it is wise to first define your needs. One way of doing that is to identify medical emergencies that could hit you hard financially.

Examine policy benefits and coverage: It is important for you to realise that not all medical expenses are covered by the products available. For instance, many policies from general insurers don't cover dental procedures, non-surgical care, or consultation.

The cover is also available till a certain age, for instance, age 80, for Mediclaim policy by PSU insurers. You should also know that critical illness riders that come with a life cover cease to exist, once used.

Determine your affordability: After you have figured out the product that will give you the best possible cover and benefits, you will have to get a fix on the premium that you can afford. Health covers from general insurers and critical illness riders from life insurance companies are entitled to tax deductions under Section 80D. Depending on your pocket, take the widest coverage possible.

Be an early bird: It pays to start early when it comes to buying health insurance. If you procrastinate, diseases surface later in life and remain out of policy coverage due to the existence of the clause of pre-existing diseases. Of course, lately there have been products where pre-existing diseases are being covered but that is subject to specific conditions.

You also get the benefit of no-claims bonus if you don't make claims, and that adds to 15 per cent of the coverage every claim-free year. You also need to keep in mind that general insurers show reluctance to insure anyone aged 45 years or older since such people are more prone to health risks.

Get cover: Even if your employer offers a perk of medical insurance, get your own cover. A change of job could leave you without healh insurance, as could retirement. Getting fresh cover after 45 is difficult.

As the longevity of the average Indian goes up, health expenses of families would mount. That is why you can expect the role of health covers in our lives to increase. We'll modify the old adage. Health cover is wealth.

Tax kick: Deduction under Sec. 80D up to Rs 10,000; Rs 15,000 for individuals aged 65 or more.

Smart tip: Get your own mediclaim even if your company offers one. Change of jobs or retirement could leave you without a cover. Also, after 40 years of age medical tests become essential.

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Why do we need Insurance

2006-11-23T13:56:00.000+05:30

As complexity of the task of managing personal financial risks increases, households will require a reasonable degree of financial literacy. Households, in particular, will need to use insurance mechanisms in an informed manner, and become adept at using financial advice.

There are many events, such as sudden death of the main income earner, or a catastrophic illness, whose chances of occurring are relatively low but the financial loss is substantial.

Assuming the value of each additional rupee is less as income increases (a well-off individual values an additional rupee less than a poor person), buying a policy can help smoothen income or wealth of households. This in turn improves the household's welfare.

When the probability of an event occurring is high, but amount involved is relatively low, such as routine medical needs, buying insurance may not be worthwhile. Self-insurance by households, involving regular savings, is more appropriate.

A household, therefore, must examine whether their cover for life, health, property, travel, and vehicle meet the above criteria. Often households purchase insurance (or their employers provide) for routine, predictable, small expenditures, but not for low-probability but high-expenditure events. In general, households must buy that kind of insurance, which is not already provided by their employers.

A policy is worthwhile if given its product features, it is actuarially fairly priced and if the providers are well regulated with appropriate standards of service and corporate governance. Tax advantages, and investment features associated with insurance products, while helpful for certain income groups, should not be elevated as prime considerations for most households.

Life expectancy in India in 2001 at age 60 was 16 years for men and 17 years for women, and this will rise. Longer life expectancy should lead to cheaper life insurance policies, but also to higher costs for health insurance and annuities.

There are additional contributory factors. India's morbidity pattern is undergoing a shift from communicable to lifestyle diseases.

India is also at early stages of introducing technology in its healthcare sector. The health insurance industry is also in early stages of development, and so are the regulatory structures. Its weak public sector health institutions are not able to check private sector costs. All these factors are likely to lead to rapid increases in healthcare costs.

For retirement financing, households must manage longevity and inflation risks. The former involves the probability that retirement resources may be exhausted before a person dies. At present, in India insurers do not have sufficient financial instruments to invest in to make annuities more affordable for a wider section of the population. There are also no instruments available to provide protection against inflation risks.

Appropriate risk sharing arrangements among insurance companies, households and the government will need to be evolved if longevity and inflation risks are to be addressed satisfactorily.

The Insurance Regulatory and Development Authority needs to be much more proactive in educating people about the benefits and pitfalls of insurance mechanisms so that they can better manage their financial risks and in enhancing professionalism and ethical standards of service providers.

It should also promote greater competition in both life and non-life insurance sectors. It should encourage product and process innovations, including micro-insurance and group insurance schemes, with a view to enhance access and affordability of insurance products for households, and assist them in managing livelihood risks.

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Booking Air tickets made easy through SMS

2006-11-23T13:54:00.000+05:30

After movie tickets and cooking gas cylinders, now you can book your airline ticket through an SMS. And it's all so easy -- send an SMS to 6858 or 4242 saying, for example, 'FLY Delhi Mumbai 20 December'.

In 15 seconds, you will get a reply listing top 11 flight options with the lowest fare on top. Another SMS by you saying 'FLY book' will get you a reply promising a call from their executive, this time within 15 minutes. Alternatively, you could visit the website (www.flightraja.com) and complete the formalities. Your ticket is done!

And if all goes as planned, in a few months it will be possible to book a ticket through SMS without any human interface, says Ashwini Kakkar, partner, flightraja.com. According to Kakkar, 6 million mobile connections were added in India in October alone.

"Over 90 per cent of the bookings are single-ticket bookings and we would like to keep it simple for this segment," says Kakkar. For more complicated bookings, involving many passengers and many sectors, users will have the option to go through a call centre.

Says Vinay Gupta, CEO, flightraja.com, "At the moment, the service is routed through a call centre. However, the automated feature will be integrated very soon."

In fact, to make the human interface safer, the company will soon integrate an IVR menu through which the customer can feed in his credit card details using a mobile phone instead of speaking it out to a call centre executive.

Other mobile-based options are also available in the market. India's national carrier, Indian has teamed up with Reliance Infocomm to offer mobile bookings of domestic air tickets on the carrier. This offer though is limited to Reliance India mobile customers only.

Low cost carrier Air Deccan, too, launched a similar service earlier, but the daily bookings have not been that high -- "only 50-100 bookings a day", says Samyukth Sridharan, principal sales and marketing manager, Air Deccan. To access the service, a user needs to first register with Air Deccan.

Ashwini Kakkar claims that flightraja.com is already doing business worth Rs 10 lakh a day and by the end of this fiscal year they aim to get to at least Rs 1 crore a day through the service.

The firm also plans to add more products to the service in the near future, such as cruises, hotel rooms, packages and railway ticketing.

International air tickets and packages are a different proposition all together. For international package trips, travellers require visas which must be obtained offline. To handle this segment, flightraja.com is extending its network of franchisees in different cities from the existing 100 to 700 by March 2007.

The customers will be directed to the closest franchisee by a call centre. "In most cases, people want their packages customised, for which human interface is absolutely necessary," explains Gupta. Time to change

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Insurance for your Home

2006-11-23T13:49:00.000+05:30

I shell out just Rs 10 every day to cover the valuables of my home." This was the quick response of Viswanathan Iyer, when asked why he took a home insurance. His residence has had a cover for the last five years. Iyer says: "I own a house in Mulund West, Mumbai, and have insured it - including valuables such as jewellery, television and other electronic items in the house - or Rs 20 lakh (Rs 2 million). My premium payout is Rs 3,240 a year."

Everyone would recall the deluge that wrecked Mumbai on 26 July last year. It is interesting to note that while motor claims were piling up, insurance industry says, claims for home insurance were few and far between.

Smart tip
Get discounts of 15-20 per cent on the premium by buying cover under four to six sections of the home insurance policy and above 20 per cent for coverage in more than six sections.

Most insurers say there has not been any drastic increase in the number of people taking home insurance this year, despite the experiences of the past year, and its penetration is still very small. Insurance Regulatory and Development Authority chairman C S Rao points out that the awareness about taking home insurance is low compared to life insurance and health cover. Most people don't know that the premium to be paid is considerably small for the value insured.

Does your home need insurance?

If your answer is yes for the following questions, then you would probably require an insurance cover for your home.

Is the structure of your home worth over Rs 500,000? (The value of the building and not the market value of the property.)

Does your home have valuable plate glass doors and windows?

Do you own electronic gadgets worth over Rs 200,000?

Is your house located in an area that is prone to the risks of floods, earthquakes or burglaries?

Are you living in a rented house, but own high-value domestic and electronic appliances? Do you have expensive furniture?

Though Iyer has not made any claims, he continues to renew his policy every year. The 40-year-old man's line of reasoning is that with hard work he managed to build a home and acquire valuables, the loss or damage of which will be large. "I see it as Rs 10 a day, less than the minimum auto rickshaw fare. I earn over Rs 10 lakh a year and the premium payout is a small fraction of my income," he says.

If you are wondering why, despite its benefits, your agent is not pushing for a home insurance, here's your answer: the premiums are small and so are the commissions. And commission largely drives agents.

S S Gopala Rathnam, president (operations) Cholamandalam MS General Insurance, says the agent feels there is an opportunity loss in selling home insurance. He would rather choose to sell a cover that fetches him more returns. In fact, agents usually insist that customers choose more segments under the home cover so that the ticket size increases and becomes attractive for them. Enhanced cover also ensures discount for the customer.

What can be covered

Home insurance can cover losses to the structure and contents of your home from any natural or man-made calamity. The disasters that can be insured against are fire, earthquakes, storms, cyclones, tempests, tornadoes, hurricanes, floods or inundation, lightning strike, explosion, landslides, impact by vehicles or aircraft, and bursting or overflowing of water tanks and pipes.

Burglary cover. Loss due to burglary or an attempted robbery of valuables such as jewellery and silverware can also be covered.
Alternative accommodation. In case the family is forced to shift to an alternative accommodation because of an insured peril, the cost of the additional rent will be taken care of.
Breakdown of domestic appliances. Home insurance covers the breakdown of ACs, and refrigerators. If there is accidental electrical or mechanical failure of domestic appliances, losses that can be repaired will be settled by repaying repair cost without applying any depreciation by the insurance company. But items that are over 10 years old will not be insured.

Benefits of taking home insurance

Cost of premium is small. The cost of the insurance premium in comparison with the value and cost of the structure and contents, domestic and electronic appliances, is less than one per cent.

Policy covers a range of segments. Home insurance covers almost all kinds of catastrophic risks, from damages arising from terrorist attacks to breakdowns of water tanks. The choice is yours - if you think your home is not going to be damaged by a terrorist attack, you don't need to cover it. In case you are living in a rented house, you can choose to insure only the contents.

Covers cost of temporary shelter. In case of fire or damage to your home, which makes it unlivable, the cost of temporary rental for six months not exceeding Rs 1 lakh will be covered.

Buy it online. It is simple and easy to buy home insurance. You can buy it online as well. Just log on to any of insurance companies' websites and fill the necessary details to buy a policy.

How to claim

Call the insurance company call centre or your agent immediately. Keep these phone numbers in the emergency list.

Write a letter stating all the damages in detail and take a copy of it before sending it to the insurance company.

Take photographs before cleaning up and salvaging what is left.

Keep damaged material for proof of loss.

In case of burglary, report it to the police.

Ensure that you keep a copy of all information and receipts.

On The Platter
	Building (20 lakh)	Contents		Domestic				Premium
		(against fire,		Plate electronic			Personal
		burglary) (4.25 lakh)	Jewellery (1 lakh)	Glass (1 lakh)	appliances (1.5 lakh)	Computer -75,000	Accident (6 lakh)
Bajaj Allianz	1,000	1,169	1,000	1,000	1,125	-	900	6,194
Cholamandalam MS	1,000	425	1,000	1,000	750	750	350	5,275
ICICI Lombard	1,200	680	750	500	375	750	600	4,855
Royal Sundaram	1,200	1,275	1,010	1,010	375	773	-	5,643
Tata AIG	1,000	1,233	1,000	1,000	1,125	-	540	5,898
All figures in rupees; figures in parentheses denote insurance cover; The figures in bold are the cheapest option The segment and benefits under home insurance vary from company to company. The above table does not include the special discounts offered by insurers and service tax of 12.25 per cent.

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Save lot of money by Travelling

2006-11-15T23:45:00.000+05:30

Traveling

Book flights early and save a lot of money. While many of the budget airlines will fly to a regional airport, it may actually cost less to fly into an airport closer to a city center (If you are going on a city break) as you won’t have to pay for a taxi to your accommodation.

When booking a flight online, and assuming you can be flexible, look out for the ‘calendar view’. This gives you an overview of the month, with the lowest price per day.

Some airlines are now charging a fuel surcharge because of the high price of oil. Check that your airline isn’t going to surprise you with another bill on checkin before you book a ticket.

Pack light. If you are going on a short haul trip, especially if your wife is making the journey with you, avoid packing the entire wardrobe for the trip. If you go over your baggage allowance you’ll be charged a hefty fee for every kilogram over.

Budget airlines such as Ryanair are now charging per bag checked into the hold in an effort to speed up their turnaround times. If you can, pack what you need (minus scissors, liquids) into your hold baggage. This also means you don’t have to wait round to pick up your baggage at arrivals.

Book hotels online rather than walking in unannounced and being hit with the typically higher ‘walk-in’ rate.

Try and get a room rate with breakfast included. On a recent trip to Bali I saved $50 per day just because breakfast was included in the rate.

Book your vacation online instead of through travel agent, you’ll save money and I find that you can be more flexible in terms of where and when you are going.

If possible, book directly with the hotel. This way you only need to provide a credit card as a guarantee, so you won’t actually have to pay until you checkout. If you were to buy through a third party you’ll probably have to pay up long before your trip.

When you are going away, think about how you can get to the airport and back for cheap. Car parking at an airport is criminally expensive, I’ve often had to pay out $100 or more just for a few days. If you must leave your car at the airport, shop around for the cheapest deals. Often the best value airport parking can be a short free bus trip away. So why not take advantage of it? If you can get away with a lift to the airport, then arrange for someone to drop you off and pick you up.

Buy your car rental online rather than arranging for it when you arrive. Car rental is a competitive market and there are plenty of money-saving offers available.

Gas is expensive stuff these days. Save money by using one of the many sites that allow you to find the cheapest gas in your area.

Buying a new car? Get yourself a hybrid, they are far more efficient than a typical combustion engine and you get far more miles per gallon out of them. Hybrids are expensive to buy new right now, but as the technology becomes more accessible their price will fall.

Don’t use your car for small trips around town, they have a terrible MPG rating on short journeys. I know this sounds a lot easier than it really is, but you will make considerable savings if you stopped driving round town and used either your legs or a bike. Either or. Both will work out better for you financially.

When your car breaks down, do not take it to your car dealer. These guys are typically very expensive when it comes to servicing cars in my experience and those of others. So go out and find an independent car engineer who won’t be hard to pay. You’ll get the same service and it won’t cost anywhere near as much.

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Save money by buying home applicance utilities

2006-11-15T23:44:00.000+05:30

Utilities

Only buy home appliances that have been certified as energy efficient, they may cost more to start with but you’ll save over time on running costs.

Replace your old light bulbs with energy efficient light bulbs, they last longer and save you money.

Lower the thermostat and burn less fuel. If there are rooms that you don’t really use in your home, turn off the radiator then close the door. If you live in a 2 storey house, you can turn the thermostat down even further upstairs because heat rises.

Buy oil when it’s cheap. As we all know, the price of oil is very erratic. If you can, buy your home heating oil when the price is low.

Insulate your home. Install more insulation in your attic, replace old curtain liners with new insulating curtain liners and seal any draughts. If you have a big enough budget, I’d highly advise installing double or even triple glazed windows. These are very efficient means of insulating your home, saving you money on heating costs. They also boost the value of a property significantly.

Turn off lights. If you aren’t in the room, turn the light off. There’s no point in being charged for light that you don’t use. Simple as that.

Switch off electrical devices. Televisions, DVD players and computers all have standby modes that mean they still consume electricity while on standby. Turn them off at the wall and you’ll shave up to 10% off your electricity bills. This is such a good way to conserve energy that the UK government is bringing in legislation that will make it compulsorary for all new applicances to not have a standby mode.

Think about some form of micro-generation. You can buy small wind turbines and solar panels for your home that can generate enough electricity to provide for 30% of your energy needs. In some countries there are government grants to help homeowners start micro-generation.

You can save a lot of money on your water bills. Always shower rather than bathing, and spend as little time in the shower as possible. Install new low-flow toilets that use less water. Reduce your use of the water heater. Install a rain-catcher (otherwise known as a barrel) and use the runoff water from your roof to water the garden.

Shop around for a different supplier. In the US and UK the energy market is free and open, so find the cheapest provider and switch.

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Buy clothes and save money

2006-11-15T23:42:00.000+05:30

Clothes

Don’t get too drawn into the fashion-frenzy. You’ll only end up buying an outfit, wearing it once and then dumping it because fashion has moved on. I suggest we move on and have the balls to dress whatever way we want without some French fashionista telling us what to wear.

Aim to build your wardrobe up with classic pieces that match. This way you will be able to interchange everything, so you won’t have to buy as many new pieces.

Go to the factory depots, they’re much cheaper. Name brands at a low price, nice!

Shop in the sales. Ok they can be stressful, but if you get stuck in you wil save money. Just keep your eyes open so that you get the best deals, the longer you wait the bigger the discounts.

Hit up your local charity store for cheap clothes. It might sound a bit cheap, but you’ll find that people throw out some of the coolest stuff. Anyway, half of the A-listers shop in charity stores because that’s where all the quirky stuff is.

Dry your clothes outdoors, you’ll save money on electricity. Save money, and the environment.

Kids are expensive enough, and they have absolutely no respect for their clothes. Mud, dog hairs, food; you name it and they’ll manage to cover their clothes with it. Get hand-me-downs for your kids, they don’t need to be super-stylish because they’ll wreck everything anyway.

Learn how to sew and fix your clothes. Where I used to throw out a T-shirt with a missing button, now I just sew the thing back on and keep wearing it.

Take back clothes for a refund that you have bought and then realize you don’t like. My wife used to buy a new top, take it home and then find out that she didn’t really like it. Each one of those garments that didn’t get taken back to the store was a waste of money.

I don’t really like doing it, but asking for discount works. The clothing industry is so competitive that many (family-run) stores will give discount just to get the sale.

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Eat more and save money

2006-11-15T23:41:00.000+05:30

Eating

You don’t need that extra coffee. In fact why bother buying a coffee from Starbucks when you can make your own at the office or home just as easily and for an awful lot less. When you think about it, that one tall latte costs about as much as a full jar of your favorite roast blend.

Take your lunch to work, you’ll save a lot of cash. Just think about it; if you ate out for lunch 5 days in the week at a cost of $15 per lunch, you’ll be spending $75 just on lunch. Now consider how much you earn per hour, and how many hours you have to work just to pay for lunch.

Cut back on eating out at night. It’s easy to get lazy and head out for dinner, but you’ve got to remember that your meal will cost a lot more than staying in. It’s also not the healthiest option.

If you do want to go out for a meal, hunt round for deals first. For example, one of the best restaurants in our area has a cheaper bistro menu that runs from 5PM - 6:30PM. Get in early, have a nice meal and pay less.

Drink water with your meal, it cleans the palate and costs less. Yeah I know it’s probably the boring option, but you’re supposed to be saving money not spending it.

Don’t buy bottled water from the store. It might taste better but you pay through the nose for it.

Don’t get a starter, you’ll not need it. Especially when most appetizers are the size of a main course anyway.

Resist the coffee after your meal, you can get one at home for much less.

Don’t buy readymade meals, they’re expensive and not very healthy. Anyway, you can grill some chicken and steam some veggies in about 20 minutes. It’s healthier and much cheaper.

Only buy what you need to eat, buying too much food means it’ll go out of date fast and you lose money on it. I’ve found that the best way to work it is to buy what you need, when you need it. OK, sometimes this means heading out to the 7/11 where food can be a tad more expensive, but it means you don’t end up going mad and buying too much stuff!

Keep your meals simple, meat and 3 veg should be your motto. Forget about all those fancy recipes you see on TV, they’re full of fat, require far too many ingredients and cost too much.

Use the leftovers from your evening meals for your lunch the next day. I always find roast is a good option for this, especially when teamed up with a little mustard.

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Do shopping and save money

2006-11-15T23:39:00.000+05:30

Shopping

As a general rule of thumb, try and do as much of your shopping online as possible. You’ll get better prices in general and you won’t have to pay for fuel and parking in order to get to the mall.

Compare prices. There are so many online shopping comparison sites, so if you aren’t in a hurry why not browse them for a while and get the best deal you can. You know it makes sense.

You want a CD with that? Don’t bother with albums, download your music. Legally from iTunes or BT.

Same goes for movies, music videos and books. If it’s content, buy (or download) it online.

Don’t be fooled by the marketing prowess of the supermarket. They know you are there to buy food and other stuff, so they’ll market and pitch more expensive products to you all the way to the checkout. Your mission, should you choose to accept it, is to get out of the store with as much stuff as possible while spending the least amount of money. The easiest way to do this is to avoid brands, keep your eyes down and go for the stuff in boring packaging. It’ll cost less.

Did you buy something that you haven’t even opened yet? Or did you get a gift that you don’t need. Sell it to a friend or stick it on eBay. Whatever you do, don’t hold onto it. Get the equity out of your junk!

If you have to go out and shop, do it at night. You’ll find that stores will mark down perishable products as they near closing time because they need to get rid of the stuff. Take advantage of this and save money on everything from bread to meat.

Draw up a list of what you need, then stick to it. If you don’t know what you need, you will overspend.

Would you like an extended guarantee with your purchase sir? Let me think. No! These plans are easy money for retailers, avoid them like the plague. Unless you have splashed out on a new 42&Prime LCD screen, give it a miss.

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Save money through Insurance

2006-11-15T23:38:00.000+05:30

Insurance

The best tip for insurance in general is to be careful. The fewer claims you make, the less you will have to pay out.

Shop around. Insurance is ultra-competitive, so find the best deal possible then get your insurance company to either equal or beat it. If they don’t want to, tell them you’re leaving and see how quick they change their mind.

You’ll find the cheapest insurance deals online because there are fewer overheads.

Avoid driving over the speed limit because if you get caught you’ll be served some penalty points, which are then put on your license. Once that happens, you can bet your bottom dollar that your premiums will go up. So slow down.

If you have an old car that has lost it’s value, you can save substantially by assuming more risk. This means that you’ll not be covered for the small dings and scratches (that probably adorn the bodywork anyway) but you will be covered for larger accidents. Think about it, why pay more for a car that has already lost it’s value?

Taking on a higher deductible (USA) / excess (UK) is another way to reduce your monthly payments. So let’s say you setup a new car insurance policy with deductible fee of $500. If you had an accident that caused $1,000 of damage, you would have to pay up the $500 and the insurance company would pay the balance.

Another way to save on car insurance is to garage your car overnight, which insurers typically view as one less risk.

If you don’t drive a lot, you might be interested in some of the new pay-as-you-drive (PAYD) plans. Instead of paying a flat rate monthly charge, you only pay to have your car insured while driving and therefore saving you a lot of money. However, there are privacy concerns as some PAYD plans rely on satellite tracking. But if you are apathetic to being tracked and just want to save money it could be well worth looking into.

Taking out personal travel insurance per journey can be very expensive and inefficient. If you are a frequent traveler then it may actually cost you less to take out a monthly year-round travel insurance policy to cover you anywhere in the world. If you travel only a few times per year then comparing prices online it the way to go.

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Save money through Loans

2006-11-15T23:36:00.000+05:30

Loans

Pay for your car in cash, up front. Let’s say you get a car loan for $15,000 at a rate of 6.80% over 10 years. You end up paying back $20,714.49, a full $5,714.49 in interest alone.

Forget about a broker, apply for your mortgage online.

Get a mortgage that tracks the base rate of interest. Loans 101 here; the lower your interest, the less you pay back.

Research the fees and penalties for your mortgage. Most lenders charge for setting up your mortgage, some more than others. Be on the lookout for mortgages that charge a fee if you want to move to a different lender.

Try and get a mortgage where the property survey is free, this will save you several hundred dollars.

Get a mortgage that calculates your repayments based on your daily amount owed. This means that if you paid in $1,000 extra on the first day of the month, your interest would be calculated on the new balance. Many mortgages calculate interest on a monthly basis, so watch out.

Some banks offer what is called a ‘one account’. Basically they will incorporate all your savings, credit card debt and loans into one. While you don’t earn any interest on your savings, the balance of your account is subtracted from the initial capital of your mortgage. So if you had a $150,000 mortgage and $25,000, you would only be charged interest on $125,000. Over the course of your mortgage term, this will save you many thousands of Dollars in interest and get you mortgage-free much faster.

Take out repayment protection. If you lose your job or simply can’t afford to make a payment, you’re in trouble. The lender hits you with a penalty and you’re worse off than ever before. One easy way to avoid this and save is by taking out a repayment protection plan. Yeah it’ll cost you per month, but it’s more than worth it in the long run.

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Save money through Credit Cards

2006-11-15T23:35:00.000+05:30

Credit Cards

Don’t pay interest, get a card that offers an interest free balance transfer. As soon as the interest free period expires on the credit card, find another one and move your balance. Just watch out for the fee they charge to transfer the balance, if you have a significant balance on your credit card the charge could be quite significant.

While you are in the interest free period, start paying back as much as you can. Make the most of your interest free period to pay back your credit card debt, because you aren’t being charged interest you’re money will work harder for you and you’ll reach a zero balance faster.

Rewards points, get a card that gives you rewards on purchases. You can then save the points and put them towards a purchase. Just make sure that you use any points earned within the allocated timeframe.

Cashback, get a card that pays you a percentage back. Therefore when you do use your credit card, you’ll get some of it back. It won’t be very much, but every little helps.

Avoid late payment fees by sending in your payments as early as possible, taking into account any weekends or public holidays that may slow down the payment. A late payment can set you back with a hefty financial penalty, which in turn means you owe more.

Setup a monthly standing order or direct debit that will cover your minimum payment. While this will go some way towards paying off your credit card debt, it will also ensure that you do not incur any late payment fees.

Ask for a lower APR. If you have to have a solid credit history behind you, call your credit card company and ask them to reduce your APR. If they aren’t being very forthcoming, you could threaten them with an account closure.

Keep your credit healthy, which will mean you will be eligible for those better credit cards. The easiest way to keep your credit healthy is never to miss a payment.

Watch out for ID theft. There are so many scams where criminals aim to get your credit information and start making purchases in your name. There are ways to avoid becoming a victim of credit card fraud such as never emailing your credit card details to anyone, shredding your statements (and any other financial documents) before throwing them out and being cynical about emails purportedly from your bank.

Keep any eye on your credit card report. Sometimes the details on your report are old or inaccurate, which means you can develop bad credit. In the US you are able to request a free credit report once every year, guaranteed by law. Get yours here.

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Government may raise taxes on direct invetment flows

2006-11-15T21:10:00.000+05:30

The government plans to raise taxes from cross-border direct investment flows, advisor to finance minister Parthasarathi Shome indicated here on Tuesday.

Such a move means there could be an added cost to not just pure foreign direct investment (FDI), but, technically, also to mergers & acquisitions - both outbound and inbound.

The thinking in North Block is that a cost-benefit assessment weighing the effects of FDI needs to be carried out. This is because FDI yields a stream of benefits such as host country tax revenue from increased capital stock and increased employment, while at the same time it has a stream of costs such as revenue foregone from tax incentives.

As competition among countries for attracting foreign direct investment (FDI) hots up and Indian corporates go global in their acquisition spree, the government is faced with the task of ensuring that a fair share of revenue comes to the exchequer without overburdening the taxpayer, Shome told a Ficci conference on “Globalising economies: challenges to tax system”.

Shome said globalisation has led to increased opportunities for cross-border investments. This has implied unilateral scaling back of corporate rates across globalised world.

“Ultimately, we have to look at whether we are able to expand the tax base and the government is continuing its effort to expand the base,” he said.

Jeffrey Owens, the director of the OECD Centre on Tax Policy & Administration, said a major challenge before Indian corporate would be to see how Indian multinationals overseas are taxed.

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Evaluate the Textile stocks

2006-11-15T21:08:00.000+05:30

It appears that the textile space is all set to rise to the occasion. Not only has the free-fall in prices halted, the domestic market may also see a price rise sooner-than-expected. The sector is also awaiting investments worth over Rs 100 crore towards expansion, mostly organic in nature, by next year. Of the companies that have plans to expand capacities, we have The Welspun Group, Banswara Syntex, Gujarat Ambuja Exports etc.

Moneycontrol has picked up a universe of 38 textile companies that have market capitalization of Rs 100 crore and above. And Arrow Webtex (a manufacturer of elastic and non-elastic tapes and woven and printed lables) have emerged as a company that have given maximum return in the one year period between October 28, 2005 and October 30, 2006. The stock with a market cap of over Rs 188 crore has given a return of 598% in one year.

Market capitalization wise, Aditya Birla Nuvo emerges as the biggest company clocking in a return of over 57% in one year. Banswara Syntex, which does not feature in out list of universe owing to its market cap of Rs 94 crore, deserves a mention nevertheless. The stock has given a return of 61% in one year and look promising on the back of its expansion plans.

According to a report by Edelweiss Research, The Welspun Group, Banswara Syntex, Gujarat Ambuja and Fab India have investment plans of Rs 3 billion, Rs 2.6 billion, Rs 3.3 billion and Rs 2.8 billion respectively in the near future.

Interestingly, both Welspun India (the terry towel company) and Welspun Syntex (the Synthetic Yarns company) have given negative returns of 16% and 7% respectively in the one year period under consideration.

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Preferable to buy Bank stocks..?

2006-11-15T21:05:00.000+05:30

There has been a lot of interest over the last few days in the banking space. At current valuations in this market scenario, should traders hold, sell or buy into this space.

Investment advisor PN Vijay and technical analyst Deepak Mohoni discuss their favourites in the banking space.

Vijay is positive about ICICI Bank. He says, "There is now a clear indication that they are going to unlock value. Kamath's strategy is very entrepreneurial; he builds businesses and then unlocks them. So ICICI Bank, amongst the biggies, looks interesting."

Apart from that, he says that there is a lot of interest in Centurion Bank. And he also feels that the DCB IPO will sell.

Deepak Mohoni feels that it is a bit late to buy UTI Bank right now. "UTI Bank had started to move about 4-5 days back. So the breakout really, if you want to call it that, has already happened. So it's little late to get into it now."

However, he says that UTI is worth a look after the dip. He says that Kotak is still in a pretty decent uptrend.

Moving on, neither Vijay nor Mohoni are too upbeat on banks as a sector.

Vijay advises, "When you are getting into the private bank stocks, you are already buying a bit of risk into that sector. If I see a pretty nice profit out there, I would book it."

Meanwhile Mohoni informs, "Ultimately, you have got to evaluate the move by seeing what sort of percentage gains the stock makes rather than whether it set a new high or not. And banks are not up there with the leaders."

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Tax on Equity investments

2006-11-15T21:03:00.000+05:30

Generally investors invest in equity for the potential capital gain. The increase in the value of their investments is the main motivator behind the additional risk they undertake by choosing to invest in equity rather than the less risky fixed income options.

However, apart from capital gains, equity instruments can confer certain other benefits to investors such as bonuses, stock splits and share buybacks. In this piece we examine the significance of these to investors and the tax consequences of each such corporate action.

Bonus shares

Bonus shares are free additional shares that a company may decide to issue to its existing shareholders in a certain proportion to the current holding. So, if a company comes out with a 1:1 bonus issue, an investor gets 1 additional share for every share he holds in the company.

A company has a certain amount of reserves which it has built up over the years by retaining a proportion of the profit and not giving it out as a dividend. While issuing bonus shares, the company converts a part of these reserves into shares.

Following a bonus issue, though the number of shares increases, the proportional ownership of shareholders does not change. Also, after the bonus issue, the cum-bonus share price should fall in proportion to the bonus issue, thereby making no difference to the personal wealth of the share holder.

However, more often that not a bonus is perceived as a strong signal by the company that the present good run is likely to continue. The management of the company would not have distributed these shares if it was not confident of distributing dividends on all the shares in the days to come.

As far as the tax implications are concerned, since no money is paid to acquire the bonus shares, these have to be valued at nil cost while calculating capital gains. The originally acquired shares will continue to be valued at the price paid at the time of acquisition. An incidental benefit is that since the market price of the original shares falls on account of the bonus, there may arise an opportunity to book a notional loss on the original shares.

Stock splits

Stock splits are a relatively new phenomenon in the Indian context. It is important that investors understand the reasons companies may split their shares and how a stock split is different from a bonus issue.

In a stock split, the capital of the company remains the same whereas, in a bonus issue, the capital increases and the reserves fall. However, in both actions (a stock split and a bonus) the net worth of the company remains unaffected.

A typical example is a 2-for-1 stock split. Say, a company announces a 2-for-1 stock split in one month. That means that one month from that date, the company’s shares will start trading at half the price from the previous day.

Consequently you will own twice the number of shares that you originally owned and the company will have twice the number of shares outstanding. Consider the following example.

If an investor held 100 shares of company X valued at Rs 3,000 each (a total value of Rs 3,00,000). After a 2-for-1 stock split, he will hold 200 shares of Rs 1,500 each. The total value, however, remains the same.

The question that arises is: If there is no difference to the wealth of the investor, why does a company announce a stock split. Well, the primary reason is to infuse additional liquidity into the shares by making them more affordable. Here it has to be reiterated that the shares only appear to be cheaper, it makes no difference whether you buy one share for Rs 3,000 or two for Rs 1,500 each.

As far as the tax implications for stock splits are concerned, there aren’t any. A stock split, like a bonus issue, is tax neutral. However, when the shares are sold, the capital gains tax implications are different. In case of a stock split, the original cost of the shares also has to be reduced. For instance, in the above example if the cost of the 100 shares at Rs 150 per share was Rs 1,50,000, after the split the cost of 200 shares would be reduced to Rs 75 per share, thereby keeping the total cost constant at Rs 1,50,000.

Share buybacks

Share buybacks are also a comparatively new phenomenon. Reliance, Siemens and Infosys are examples of companies that have bought back their shares.

A buyback is a financial tool in the hands of a corporate that affords flexibility in the capital structure. It allows the company to sustain a higher debt-equity ratio. It is also a tool to defend against possible takeovers. Companies buyback when they perceive their own shares to be undervalued or when they have surplus cash for which there is no ready capital investment need. Stock buybacks also prevent dilution of earnings. In other words, a buyback programme enhances the earnings per share, or conversely, it can prevent an EPS dilution that may be caused by exercises of stock option grants etc. And, a buyback also serves as a substitute for dividend payments.

This brings us to the crucial issue of tax implications of a buyback. An important consideration is whether the amount paid on buyback is dividend or consideration for transfer of shares. If it is indeed considered to be dividend, the same will not be taxable in the hands of the investors. Also, to what extent, if at all, can the amount paid on buyback be taken as dividend? Is the entire amount paid dividend or is it only the premium paid over the face value?

The case of Anarkali Sarabhai v CIT (1997) 90Taxman509 (SC) had laid down the principle that redemption of shares by the company which issued the shares (in this case preference shares) is tantamount to sale of shares by the shareholders to the company. The Finance Act 1999 has reiterated this stand to remove any confusion. Now, where any company purchases its own shares, then, the difference between the consideration received by the shareholder and the cost of acquisition will be deemed to be capital gains. Further, this will not be treated as dividend since the definition of dividend does not include payments made by company on purchase of its own shares.

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The real risk of equity investments

2006-11-15T19:49:00.000+05:30

One of the sacred cows of modern day investing is the idea of buying, and holding, and holding! Younger investors for example, are advised to invest aggressively in equities and then hold for the next 20, or 30 years. The thinking behind this is that such investors have more time over their lifetimes to recover from dips in the market. In other words, given enough time, good returns will eventually overpower bad returns. Does this always have to be true?

The answer, actually, depends on what you mean by risk. It is, for example, true that the possibility of suffering a loss on your investments actually decreases with time. In this sense, risk does indeed decrease with time. On the other hand, time also increases the possibility that you could be exposed to truly horrendous turns in the market. In the long run, you would be exposed to more outcomes which could wipe out your entire investment corpus. In this sense, risk actually increases with time.

Examining daily returns on the Bombay Stock Exchange since 1997, we see that returns have averaged about 11.5% a year, with a standard deviation of 25.6%. The standard deviation is a measure of how much your return could vary from the mean return.

So, if on average you expected to get back Rs 111.5 for every Rs 100 you invested in the stock market in a year, because the standard deviation is as high as 25.6%, your returns could vary in two out of every three times between Rs 87 and Rs 137. This is a wide of range of values, and hence the risk.

Taken to its extreme, this would also seem to imply that once in every 40 years, your portfolio could lose more than 39% of its value in a year.

To make all this a little more concrete, we used a kind of data experiment called a Monte Carlo simulation to visualise a range of possible investment outcomes over the next 20 years. It is of course highly hubristic to assume that we can put accurate numbers on what may happen in the future. However, a Monte Carlo simulation is probably one of the more modest ways of doing so, since all it does is generate thousands of new ways that previous experiences can be combined.

In any case, this is designed to merely give you a flavour of what might be, rather than a forecast of the future. The heroic assumption in this exercise, and indeed in all of investment analysis, is the idea that the future will more or less look like the past. Having done so however , it is then possible to make some probabilistic statements about relative outcomes from investing in various asset classes.

For example, we can compare these outcomes to the result of investing money in a bank fixed deposit at 9 per cent per annum. Based on these numbers, our simulations indicate that there would be roughly a 40% probability that our investments would be worth less than the bank deposits in 5 years, but only a 29% probability that the stock investments would be worth less than the bank deposit in twenty years. In other words, the risk of our stock investments doing worse than our bank deposit is actually lower as more time passes. Risk in this sense, clearly does decline with the passage of time.

On the other hand, we could look at the worst 5% of the stock market outcomes in both time periods. Over a fiveyear period, at least 5% of the time, you could end up with less than 45% of what your bank deposit would be worth at the time. Over a 20-year period however, at least 5% of the time, you could expect stock market losses to be so large that you could end up with less than 25% of the money you could have had investing in a bank deposit instead.

You would see qualitatively similar results for the worst 10 or 15% of outcomes at the two time periods. In other words, you would see more of the really bad outcomes, where the bulk of your money gets wiped out, when you stay invested in the market over a longer period . Clearly, risk in this sense actually increases with time.

So is there any way in which time unambiguously diversifies risk? There is actually, but this relies on a slightly different logic. Younger people have a longer supply of human capital, which serves to diversify risk. Put slightly less elegantly , the younger the age at which you start investing, the better the chances that you can slog really hard to offset possible losses in the stock market!

However this is not meant to argue that long-term investments are not worth their price. We only mean to point out that the tradeoff between long term returns and risk does not mysteriously become as one sided as many advisors would have you believe.

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Infosys buyback offer for Infosys shareholders

2006-11-15T19:46:00.000+05:30

Are you an Infosys shareholder? Then you must be aware that their buyback offer is on. Although technically it is not strictly a buyback, the process and taxation work similarly.

However, actually what Infosys is doing is sponsoring an additional ADR/GDR offering against equity shares offered by its existing shareholders. In other words, Infosys is inviting you as a selling shareholder to participate in a public offering of American Depository Shares (ADS) on the Nasdaq.

Now for the main question. Should you go for it or not? This will depend upon the following two factors:

The price at which the shares are bought back from you; and
The tax impact of this transaction on you.

Unfortunately, the first point cannot be answered, even by Infosys. The price at which the shares will be bought back from you depends upon how much the underwriters can get for the ADSs being sold -- which in turn depends upon the prevailing market conditions at the time of sale.

The proceeds of the ADS sale after deduction of registration and other expenses will be distributed between the selling shareholders in proportion of the shares accepted from them.

However, at this point it is pertinent to note that historically Infosys ADSs have largely been trading at a premium to the domestic share price. The historical data in this regard can give a selling shareholder a fair idea about the price appetite that the foreign market has for the offered shares.

The offer document contains data in this regard since September 2005 till October 2006 and one finds that the premium is in the range of a high of 28 per cent to a low of 14 per cent with the mean being somewhere close to 20 per cent.

This information is important as it can serve as a benchmark for your tax calculations upon accepting the offer. However, apart from the price realization, shareholders need to understand the tax impact, if any, of the above transaction since taxes will directly cut into your profits.

Readers would know that long-term capital gains (on shares held for over one year) are tax-free while short-term capital gains (on shares held for less than one year) are taxed at 10 per cent.

Now, first and foremost note that these rates will NOT be applicable to this Infosys offer. The reason for this is that the abovementioned rates of capital gains taxes are only applicable for shares sold on a recognized stock exchange where the seller pays STT (Securities Transaction Tax).

The offer doesn't meet these conditions, i.e. it does not constitute a sale on a recognised stock exchange and the seller will not be paying STT thereon. Instead, it would be construed as an off-market transaction.

Here the tax rates on long-term capital gains will be 20 per cent with indexation benefits or 10 per cent without indexation, whichever is lower.

Any short-term gains will be added to your other general income and be taxed at the slab rates applicable to you. As generally most investors would be in the 30 per cent bracket, it would be safe to say that such short-term gains would be taxed at 30 per cent.

There is yet another twist in the tale. Remember, Infosys declared a bonus in July. Since you will be offering the shares from your demat account, the FIFO (First In First Out) method will apply. In a bonus issue, the original shares are carried at the same cost (the price you paid for them) whereas the bonus shares are taken at nil value.

Therefore, in all probability, by selling your shares in this offer, you would book a notional capital loss. I cannot emphasise the word 'notional' enough. In other words, on your investment as a whole, there would (or more appropriately) should be a profit. It is only on account of the taxation system that a notional loss comes about.

Now, this loss (though notional) can be used for tax planning. The rule is that long-term loss can only be set-off against taxable long-term gains whereas short-term loss can be set-off against short-term gains or taxable long-term gains.

Ergo, this Infosys offer has the potential of being a win-win. On the one hand you can make some money over and above what you would have, had you sold the shares in the market and at the same time, you can save some tax on your other profits.

The following table sets out the above discussion in terms of numbers:

	No.	Price (Rs)	Amount
Original shares purchased	20	2,700	54,000
1:1 Bonus in July	20	---	---
Shares submitted in this offer	20
Shares accepted *	5	2,600	13,000

* Number and price of shares accepted is assumed

In the above example, since only 5 shares have been accepted and 15 shares returned back, the tax impact will only be on the 5 shares. 15 shares go back in your demat account and there is no tax impact thereon.

On the accepted 5 shares, FIFO will apply and your cost per share would be Rs 2,700. You have sold these at Rs 2,600 thereby making a notional loss of Rs 100 per share. Why notional? Because your actual average cost per share is Rs 1,350 (Rs 54,000/40). So ipso facto, though you are earning a profit of Rs 1,250 per share, tax wise you are actually booking a loss.

Depending upon your period of holding, the loss is either long-term or short-term as the case maybe and the tax treatment would be as explained before in the article.

In conclusion, the offer offers the Indian shareholder to earn some arbitrage profits on account of the differential price of Infosys on the Nasdaq. You can always buy back the accepted shares in the domestic market thereby making some relatively risk-free profit.

The tax benefit is just icing on the cake. Note that the offer closes on November 17.

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Choosing Value Stocks and growth stocks

2006-11-14T23:27:00.000+05:30

Is Infosys Technologies a value stock or a growth stock? This specific question reveals a broader dilemma that seasoned investors face today when the market is moving up rapidly.

Query Bharat Shah who manages more than Rs 2,500 crore at ASK Raymond James and he will most probably tell you that the company is a value stock. Based on FY08 earnings the stock is traded at a price to multiple of 25 times which is lower than the expected growth rate 30% in future.

In a way he is saying that the intrinsic value of Infosys is far higher than the present market price that the company commands and this makes it a value stock.

Bharat Shah has always followed the margin of safety rule, which is basically the discount of the market price to the intrinsic value of the company. More than a decade ago, he had approached Infosys based on the concepts of value investing and he is reaping rewards for the same.

The same goes for investors, who invested in Hindustan Lever twenty years ago and have seen the price appreciate ever after. Value investors typically invest for a longer time and go for companies that are brands in themselves and avoid commodity-related stocks as the latter are not easy to distinguish and thus uncompetitive in nature.

Value investors are obsessed in understanding intrinsic values of companies by discounting future cash flows to their present values. This strategy, feels Bharat Shah, is very classical and will work in any market at any given point in time.

Parag Parikh, chairman of Parag Parikh Financial Advisory Services, also follows the rules of value investing but does not like to get into a debate of investing in value and growth stocks. Says he, “I believe that all growth stocks eventually become value stocks. Value and growth are names given by analysts who do not want to work hard on finding discounted cash flow models. They prefer to use P/E multiples, which are heuristics or shortcuts, to justify valuations in any which way.”

There might just be a possibility that India had never offered value investment opportunities to investors. Investors invested in companies that were offering lower price to book values or higher dividend yield. These happen to be basically value investment tools in highly inefficient markets. There is just a possibility that these investors ended up buying growth stocks that were showing all characteristics of a value stock.

So, how does it matter if one has picked up a growth stock thinking that it was a value stock as long as one makes money? It is not about returns or making money. It is more about risks. Buying a growth stock by using value parameters simply means that we attach a lower risk to the investment and expect a higher return at the same time.

A value stock always has a lower risk attached. These are stocks of companies which have normally operated for years together in matured markets or industries. That is probably the reason Warren Buffet, the father of value investing would never touch a technology stock.

These were stocks that could grow at very high rates but were risky as they were not operating in mature markets and had never stood the test of time. Most agree that there are no mathematical rules to classify what really is a growth or value stock. But the fact also remains that growth stocks are risky in relation to value stocks.

Also growth stocks offer low dividend yields, involve high capital outlays and operate in immature market that has not absorbed the product or technology. They might be the biggest brands and can even offer lower P/Es based on forward earnings, but it will be some time till you call them value.

If they survive and become market leaders where the product is completely absorbed, they eventually become value. But till that time, these stocks are growth stocks. Sanjiv Shah, executive director of Benchmark asset management company, feels that with the Indian economy growing around 8% annually, the entire index itself has to be valued on growth parameters.

This basically means not to use the methodology that one uses to look for value stocks. Says he,”Value investing and Warren Buffet will work in the US as the markets are mature. DCF methods can work in these markets in India it is difficult as technology changes and growing markets become a moving target for analysts to chase.”

Maybe that is the reason why analysts mostly miscalculate earnings for growth companies. Analysts have always underpriced the earnings of companies like Infosys Technologies as they have tried to calculate the intrinsic value of the company using discounted cash flow method. Infosys is a growth stock and these methods are more likely to go wrong than right.

One of the main reasons why investors confuse between growth and value is the fact that analysts fall for mental heuristics. They take the shortcut of using methods they understand than understanding the industry and where a particular company stands on the growth path. This is a typical fallacy that people in behaviorial finance love to talk about.

Coming back to Infosys Technologies, the company enjoys a lower risk premium than most of its peers. The company has a risk premium of 6.3% which is lower than the risk premium of State Bank of India at 6.93% and HLL at 6.28%. Risk premiums basically tell us how much investors are ready to pay for a stock beyond the risk-free rate of return.

Value stocks will have lower risk premiums as compared to growth stocks. Ideally, one would expect HLL to be a value stock going forward as the company is operating in a mature market and has a strong brand presence. But Infosys as a brand is enjoying a higher brand presence. It is more of a service company and the risks attached to a technology company are not attached to this company. This is one company that has blurred the lines between value and growth investment.

To an extent, Bharat Shah could be right about Infosys Technologies. Simply based on the premium that the market is giving this stock, one can say that it is a growth stock that has a lot of value attached to it. Still predictions based on the intrinsic value for the stock will continue to go wrong till the stock actually achieves its value status.

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Cut your mobile bills to half

2006-11-14T22:50:00.000+05:30

Post-paid customers, who make up 20 per cent of mobile users but account for 50 per cent of the revenue, are generally at sea when choosing the right cellphone plan or operator. Help is at hand.

Texas-based technology-enabled business value services provider, Trilogy, has developed a real-time solution, which has been ported on its website YourBillBuddy.com.

All that an Indian subscriber needs to do is to logon to the site and upload the latest e-bill.

The site, in a 'milli-second', will break down the bill into multiple components, compare them against the tariff plans of each mobile operator and then suggest the best plan for the subscriber's kind of usage.

"We have developed a very intelligent algorithm, which has been patented. It basically categorises all the bill plans in certain modules. With the algorithm, we feed in the latest bill plans launched by the various telecom operators. The algorithm is designed in such a way that whenever a bill is uploaded, in parses the bill into various calling categories like local voice, STD voice, ISD voice and SMS, and rates the bill across various rate plans. Then it suggests the best rate plan across all the operators for the kind of usage by a subscriber," said Virendra Gupta, director, Telecom Services, Trilogy.

The service, which is free for end-users, has been launched initially in Bangalore, Delhi and Mumbai � it covers plans available to customers in these areas. The company is planning to launch this in all other cities in a couple of weeks where Internet penetration is substantial. The company is also planning to launch the service for pre-paid mobile subscribers for which it is now busy developing a suitable platform which will not be based on the e-bills, said Gupta.

Within a month of the official launch of the service, Trilogy claims to have recorded 12,000 registered users and over 60,00 visitors. Based on user feedback, the company is planning to launch a new value-added feature wherein a user can upload his/her phonebook easily which will keep the contacts safe even with a change of handset.

The company aims to target telecom service providers for its revenue. "We believe that by providing a customer with the best plan, he will choose an operator or a plan (of the existing operator) based on fundamental value rather than perception. This will help the operator retain existing customers and also acquire high-value customers," said Gupta.

He added that customers can switch operators or plans by the click of a mouse only with operators with whom Trilogy has an agreement, that is as a result of the switch it earns a fee. The customer is of course free to take the information from the site and make the switch on his own. Ultimately, Trilogy hopes to be of help to TRAI in making life simpler and more transparent for customers and turn this into a business proposition.

The company plans to launch the service in many other countries basing on its success in India. "India is our flagship country for this product and once we prove our model here, we want to expand to markets like China, Europe and the US," he added. Trilogy's development team is based out of its R&D centres in India, China and US. Bangalore houses 300 out of the company's total 500 engineers. Its revenue comes mostly from the US but it is increasingly turning to markets like India and China.

The private firm, founded by CEO Joe Liemandt in 1989, has grown within 10 years to become one of the world's largest privately-held software companies, claims the Trilogy website. Trilogy gets paid by helping firms improve their topline and bottomline by delivering business value through its value services. It has "dozens" of customers from among Fortune 1000 firms.

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Future of Sensex at above 13000

2006-11-13T20:30:00.000+05:30

The recent surge in the Sensex has surprised most market participants. The market has been propelled by strong earnings and renewed flows from FIIs and domestic investors. FII activity has been limited to large-cap stocks. Mid caps have not performed in line with frontline indices.

Over June-October ’06, the Sensex gained 25%, while the CNX Midcap Index gained only 10%. In terms of valuations, most large caps trade at fair valuations, while several mid caps are relatively undervalued. To illustrate this point, the Sensex trades at a P/E of 21.3 times trailing earnings, while the CNX Midcap trades at 17.6 times trailing earnings.

Past experience shows that when mid-cap valuations trail those of large caps by such a large margin, the divergence indicates that mid caps will perform better than large-cap stocks over the short to medium term. We now believe that several mid caps are at levels where valuations are attractive, and valuations may catch up during the second half of the year, as the market discounts their Q3 and Q4 earnings, and future potential.

With India being among the fastest-growing economies, opening up of new export markets and booming domestic demand, coupled with focus on infrastructure spending, will ensure mid-cap companies are on the growth path. Several of them are expected to become large companies in the near future.

The growth potential is higher in mid-sized firms, compared to large companies. The true challenge in investing is to identify mid caps which have the potential to become tomorrow’s large caps. One of the issues in investing in mid caps is their poor liquidity. But recently, mid caps are seeing improved liquidity, though it is still lower than that of large caps.

The other issue is the information flow relating to smaller companies. It is imperative that retail investors have adequate information about the companies they invest in. As the number of mid-cap companies is very large, it’s tough to identify the right companies. A portfolio of carefully-handpicked stocks is an investor’s best course of action.

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Beware using Credit cards on E-shopping

2006-11-13T20:21:00.000+05:30

Supratik Chakraborty, received a credit card bill of about Rs 120,000, all spent on buying as many as 22 air tickets in just 30 minutes. This young IIT Powai computer science professor was billed for 21 Kingfisher Airlines tickets and a Spice Jet ticket bought on September 29, a purchase, he says, he never made. To make it worse, no one at his bank found this unusual.

A shocked Chakraborty says, "What is more suspicious is that more than a lakh worth of transactions took place within half an hour and no alert was sent from Citibank. The very next day they sent me a mail asking whether they can increase my credit limit."

But what does it take for a fraudster to commit an online fraud using a credit card? Only the sixteen digits and the Card Verification Value number on the back of the credit card, which are easily accessible. The big question is what is the need to print this CVV number on the credit card? Banks say the CVV number is needed to ensure the customer actually possesses the card while making the purchase.

In reality, anyone can quickly note the digits on your card and make it his own at least on the Internet. With online shopping sites not asking for a second factor identification, the chances of fraud are very high.

Says G Sivakumar from IIT Bombay, "The second factor identification should ask for information which is known only to the consumer. Giving all information on the card is not advisable."

Interestingly, online purchases with a debit card are much safer because transactions take place on the bank's website rather than the merchant's. Banks always ask for a customer identification number and the netbanking password, which is only known to the customer.

Chakraborty is one of four such victims from Powai alone and although his loss is protected by Citibank, cases like these are now one of the biggest headaches for credit card companies.

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Buying gold from banks may cost you higher

2006-11-13T20:20:00.000+05:30

Banks have hit upon a new idea to get a larger share of your wallet -- retailing gold. While the banks claim that buying gold from them is a wise decision, we beg to differ. In fact we would go so far as to say that if you want to buy gold, don't go to your bank!

Why gold?

There are various reasons for which you should own gold in your portfolio. The most important of these is that gold is a real asset whose value is driven by factors (such as the amount of gold mined) that are very different from those that impact the value of financial assets. Therefore, it brings in a much needed element of diversification in your portfolio.

You can read our detailed note on the reasons for and against investing in gold. Suffice it is to say over here that you must have about 5% of your wealth in gold.

Form of gold

The next question that is often put to us is in which form should one hold gold? The one form which we all are familiar with of course is jewellery. However, from an investment perspective this is not the best option as the making charges for jewellery can be as high as 30% of the value of the gold i.e. if your jewellery has gold worth Rs 100, you are probably going to be buying it for Rs 130.

So if you wish to sell your jewellery, all you will get is the value of the gold; the making charges will be a loss to you. Not to mention that sometimes jewellery that is promised to be made of 22K gold turns out to be of a poorer quality.

The best form to hold gold, from an investment perspective, is probably, gold bars (or like they say "biscuits"!). Gold bars are standardised products whose purity is assured by the hallmark (seal of the producer) that it carries.

There are no making charges involved and as the purity and quantity is assured, on liquidation you do not have any surprises in store for you.

Where to buy gold?

In recent months, banks have become very aggressive in marketing gold bars. This pick up in tempo is not only due to the festive season; it is also due to the fact that banks have hit upon a new idea to make a "neat buck" off you. We will let the numbers speak for themselves.

On the 8th of November, 2006 we called one private sector bank and one jeweller making an enquiry to purchase gold. This is what we got as a response --

Expensive, for sure

	Bank (Private)	Branded Retailer	Jeweller
Purity	0.999	0.999	0.999
Price per kilo* (Rs)	1,071,520	1,025,000	940,000
% Discount to Pvt Bank Rate	NM	4.5%	14.0%

* Prices as on 8th of November 2006; Including VAT
NM - Not Meaningful

Do not make a judgment as yet. The banks, as their relationship manager will definitely pitch (only if you ask though), give you a certificate assuring you of the purity of the gold. And that's why they charge a premium for the gold. So, on the one hand you get pure gold with a "certificate" and on the other you get just pure gold.

To be able to make a rational decision, let's ascertain the value of the certificate i.e. what benefit it offers you. In case of standard gold bought for the purpose of investment, the benefit which one looks for is whether the seller will buy the gold back or not and, if yes, at what price will he buy it back?

Banks lose out

Gold Bar	Bank (Private)	Branded Retailer	Jeweller
Buy back facility	No	Yes	Yes
Discount on buy back	NA	NIL	NIL

Here's an eye opener for you. The bank, which pushed you into buying standard gold at a premium, will not buy the gold back from you! So, if you bought gold from a bank today for Rs 100, and you needed to sell it the same day (to a jeweller as the bank will not buy the gold back from you), all your will realise is Rs 86! Of course, you get to keep the certificate!

The jeweller on the other hand, will buy back gold from you any day at the prevailing price. Some jewellers also give you a certificate for the gold you buy, thus diluting a key selling point of the bank.

The answer to the question of where you should buy gold from is simple -- give the banks a skip in case you are looking at buying gold. Opt instead for a credible jeweller (even in the case of jewellers, we found that there is a lot of price variation with branded stores charging a premium -- do your homework well before you buy gold). And, of course always buy standard hallmarked gold.

If you do decide to go to a jeweller to buy gold in bulk, do negotiate. It is likely you will get a discount. In our conversations with a couple of brokers, we were offered a discount on bulk purchases.

Beware!

Based on our interactions with thousands of individuals every month, we find that instances of mis-selling of investment-related services and products is growing at an alarming rate.

As an individual with limited knowledge about such products and services you probably are not geared to ask your advisor the 'right' questions. The best way then to eliminate the risk of being 'cheated' is probably to spend time in selecting an honest financial planner for yourself.

Even as you take measures to protect yourself from this surge in mis-selling, maybe the banking regulator, the Reserve Bank of India will take note and come to the rescue of millions of ill-informed investors.

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South Indian Bank tie with UTI Mutual Fund

2006-11-13T14:30:00.000+05:30

Country's largest mutual fund, UTI Mutual Fund said on Thursday that it has signed a strategic tie-up with Kerala-based South Indian Bank Limited for distribution of its MF schemes.

UTI AMC Regional Sales Head-South R Vijayakumar said under the agreement South Indian Bank will offer the entire bouquet of UTI Mutual Fund's schemes across the bank's selected branches.

"With an intention of reaching out to more retail investors, we are today signing an agreement with South Indian Bank for distribution of our schemes. South Indian Bank has got a dominant presence in Kerala, which also happens to be an important retail market for UTI MF," Vijayakumar said.

UTI Mutual Fund has assets under management of Rs 37789.97 crore and investor accounts of over 7.80 million under its 61 domestic schemes, he said.

UTI Mutual Fund also reaches out to its investors through tie-ups with several banks and Department of Post.

South India Bank General Manager Alex Mathew said with this agreement, the bank has taken another major step to meet the diverse financial needs of its customers, all under one roof.

The bank has identified its 200 branches across the country for distribution of UTI MF products, he said.

Alex said South Indian Bank was the first Kerala-based bank in the private sector to become a scheduled bank and was also the first Kerala-based bank to go on-line through a centralised Core Banking Solution.

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Know about Swiss bank and its banking system

2006-11-08T22:42:00.000+05:30

There is a common misconception that people who cannot store their unaccounted wealth in their own country open accounts in Swiss banks. Even though this may be true to an extent, Swiss banks are well known for their sophisticated and discreet banking services.

Many of the rich and famous like film stars, business entrepreneurs, top government officials, presidents, etc, are reputed to have Swiss bank accounts. Then again, it is also said one need not be a multi-millionaire to open a Swiss bank account.

Brief Background of the Swiss Banking System

One of the most prosperous and economically advanced nations, Switzerland has the worlds largest gross domestic product (GDP). There are nearly 400 banks in Switzerland, which range from the Two Big Banks, to smaller banks, serving single communities or selective clients. Considered as the worlds largest offshore financial center, the Swiss banking sector is renowned for its privacy, stability and protection of their customers information and assets. The Federal Banking Commission (FBC) regulates these banks.

Opening a Swiss Account

Often freely available, a Swiss bank account provides total confidentiality, strict privacy, and is tax-free. However, certain documents are required as proof to open a Swiss account. For example, people who are not residents of Switzerland need to furnish their passports, along with a passport size photograph. Depending on the profession, a current bank statement would be required to determine the clients current financial condition. Along with this, certain personal information, like the date of birth, country of origin, etc., is also required.

A useful feature of Swiss banking is that it can also be done via correspondence as long as the customers follow bank rules and regulations. The bank and customer could interact through the Internet, telephone or snail mail.

However, a drawback of Swiss banking is that non-residents are expected to pay a hefty amount as deposit, and, the smaller accounts are more expensive to maintain. There is a clause especially for US citizens wherein they are expected to refrain from making any business transaction through their Swiss accounts, to keep their account privacy intact.

Deposit

A security deposit is needed in case the customer wants to obtain a credit card. Approximately 1.5 to 2 times the monthly credit limit is demanded, depending on the bank the customer chooses. This deposit is returned when the customer decides to discontinue the credit card, and has paid all outstanding bills.

Confidentiality

There are legends about mysterious numbered accounts in Swiss banks. Some high security bank accounts are given pseudonyms or special names instead of issuing them in the name of the customer, to preserve the anonymity of the customer. This number or name is used wherever the customer is referred. Moreover, even bank employees are expected to respect the customers privacy, the failure of which could land them in prison for several months.

However, Swiss banks, being very particular about preventing money laundering, crosscheck the authenticity of the information provided by the customer. If, during the scrutiny, the bank finds the information of a potential or existing customer connected to some criminal activity, a Swiss judge or prosecutor issues a lifting order. These investigations could include international criminal investigation for tax fraud, insider trading, or the infamous terrorist financing of recent times.

Closing of an Account

Despite a few negative notions about Swiss banking, closing an account is said to be easier than expected. No financial penalty is demanded, and neither is the money held hostage, like it is done in other off shore banking.

To conclude, the secrecy and discreet nature of Swiss banking makes them convenient and dependable. This not only helps customers to save money, but also is a viable means of attaining economic superiority in the business world and society as a whole.

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Easily start your own business

2006-11-07T23:00:00.000+05:30

More people are going into business. However, many are not mentally prepared. Many are lacking the business knowledge when they first start their business. You can get some key points here in starting your own business.

1. Watch your cashflow

Cashflow is the bloodline of your business. Most business fail because they ran into cashflow problem. Most new business owners start to spend lots of money before the businesses start making money.

Spending money on renovating luxury offices, buying unnecessary things or renting too big an office space. Even buying small items can bring huge burden to your to your cashflow.

If you are not someone who is good at managing cashflow, get someone who is good to do it for you. My business partner is good at that, she is the one who manages all the money in the company.

In the first year of our business, she had stopped me numerous times in buying unnecessary things.

Learn to watch your cashflow. Your business depends on it.

2. Marketing business

When I was young, someone told me this, "as long as you start a business, they will come and you wil be rich." That may be true many years ago. But it's no longer true now.

When you start your business, you must make known to the world. Tell everyone about your business. Learn to do effective marketing not just marketing that everyone else does.

All businesses are in the business of marketing. If you sell pens, you are also in the business of marketing. Just that you are marketing pens.

Marketing is a huge subject. Many business owners start business without knowing even the basic of marketing. I done lots of test about marketing. I started to learn about marketing five years ago. Only in the last years, I discover I had moved to a deeper level in understanding marketing.

3. Negotiate, Negotiate, Negotiate

Learn this skill and you can get many good deals. You may even get people who's willing to work for you free. A tip for you before going into a negotiation is to understand what the other party wants. Know that and you'll find your negotiation goes much smoother.

Understand this point, negotiation is about win-win. Creating a win-win deal in a negotiation. If a negotiation turns to win-lose, one party will definitely walk away from the deal.

4. Taking care of your customers

You have to think your customers as long term friends. If you take care of your customers, they will take care of you. Build trust and rapport with your customers, they will buy from you for a life time.

Build a system so that you can always keep in touch with your customers. When your business grows, you do nt have the time to keep in touch with all of your customers. That's when this system will come in handy. Build it early, so you will not lose any customers.

Get yourself prepared for a new business. Be mentally prepared, physically prepared too. You will find great success in your business if you are prepared.

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Review on BSE and Nifty this year

2006-11-06T20:57:00.000+05:30

Our celebration of Sensex’s new highs was a little muted as the 50-stock Nifty had not joined the festivities. However, last week, the two finally rocked together.

With the Nifty’s 1.77% (66-point) move, the two indices are in sync, doing the tango at new life highs. From a technical perspective, you could ask for no better confirmation that the trend across all-time frames is indisputably up.

How deep & how wide?

Let’s look at the BSE500. This 500-stock index is constructed to represent close to 93% of the total market capitalisation of the Bombay Stock Exchange (BSE). Though it contains all the market heavies (or probably because of it), the BSE500 is a bit of an elephant, and elephants, we know, can’t dance. Or can they? Consider this.

The BSE500 index is up nearly 50% from June ’06 lows, and is just a shade under its May ’06 highs. It has already posted the weekly highest closing ever. And the BSE500 has not had a negative week for the past 15 weeks, since late August ’06.

Now, if an index that covers over 93% of market capitalisation can show such strength (we are not finicky, we just round that off to 100%), it’s surely sufficient reason to think that the market is in good shape.

Sectorally speaking

Sectors that have joined frontline indices at new life highs include banking, IT, cement and the BSE Tech pack (which includes IT, media and telecom). The BSE500, BSECapgoods, BSEOil&Gas indices trade a shade under their respective May ’06 highs, and are a step away from new highs.

Sectors that significantly underperform the Sensex are FMCG, BSE Consumer Durables, Healthcare, Metals, Sugar, Mid and Small Caps. Sectoral analysis broadly suggests traders coming into the post-June ’06 rally seem to have chosen the ‘infrastructure-led growth story’ over the ‘massive middle class’ rationale.

However, as trend followers we are more concerned with the ‘how’ than the rather nebulous ‘why’. And we will continue to buy strong sectors, while looking for fresh emerging strength among the current underperformers.

Tank up

Speaking of underperforming sectors showing promise, we checked out the BSE Oil &Gas sector. This sector is buoyed by RIL’s outperformance, helped along by gains in HPCL and BPCL, that come after a 2-1/2 year bear market. Despite this, the sector underperforms, held back by ONGC’s reluctance to move.

However, this week, ONGC breaks its shackles with a 12% move. (In fact, much of the Nifty’s ascent into historical highs is thanks to this stock.) ONGC is now likely to find support from Rs 825-840 level, a range that previously resisted all gains since June ’06. Going forward, we think the stock is on a move to retest May ’06 highs at Rs 1,010. Once ONGC makes and sustains new highs of its own, we expect it to trade in the Rs 1,200-1,400 range.

Which way ahoy?

Now that the market heavyweight ONGC starts to rock, what does this imply for frontline indices? The Nifty has just edged up above 3770. The Sensex is yet to move above the equivalent level of 13135. Once these levels are firmly in place as supports, we expect the market to test 4030-4050/13500-13550 levels.

We will look for weakness only under recent lows at 3700-3725/12800-12900. For those with cold feet about buying with the market at all-time highs, these are levels to watch out for as acceptable downside risk before calling a reversal of this 4-1/2 month old upmove. Trade well. Trade wisely.

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Investing in Bharti or Reliance Communication

2006-11-06T20:46:00.000+05:30

The players in the domestic telecom sector couldn’t have wished for better times. Though Bharti Airtel (Bharti) has had the benefit of listing early on the bourses, coupled with robust performance, Reliance Communications (RCom) is not too far behind either.

Bharti has been commanding better valuations. However, the mist on the business and financials of RCom is getting cleared, and the same is reflecting in its stock price. RCom remains an attractive investment proposition, along with Bharti.

Both these telecom majors operate in 23 circles. Though they are vying for the same circles for their potential subscriber base, there is still substantial room for growth, as the wireless penetration in India continues to be low, at less than 10%.

Segments

RCom’s business segments are classified as wireless, global and broadband. The capital expenditure (capex) in the wireless segment stood at Rs 1,499 crore during the latest quarter. The company has a market share of 20.5% in the wireless segment, with 27 million wireless and mobile customers.

In the past one year, till September ’06, RCom’s subscriber base has risen at a rate of 99.9%. The revenue per minute stands at 77 paise. Under the global business segment, the company has operations and customer base in 28 developed countries, globally.

It has a market share of over 40% in the international long distance (ILD) market and 22% in the national long distance (NLD) market. During the September quarter, RCom commissioned its submarine cable system, Falcon was launched four months ahead of schedule at 80% of the projected cost.

The company has the largest next generation IP-enabled connectivity infrastructure, comprising over 1.5 lakh km of fibre optic cable systems, giving it a presence in six continents. The company’s global and broadband businesses will be the growth drivers in future. Its broadband business grew at 201% over the same quarter in the previous year to Rs 271 crore. The EBITDA margin of this sector stands at 44.8%.

Investment rationale

RCOM is hiving off its towers used for wireless communication into a separate company, which will be a subsidiary of RCom. Globally, tower companies attract a valuation of 20x EBITDA. Overall, this development is likely to have a positive impact on RCom as the depreciation and interest cost will fall, though network operating costs will rise.

The company is set to launch a new technology — Converged Home & Office Integrated Services (CHOIS) — which can be a substantial revenue-earner for the company, going forward. CHOIS is a complete end-to-end technology for constructing a fully dually-redundant, ethernet everywhere, fibre-to-home network. Market leadership in the CDMA space has proved beneficial for the company. Though it is easy to switch service providers in the GSM space, this is not the case for CDMA technology. The company’s CDMA distribution reach for handsets in smaller towns has worked in its favour.

RCom has been a pioneer in e-charge and refill vouchers in small denominations. Reliance Netconnect allows the use of internet through the mobile phone. Reliance mobile phones, fixed wireless phones and data cards can be used to connect to the internet. This service is highly popular in B and C circles.

RCom currently provides GSM-based wireless services in eight circles in eastern and central India. In September ’06, the company had over 29 lakh GSM-based subscribers. It is looking at expanding it GSM-based services to metros and other areas. RCom is confident of successfully providing CDMA and GSM-based services simultaneously.

The company is well-placed to take advantage of growth in the telecom sector. Its focus on affordable schemes, coverage, and wider reach of handsets and recharge vouchers can help it to become a volume player, thus removing its susceptibility to margins. Adlabs Films, with which the Reliance group has a tie-up, can be an important mobile content provider, which can work in RCom’s favour.

Financials & valuations

RCOM’s revenues grew 40% to Rs 3,526 crore in Q2 FY07, compared to Rs 2,522 crore in the corresponding period last year. EDITDA and net profit for Q2 FY07 stood at Rs 1,353 crore and Rs 702 crore, respectively, compared to Rs 427 crore and a loss of Rs 19 crore, respectively, in the year-ago period. Interest costs fell significantly from Rs 65 crore in Q2 FY06 to Rs 5.6 crore in Q2 FY07.

Debt stood at Rs 2,057 crore at the end of the quarter. Access charges and licence fee dropped by Rs 125 crore over the same quarter in the previous year to Rs 906.8 crore. Based on expected FY07 results, the estimated earnings per share (EPS) works out to Rs 12.4. The stock currently trades close to Rs 390 and commands a P/E of 31x.

RCom has over 27 million subscribers, while Bharti has over 28 million subscribers. For Q2 FY07, Bharti’s revenues and net profit stood at Rs 4,357 crore and Rs 934, respectively. Bharti’s stock is trading close to Rs 540. Based on expected FY07 results, the estimated EPS works out to Rs 18.8; it commands a P/E of 29x.

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Huge investment by FIIs in this quarter

2006-11-06T20:43:00.000+05:30

The market is back with a bang — and this is not without reason, as Corporate India has put up an exceedingly good show for H1 FY07. The earnings surprise has led to a re-rating of the domestic market, driven by earnings upgrades and higher Indian exposure among overseas investors.

For the September ’06 quarter, foreign institutional investors (FIIs) were net buyers of around Rs 12,400 crore, which is the highest ever since the start of the bull run. While FIIs have been rushing to the market, domestic funds seem to be taking to the market more tactically, by collectively buying stocks worth Rs 1,686 in the latest quarter.

This is a fall from Rs 8,568 crore seen in the June quarter, when the market was seeing a broad correction. However, mutual funds (MFs) have definitely not exhibited the same enthusiasm as that shown by FIIs in the September quarter.

FIIs have increased their share of stock ownership in all Sensex scrips, except in Larsen & Toubro (L&T), Hindalco, Ranbaxy and Reliance Communications. The sharpest jump was seen in Reliance Energy, wherein the FII holdings rose to almost 20% from 14% in the last quarter.

The increasing FII exposure seems to have come off falling levels of MF holdings, with mutual funds reducing exposure in 15 out of 30 Sensex stocks.

However, domestic funds have been increasing exposures selectively in counters like Gujarat Ambuja, Hero Honda and Reliance Energy. Reliance Energy seems to be finding favour with both domestic and overseas funds.

However, Reliance Communications has been at the receiving end, with both domestic and overseas funds reducing exposure to the scrip. Stocks that saw a reduction in domestic fund exposures were HDFC, L&T, ICICI Bank, Tata Motors and Tata Steel. Clearly, domestic funds are buying selectively and acting cautious at current market levels.

Barring the index scrips, both MFs as well as domestic funds seem to be actively managing their portfolios. Some of the big exits by FIIs were Thermax, Navin Fluorine, Elecon Engineering and Man Engineering, where MFs have reduced exposure to zero levels. Other stocks where MF holdings seem to have dropped sharply are Bharat Electronics (BEL), i-flex solutions and PVR.

Domestic funds seem to be betting on the mid-cap segment, with their strongest additions being in Himatsingka Seide, Ceat and Kalpataru Power. Other strong additions include mid-cap banks like Union Bank of India, Bank of India and Bank of Baroda. However, domestic funds have exited from some infrastructure construction companies like IVRCL and Nagarjuna, while adding relatively lower-priced mid-cap banks and financial service providers like LIC Housing Finance and IDFC during the quarter.

What’s interesting here is that in some counters, MFs seem to be providing FIIs with an entry into the stock. Examples of these counters are PVR, IVRCL, Educomp Solutions, Indiabulls Financial Services and Shoppers’ Stop. All of these have been witness to selling by domestic funds, only to be lapped up by FIIs.

Consider Indiabulls, which saw an around 2% reduction by domestic funds, but this was more than made up by a huge 12% increase in FII ownership. The same is the case for Educomp Solutions, in which domestic funds reduced their exposures by around 5%, while FIIs increased their stake by 7%.

There are also some instances of the reverse situation, with FIIs cashing out and domestic funds buying — these include LIC Housing Finance, Himatsingka Seide and KEC International.

Concurrent action was also visible in counters like Thermax — where both domestic and overseas funds have exited — and Kalpataru Power Transmission — where both have been buyers. Other scrips that have found favour with both groups include IDFC, Manugraph Industries and Gokaldas Exports.

Other major exits by FIIs, apart from the index space, during the quarter include Prajay Engineering, Astra Microwave, Alok Industries, Max India and Himachal Futuristic. However, despite higher flows from FIIs, there hasn’t been any significant change in the ownership profile, with percentages remaining more or less stagnant for both the Nifty and BSE 500.

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Floating home loan rates never drop

2006-11-06T20:39:00.000+05:30

The Indian home loan market, bedazzled by the low rate home loans, forgot to ask one basic question: what is my floating rate loan benchmarked to?

A floating rate loan is one, which is pegged to a rate and should rise and fall with the benchmark, according to the rise and fall of the cost of funds in the country. So far so good, but the most obvious things break down in India because the organised institutions profit from and exploit the financial illiteracy of the retail customer. Here is how benchmarks lose relevance in India.

What is a benchmark? A benchmark is usually a rate that is used as a yardstick to either evaluate performance or set other linked rates in the market. For example, diversified equity funds use the Sensex as a reference point for their funds' performance. A good benchmark, of course, needs to be independent.

This means that the person measuring performance or using it to set other rates should not be able to influence it in any way. Hence, the mutual fund rules have the need for an independently determined benchmark (the market determines the Sensex and not one fund or company) to enable the investors to evaluate performance.

The same rules do not apply in the home loan market. Who, do you think, sets the 'benchmark' prime lending rate that your loan floats against? The RBI? No, it is the banks themselves who fix the benchmark.

This gives them the ability to change the benchmark at will and introduce new ones when old ones stop going their way. For example, ICICI Bank has two benchmarks in operation. Borrowers till early 2004 are on what is called the Internal Retail PLR (or RPLR) and those after that are on Floating Reference Rate (FRR). This, in early 2004, was set 2 per cent lower than RPLR, at 7.75 per cent.

What this means is that instead of passing on the benefit of the falling rates in 2004, the bank preferred to float a new benchmark, that was lower, rather than reduce the old one.

New customers got a market benchmarked competitive rate, and the old customers, who thought their rates would float down, continued to pay more - defeating the very purpose of being on a 'floater'. Today these benchmarks are at 10.25 per cent for FRR and 12.25 per cent for RPLR.

And then there were none. The only banks that tried out independent benchmarks in India were ING Vysya and Kotak Mahindra Bank, and this October, both withdrew these. For Kotak Mahindra Bank, the benchmark was its own one-year fixed deposit rate, along with a regular PLR-based (internally fixed) rate.

The FD-linked rate would truly reflect the cost of funds because a hike in the FD rate would mean that the bank would have to pay its lenders a higher rate as well. Mid-October, the FD-linked rate was recalled. ING Vysya used the three-month FIMMDA-NSE Mumbai Inter-bank Offer Rate (Mibor) index operated by the National Stock Exchange.

This is as independent as a benchmark can get and most countries use a similar inter bank rate as a measuring rod.

Mibor rates have ranged from a low of 5.51 per cent in January 2005 to a high of 8.63 per cent in March 2006, and are ruling at 7.48 per cent today. A loan at Mibor plus 2 would have moved from a high of 10.63 per cent to a low of 7.51 per cent over this time period without the bank being able to influence its movement - up or down. It is indeed a pity that the only truly transparent home loan benchmark in India was discarded before it could become the industry standard.

Though both banks cite customer indifference to the independent benchmark rates as the main reason for dumping these, could it be that these banks were losing competitive margins because of not being able to set the rates as other banks with captive benchmarks were doing?

What now? The market is left with no independently fixed home loan benchmark. Two things can happen - RBI can make it mandatory for banks to disclose transparently their benchmarks like banks in Australia. Or, the RBI can make it mandatory for banks to fix home loans to an independent benchmark, like the Mibor. Outlook Money is rooting for option two.

Till then, carefully look at what your loan is benchmarked to and start engaging with the banking ombudsman in case you are unhappy with the way your bank tinkers with its benchmark.

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Temporary employment jobs gets good money

2006-11-06T20:37:00.000+05:30

Are you looking for a job that offers you learning opportunities in various areas, flexi-scheduling and a decent pay packet? The answer to this, even a decade ago, would have been, "Get real." But now, with temporary employment (temping) becoming a big human resources phenomenon in India, jobs with all these attributes are well within the realm of reality.

A temporary staffing solution provider puts the size of temporary staffing in India at about Rs 1,360 crore (Rs 13.60 billion). He adds that there are over 2.5 lakh (250,000) temp workers in India and that 120 lakh (12 million) temp jobs are expected to come up in the next five years.

Temping has many advantages: it helps you develop new skills, gives you broader experience and provides you the opportunity to work with various levels of management.

Who temps?

Right from a college student to a 50-year-old professional can find a temp job in the corporate world. Companies look for temps to fill any short-term gap arising due to the absence of an employee or unplanned termination.

Manjit Kaur, 32, temped as a secretary in an embassy till the permanent employee she was filling in for came back from her three-month-long maternity leave. She feels this exposure helped her secure her present permanent job in another embassy.

Organisations mostly hire workforce on lease for non-core activities like frontline sales, HR, administration and accounts. Companies also employ manpower on lease if they are scouting for people with special skill sets.

Areas of temping

Temping opportunities exist across all industries and almost all job functions. "The demand is mainly in human capital-intensive sectors like financial services, telecom, insurance, banking, IT/ITES, FMCG, retail and manufacturing," says Achal Khanna, country manager, Kelly Services India, a temp staffing solutions provider.

Temping is more pronounced at the entry level than at higher positions. If you are a fresher, temping is the perfect launch pad to get introduced to the sector you are interested in. You are free to choose a job function and, as you gain experience, you can move across functions and sectors.

Fruits of temping

Temp jobs help you network and don a variety of hats. They can be enticing enough to even draw people with permanent jobs. Take the case of Sunita Bhardwaj, 32, who quit her permanent job in the administration department of a company to work as a sales coordinator in a US-based Fortune 500 firm. A year and a half later, she got a chance to make yet another job function transition when she became executive assistant to the CFO.

"It doesn't matter that I am a temp. I am working for a Fortune 500 company and am exposed to a world-class work culture. I don't feel victimised either on salary or treatment. Besides, I am acquiring new skills," says Bhardwaj.

Remuneration

Temp salaries are decent enough. Though temp jobs are not yet giving permanent jobs a run for their money, at times, temps can earn more than permanent employees. Jaychandran Pillai of Alps Management, a hiring firm, points out that in the case of specific time-bound projects, temps get about 20 per cent higher salary than regular employees. The starting salary of a fresher in a sales function in a large financial or insurance firm in a metro is Rs 9,000-10,000 per month.

An HR executive can get a starting salary of Rs 7,000. While the average salary in the lower management rung is around Rs 7,500 per month, for middle levels, it is Rs 35,000 and at senior levels, it can go up to Rs 4.5 (Rs 450,000) lakh per month. Bhardwaj is quite satisfied with her salary of Rs 3 lakh (Rs 300,000) per annum.Says Ashok Reddy, MD, TeamLease Staffing Solutions, "The average salary of our associates is around Rs 9,000 per month. The average growth rate in compensation has been about 15 per cent." The remuneration depends on experience, qualification, the job function, sector and the city where the opening is (See table below).

Temp Pay: Admin/Logistics/Sales
City	Undergraduates	Graduates	Post-graduates
Ahmedabad	4,000-6,000	5,000-8,000	7,000-14,000
Bangalore	4,000-6,500	6,000-13,000	6,000-14,000
Chennai	5,000-7000	6,000-10,000	7,000-11,000
Delhi	5,000-8,500	7,000-10,000	8,000-11,000
Hyderabad	5,000-9,000	5,500-9,500	6,000-10,000
Kolkata	4,000-6,500	4,500-8,500	6,000-10,000
Lucknow	4,000-8,000	5,500-9,000	6,000-10,000
Mumbai	N/A	7,000-9,000	6,000-10,000
Pune	5,000-6,500	6,000-8,500	6,500-11,000
*Salaries in Rs per month Source: TempLease Staffing Solutions*

The gap between the pay packages of leased and permanent employees could be as wide as 40 per cent. Omprakash, 30, who works as a systems engineer with a top Indian IT firm, says that his salary shot up by over 40 per cent when he was absorbed in the company after working as a temp for three years.

Temp to perm

This transition is another reason why temping is so popular globally. It is used as a stepping-stone to permanent employment. Organisations often absorb leased employees when vacancies arise. Staffing companies differ on the percentage of temps who become perm: the figure ranges from 15 to 40 per cent.

Conclusion

Despite its advantages, companies are reticent in talking about temping. "That's because of stringent, unclear and non-flexible labour laws," says Pillai. Some companies feel they would lose face and be stigmatised if they are perceived as temping firms. Some companies go to the extent of signing non-disclosure agreements with their recruiting agency. Unlike the West, temping is still not a lifestyle choice in the Indian job market. However, that is certainly changing. So, go ahead and temp, it could be fulfiling and fun.

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Advice investing in Parsvnath and Lanco

2006-11-06T20:29:00.000+05:30

Deven Choksey of KR Choksey Securities gives his perspective on Lanco Infratech and Parsvnath Developers.

According to him, Parsvnath Developers offers a good amount of opportunity. Moreover, he feels that there is a good amount of appetite for such issues because in the realty space, the institutional buyers and the overseas buyers are equally interested. Hence, he feels that it should find good response from investors.

As regards to Lanco Infratech, Choksey feels that given the kind of issue and the kind of a complexity, it is largely for those investors who are institutional investors and who have an appetite to stay in the infrastructure space for a longer period of time.

Openion on the price band for Parsvnath Developers is valued?

I think if one is looking at comparative valuation with Unitech, what we find is that sales to market cap ratio of Unitech is probably 30 times and this company is being marketed at less than 5 times. So if one looks at it from this angle, then this particular company should be revalued.

Secondly, the land bank of about 102 million square feet is equally impressive because as it unfolds into projects and realizing into revenue and profits, in the coming years, it will significantly contribute to topline and bottomline of the company.

So, to a great extent, the issue offers a good amount of opportunity. Moreover, there is a good amount of appetite for such issues because in the realty space, the institutional buyers and the overseas buyers are also equally interested. This company is a relatively known company as far as the operations are concerned. Probably that would find good amount of interest in the market. So all put together, it should find good response from investors.

At Rs 250-300, would put a subscribe on Parsvnath Developers?

Yes, I think the retail investor should go towards the higher band of the price and probably ask for subscription. They should get better subscription prospects in this particular range.

Lanco is a little bit more of a complex business; it has got many elements, which ones of those elements do you like?

I think you are very right, there are two aspects, one is the holding company aspect, the holding company holds investment in various power projects, which are either commissioned or are in the process of being commissioned.

They are putting up further capacities and taking over some of the stakes. If you look at the holding company structure and the investment in the power project and then look at the revenue coming into the books of the company, maybe I think the valuations are looking quite stretched.

But as we have seen, in such a scenario, where in the companies will unfold their projects, at some point of time and maybe unlock the valuation, the shareholders who have been holding company would get a little bit more benefited in the second stage.

In my viewpoint, given the kind of issue and the kind of a complexity, this particular IPO is largely for those investors who are institutional investors and who have an appetite to stay in the infrastructure space for a longer period of time.

The other business model of this company, which they are entering into, is in the realty space. They will be coming out with around 19.5 million sq ft of land, which is either owned or given the development rights. I think they should develop those lands over a period of time. So to that extent, I think the valuation would be seen over a period of time from that area.

The only issue, which I probably wanted to find out more from the management of the company is that they have a larger part of the development belonging to the company's own development efforts.

To a great extent, I think it should be seen whether the timely delivery will happen. I think it will be in Hyderabad and Andhra Pradesh with the IT park as well as the residential complex that they are developing in the realty space.

So, I think it is dependent on one particular geography of the country. Otherwise, I think as I have said that the investors who are having a long-term horizon for this kind of business, should be coming into this company.

So how would you value the land bank and the sort of orderbook they have in the construction part of their business?

About Rs 1600 crore worth of orderbook is seen. And out of that, Rs 1200 crore belongs to the group activities in this space. Land bank valuation would be slightly tricky at this point of time to get into.

But as far as the cost part of the valuation is concerned, if you are looking at the diluted equity of Rs 220 crore, it comes to somewhere around Rs 35 per share. We will have to actually see the market valuation part of the land and maybe the property when they develop it, I think we will have to see it further but Rs 35 per share is largely the cost part of the valuation.

So what is the bottomline, subscribe on Parsvanath and stay away from Lanco?

For retail investors, yes, I think one should subscribe to Parsvanath possibly stay away from Lanco. For institutional investors, who have infrastructure as their focus and want to stay invested for 4-5 years, then one should equally subscribe to Lanco.

Maybe I think at every opportunity you get, you may get further to buy from this stock as well in the market post listing.

How are you finding the market now? Do you think it is going up even from here?

In my viewpoint, I do not doubt that the market will have an upside, maybe 13,400-13,500 at this point of time is reasonably placed. Cairns Energy issue will slightly re-rate some of the oil companies particularly ONGC and it has started the process since last week.

I think that ONGC and Reliance will be the drivers in my view, also Bharti and certain other cement companies. I see that at this point of time, the market will move in the 12,925 and 13,400 band and maybe consolidate before it makes a bigger move thereafter.

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Floating home loan rates rise always know why?

2006-11-04T22:37:00.000+05:30

The Indian home loan market, bedazzled by the low rate home loans, forgot to ask one basic question: what is my floating rate loan benchmarked to?

What this means is that instead of passing on the benefit of the falling rates in 2004, the bank preferred to float a new benchmark, that was lower, rather than reduce the old one.

This is as independent as a benchmark can get and most countries use a similar inter bank rate as a measuring rod.

Till then, carefully look at what your loan is benchmarked to and start engaging with the banking ombudsman in case you are unhappy with the way your bank tinkers with its benchmark.

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Pay more on Tour packages now

2006-11-04T22:35:00.000+05:30

Tour packages this season are set to shoot up by 10 to 15 per cent, owing to an unprecedented increase in demand for hotels and travel bookings.

Despite the tourism season still a month away, the cash registers of tour operators and hotels are already ringing.

On the domestic front, like the last year, Goa leads as the travel destination for Christmas and new year, followed by Kerala, Rajasthan and hill stations in the North and South.

Bookings for Goa have gone up drastically. India's leading travel portal Travelguru said it is handling as many as 30 bookings a day as compared with 5 to 10 bookings it handles in the lean season.

On the international front, Malaysia, Singapore, Thailand, Australia, New Zealand and Egypt score as the most sought-after travel destinations. Cox & Kings, however, is expecting more tourists to visit Dubai, as the Dubai Shopping Festival kicks off in December.

In Goa, the hotel occupancy is close to 80 per cent with a few hotels even levying a surcharge.

"The five-star hotels in Goa have jacked the rates up by 25 per cent, whereas four- and three-star hotels have increased them by 15 per cent. Though the occupancy is not 100 per cent yet, it is likely to go up with the New Year approaching," said Travelguru CEO Ashwin Damera.

However, besides these traditional family destinations, there are other destinations too that people are willing to explore.

"We have come out with exciting packages to Mauritius and Maldives, which are picking up. Indian Airlines has announced that it would start direct Bangalore-Male flights from November with an introductory offer of Rs 10,000. This would make Maldives very attractive. It has a lot of potential as a honeymoon market," said Karan Anand, director, Cox & Kings.

Thomas Cook too is offering new package tours to Turkey, Fiji, Bora Bora and Korea, recording most of the bookings for Turkey.

Star Cruises, on the other hand, is also seeing an upward trend in bookings this season. In terms of itinerary, its three-night cruise to Kadmat in Lakshadweep has received tremendous response from passengers for this New Year.

"We are expecting more bookings with the numbers picking up as the New Year draws closer. So far, our cruises are doing well and we are positive that it will be better than last year," said Naresh Rawal, senior manager, marketing, Star Cruises.

Star Cruises has revised its itineraries from four nights, two nights and one night last year to three nights, two nights and one night this year and the rates are also lower.

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About Lanco Infratech Ltd. IPO issue offer on 6th Nov

2006-11-04T11:07:00.000+05:30

Background:

Lanco Infra Tech Ltd. (LITL) was originally incorporated on March 26, 1993 as “Lanco Constructions Limited” in Andhra Pradesh. On November 24, 2000 the company’s name was changed to present. LITL is an infrastructure development company in India with interests in power, construction and property development.
It has experience in the execution of several power projects, transportation networks, water supply works, and commercial and residential building complexes. The power business is expected to contribute significantly to the income and profits in the near future. The property development business is still in the early stages of growth.
It owns 11 power projects (of which five are in operation and six are under development) with current operating capacity of 149.75 MW in operation and 1,260.0 MW under development. Company’s power assets consist of gas, bio-mass, hydro, coal (indigenous and imported) and wind-based power plants. It also commenced power-trading operations in January 2006.
Various projects executed by the company are the coffer dam for the Tehri Dam project, the Veeranam water supply project, modernisation of an 825-bed hospital for the Indian Navy in Mumbai, a cable-stayed flyover in Navi Mumbai, and construction of the Kondapalli Power Plant and the Aban Power Plant.
In the property business, company owns or have won bids to develop approximately 19.5 mn square feet of saleable area, including a 100-acre integrated IT park and township and a 21.8-acre residential development, both located in Hyderabad.
LITL is coming up with the issue for the purpose of the reorganization and consolidation (started in May 2006) of the power and property development businesses into one company to derive synergies from operating across various businesses in infrastructure development. Currently, it has 19 subsidiaries. Also as part of the reorganization, Lanco Kondapalli Power Private Ltd. (LKPPL) is expected to become a consolidated subsidiary of LITL by the quarter ending December 31, 2006.
Upon completion of the issue, promoter’s holding will get reduced to 75% of the post issue equity share capital from current 93.75%.

Objects of Issue:

Investment in various subsidiaries
Investment in Nagarjuna Power Project
Payment for acquisition of 13.3% equity stake in Aban Power to Aban Ventures
Payment for acquisition of 25.1% equity stake in Lanco Kondapalli to Globeleq

Strengths:

LITL has strong order book of Rs. 16,118.3 mn as of September 30, 2006, of which Rs. 12,299.5 mn (76.3%) represents contracts with affiliates of the company.
LITL’s OPM & NPM have improved substantially in FY06 at 12.2% & 6.2% from 6.9% & 1.8% in FY05 respectively.
Company’s FY06 revenue & net profit was Rs.1471 mn & Rs.91.5 mn where as in Q1FY07 LITL’s revenue stood at Rs.1102 mn & PAT Rs.93 mn (more than full year FY06 PAT).
LITL has entered into strategic and financial partnerships with leading international firms and have strong relationships with leading Indian financial institutions, which help in easy access of funds. In the power sector, it has worked, or are currently working, with Genting Group (Malaysia), Doosan Engineering (Korea) and General Electric Company. For construction projects, it had strategic partnerships with Hyosung – Ebara Company, Voist-Alpine Tech Wabagh (India) and Punchak Niaga Holdings (Malaysia).
Benefits from the use of the Lanco brand. LITL is the flagship company of the Lanco Group. Due to the long-standing history of the Lanco group of companies in India (over 40 years), the Lanco brand enjoys brand recognition in India. Company uses the Lanco brand in each of its power, construction and property development businesses.
Company is present in the construction industry which is witnessing high growth fueled by the large spends on the ongoing infrastructure development projects by the Government of India. Over Rs.60,000 crores of investment is expected to be made in key infrastructure sectors like road, ports, railway and power plants in the next five years.

Weakness:

LITL’s has been witnessing inconsistent revenue since past five years starting FY02. Also, revenues have declined at a CAGR of 4.2% since FY02.
LITL’s had witnessed decline in net profits from Rs.107mn in FY02 to Rs.32.7 mn in FY05, however FY06 witnessed a whooping 180% rise in net profit.
LITL’s debtors/sales ratio has increased from 10% in FY05 to 26% in FY06.
The company has been generating negative operating cash flow for last two years. Cash from operations as on 31st Mar 2005 & 2006 was –Rs.372.59 mn & -Rs.99.65 mn respectively.
Company’s RONW & ROCE has shown declining trend since FY02, from 16.1% &16.4% to 4.2% & 5.6% in FY05 respectively. However, both ratios showed some improvement in FY06 with RONW at 9.6% & ROCE at 6.9%.
Construction companies are highly dependent on timely supply of the requisite raw materials. Also, prices of key raw material like cement are firming up which can have an adverse effect on company’s profit margins.

Valuation:

The company’s net worth as on 31st March 2006 is Rs.954.28mn and book value per share at Rs.15.5 per share (pre equity issue) and Rs.4.3 post equity issue. However in Q1FY07, company’s net worth has increased substantially to Rs.3000.92 mn. On Q1FY07 post issue book value per share is Rs.13.5.Hence, company’s post issue price to book value band is14.8-17.8 times.
Post issue annualized EPS based on 30th June 2006 earnings is Rs.1.67 per share. The shares are being offered in the price band of Rs.200-240. At P/E range of 119-143. The average industry P/E is 39 for construction industry & 11.4 for power industry.

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SBI and ICICI in global banks ranking

2006-11-03T21:26:00.000+05:30

The State Bank of India and ICICI Bank, at the 61st and 66th positions, respectively, are the only Indian banks that figure in the global 100 most valuable banking brands list for 2006 published by the UK-based brand valuation agency Brand Finance and The Banker magazine.

"ICICI Bank remains one of the most potential Indian brands to go global," says Unni Krishnan, CEO - India, Brand Finance.

The report is based on the analysis of the world's 500 largest banks by market capitalisation. The top-100 table shows the most valuable banking brands ranked by financial value in dollars. Citi (Citigroup) followed by HSBC bagged the top two spots with brand values of $35.1 billion and $33.4 billion, respectively.

According to a statement by Brand Finance, 'The two brands are good examples of how fragmented and undifferentiated banks have become well-liked and most valuable brands internationally.'

However, only four of the top 100 bank brands, namely HSBC, Citi (Citigroup), Bank of America and American Express, receive triple-A brand ratings (extremely strong brand status). While SBI received a 'AA-' rating, ICICI Bank received a 'AA' rating on par with other international financial brands such as Capital One.

Credit card oriented bank brands such as American Express and Capital One display the highest proportion of brand value to market capitalisation.

"This is because emotional or image-related factors are significant drivers of demand in this sector as customers look for privilege and credibility," said Krishnan.

American Express and Capital One are ranked fourth ($18.1 million) and 25th ($5.7 billion), respectively, despite their relatively smaller market capital in comparison to other banks included in the index.

For instance, American Express has a market capital of $63.89 billion compared with UBS which is at number six with a market capital of ($103.52 billion), but a brand value of only $15.1 billion.

Investment and wholesale banks display surprisingly large brand values.

'This is because banks of this type do not need large retail networks, infrastructure and tangible assets. Much of their value is intangible and the two main assets are key personnel knowhow and the corporate brand itself', says the report.

As many as 11 of the 20 most valuable bank brands are headquartered in the US. Banks that are headquartered in large and rapidly emerging markets such as Brazil and India benefit from increasing business banking activity and the increasing demand for consumer banking services.

The examples are India's State Bank of India ($3.08 billion) and ICICI Bank along with the Brazilian Banco do Brasil ($ 2.3 billion). However, there are no Chinese bank brands in the Global 100 Banking Brands Index.

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Increase of home loan? Your action plan

2006-11-03T21:25:00.000+05:30

Examine your home loan agreement. If your bank uses an internal benchmark rate, you need to be alert. Start by getting a copy of the home loan agreement. If the bank does not provide you with one, insist on it - it is your legal right. If necessary, lodge a complaint with the RBI.

Keep a tab on the interest rate. You need to track the changes in the interest rate on your loan. Says Ian Hamilton, analyst with Australian consumer infomediary Infochoice:

"Don't sit and forget your loans and accounts; review them regularly and shop around, comparing widely. Don't be afraid to vote with your feet and move elsewhere. But more often than not, you may win by going back to your lender and demanding a better deal."

Fend off agent's hardsell. Don't sign a home loan agreement without spending a few days looking over it. Take your time, and don't feel pressured by your home loan agent -for most of us, our homes are the largest single investment we will make. Above all, remember that the banks need us as much as we need them.

The financial logic in favour of buying a home continues to be compelling. But to exploit the multiple advantages to the hilt, the home buyer has to be on his guard while taking the loan. That's the important caveat to the unchanged home truth.

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Home loan rates of different banks

2006-11-03T21:01:00.000+05:30

In order to lend you money, banks and housing finance companies borrow from depositors like you and from corporate and government institutional lenders. Obviously, they need to charge you a rate higher than what they pay out. The difference between the cost of their borrowing (also referred to as their cost of funds) and the cost of your borrowing, or home loan rate, is their 'spread'. The higher the spread, the greater their profits.

Floating rate loans. In the case of floating rate home loans, the bank or HFC determines the rate you pay with reference to some benchmark, referred to by different banks as 'prime lending rate' (PLR), 'advance rate', or 'mortgage rate' (see: Owning the Keys to the Treasury).

Owning the Keys to the Treasury
Banks	Benchmark	Fixed by	Current benchmark rate (%)	Current floating rate (%)¹
Citibank	Citibank Mortgage Prime Rate	Bank	11.5	9.5
HDFC	Retail PLR	Bank	12.25	RPLR minus 2.75
ICICI Bank	Floating Reference Rate	Bank	10.25	9.5
SBI	State Bank Advance Rate	Bank	11	SBAR minus 1.25-2.25
Bank of Baroda	BoB Prime Lending Rate	Bank	11.5	BPLR minus 1.25-2.25
HSBC	Prime Lending Rate	Bank	11.5	9.5
ABN Amro Bank	Mortgage Floating Reference Rate	Bank	11.5	9.5
Kotak Bank	Prime Lending Rate	Bank	12.25	9.25
ING Vysya Bank	Home PLR	Bank	13.5	9.5
¹As applicable to new borrowers
PLR: Prime Lending Rate
In all the above cases, the floating rate is revised every three months from the date of first disbursement and it matches the revision in benchmark rate; the benchmark rate is reviewed every quarter (exact date not specified by a majority of banks) and it is at the discretion of banks to revise it or not

Your floating loan carries a rate that is usually upto 3 per cent lower than this benchmark. But that does not mean you are being obliged - this benchmark rate is not the cost of funds for the bank or HFC. It is an internal measure related to the cost of funds.

Nor is there any legal sanctity to the difference between the benchmark and the floating rate. For instance, on 1 July 2006, Standard Chartered Bank had a current home loan reference rate of 12.50 per cent and stated that the floating loan interest will be upto 5 per cent below this. On 31 August, this was 9.85 per cent.

If the cost of funds goes up, banks and HFCs tend to maintain their spread by increasing their benchmark rates and hence your floating loan rates. But the two do not necessarily rise at the same pace or time.

Says Sujon Sinha, head, retail assets, UTI Bank, "When interest rates are falling, a bank lowers the prime lending rate only after the cost of funds falls by 0.50 to 0.75 per cent. But if the rates are climbing up, a bank is prompted to raise the rate for every 0.25 per cent rise in the cost of funds."

Obviously, you do not benefit by this arrangement. Says Harsh Roongta, CEO, apnaloan.com: "Lending rate affects only loans. A far more objective benchmark reference rate would be one that affects a much larger body of parties - for instance, fixed deposit rates, since they also represent the cost of funds for a bank or HFC."

Banks and HFCs even differentiate between existing floating rate customers and new ones. For example, as ICICI Bank reduced its internal retail PLR from 11.50 per cent in 2002 to 9.75 per cent in early 2004, its existing floating rate borrowers saw their loan rates drop by two per cent, but new borrowers received a further one per cent benefit.

Says Sreenivasalu Raju, loan manager at Andhra Bank: "The problem of non-transparent rates is felt by a customer only when the rates fall. A customer does not have an accurate idea of the fall in rates."

The case of Kamal Baldi, 43, illustrates what can happen when a bank follows an internal benchmark. When he signed up for a Citibank home loan in April 2005, it was at 7.25 per cent.

The bank uses an internal benchmark rate, mortgage PLR, and when it revised it upwards, his interest rate moved up to 7.75 per cent without any intimation. In April this year, his loan rate was further revised to 8.25 per cent, though he was informed this time around.

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Buy a house now for these reasons

2006-11-03T20:59:00.000+05:30

Given the current situation of high real estate prices and loan rates, does home buying have to be purely driven by emotions or is there an adequate financial logic for purchasing your own home? The good news is that even in this scenario, there exist five compelling reasons why you should buy your dream home.

1. Advantage from tax breaks and inflation

Tax breaks for home loans and inflation's impact on home loan repayments are two factors that continue to work as loyal servants for the home buyer. Under the present tax rules, you can get a tax break on interest repayments for home loans to the extent of Rs 150,000 and on principal payments up to Rs 100,000 per annum.

And, as inflation raises all other costs (and incomes), the real cost of your EMI becomes easier to bear. If you look at a loan of Rs 30 lakh (Rs 3 million) with a tenure of 15 years carrying a 9.50 per cent interest rate, the EMI works out to Rs 31,326, or roughly Rs 375,000 per annum.

After accounting for the income tax deductions thereon, the real cost to your cash flow for the first year would be only Rs 256,000.

Assuming that interest rates remain the same, by the end of your loan period, the 'real' cost of this EMI, after adjusting inflation and deducting tax, will be only Rs 72,428. This is probably the only time you will bless the bites that rising prices take out of money - it works to make your EMI cheaper each year.

2. Rising salaries

Meanwhile, salaries will continue to rise, both in nominal and real terms. According to a recent survey, the wages of mid-level IT professionals in India have risen by an annual average of 23 per cent in the last four years.

For other sectors too, be it new economy ones such as telecom or old economy ones such as FMCG, the salary growth rates have been in double digits. Thanks to these hikes, the average cost of a home has dipped from 11 times the home loan borrower's income in 1997 to 4.6 times now.

Estimates vary, but forecasts indicate that the salary growth is slated to remain in double digits for at least the next two to three years. With corporations increasingly including performance-linked pay in compensation packages besides wealth-creating pay components such as employee stock options, the effective impact of pay hikes will be much more.

3. Longer working lives

Your parents may have retired at 58 or 60, but you are unlikely to hang your boots so soon. Increased lifespans and better healthcare facilities will help you have a much longer professional life than your parents. This means that you will get a much longer period to repay the home loan. This is especially helpful if the tenure of your floating rate loan gets extended.

As the Indian economy grows, an acute talent shortage - signs of which are already beginning to surface - will make it financially tempting for skilled individuals to move on to a second, third and, perhaps, even a fourth career.

This is something that is already happening in the West, especially in the US, where people are increasingly looking at working till age 70. Thus, even if someone is taking a loan at 31 today, it is unlikely to stretch him financially since he will be 51 at the end of a 20-year tenure.

4. Appreciation of property values

As an investment, homes will continue to be as rewarding as in the past. Even if housing prices tumble over the next few years, they will more than recover - this has been their history in modern India.

Urbanisation is bound to accompany our economic progress - 30 per cent Indians will be living in cities by 2010, a figure that will go up to 40 per cent by 2020. Experts expect this to create a long-term housing shortage.

In the next 10-15 years, it is estimated that 85 million housing units will have to built to meet the demand for homes. That's a tall order. Thus, it is reasonable to conclude that the possibility of a few years of drop in housing prices will be dwarfed by the virtual certainty of housing values going up manifold over the lifetime of a typical home buyer.

Some experts are quoting an annual return of 12-15 per cent over the next six to seven years despite short-term dips. If these forecasts materialise, not many would be complaining.

5. Reverse mortgage

The great thing about owning your own home is that if you need the money in the future, you can always unlock its value - even without moving out. With reverse mortgages coming to India, your home can become a financial planning tool for your old age, especially if you have paid fully for it by then.

What is a reverse mortgage? In a conventional mortgage, with every EMI that you pay, your equity in the house increases. Once you have paid up the entire loan to the housing finance company, your equity in the house will be 100 per cent.

In a reverse mortgage you do the opposite. You pledge your house with a financing institution that pays you a monthly amount based on factors like your age, value of your house and so on. Proposals for implementing reverse mortgage in India are being prepared by the National Housing Bank.

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Thinking of Buying a house now

2006-11-03T20:57:00.000+05:30

In the bad old times not so long ago, only rich old families owned homes. Salaries were low and loans expensive, costing upwards of 15 per cent per annum. In the early part of this decade, home loan rates dropped sharply, and by 2003, you could get a home loan for as little as 7.75 per cent per annum (floating). Meanwhile, real estate prices had been depressed for five years.

Home buyers' ecstasy . . . Rising income levels and the boom in the information technology and related services sector made it possible for many families to buy homes.

"Sustained growth in the economy coupled with easy availability of home loans led to a huge demand for quality residential projects," says Maj. Gen. (retd) Jayant Varma, executive director (north), Knight Frank (India).

Younger and younger people began putting down money to buy homes, signing attractive home-loan agreements to fund the bulk of their investments. For the next couple of years, things looked great - salaries continued to rise, making EMI payments a breeze.

Inflationary home economics

In 2004, if you were planning to buy a two-bedroom flat in the suburbs of Delhi, it would have cost you around Rs 20 lakh (Rs 2 million). At that time, a 15-year loan would have come at 7.50 per cent. If a down payment of 15 per cent came from your own resources, so that you took a loan of Rs 17 lakh (Rs 1.7 million) to buy the flat, your EMI would have worked out to around Rs 15,759.

Today, the same property would cost you over Rs 40 lakh (Rs 4 million), and a 15-year home loan attracts an interest rate of 9.50 per cent. So, if you were to borrow Rs 34 lakh {Rs 3.4 million (again funding the 15 per cent down payment yourself)} for 15 years at 9.50 per cent, your EMI will work out to around Rs 35,503. This is just the cost of the house, other costs like registration will set you back by a few extra lakhs.

Are Things Going to Change Radically?

Real estate prices. Experts believe that select areas in metros are seeing a reduction in prices. "Delhi, Mumbai and Bangalore are indisputably seeing areas of correction. Property prices in Kolkata and Chennai might see a slowdown in the growth rate soon," says Anuj Puri, MD, TrammellCrowMeghraj.

In Mumbai, prices of residential units in Andheri and Goregaon are 20 per cent below their peak levels. There has also been a correction in Navi Mumbai and other suburbs. In some parts of the Delhi NCR region, prices have sunk by 15-20 per cent. In parts of Bangalore, residential property prices have gone down by 10 to 20 per cent.

However, the correction is not likely to be either sharp or deep - international experience shows us that most rallies in residential property end in a soft landing rather than abrupt drops.

Also, asset prices, including prices of residential units, tend to move in cycles. In India, this cycle has tended to move up for six to eight years before softening for another six to eight years. This particular uptrend is only four years old, so those betting on downward moves in housing may yet see higher prices in certain areas.

Home loan rates. As regards interest rates, they have firmed considerably in the last two years. From a low of 7.50 per cent in 2004, the rate of interest on a 15-year loan had climbed to 8.25 per cent by January 2006. This has now gone up to 9.50 per cent. What lies ahead?

"It is very difficult to predict interest rate movements. Though liquidity is strong now, it would be important to track factors such as inflation, growth rate and money supply to know the trend," says Rajiv Sabharwal, head, retail assets, ICICI Bank. Sameer Kaul, business manager, mortgages, Citibank, believes that "interest rates may continue to have a slight upward bias; however, it is difficult to predict how much higher they can go from here". At the same time, few think that we are likely to see interest rates at the historic heights of the 1990s.

Home buyers' emotion. The way we look at it, trying to second-guess the markets, whether in real estate prices or in interest rates, is a difficult proposition. While the speculator profits or loses directly with the rise or fall in real estate value, for home buyers, the special feeling of owning a house is more important than these notional gains.

Take the case of Neeru Kumari, 27, a Bangalore-based Chinese language specialist. Neeru lived in a rented flat in Bangalore. She calculated that renting was a lot cheaper than buying. Yet, she decided a month back to take the plunge and book her own flat. She made it easier for herself by taking a step-up loan, where her EMI will be Rs 17,000 for the first two years, before settling down at Rs 20,000.

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Find on Top 10 IPOs more

2006-11-03T20:54:00.000+05:30

The media and several analysts have been flooding us with reports on the deluge of IPOs and the losses to investors arising from the overpricing of new issues. This scare has led to a proposal of rating IPOs - an untried and questionable idea.

For one, there is no deluge. In the one-year period, only 79 IPOs have been floated raising a meagre Rs 12,898 crore (Rs 128.98 billion).

For another, the analysts seem to forget that IPOs do not operate independent of the secondary market, once made, they list on it and are influenced by it.

For me, efficient IPO pricing is determined by whether an IPO gave the investor an opportunity to exit at a profit and if not, was the reason a crash in the secondary market around the time of listing.

Ten Largest IPOs
Company	Issue Date	Issue Amount (Rs Cr)	Offer Price (Rs)	Current Price(Rs) 19-Oct-06
Reliance Petroleum	13-Apr-06	2,700	60	65
GMR Infrastructure	31-Jul-06	789	210	286
Punj Lloyd	13-Dec-05	642	700	740
Sun TV	3-Apr-06	603	875	1,228
Tech Mahindra	1-Aug-06	465	365	764
M&M Financial	21-Feb-06	400	200	247
Gujarat State Petronet	24-Jan-06	373	27	40
Jagran	25-Jan-06	369	320	320
Deccan Aviation	18-May-06	363	148	107
Gitanjali Gems	16-Feb-06	331	195	221
Ten largest IPOs from Diwali 2005 (1 November 2005) to Diwali 2006 (21 October 2006) Source: Prime Database

On this parameter, I find that almost all IPOs offered a profitable exit window. Of the 124 IPOs floated between April 2003 and April 2006 - the period of the bull run - as many as 85 were still quoting above their offer prices as on 31 May, 15 days after the crash. And the collective loss on the remaining 39 issues, at Rs 1,324 crore (Rs 13.24 billion), was a fraction of the Rs 25,511 crore (Rs 255.11 billion) gain on the 85 winners.

The top 10 IPOs, even after months of listing, have given a positive return. The only exception - Deccan Aviation - is suffering entirely due to the increasing warfare in the airlines industry.

Significantly, all large issues, which also entail larger number of investors, have done well. In this period, 79 IPOs were floated, to collectively raise Rs 12,898 crore (Rs 128.98 billion). The top 10 IPOs accounted for Rs 7,035 crore (Rs 70.35 billion) of the total amount.'

If these have given positive returns, and as they constitute a major portion of the issuances, the bogey of IPO over-pricing should be laid to rest.

The proof of pricing should lie in only two parameters: the level of over-subscription and the listing price. If both are significantly in the positive zone, the accusation of overpricing becomes absurd.

Lessons to be learnt. Like all mid cap and small cap stocks do not do well and like an investor typically does not invest in all secondary market stocks, all mid and small size IPOs would also not do well post-listing. The investor should do value investing in IPOs, and keep three parameters in mind.

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Invest in these stocks and sectors

2006-11-03T20:39:00.000+05:30

The markets are lackluster today due to lack of buying interest. At this juncture, which stocks and sectors do experts feel one should invest in?

Speaking about his top trade for the day Rajat K Bose of rajatkbose.com says, "I would say that one could safely have a look at Asahi India. If it stays above Rs 121-122 range, then it may be heading towards Rs 128-129."

He adds, "One can also look at Finolex Pipes. My target for the day is first Rs 99.75 and if it manages to stay above that, then may be Rs 103-104 could well be reached. So these stocks are looking good."

Giving his picks for the medium term, he says, "Saregama's stock has actually been consolidating for seven to eight trading sessions. After that, this jump has happened and now one needs to watch out for a level of Rs 204. I will be closely watching the level of Rs 204 to Rs 210, and if it manages to get past that, then definitely this stock can give a good medium term upswing."

According to Bose, ONGC is giving leadership to the market. "I was watching the level of Rs 846 yesterday, today that Rs 846 has been crossed and it is trading decisively above that. So maybe it is heading towards Rs 860, which is the immediate target. Of course that can be reached anytime now."

He goes on to say, "After that, Rs 873 would be the next target to look at. Around that level there could be some profit booking because ONGC never sustains two big moves consecutively."

Bose is very positive on Voltas. He mentions, "First the target will be around Rs 110 for Voltas and then the target will be Rs 117. As of now, one should be watching the level of Rs 102 for support and if it manages to stay above Rs 105, then the next target will be Rs 110 and then Rs 117, the chart really looks good, It is a buy here."

Speaking on the banking and financial services sector, he states that Bank of India has been an out performer.

He adds, "The run was pretty much vertical for Indiabulls Financial Services. Yet if it manages to stay above Rs 480, then the next target is Rs 485 and then Rs 496 would be another target to watch out for. Unless and until it falls below Rs 474, it would maintain its strength."

Speaking about which sectors will give a lead to the market Vibhav Kapoor of IL&FS says, "Probably cement could be one sector, which could take a lead. Banking is of course another sector, which could still continue to do very well with benign interest rates."

He is positive on the sugar space. "I am reasonably positive on sugar. Of course, the last few months have been very bad for sugar stocks and they have fallen steeply. The ethanol issue seems to be resolved now and the pricing of Rs 21.5-22 is almost fixed in most of the states. So that will help sugar companies going forward," says Kapoor.

He adds, "Selectively, a lot of benefit over 6-12 months will come from the fact that a lot of these companies particularly in the northern belt are going to start power projects. That will be a big driver over the next two months. So all in all, it's time to accumulate gradually and sugar stocks should give good returns over the next 6-12 months."

Speaking on the auto space, he says, "The four-wheelers and commercial vehicles still look very good. Although prices have run up in some of them, I think one should be looking at every correction as a buying opportunity in them. We are positive on the four-wheelers, both commercial vehicles as well as tractors and passenger cars. But we are not so positive on two-wheelers at this point of time."

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Introduction of Wrap Schemes in indian market

2006-11-02T21:14:00.000+05:30

Indian asset management companies are exploring the option of introducing a new product — Wrap — in the domestic market, which is increasingly gaining popularity in developed markets.

Also known as wrap account, the product brings various investment avenues such as shares, insurance, bonds, tax shelters etc, under one roof, even if they come from different providers.

While this proposal is yet to take shape, a representation of the industry has sounded out the market regulator Securities and Exchange Board of India (Sebi) about the plan, sources familiar with the development said.

“The market regulator seemed to be open to the proposal, but this would need the permission of finance ministry, as other regulators (IRDA) also come into the picture,” an industry official said.

In developed markets, wrap account service, which uses a web-enabled software platform to aggregate client investments, involves managing assets within a single portfolio and is investor friendly as an investor pays a fee to the agent based on the value of the assets contained within the wrap.

This is different from the traditional investment method, where an investor pays an upfront charge to the agent on each trade. As a result, agents do not have an incentive to sell a product, which earn them higher commission and at the same time, may be disadvantageous to investors.

This product has a simple cost structure involving a single annual management fee, instead of a range of separate costs such as management fees, investment advice, portfolio management and brokerage commissions.

“Once this is introduced there will be a big change in the way insurance and mutual fund products are marketed and priced. Policy changes in the pension sector will also add variety to it,” the official said.

Wrap accounts have gained popularity in Australia, Canada, New Zealand, the UK and US in recent years, where they now account for 75% of new investment business. The original concept of the traditional wrap account has been extended to creation of mutual fund wrap accounts and ETF (exchange-traded fund) wraps.

Mutual fund wrap products, similar to the concept of fund of funds in investment philosophy, are designed to make investment allocations across range mutual funds, which may cover a variety of asset classes.

Industry officials said, in addition to regulations, the key to the development of the wrap market would be the partnerships and understanding between companies of various asset segments.

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Pay placement tax for IIMs and IITs

2006-11-02T21:07:00.000+05:30

ndia's premier technology and business schools like IIMs and IITs, which charge placement fee from companies for campus recruitment, will now have to shell out service tax from May this year, a CBEC circular said on Wednesday.

The circular said these services rendered by the premier institutes are liable for service tax at 12.2 per cent.

Educational institutes like IITs and IIMs charge a fee from prospective employers like corporate houses or MNCs, who come to these institutes for recruiting candidates through campus interviews, it said.

Earlier, there was a confusion whether these educational institutes fall in the category of manpower recruitment supply agency and accordingly, whether service tax can be levied on the placement fee.

Clarifying the exact position, the CBEC circular stated that the service tax was leviable for the activity of manpower recruitment or supply agency only if undertaken by a commercial concern.

Given that most educational institutes do not have profit as their primary motive, they were not covered earlier under the taxable service definition till the amendment was done in this year's budget.

With the enactment of Finance Act 2006, the expression "commercial concern" was replaced with "any person" engaged in the recruitment or supply of the manpower even without commercial concern now comes under the tax net.

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Consider exchange rates while investing

2006-11-02T21:06:00.000+05:30

Many investors who hold foreign currency -- let us take the US Dollar in this case -- worry a lot about the 'exchange rate' at which they will get to transfer their proceeds into India and back. What they should, however, be looking at is whether all this 'worry' is worth it, i.e. does the exchange rate actually have a significant impact on the overall returns.

Before we look ahead, let's look into the past to understand how significant has been the impact of the exchange rate (Indian Rupee/US Dollar).

If we take the period starting December 1998 (which is about five months after Russia defaulted on its international debt repayments; the Asian crisis started with Thailand's currency losing its value significantly in July 1997), the Indian Rupee has oscillated quite a bit, but within what is apparently a band of Rs 42.49 per US Dollar and Rs 49.05 per US Dollar.

From point-to-point (December 1998 to September 2006), however, the depreciation in the value of the Indian Rupee vis-�-vis the US Dollar is just, hold your breath, 1.0% per annum (p.a.)! In the same period, the Indian stock markets, represented by the BSE Sensex, returned 18.9% CAGR (compounded annual growth rate). In effect, the impact on returns was an insignificant 5.1%!

Within this period of nearly eight years there are two distinct phases. The first phase, between December 1998 and May 2002, saw the Indian Rupee depreciate by 4.3% per annum. This phase saw a very unstable global environment marked by the Asian crises, the Technology-Media-Telecom (TMT) bubble and the Y2K issue.

During this period, the Sensex yielded a return of 11.5% CAGR. The impact on a foreign investor was a very significant 7.2%, i.e. your return would stand reduced significantly to 7.2% on account on the depreciation in the value of the Indian Rupee.

In the second phase, between May 2002 and September 2006, the Indian Rupee actually appreciated against the US Dollar at an annualised rate of 1.5%.

In this period, where the overall global environment was very bullish and the premium for risk had reduced dramatically, the BSE Sensex returned 26.9% CAGR in Indian Rupee terms; in terms of US Dollars therefore the gain was higher at 28.4%!

What the graph then tells us is that over a longer period of time, the currency impact has been negligible. However, in shorter time periods you could have either gained or lost depending on the timing of your entry/exit.

So, should you pay little heed to the exchange rate when you are investing in India? Let's first list out the key factors that support this view:

One, if the view is that India is likely to grow at over 8.0% p.a. for the foreseeable future and continues to open up the economy from an investment perspective, then the flow of funds from abroad, be it FDI (foreign direct investment -- broadly investment in real assets) or FII (foreign institutional investor -- money goes into buying securities) will continue to be buoyant.

So far, the FII money has dominated the inflows; over time FDI, which is more stable, relatively more predictable, will also pick up. The inflow of funds, will lend support to the value of the Indian Rupee (the foreign investor will exchange his Dollars for the Indian Rupee, thereby driving up the demand, and therefore all else being the same, the value of the Indian Rupee will rise).

Two, growing exports (of both services and manufactured products) coupled with mobilisation of funds from the international markets by Indian companies and remittances by Indians abroad (in China, remittances from overseas Chinese is a big contributor to overall foreign currency inflows) should add to foreign inflows, which again will provide support for the Indian Rupee.

While exports will benefit predominantly from cost competitiveness, the investment opportunity in India will see Indians remit increasingly large sums of money to India.

Finally, over the long-term, a stronger economy should result in a stronger currency.

From what is apparent today, the American economy is slowing down (not to mention that it suffers from critical structural issues including excesses in the real estate market which in recent years has been a key driver of consumption and a burgeoning current account deficit), while India finally seems to have achieved a higher growth trajectory of 8.0% pa or thereabouts (being realistic, we will disregard talk of 10.0% pa growth).

Over time, as the US economy corrects the excesses and the Indian economy gathers momentum, the relative strength of the Indian currency vis-�-vis the US Dollar should improve.

Why a relatively stronger Indian Rupee may not be a reality?

1. First, the eight-year period that has been considered for the study in itself may be too short. If the time period under study is doubled (starting January 1990), then the rate of depreciation of the Indian Rupee vis-�-vis the US Dollar increases dramatically to 6.5% pa. The interest of the global investment community in emerging markets goes through phases.

The reversal in interest, as and when it comes, can often be painful. In present times, there is little risk premium attached to investing in the emerging markets, which simply put, is more a result of too much money flowing in emerging markets rather than a change in the fundamental 'volatile' nature of emerging markets.

As and when the risk premium reverts to the mean, the 'correction' in asset values and also the currency can be significant.

2. Second, even though studies have indicated that the Indian economy has grown irrespective of which political party is in power, it cannot be overstated that many a times the policy initiatives of the government are driven by factors which are other than economic.

Of course, there is more or less a unanimous opinion that the reform process is irreversible. In fact, slow as it may be, the process is chugging along. But concerns remain about proposed policy measures, including job reservation in the private sector.

Then of course, the biggest risk that India runs today is that its coalition government (single party governments do not seem a reality well into the future as of now) will not rise to the occasion and create an environment (read policy framework, infrastructure) where all this feel good about India will translate into actual money flows and therefore growth.

This failure is not without a precedent. This will impact the long-term attractiveness of India as an investment destination.

3. Third, in recent years even as oil prices have risen sharply, the impact on the Indian economy has been surprisingly muted. The reasons are not far to seek. Steady foreign inflows (both FII money and export proceeds) have helped India fund the import of this commodity which now accounts for about 40% of all imports.

4. Then, of course, the government has not permitted the complete pass through of the rise in crude price to the consumer; while a part of this burden has been borne by the government, oil marketing companies too have had to share the losses.

5. Finally, due to some clever accounting jugglery, this 'deficit' which the government has to bear is no longer part of the union budget i.e. the fiscal deficit no longer includes the losses incurred by the government on 'subsidising' prices of petroleum products.

The result is that finances of the central government appear better than they actually are. Historically, a rise in prices of crude oil used to create a flutter; now we are almost indifferent.

However, ultimately someone will have to foot the bill for this subsidy; but in case the price impact is passed through to the consumer, the impact on economic growth too would be felt. This would result in a toning down of near to mid term expectations of domestic growth.

So what should you do?

In our view, the best approach would be to allocate money to India depending on two factors:

a. Your needs which involve an expenditure in Indian Rupees: So if you are planning to retire here or you need to provide for your dependents in India, it is best that you do not pay much heed to the exchange rate and start to transfer funds to India.

b. The extent to which you are comfortable with the depreciation of the Rupee: If you are contemplating investing in India, it would be advisable to factor in a 3% annual depreciation of the value of the Rupee vis-�-vis the US Dollar. The current feel good environment may not last long and it is best that your investments are based on realistic assumptions.

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KEC improves in Q2 results

2006-11-02T21:02:00.000+05:30

KEC International spurted 14.10% to Rs 353.60 after it reported 100.18% surge in net profit for Q2 September 2006.

1.85 lakh shares changed hands in the counter on BSE. The stock had slipped from its intra-day high of Rs 372.40.

The stock witnessed a steady rally in the past from Rs 247.20 on 22 September 2006, to Rs 310.35 by 31 October 2006, on sustained buying interest.

KEC International reported 100.18% surge in net profit for Q2 September 2006 to Rs 21.68 crore (Rs 10.83 crore). Net sales rose to Rs 467.66 crore (Rs 412.72 crore).

In late August 2006, KEC had bagged orders worth Rs 150 crore from international and domestic markets, taking its order-book to a record Rs 3,000 crore level. This is 1.7 times its FY 2006 sales of Rs 1,727.25 crore. In July, KEC International secured two new orders worth Rs 520 crore from Kazakhstan and Abu Dhabi.

KEC is seen benefiting from privatisation of transmission lines in India. The country urgently needs to strengthen existing transmission networks, with power-generation and demand shooting up. As per reports, the state-owned Power Grid Corporation (PGCIL) is in process of building new networks with the help of government funding as well as private parties. The successful bidder will set up and maintain the transmission lines that will criss-cross Maharashtra, Gujarat and Madhya Pradesh. PGCIL will set up sub-stations.

KEC International is the largest power transmission, engineering, procurement and construction companies in the world, with a presence in more than fifteen countries. It is a market leader in India.

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Reliance industries growing very high

2006-11-02T21:01:00.000+05:30

Reliance Industries advanced 3.25% to Rs 1266, after the company said it plans to raise $ 2 billion (around Rs 9,000 crore) for oil and gas exploration and production.

The stock surged to lifetime high of Rs 1268, a little while ago, as buying intensified. The counter clocked huge volumes of 23.36 lakh shares on BSE, much higher than its half-yearly average volumes of 20.71 lakh shares on BSE.

The company has scheduled a meeting of its board of directors on 09 November 2006 for approving a proposal to raise funds. The funds will be raised by way of Foreign Currency Convertible Bonds (FCCB), syndicated loan or fixed or floating bonds.

RIL will invest $5.2-billion to double the output from its D6 block in Krishna Godavari basin to 80 million standard cubic meters per day (mmscmd). RIL had earlier proposed investment of $2.47 billion to produce 40 mmscmd for 7.5 years from discoveries - Dhirubhai 1 and 3 (in the D6 block) - out of total 34 wells.

The company has made a dozen discoveries from the 15 wells drilled in the deep-sea but only the first four discoveries - Dhirubhai 1, 2, 3 and 6 - have been declared commercial. Reliance holds 90% interest in Block D6 where it estimates reserves in excess of 14.5 trillion cubic feet. Niko Resources of Canada has the remaining 10%.

On 30 October, RIL announced launch of its first retail format called Reliance Fresh in Hyderabad. These 2,000-5,000 square feet "friendly neighbourhood stores" will sell fresh fruits, vegetables, staples and other products. The store at Banjara Hills will be among a set of pilot stores that the company plans to open in Hyderabad on 03 November. RIL would invest close to Rs 25,000 crore over the forthcoming five years in the retail business.

Despite heavy erosion in gross refining margins globally, RIL reported a 9.2% growth in bottomline for Q2 September 2006 to Rs 2,709 crore (Rs 2,481 crore) on the back of a strong performance by its petrochemicals segment. Net sales increased 37.40% to Rs 28,474 crore (Rs 20,717 crore). RIL’s petrochemicals margin rose in the July-September 2006 quarter on account of lower input prices. Analysts expect, a strong outlook for global petrochemical and polyester margins as supplies are likely to remain tight in the medium term.

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