Monday, March 30, 2009

Sensex & Nifty Targets

I have received a long & comprehensive query in the ‘Comments’ section of my previous post on the prevailing status of equity markets by one Mr Dark Knight Abhay. Even Mohit has posed somewhat same query related to targets for Sensex and Nifty and their next course of action.

Dark Knight Abhay's query typically depicts plight of many gullible investors who initially go by words of TV Analysts. Most of the times, these analysts may be speaking from short-term perspective which is often implied wrongly as long-term call by many investors. So, in short-term, what may be a bearish call by these analysts is construed as bearish long-term outlook by investors due to lack of clarity of nature of their call. This induces the investors to stay away from the markets in the times of extreme panic and mahyem. Though, there are other analysts who give calls clearly from the long-term horizon. Below is the query posted by the reader (Abhay) in the ‘Comments’ section of my previous blog posting:

Hi Viral,

The markets are making me mad, the Sensex today crossed 10,000 level, all the resistance made by the TV analysts are broken down. When the markets were on 8000- I missed to buy as this people said that it will reach 7000 - 6000..... Now their target is 11,000...

What can u say about the current rally...? I don’t think it will last long as it's doing what it did last time when it reached 7,700 in Oct. and bouncing back to 10,000 and again crashing...

I have sold some of my stocks… And I wanted to know what’s u r target for Sensex for the next few days and after a month. Waiting for your reply…


Recession feeds into severe Recession:

Slowdown leads to further severe slowdown in an economy. Slowdown phenomenon feeds on pessimistic news of slack in demand & eventual cut in production of output. Slowdown is often coupled with falling prices on the back of fall in aggregate demand. Consumers tend to delay their purchasing decisions to a later period on anticipation of further fall in prices in times to come. This leads to postponing of lift in demand led by pessimistic approach of consumers. The cycle feeds on itself leading to a prolonged slowdown or recession.

Gradual Reversing of the Cycle:

But, sooner or later, this cycle has to break its path of movement and the slowdown reaches the trough of pessimistic approach. The slowdown reaches such proportion that price factor of goods and services are rationalized to very reasonable levels. This is further aided by the cause that demand from the consumers which was constantly delayed on the back of negative outlook has to materialize sometime or other and give way for shopping call. This slowly leads in to emergence of demand at lower prices and consequently gradual pick up in aggregate demand over a period of time. Steadily this leads the way out of the economic rot.

However, this is only one way of uplifting economy and the economy does not necessarily operate on such simple & summarized explanation of cycle of economy. The economy needs lift & stimulus from various sources fiscal, monetary, government spending, trade stimulus, policy reforms, encouraging for disbursement of savings into investments and private sector spending among various aspects that contribute towards a complete recovery of an economy from a long-drawn recession.

Analysts feeding on Pessimistic Sentiment:

Similarly, pessimism feeds into further pessimism. When there prevalence of the pessimistic environment, all possible news from different quarters point towards negative sentiment. This inflates a balloon into a football of doom situation. When such is the extent negative sentiment, even so called ‘Analysts’ prefer to go in the line with the prevailing trend. When markets are moving in almost a linear fashion with a downside bias, Analysts prefer to ride the negative trend further fuelling the wave of pessimism.

However, this story is not comprehensive. There are also other types of Analysts who have tendency to walk in opposite direction of the trend and go out of way to give investors the calls which are ‘Contra’ in nature. They present investors with the other side of the story and signify that markets can never be unidirectional on permanent basis. The trend ought to change sooner or later.

Someone has rightly said, ‘Listen to all possible analysts but take your own call based on informed decision.’ Keep your mind open to let in views of all possible nature and sources – positive and negative. But while making your decision to invest your hard earned money, take as much effort to understand about it as you shall be taking while buying any other expensive commodity from the market.

Technical Views on Nifty:

Nifty is currently trading with the broad range of 2550-3150 since many months. Nifty 2550 levels are equivalent to Sensex 8500 levels & 3150 corresponds to Sensex 10500 levels. Stiff Nifty resistance is long standing at 3150 level & strong support lowly sits at 2550 since quite some time now.

Nifty levels of 3150 has been tried and tested for as many as 3-4 times in past 6 months but all attempts in vain against this strong resistance level. Nifty 2550 is the level at which markets had formed a likely bottom on closing basis in the month of October 2008. Within the current broad range of Nifty levels 2550-3150, it has worked out its way for narrow ranges like 2550-2850 and 2850-3150 lasting for several weeks altogether.

On the other hand, on the break-out from Nifty 3200 levels, markets are poised for yet another big relief rally which could extend until Nifty levels 3550-3850 on the upside.A weekly Close above Nifty 3200 is crucial for break-out from the prevailing broad range of 2550-3150.

My Targets for Sensex and Nifty on the Downside:

Below Nifty 2550 levels, Nifty is likely to find some intermediate support around 2250 levels which were tested on intra-day basis during the month of October 2008. Below 2250 the next support is reached around 1800 which shall roughly correspond to around Sensex levels 6000-6500. This is the worst case scenario in my eye for this bear market, which my or may not occur in the upcoming future. As of now, Nifty 2550 levels are implied as current market bottom which are tested approximately twice till now.

Usually, in bear markets the bottoms are tested and re-tested for multiple numbers of times to determine the strength of the ultimate market bottom. So, it can not be absolutely ruled out that markets may again come lower and re-test the ‘so-called’ bottom level of 2550 again to check the knot of its absolute effectiveness.

My Expectation: Nifty may bottom out in the range of 2000-2500 (Sensex 7000-8000) what with some bit of positive news have started trickling in by the way of robust numbers from capital goods & steel sector. These two sector forms a core for determining the pace and development of infrastructural growth.

Nifty Upside Targets & Bear Market Rally:

Interestingly, sometimes in bear markets, the rallies are sharp enough to give gullible investors the wrong signal that a new dawn of the bull phase has commenced. Surprisingly, these ‘Bear market Rallies’ last long enough to woe even most seasoned of the investors in be sucked in by such rallies which almost resemble bull market exuberance.

Most recently we have witnessed markets soaring at a dizzy speed on the back of positive global cues and sentiment. Sensex was around 8200 on 12th March 2009 and it has appreciated steely to 10,000 levels in a matter of 15 days period as on 27th March 2009. Nifty has had a dream journey of 600 points in such short span of time. If indeed this is touted to be one of those classic 'Bear Market Rally', this dream run could even extend to another Nifty 800 point rise from current levels, giving sense of emergence of new but 'false' bull run. This spells target of around Nifty 3850 levels if the 'Bear market Rally' fructifies.

Importance of Nifty level 3200:

Nifty levels 3150-3200 have been tried & tested several times in last half year. This simply means markets have more often than not got over bought around this zone. More so, there is a great deal of Supply around this arena which has till now out done any sort of demand factor. If the current rally which has started from around 2600 levels needs to fructify & balloon into a roaring 'Bear market Rally', the break-out from this stiff resistance levels of Nifty 3200 is a must for any sort of survival for a sustenance of a 'follow-up' rally from here on.

Justification of Bear market Rally:

This next likely upside momentum from 3200-3850 could be on the back of sustained action from efforts by various Central Governments all over the world. Several integrated steps of monetary and fiscal measures adopted by the Central Banks the world over. Add to that a series of stimulus packages & government spending by big-league developed companies could temporarily act as a positive trigger on the back of 'false' signs of revival in various macro economic factors.

This so-called revival may prop up Rupee-dollar equation & foreign inflows into the country further giving an impression of bulging forex kitty. Gradually, the economy would record positive news flow in rate sensitive sectors like Automobiles & Real-estate. But, this all could prove false once the bear market rally is up for wrapping and comes in sync with market weakness and negative global cues.

Fate of Large-caps that witnessed sharp Rally:

More than half of the current market jump from Sensex 8200 to 10,000 levels is on the back of few heavy weight Large-cap stocks like RIL, BHEL, ICICI, Infosys and HDFC Ltd. to name a few. Reliance Industries was quoting at Rs.1153 at the closing of March 11 as against Rs.1548 as on March 27, a steep upside of 35% from the then closing levels. ICICI which was floating at lower levels of Rs.262 at the close of 11th March saw a steep upside to close at Rs.385, an appreciation of 45% from its lows. This was followed by HDFC Ltd. which was around Rs.1255 on March 11 and a sharp rally to Rs.1590 to close on March 27.

On the other hand, Cement major Grasim Industries which had recorded a 52 week lows of Rs.831 during October 2008 has almost doubled up to close at Rs.1606 as on March 27, 2009 on the back of strong fundamentals & diversified presence in the business of Cement and Viscose fibre.

Can these rallies in Large-caps Sustain?

Most of the recent market rally was largely fuelled by large-caps & lack of retail participation saw a low zeal of interest in Mid-cap participation in the rally. One striking fact that comes into my mind is that on previous occasion when the Nifty peaked out around 3150, Reliance and Bhel has established the levels prevailing currently. Which implies, this time around these stocks have out-performed markets and have attained those levels on good 50 points in advance on Nifty & 500 points on Sensex.

From here, even if markets were to rally forward by witnessing a break-out into a new range above 3200, it is highly unlikely that the current constituents of the index which have contributed majorly in the recent up move would participate aggressively as most of these heavy weights are somewhat in short-term over-bought zone. This would indicate that index may have to spurt on the support of remaining major constituents like ONGC, Bharti Airtel, Reliance Communications, ITC and HDFC Bank among others.

Non-active participation of heavy weights like Reliance, HDFC Ltd, Bhel and ICICI would mean that there shall not be a sustained & a consistent up move from here, inflicting a case of highly volatile & fluctuating game for the bull and the bear cartels of the market. Every rally will be consciously met by retail investors exiting at higher levels.

My Sensex & Nifty Targets based on current News Flow:

It is not possible to consistently forecast the market trend & movement as it depends on various factors ranging from investor sentiment, forecasting future earnings, facts and rumors, macro environmental forces, commodity cycles, monetary policies and global linkages among various other factors. We can only conduct our own research and form an opinion based on prevailing facts & guesstimates of corporate earning prospects. As the economic situations changes consequently effecting earnings of the companies, the estimates may have to be adjusted factoring in all possible good and bad news.

From the above, for the time being, I can conclude that Sensex and Nifty may find its bottom around 7000-8000 and 2000-2500 points respectively. Though, the worst case scenario of Sensex 6000-7000 can't be absolutely ruled out in case global markets, especially, the developed markets go for a complete tail-spin and deep long-drawn recession. In any case, a much deeper correction is not feasible for a relatively faster growing and emerging economy like India.

On the other hand, for any sort of sustained 'Bear Market Rally', I see it difficult for Nifty to surpass stiff resistances of 3850-4250 levels.

Strategies for Traders:

For traders active in engaging in various kinds of trade, can have a keen eye on weekly closing levels of Nifty 3150 levels which has acted as a strong resistance on the upside in the last 6-8 months. The confirmation of the break-out can be expected with a closing above 3200 with a Stop Loss at 3020 and initial target of 3550.

Contra Traders: Traders willing to go an unusual bet can approach the markets by shorting around 3100-3200 zone with a Stop Loss of 3250 with an initial target of 2900 , the call based on Technicals of the Nifty movement. This call is 'Contra' in nature, as it is not usually advisable for traders to act in direction contrary to market trend which is 'up' as of now unless Nifty sustains above 2850.

Traders at Side lines: Traders with no open positions should wait out for the time being. They should either wait for a substantial dip and a consequent opportunity to go long around Nifty 2900 levels. Currently, markets are quite over-bought in very near term period. Quite possibly, markets may show a very limited up move as possible from here, & get back to test lower levels of around 2900-3020 in very near term as a 'Breather' pull back.

Last Stage of Bear Markets:

The current rot in global markets finds its roots in the crumbling fundamentals of housing markets with its contagion effects on the Financial sector. Such scenarios are often deep and painful to recover from, especially, if it stands out to be a long-drawn process. Housing & Financials for a major part of any economy as they are indirectly related with many related and ancillary industries that thrive on these benchmark sectors.

With as much as pain witnessed in last more than 1 year, economies the world over would find it difficult and an elongated process to revive themselves from the current rot with wide spread impact which have gradually affected the fundamentals of all possible industries dependent, directly or indirectly, on housing and/or finance sectors.

Slow pick-up of Revival:

Stocks markets the world over has till now witnessed almost a linear fall since more than last 1 year, which signals that the bottoming out process has just yet started. And, bear market bottoms tend to be long 'U' shaped like curves rather than 'V' shaped recoveries that we usually witnessed during the small bull phase corrections.

Bear markets are often characterized by depressed and mouth watering valuations for long time before they see any sort of pick-up in demand from genuine long-term investors. Usually, buyers lack interest in buying during such pessimistic scenarios where the returns from equity have turned negative, leave alone the positive prospects & depressed valuations of the Corporate world. This lack of interest in buying equity as an asset class & a general shift of investors towards debt instruments providing rationalized returns calls for a long-drawn revival over a period of time as sentiment rationalizes from being overly-pessimistic.

Note to Mr Dark Abhay Knight:

"The markets are making me mad, the sensex today crossed 10000 level, all the resistance made by the TV analyst are broken down. when the mkts were on 8000 i missed to buy as this idiots said that it will reach 7000 - 6000."...

When you say the above mentioned lines, it is clearly visible that you were attempting to TIME market entry based on Analyst views. To me, trying to time the market is the worst possible act that investors can do. One can not be successful all the time while looking to time his entry/exit. Not even the best of the analysts can predict such market movements on a consistent basis.

Please don't take it as anything personal against you. In fact, same is the plight of most of the other investors who attempt to TIME market entry/exit.

You should look forward to read my 1st ever article on this blog based on 'Strategy for Investment'. It demonstrates as to why you should not look forward to have pre-set targets either while plunging into markets and even while exiting the markets. There are various benefits linked to using this strategies.

A Request to Readers:
Readers are requested to post their view/query/suggestion in the below given 'Comments' section. They can share their thoughts, positive or negative, through this interactive Comments section which will make the blog much more interesting for the readers themselves, in gauging the response to the article & knowing different view points of various investors/traders.

Disclaimer: All data, content and/or reports posted by Viral Rajnikant Dholakia on this site are only for information and educational purpose of visitor/readers of this blog. It does not constitute to be a recommendation/offer/advice to buy or sell assets/securities in any form. Individuals/organizations are requested to take an informed call by consulting their Financial Advisor before acting on any matter/data published on this blog. This blog does not warrant of any kind of accuracy, adequacy and completeness of data, ideas or thoughts published in it. This site and Viral Rajnikant Dholakia assumes no responsibility or liability or loss or damage of any nature for your trading and investment decisions and its consequent results.

Monday, March 23, 2009

Diversification of Equity Portfolio

They say that sometimes in stock market experience comes in more handful than mere knowledge and/or information. Similarly, an investor can get to learn & obtain more and more know-how about investing as he experiences a patch of lean period of action like current bear phase. And nothing better than the ongoing deep recessionary bear market across the globe. It teaches various lessons which may range from patience, perseverance, art of staggering investments, discipline in decision making and rationalization of expectations among various others.

Though, it is understood that, investors in stock markets have short and weak memory. Most of the times, they do learn quickly from their past mistakes. But, as soon as times of recovery re-emerge on the horizon along with the waves of over-exuberance, they tend to forget about the past experience and fail to implement the lessons of the bad times thus depicting lack of discipline & perseverance.

Diversifying Fruitfully:

Every kind of asset class is fraught with uncertainty upto a certain extent. No investment is a sure shot guarantee of fixed returns. This aspect of uncertainty in offering returns makes the world of investment diverse and broad in nature depending upon its return and risk profile. This very quality of uniqueness in providing diverse returns is useful to determine & examine various options from the number of different asset class based on one’s investment and risk profile.

Diversification - to explain it in simple language, suppose there are 2 baskets full of fruits. One of them consists of only five Apples. The other one is filled with Mango, Apple, Grapes, Orange and Banana. Thus, both the baskets are filled with 5 units of fruits each – one with only Apples & other with mixed fruits. Which basket would you choose from? The one filled with only Apples or the one with the mixed basket of fruits?

The answer would be simple- any rational person would choose a mixed fruit basket simply because it contains of various different fruits. The person would get bored and would not like to eat 5 Apples at a time from the first basket. It may also be possible that the person may not have a liking towards the taste of Apple. In that case, he will have to remain hungry if he is awarded first basket filled with only Apples.

But, if the person is given the second basket, he may get to cherish different fruits with different taste and flavours. Even if the person does not have a liking towards a particular 1 or 2 specific fruits from the mixed fruit basket, he has the option to fill his stomach with remaining different varieties of fruits.

Diversification of Equity Portfolio:

Same is the correlation between the above example of mixed fruit basket and diversification of equity portfolio. Just as the person opting for the second basket of mixed fruit, who did not like 1 or 2 fruits even from the mixed fruit basket, could contain his hunger by consuming remaining varieties of fruits – even an investor could shield his portfolio performance and movement from the dominance of a particular stock(s)’ performance.

De-risking of Portfolio:

In equity markets, diversification is needed to de-risk the portfolio from the risks and uncertainty revolving around any specific company’s stock. Also, an under-diversified portfolio is vulnerable to movement & fluctuation of the limited number of constituent stocks in one’s kitty. The returns of an under-diversified portfolio could be affected negatively, if one of the major constituent in the portfolio witnesses any sort of setback or slowdown or even frauds as experienced recently by shareholders of Satyam Computers. This shows that even financially sound companies with good past management track record can also go down under or get stuck in trouble by any kind of fraud or mismanagement issues.

Going much deeper into the topic of diversification, one can also create and tweak diversification strategy depending upon one’s goals, objectives & risk profile. Diversification of an equity portfolio could be of two types:

1) Sector Allocation
2) Staggering by Time.

Sector Allocation:

This form of diversification relates to buying stake of companies operating in various different sectors and industries. This form of diversification shields one’s portfolio from the exposure and risks related to performance and prospects of a particular sector of the industry. Many-a-times, particular business operations are exposed to performance according to the seasonal nature of markets. During such times, the performance of the company may get affected during the season period of lean operations or demand for their goods or services.

Why is Sector Diversification needed?

Sector wise Diversification is needed in long-term investment as the investor is willing to wait & hold the portfolio for a longer-duration of time or until his pre-set targets are achieved. This long-term investment can span across few years or even more. During such times, in this constantly changing environment, various sector of the economy come into bullish TREND & diminish from the buzz due to various factors like seasonality, slowdown, etc. The trend keeps changing among various sectors depending upon various internal and/or external conditions related to the economy in general.

Like, for example, at one point of time, IT sector was doing very well. But with recent recessionary environment in US, it is more likely that even the IT sector may witness a slowing demand for their services as their clients tighten their fist to curtail & control expenses. Thus the IT sector was prone to external environmental conditions prevailing in overseas markets.

Examples of Sector Diversification:

1) Highlights of Defensive stocks: Let us take another example, currently in the ongoing bear phase, FMCG sector has shown better resilience to downturn due to their nature of dealing in the space of inevitable fast-moving consumer goods which may be needed in daily sustenance of life. At the most, consumers may opt to stop using expensive soaps and switch to cheaper soaps, but they won’t absolutely stop using them in their routine life. Same logic goes for Pharmaceutical sector, where people won’t stop consuming medicines even in a bearish and slowing market conditions.

But, in the last bull phase, the above mentioned so-called ‘Defensive stocks’ had under-performed markets based on their nature of slow & steady growth based on routine consumer demand. Markets do not correlate such defensive stocks with bright prospects as in ‘Growth’ stocks. This leads to under-performance of stocks from defensive sectors during bull phases & out-performance during periods of pessimism when defensive sectors are awarded for their dealing in the space of steady business operations.

2) Highlights of Growth stocks: On the other hand, during the last bull phase, we witnessed sharp rallies in stocks related with Commodity businesses, like for example Metals, Crude, etc. on the back of thinking of investors and analysts that these natural resources are up for extinction in the global markets and thus ripe for demand-supply mismatch.

Thus, for an investor with long-term horizon, needs to have stocks from various different sectors so as to ably float through all different business cycles & phases with some degree of cushion strength. If the investor has some stocks from FMCG sector, it would help him to ride through the volatility of bear phase.

Based on above discussion, it could be implied that every portfolio should have around 10-20% investment in DEFENSIVE sector stocks to over-come the over-aggressiveness of remaining sectors. This would provide cushion of safety when the tide turns in opposite direction, as we witnessing right now – in the current bear phase.

Staggering by Time:

Staggering by time is nothing but spreading one’s investments over a period of time in a strategic manner. This strategy helps in curtailing concentration of investments in a short span of time & thus proves a shield by not endangering the investors to the vagaries of market movement in a specific short-term period.

Like for example, many new investors plunged into stocks markets when the indices started coming-off from its peaks recorded a little more than a year ago. When indices started to slump from Sensex 21000 levels and reached 16000 levels, many investors felt it is an opportunity to invest money at lower levels. A large number of people would have invested at such lower levels as well. And it was quite understandable, at that time- based on fundamentals then, that investors sitting on cash would have invested then.

But, what would have happened such investors would have invested all their life’s savings specifically at 16000 levels?

As we know markets plunged further to establish even lower levels to date, these investors would have run out of money had they opted to invest most of their idle funds at higher levels of Sensex16000. Those who would have used the strategy of staggering the investment of their funds at different point of time intervals, would have benefited in spreading their investments in a thin manner at even lower levels, say, at an interval of every 3 months.

You can read more on my detailed views on the approach of Staggering by Time in my first ever posting in this blog with the title ‘Strategy for Investment’.

Sector Allocation Guide:
Given below are various different Sectors in which investors can diversify their funds to de-risk through Sector Allocation strategy:

Core Sector:

Capital Goods & Engineering: 15-20%
Power & Energy Sector: 14-18%
Banking & NBFC: 12-16%
Oil & Gas Sector: 12-14%

Telecom Sector: 8-12%

Non-Core Sectors:

Real Estate & Construction: 8-10%
Information Technology: 7-10%
Pharmaceutical & Healthcare: 5-8%
Automobile Sector: 6-8%
Media & Entertainment: 6-8%
FMCG Sector: 4-6%
Metals: 6-8%

The above is one such presentation of diversifying an equity portfolio based on strategy of Sector allocation. The above does not mean to imply that one must be invested in the entire list of above sector. One can opt for any 6-8 sectors from the above list.

However, it would be preferable if one has some sort of mandatory investments in the all the first 5 sectors of Capital Goods, Banking, Telecom, Power & Oil and Gas. It’s like a Core Sector group. From the remaining list of Non-core sector, one can opt for any 3-4 sectors depending upon one’s likes & dislikes.

Diversification by Market Capitalization:

Another way of looking at Equity portfolio diversification is determining on the basis of a stock’s market capitalization levels– Large cap, Mid-cap and Small cap.

Large cap Stock: Market cap of above Rs.5000 cr.
Mid cap Stock: Market cap in the range of Rs.500 cr to 5000 cr.
Small cap Stock: Market cap of below Rs.500 cr.

Though, this does not exactly specify the rule for determining the market cap of all companies. In bull phase, most of the mid-cap would have been valued at market cap of over Rs.5000 crore. But, in the current bear scenario, not many mid-caps are able to survive above Rs.5000 crore. So, the above formula of determining stocks based on market capital is a highly ‘Relative’ guide. Though, this can be taken as a rough estimate in laying companies unique from each other based on market capitalization of these companies.

Usually, large caps are associated with safety & steadiness during such pessimistic times. On the other hand, mid & small caps are regarded as highly risky and fluctuating during such slowing times.

I would suggest investment in stocks based on market cap for various investors with varied RISK profile as follows:

Low risk Profile:
75-85% in Large caps.
15-25% in Mid caps
Nil in Small caps.

Medium Risk Profile:
65-75% in Large caps
25-35% in Mid caps
0-5% in Small caps

High Risk Profile:
45-60% in Large caps
40-55% in Mid caps
5-15% in Small caps

Correlating 'Sector Diversification' Strategy with my 'Favourite Stocks for Long-term Investment':

In my previous post, i had listed the list of my favourite stocks for long-term investment plans. Now, over here, i will correlate that portfolio with the above discussed strategy on 'Sector Allocation' for Diversifying portfolio:

(A) Core Sector:

Capital Goods & Engineering: 15-20%
Larsen & Toubro: 12%
Bhel: 4%
Thermax: 3%

Power & Energy Sector: 14-16%
NTPC: 5%
Power Grid: 5%
R.power: 3%
Suzlon: 3%

Banking & NBFC: 12-16%
State Bank of India: 6%
R.Capital: 3%

Telecom Sector: 8-12%
R.Comm: 5%
OnMobile: 3%

Oil & Gas Sector: 12-14%
Reliance Industries: 13%

(B) Non-Core Sectors:

Real Estate & Construction: 7-10%
DLF: 4%
HCC: 3%

Information Technology: 7-10%
TCS: 4%
Financial Tech: 3%

Pharmaceutical & Healthcare: 5-8%
Ranbaxy: 3%
Biocon: 3%

FMCG Sector: 4-6%
ITC: 5%

Metals: 6-8%
Sterlite Ind: 4%
Sesa Goa: 3%

Total = 100%

Portfolio Features of the above presentation:

In the above Analysis of Portfolio coupled with Sector Allocation, I have tried to encompass sector diversification at its best to my knowledge. The above portfolio constitutes of Large Caps to the extent of 72% of the portfolio & 28% reliance on Mid-cap stocks, thus favouring Low risk to medium risk investors both. Readers can carry out minor adjustments to the portfolio to suit exactly to their risk profile by few nothces up or down.

11% of the above portfolio is formed of Defensive sector stocks like FMCG and Pharma that shall be useful to shield the investor from the sharp fluctuations and vagaries of the market. 'Core' sectors like Capital Goods & Engineering, Power & Energy, Banking & finance, Telecom and Oil & Gas Sectors constitute 68% of the over portfolio leaving the remaining space for the non-core portfolio sectors.

Portfolio Summary on Sector Allocation:

1) The portfolio constitutes of balanced number of 22 stocks.
2) Large caps: 72%, Mid caps: 28%
3) Core Sectors: 68%, Non-core Sector: 32%
4) Defensive Sector: 11%
5) Reliance + L&T = 25% of portfolio
6) My Core Portfolio Stocks = 50% of portfolio
(Reliance, L&T, SBI, NTPC, PGCIL, RComm, Bhel)

A Request to Readers:

Readers are requested to share their experience with this posting which has integrated stocks discussed in previous topic along with strategies needed for its better implementation to arrive at a balanced portfolio for long-term investment Readers can share their views in the below given 'Comments' Section.

Disclaimer: All data, content and/or reports posted by Viral Rajnikant Dholakia on this site are only for information and educational purpose of visitor/readers of this blog. It does not constitute to be a recommendation/offer/advice to buy or sell assets/securities in any form. Individuals/organizations are requested to take an informed call by consulting their Financial Advisor before acting on any matter/data published on this blog. This blog does not warrant of any kind of accuracy, adequacy and completeness of data, ideas or thoughts published in it. This site and Viral Rajnikant Dholakia assumes no responsibility or liability or loss or damage of any nature for your trading and investment decisions and its consequent results.

Thursday, March 19, 2009

My Favourite Picks for Long-term Portfolio

The Indian equity markets have corrected by a whooping 60% from its peaks recorded around January 2008. The above mentioned slump of more than half of the all-time highs is, specifically, in terms of correction in the indices – Nifty and Sensex. Whereas the constituent stocks of the above indices have declined even sharper, inflicting deeper pain on the back of large losses booked by investors. The story is even worse for those investors who kept holding their portfolio with the hope of a ‘turn around’ recovery in the economy & eventually an upswing in the equity markets which led to further mark-to-market losses on their cost of acquisitions of the constituent stocks in their portfolio.

Working of Bear Markets:

As we get deeper into bear markets, the equity investors are increasingly losing faith & sheen in the stock markets. The braoder market is either poised for a long-drawn range bound movement or resume its journey towards attaining its illusive bottom levels. During such bear markets, investors tend to lose interest in equity markets & stay away as a natural instinct on constantly witnessing markets making newer lows. Even investors holding substantial cash & sitting on the side lines, tend to delay their decision of investing in markets until there is some semblance of stability or a new wave of up move.

This article is primarily aimed at new investors who wish to start accumulating good stocks, but have little knowledge as to how to get started with it & which stocks to buy due to their scope of limited knowledge & research in equity markets. Though, even other investors can take a clue from the list of stocks mentioned in this posting as to how to divide the portfolio into parts and give varied importance to different parts of the portfolio depending upon their fundamentals.

Value Investing:

However, long-term investors can find good value among strong fundamental stocks during such depressing times. Most of the big wealth is created by making shopping decisions during times of extreme pessimism and cautious outlook.

The valuations are much more subdued and reasonable during such times when supply outstrips demand. During such phase of slowdown, the investment strategy needs to be staggered as the worst is not yet over for the markets. The price may further dip from the cost of acquisition of investors, but in longer-duration the chances of substantial appreciation stands good and strong.

Building-up of Equity Portfolio:

In this posting, I have discussed about Portfolio Building for Long-term Investment in Equity markets. I will speak out my view on my favourite list of stocks that should constitute as a part of one’s long term aspirations from equity portfolio. The list is reflection of my views on stocks to be held for long term. But, the views of investors can differ from this list of stocks depending upon individual risk profile, long term goals, outlook on equity markets, expected return ratio, age-profile of the investor and many other aspects that goes into determining the portfolio features of an investor.

It is also important to understand that a long-term portfolio should be well Diversified in terms of exposure to specific ‘Sector/Industry’ and even in a ‘Stock specific’ way.

Prior Objective Analysis:

Before building or starting up with a new portfolio, the investor should carry out certain analysis of his future needs & expectations in terms of returns from his money intended to be invested for long-term goals. Without the direction to your portfolio goal, it will run into troubles caused by lack of clarity about future goals and expectations. Like, for example, an investor who has no goal for his money invested, may not be able to determine his target to book profits on his portfolio, as may be suited to his future requirement.

Another case in point, supposes an investor is investing for long-term through Mutual funds. If he has no clear priority in his goals, how would he determine whether to invest in the ‘Dividend’ option of the scheme (which pays dividends based on the fund returns) or to subscribe ‘Growth’ option scheme (where the fund culminates all the returns that accrue to the fund & reinvest the money for further growth). Dividend option gives the investor an option to get regular income in the form of dividends announced by the fund on regular basis. On the other hand, if the investor feels he would be in no dire need of funds in between the time intervals, he may as well opt for the ‘Growth’ scheme of the Mutual fund.

Balancing of Equity Portfolio:

(A) Magnetic touch of Speculation: Equity investments is, traditionally, regarded as ‘long only’ portfolio with a primary objective to earn steady income in the form of ‘dividends’ & secondary aim to earn returns on capital from investments. But, with on set of every new bull phase, this feeling of stable & safe returns is vindicated once investors taste the blood of ‘short-term gains’. Investors get attracted by the prospects of quick gains in few months over long-term wealth creation process.

(B) Categorizing Portfolio: Smart investors are aware that such short-term speculative trading is fraught with dangers of market uncertainty & unpredictability. Sharp market fluctuations can as well inflict painful losses to such investors who may have diverted their attention from ‘long-term portfolio building to short-term speculation’ unless market sustains in positive. To counteract this dichotomy risk of sharp portfolio fluctuation, investors shall go for division of portfolio into 3 different categories.

1) Core Long-term Portfolio
2) Tradable Long-term Portfolio
3) Short-term Speculative Portfolio

Core Portfolio: The Core long-term portfolio refers to a specific set of few very good fundamental stocks that needs to be held for long-term without indulging into trading in these stocks irrespective of trading opportunities based on news/technical indicators/actions related to these stocks. Though, that does not mean that investors should stop tracking the prospects of these stocks once they are bought as a part of their ‘Core’ long-term portfolio. Investors should keep tracking even the best of the best company in their portfolio in the light of current market events, prospects & potential.

Short-term Portfolio: Short-term portfolio is, on the other hand, dictated by a number of market forces like news, rumors, technical indicators, triggering of set target and most importantly exiting when Stop loss levels are hit. Stop loss plays a very important part in determining exit on failure of the call to thrive as per expectations on the stock. Risk management strategies need to be adopted in short-term calls in order to ride out the market uncertainty & fluctuations.

In this posting, we will concentrate on discussions about stocks to be constituted as a part of building ‘Core Portfolio’ and ‘Long-term Portfolio’.

(A) Core Portfolio:

Note: Core portfolio is a list of ‘must have’ stocks in any good long-term portfolio. All the above mentioned 7 stocks should form a part of a core portfolio. As to how much should each of the above stocks constitute as a part of the over-all portfolio in Percentage terms would be dealt in next article on Diversification of Portfolio.

1) Reliance Industries: This stock has a long tradition of rewarding its share holders driven by its diversified business operations led by crude Refining & more recently gas discoveries. The stock has an immense unlocking prospects & large potential reserves in initial stage of discoveries.

Accumulation Zone: Rs.900-1220.

2) Larsen & Toubro: It is yet another diversified stock from engineering & capital goods space with its wings spreading in various sectors like shipping, defense, nuclear power, IT, etc. L&T holds a pending order book of over Rs.75,000 crore. It is a leading Engineering & construction (E&C) company in India.

Accumulation Zone: Rs.450-650.

3) Bhel: It is the largest power equipment manufacturer in India with a pending order book position of over Rs.1 lakh crore. This PSU company forms a core part in India’s emergence as a nuclear power & energy. The company has proven capability of executing power projects from concept to commissioning.

Accumulation Zone: Rs.950-1250.

4) NTPC: This company is by far the largest thermal-power generating company with highest share of power being produced in India. This PSU is placed at the core of India’s nuclear ambitions. The stock has been an out-performer versus the benchmark indices on the back of strong prospects of the power sector and fundamentals of this power company.

Accumulation Zone: Rs.115-145.

5) State Bank of India: This Public sector bank is the one of the largest financial institution in India which holds a record number of branch network spread across India – including urban & rural areas. This large-cap bank is leading the race in providing cheaper & subsidized loans to spur the economy.

Accumulation Zone: Rs.750-950.

6) Power Grid: This PSU Company is a clear case of monopoly in the transmission sector with one of the largest grid network in India. The company has a market share of around 40-50% in the Transmission sector. The company also provides transmission-related consultancy services.

Accumulation Zone: 55-70.

(7) Reliance Comm: This telecom company has presence in both GPRS and CDMA networks. The company has more recently spread its wings within the GPRS network on acquiring licenses for pan India network. The stock has recently witnessed a sharp correction.

Accumulation Zone: Rs.135-185.

(B) Non-Core Large Cap Portfolio:

(Figures within brackets represent the levels of ‘Accumulation Zone’)

1) ONGC (Rs.550-650)
2) TCS (Rs.400-550)
3) HDFC Ltd. (Rs.900-1200)
4) ICICI Bank (Rs.250-350)
5) ACC (Rs.450-550)
6) Grasim (Rs.800-1200)
7) ITC: (Rs.135-155)
8) Cipla (Rs.145-175)
9) M&M (Rs.250-350)
10) Sterlite Ind. (Rs.180-240)
11) DLF (Rs.125-175)

Note: From the above 11 Large Cap stocks, investors should not for all the stocks in the list. They can choose 6-7 stocks depending upon size of an investor’s portfolio, Sector prospects from time to time & the portfolio features & expectations of investor.

(C) Core Mid-Cap Portfolio:

1) R.Capital (Rs.270-370)
2) Suzlon (Rs.30-55)
3) R.Power (Rs.80-115)
4) Sesa Goa (Rs.60-85)
5) Thermax (Rs.155-220)
6) Bharat Electronics (Rs.500-650)
7) Pantaloon Retail (Rs.100-135)
8) IVRCL (Rs.80-125)
9) A.B.Nuvo (Rs.300-450)
10) IDFC (Rs.45-60)

11) GSPL (Rs.25-35)

Note: From the above list of 11 stocks of Core Mid-cap portfolio, Investors should select and buy at least 6-7 stocks from long-term horizon. All the above stocks are fundamental picks from the mid-cap space.

(D) Non Core Mid-Cap Portfolio:

1) LIC Hsg Fin (Rs.170-215)
2) Gitanjali Gems (Rs.35-55)
3) Oracle Financials (Rs.450-600)
4) Bank of Baroda (Rs.170-200)
5) Praj Industries (Rs.45-65)
6) PVR (Rs.70-110)
7) Videocon Ind. (Rs.80-130)
8) Welspun Gujrat (Rs.60-90)
9) Educomp (Rs.800-1200)
10) Jain Irrigation (Rs.280-350)
11) Punj Llyod (Rs.70-120)
12) Everest Kanto (Rs.90-120)
13) Adlabs (Rs.150-200)
14) Indian Hotels (Rs.30-50)
15) Crompton (Rs.110-140)
16) Cummins (Rs.140-165)
17) Asian Paints (Rs.600-700)
18) Financial Tech. (Rs.300-450)
19) Titan (Rs.450-600)
20) Mundra Port (Rs.250-350)

Note: From the above list of 20 Non-core Mid-cap portfolio, investors can select remaining part of the mid-caps stocks to complete their portfolio balance. How much of mid-caps to select will be discussed in my next article.

Extra Notes:

1) Punj Llyod: Looking at the fundamentals & price erosion in stock value of Punj Llyod, the stock would have been included in the ‘Core Mid-cap Portfolio’ category. But since we already have L&T as a part of Large-cap Core portfolio, investors can determine the decision of buying this stock as ‘Optional’ in nature.

2) LIC Hsg. Finance: Even this stock would have easily formed a part of core mid-cap portfolio based on its superior fundamentals, low beta fluctuation & cheap valuations, but for the presence of another stock from the same sector- HDFC Ltd in large-cap Non-core portfolio. Though, investors who have not opted to Buy HDFC Ltd. could certainly include LIC Hsg. Fin in the core mid-cap portfolio.

Dark Horses:

Some stocks can prove as 'Dark Horses' for long-term investors if they are bought at lower levels and valuations. Currently, these stocks may not be in lime light due to some fundamental problems or High Debt problem or Pledge issues or Credit crunch (or if nothing, just that the stock may have melted down on the back of severe bear phase) that some of these stocks may be suffering from. But as and when there is recovery & stabilization in the global market conditions over longer duration, these stocks may fare well if all things fall right for such stocks. These stocks can as well be termed as 'Contra' bets.


1) Tata Motors
2) Ranbaxy Laboratories


1) Biocon
2) Kalindee Rail
3) Bartronics
4) NIIT Ltd.
5) Time Technoplast
6) Ess-Dee Alluminium
7) Bajaj Financials
8) TV18
9) Hind. Construction
10)Moser Baer

In My Next Post:
I will discuss as to how to arrive at a well-diversified list of portfolio from the above mix of large-cap & mid-cap stocks both. The strategies that could be adopted to get a right mix in terms of sector allocation & (market) capitalization levels of the above stocks. So, in my next posting, don’t miss out on various strategies that could be adopted while diversifying & risk minimization of portfolio.

Share your Favourite Portfolio in the 'Comments' section:

Readers are requested to post their view/query/suggestion on the above PORTFOLIO in the 'Comments' section. Readers can also post & share their favourite portfolio constituents for 'Long-term Investments' in the same Comments section. This will make this posting on Long-term portfolio more interesting, interactive & explore new stock ideas among themselves.

Disclaimer: All data, content and/or reports posted by Viral Rajnikant Dholakia on this site are only for information and educational purpose of visitor/readers of this blog. It does not constitute to be a recommendation/offer/advice to buy or sell assets/securities in any form. Individuals/organizations are requested to take an informed call by consulting their Financial Advisor before acting on any matter/data published on this blog. This blog does not warrant of any kind of accuracy, adequacy and completeness of data, ideas or thoughts published in it. This site and Viral Rajnikant Dholakia assumes no responsibility or liability or loss or damage of any nature for your trading and investment decisions and its consequent results.

Monday, March 16, 2009

Keynesian Economics: Implications on India & US

The 'Keynesian Economics' was advocated by the British economist John Maynard Keynes in his book ‘The General Theory of Employment, Interest and Money’, after the world suffered the Great Depression of 1930. The seeds of the theory were sawed after experiencing mass unemployment in the times of the Great Depression. The theory works on the principle that higher demand growth on the back of stimulated policies & measures led by the public sector would consequently avert the long drawn recessionary period which would otherwise have been long-drawn-out and self-correcting policy in nature.

(1) Keynesian Approach basically targets 5 aspects:

1) Government Policy & Stimulus Packages
2) Infrastructure Spending to generate Employment opportunities
3) Circular relationship between Spending and Earnings
4) Aggregate Demand for Goods & Services
5) Revival of Economy from the worsening business cycle.

(2) Assumptions of the Keynesian Theory:

The theory works on the formula that a certain stimulation of spending trend would lead to multiplier effect in the growth of output. The theory connotes the role of importance to pump prime the poor economic state either by the way of increasing spending or enhancing flow of funds in the economy. The theory stressed on the fact that it is the public sector that is responsible for the smooth operation of business cycles which could be done by means of various policy measures. The theory emphasizes on the cause of economic fluctuations as divergence in the nature of circular money flow in the economy on the back of sudden jolts in consumer confidence levels.

(3) Stimulating Demand led by the Public Sector:

The theory was articulated on the basis of assumption that when the economy operates below its equilibrium growth levels, on the back of under-achievement in terms of its potential output, it needs stimulus and spur led by the government measures in order to stabilize the macro-economic indicators of the economy. The theory stressed on the role of active government policy in managing & controlling the economic factors.

(4) Averting Long-drawn Economic Downturn:

The Keynesian theory connotes that phenomenon of fall in demand during the times of economic downturns need not necessarily get corrected on its own and that it needs various policy measures & actions by the government such as cut in interest rates and increased spending towards infrastructure which would lead to enhanced public participation in building infrastructure projects and hence creation of employment & eventually more spending power in the hands of people. This could lead to more investment demand to fulfill growing needs in the course of a business cycle.

(5) Drawbacks of the Keynesian Theory:

(A) Rise in Inflation: The theory was not without its part of criticism & drawbacks from various quarters. Since the theory was led by the purpose of stimulating demand and growth, it was susceptible to inducing sharp rise in inflation under on the back of increased demand & money supply to stoke commodity prices over a period of time. However, the theory blatantly points out that change in aggregate demand would not have impact on prices but its output and employment levels.

(B) Increased Fiscal Deficit: Higher spending by the government would lead to increased deficit, especially, when such data already points at a negative tick in the recessionary situation. Thus, what forms as an act of stimulus package for the economy, at one side of the coin; would contradict as rising deficit on the other side of the coin, thus defeating the very purpose of the reviving economy.

(C) Rising Budget Deficits: The theory stresses on the use of Monetary & Fiscal policies to counteract the divergences in the aggregate demand scenario & spending capabilities of the public. This would imply lowering of taxes as a part of fiscal measure to disburse more money in the hands of general people & spur the aggregate demand. But, this lowering of taxes will further stop the source of income for the government & a measure to kill budget deficits. This would further slowdown the chances of revival of the economic problem at hand.

(D) Limited influcence of Private Sector: The theory is more prone to tilt towards central focus of governmental influence. The theory advocated more of government spending and less by private sector. This could also lead to more borrowing by government and to that extent extinction of funds from the public account. This borrowing of funds is usually in the form of divestment of governmental stakes or through issue of bonds. This would also eliminate the chances of private sector influence in the decision making process in shaping economy.

(6) Feasibility of Keynesian theory in US Crises:

We all know how it all started with sub prime crisis in US and spreading across most of the developed and emerging economies of the world. The sub prime crisis of US further worsened taking form of Credit crisis and spreading across the global economies. Further, the credit crisis gobbled the likes of few large Investment banks in the US which had their wings spread wide and far across the globe. This crisis slowly spread across the sectors among various industries affecting various business lines. Unemployment data started cropping up & rising sharply all over the world, especially US.

(A) Integrated approach to Monetary measures:

This led to an integrated approach by the central banks all over the world in order to correct & rectify the situation with the help of monetary & fiscal policies on basis of individual standing of various economies. US Fed led the slide in interest rates which were gradually lowered to as low as near zero levels. This was followed by various other economies – developed & emerging both – as it could be sensed that no economy could be spared by the torrent of downturn.

(B) Application of Keynesian theory:

Finally, as inflation fears started subsiding on the back general slowdown in the world & unemployment data showed skyrocketing figures, most of the economies indulged in various monetary & fiscal measures & increased spending by respective government authorities, which nothing but a form of Keynesian approach towards reviving economy prospects. Combating unemployment & generating demand for their goods assumed priority as worries of soaring inflation comes down.

(C) Will US Succeed in Bailing out its Economy by applying the Keynesian theory?

United States went all out with all possible monetary & fiscal measures, not to mention stimulus and bailout packages offered to various private Investment banks & other private majors from various industries. These measures were adopted on the back of combating worst recessionary trend witnessed after the Great Depression crises. Unemployment rate has soared to a record 8% levels in US, which spurred US Fed to undertake various approach of stimulus & bail-out packages.

(D) Seeds of Recession in US:

These are deep recessionary times in US led by a housing collapse & related sub prime mess. Spending among US consumers far exceeded their income levels. There is a fundamental issue in the economy which cannot be corrected by a mere use of Keynesian approach, though the applicability of this theory ought to be a part of the final rescue package. The current rot in the US economy has more devils in the detail than just minor problems involved with aspects like inflation, demand & growth potential.

The largest economy of the world is largely lying within the pool of deficit. The country needs to correct the situation by counteracting the situation with huge amount of exports from currently being an import dependent economy. For this, spending and findings from R&D will play a large role in the initial phase to produce new and improved products.

(E) Need to Stop 'Leveraged' Spending:

The economy which relied on excessive spending will have to turn in to 'Savings-led' economy. Savings will eventually lead into investments & spur the growth. Once these basic approaches are evolved into & new concepts of development are inculcated into the economy, gradually the country can also lead into application of Keynesian economics more aggressively. The country needs an integrated approach with a change in particular fundamental factors & application of the Keynesian economics together.

(F) US bail out of Finance Companies –
Is it a Right Approach?

US economy is currently spending most of its bailout funds in financing & improving credit lines of financial companies like large Investment banks, Insurance giant AIG & various other financial institutions. Whereas the requirement, on the other hand, is producing & supporting more and more of export-oriented units & businesses which would bring down the country’s deficit ratio & also aiming for domestic infrastructure projects which would create large employment opportunities & stimulating growth potential. The country needs more focus on appropriate funding of industries invovled in manufacturing of real output for the economy, something that is adding materially to the economic growth.

(G) Direct approach of killing US Recession:

One may argue that if these financial bigwigs were not supported it may have lead to sinking of giants; further delaying the revival of the economy & consequently making out a case for long-drawn recession, asking for a painful wait through. But, then the current flows of funds which are being pumped into these companies are getting extinguished on the back of severe credit crisis & are proving insufficient over a period of certain time limit.

Instead, the government can use it directly in spurring domestic infrastructure & other employment opportunities in the economy which may be involved in a rather conscious approach to compensate the hugely unemployed population and disbursing money in the hands of worst effected people of that horizon.

(7) Feasibility of Keynesian theory in Indian Slowdown:

On the other hand, a more resilient Indian economy, which largely relies on the domestic economy, has willfully approached the slowing mantra with sound monetary and fiscal measures. Indian economy has a low ratio of reliance on exports of around only 1/3rd of the economy. This has ensured that in the present growing recessionary environment, the world over, the country is not as reliable on exports to other countries as a major part of its over-all trade. The soaring growth has come to a halt with a slight slowdown in the growth figures.

Rising Infrastructure Spending in the Domestic economy:

Fundamentally, India has not gone wrong on any major aspects. But, the infrastructure spending continues to be lower side even till date. The Keynesian approach is more useful in case of Indian economy than US economy where there is faltering on certain fundamental factors which specifically needs a correction in initial phase. On the other hand, Indian economy which is still largely deprived from domestic infrastructure spending would specifically benefit on account of large government spending on infrastructures & industries along with cut in tax rates which may disburse more liquidity in the hands of people and thus enabling higher spending & consumption phenomenon.

So, possibly though not necessarily, India stands a better chance to gain recovery of economy on implementation of Keynesian approach than the prospects of the same for US economy. Though, any such domestic recovery may also depend to a great extent on global linkages & other domestic factors.


Conclusively, the implications of Keynesian theory are largely variable on the case to case basis for every other country depending on the various factors of reliance of their respective economies, demand-supply scenario, employment levels, infrastructure standing, foreign policies, and inflation levels among various other factors. The theory may work differently in different conditions and economies, dependent on the underlying fundamentals of the respective economy & it’s potential.

The theory has its own positive and negative aspects which need to be determined by the monetary authorities of the economies interested in implementing the policies of the law. Some economies may need integrated approach where various measures need to be blended to arrive at a right mix of actions & policies. While others may need a plain-vanilla approach of mere stimulus packages where the problem is more definite & clear in nature.

A Request to Readers:

Readers are requested to post their view/query/suggestion in the below given 'Comments' section. They can share their thoughts, positive or negative, through this interactive Comments section which will make the blog much more interesting for the readers themselves, in gauging the response to the article & knowing different view points of various investors/traders.

Disclaimer: All data, content and/or reports posted by Viral Rajnikant Dholakia on this site are only for information and educational purpose of visitor/readers of this blog. It does not constitute to be a recommendation/offer/advice to buy or sell assets/securities in any form. Individuals/organizations are requested to take an informed call by consulting their Financial Advisor before acting on any matter/data published on this blog. This blog does not warrant of any kind of accuracy, adequacy and completeness of data, ideas or thoughts published in it. This site and Viral Rajnikant Dholakia assumes no responsibility or liability or loss or damage of any nature for your trading and investment decisions and its consequent results.

Sunday, March 8, 2009

Telecom Sector: 3G, WiMax & Number Portability

In the present times of economic turbulence in the global & domestic markets, hardly any specific sector has come out unscathed from the wrath of excessive pessimism and effects of slowdown. But one industry that has somewhat managed to scrape through amid the recent slowdown is the Indian telecom sector- which easily is one of the fastest growing industry in the world. Cellular telephony, in fact, forms a crucial part of the Indian infrastructure story which has been attracting large chunks of investments which can only go up with entry of new players and policies.

A Wireless Revolution:

Wireless telecom services can easily be the next big thing what with the lower Tele-density levels in rural & semi-urban areas, which still largely remains untapped. The new economic reforms, technological changes and policies led by the government has left open the door of hope for the Indian telecommunication sector in the form of 3G (third generation spectrum) technology. Though, this upcoming latest technology is moving forward at a snail’s pace and is struck by procedural delays. The government should revisit some of the pending issues faster with constant interaction with TRAI. New upcoming technologies like 3G services, WiMax, rural telephony, data services & Value Added Services will drive the growth prospects for the sector for the next few years at least.

Rumblings in the Telecom Sector:

The new restructuring changes in the Wireless world are set to sweep in the unusual changes in Telecom Services sector. The Indian telecom sector is still growing at a very fast pace with the total number of subscriber base crossing over 250 million mark; with a bounty of untapped rural population still in the fray as potential subscribers. It is no surprise than, that there are various rumblings in the telecom sector right from 3G spectrum allocation, WiMax, falling ARPUs (average revenue per user), tower infrastructure business, mobile number portability & price wars triggered by new entrants; which depicts the potential of high & continued growth rested in this sector in its foreseeable future.

What is 3G Technology?

3G spectrum is most widely heard term in the recent times used for the next generation of mobile communication systems. It provides access to a wide range of telecommunication services specific to mobile users by helping in providing faster data access and multimedia services through the mobile phones. 3G helps to simultaneously transfer both voice data and non-voice data. It also aids in accessing of video telephony. 3G is about better bandwidth and high speed transfer of data & internet browsing.

In India, State owned telecom companies BSNL and MTNL are the first two firms to get the 3G license. Whereas for firms in the private sector, an auction process would be conducted through bidding for acquisition of 3G spectrum.

How will 3G Technology bring in revolution?

The telecom operators are anxiously awaiting launch of 3G spectrum so that they can provide high-end services to its customers. 3G can be useful in various other ways like e-learning, stock transactions, and various other applications through wireless communication. It will serve as a one-stop entertainment source through mobile accessing for downloading purposes, e-mailing, mobile TV, ticker services, music, mobile games, movies, mobile banking, GPS, etc. while on a move.

The next generation technology will evolve into an entertainment devise, organizer, payment devise & serving other useful purposes needed to make life easy & comfortable by just logging in to ones mobile device.

Constraints in embracing 3G Technology:

The major deterrent for 3G technology may turn out to be expensive handsets with state of art features with 3G enabled technologies. Most subscribers in India still use mobile phones for voice services with low-end value providing handset features & hence bleaker multimedia functions.

The DoT insists in its policy that the base price for 3G spectrum allocation would be Rs.2,020 crore while that for broadband access technologies would be Rs.1,010 crore. But, the finance ministry has different views & is demanding for doubling up of such charges as prescribed by DoT. This would lead to increase in the cost of 3G services & make it expensive for the final consumers. This would also reduce the interest of bidders in the auction process & may yield poor response from the service provider companies including Internet service providers.

As per some reports from a few Telecom Analysts, during the current recessionary times, the absence of foreign bidders would further lead to rationalization of expectations of high bid realizations on the part of government entities & waning of interest in the auction process.

Delay in 3G Auction:

The spectrum demand for 3G licenses is expected to far outstrip its supply going ahead in to future. The telecom companies are required to buy the spectrum from the related government entities. Now, even the government is slowly realizing that spectrum allotments can garner smart revenues & should be considered as a valuable resource. This has prompted government entities to sell the spectrum at the highest possible prices.

This has led to a constant delay in the auction process of 3G spectrum. There are differences of opinions between various ministries of government organization on the real value of these spectrum resources, prompting a delay in its auction. Even the defense sector is playing its own role in complicating releasing of 3G frequencies from its control reasoning that some portion of the spectrum be reserved for their communication needs. Now, the auction is expected to take place early next fiscal year in the light of disagreements between various government departments on some key parameters.

Mobile Number Portability:

Mobile number portability (MNP) enables the subscribers of telecom services to retain their numbers while switching over from one network operator to other within the same service area on the look out for better product / service offerings. Analysts say that this policy may act as a customer deterrent for some operators whereas allowing the better service provider an opportunity of newer customers from the competitor’s camp.

The much awaited mobile number portability policy being in place is still to see the day light for the benefit of subscribers. As soon as the regulation comes into implementation, it will lead to further refinement of services & product offerings by various service providers, small and big. Customer relation & satisfaction will form a core part of company policies as sound services will lead to customer retention. Also, during such times, customer poaching from various competitors will also become common as subscribers could then shift to other service providers with the comfort of communicating with the same number & no need to change their old numbers while changing their service provider in the look out of better service & product offerings.

As per Telecom analyst GV Giri, “Only those incumbents who manage to win 3G license will emerge as winners, as they will be best positioned to grow their ARPUs exploit their existing infrastructure better and at the least, remain competitive in a MNP regime.”

Constraints in implementing MNP:

1) Gearing up present telecom infrastructure to suit changes in subscriber’s service provider for availing of the MNP facility.
2) Maintenance and updating of ported number database.
3) Recovering costs of porting from an individual network to another. During times of competition, the acquiring company may have to provide free portability service on the prospect of gaining new customer.
4) Operational challenges like a prepaid subscriber will not be able to transfer unused balance in their accounts to the other service network.

3G Technology vs. WiMax:

WiMax stands for Worldwide Inter-operability for Microwave Access. It is a digital communications system which enables wireless transmission of data. WiMax is predominantly used for fixed services. It is a second generation protocol which allows more efficient bandwidth use, interference avoidance, and is intended to allow higher data rates over long distances. Initially, WiMax is expected to be used for the fixed residential & enterprise broadband access in urban areas & than to large untapped rural parts India. WiMax networks, when deployed across, one can connect to the internet wireless from any point of the vicinity, even on the move.

Whereas 3G networks, on the other hand, offers its users various services like video telephony, voice calls, high speed internet and other advanced services while on a move. This technology provides more enhanced value services at lowered costs.

Review of recent Q3 Result’s of Telecom Majors:

Telecom major Bharti Airtel reported a growth of 26%. It witnessed a rise in net income from Rs.1720 crore in third quarter of previous year to Rs.2160 crore in the Q3 this financial year. The company added a substantial number of subscribers for this quarter under review, though there was a marginal fall in its ARPU.

Idea Cellular, an Aditya Birla Group company, on a standalone basis, reported a new profit of Rs.219 crore for the third quarter current fiscal, down 7.3% from Rs.236 crore same quarter previous fiscal. This drop in margin was witnessed on the back of increased overall income.

Reliance Communications, on the other hand, posted a mere 2.7% rise in profits in the third quarter this fiscal compared to the one in the last fiscal. Though, it witnessed a jump in the number of subscribers by 5.3 million users

GSM launch by Reliance Communications:

During the first month of calendar year 2009 Reliance Communications added 5 million (CDMA+GSM) new mobile users on the back of its recent GSM launch. With this the total number of subscribers for the company sums up to 66 million. The company has rolled out GSM services across 14,000 towns. The company has guided capex for FY10 at $3.2 billion.

However, I feel, Reliance Communications recent GSM launches & promotional offers should ensure reasonable growth in subscriber base & revenues in the near term, but it remains to be seen whether it can settle with higher growth in margins over a sustained period of time.

A Request to Readers:
Readers are requested to post their view/query/suggestion in the below given 'Comments' section. They can share their thoughts, positive or negative, through this interactive Comments section which will make the blog much more interesting for the readers themselves, in gauging the response to the article & knowing different view points of various investors/traders.

Disclaimer: All data, content and/or reports posted by Viral Rajnikant Dholakia on this site are only for information and educational purpose of visitor/readers of this blog. It does not constitute to be a recommendation/offer/advice to buy or sell assets/securities in any form. Individuals/organizations are requested to take an informed call by consulting their Financial Advisor before acting on any matter/data published on this blog. This blog does not warrant of any kind of accuracy, adequacy and completeness of data, ideas or thoughts published in it. This site and Viral Rajnikant Dholakia assumes no responsibility or liability or loss or damage of any nature for your trading and investment decisions and its consequent results.

Thursday, March 5, 2009

Shaping up of Domestic News Flow

RIL-RPL Merger:

The merger of Reliance Industries and Reliance Petroleum is no more a new concept to the shareholders of Reliance Empire. RIL had earlier merged RPL with itself in the year 2002. But, over here we’re not speaking about the recently built refinery which is going to get merged with RIL. RIL had earlier conceived RPL in 1993 in Jamnagar and later announced a merger with itself in the year 2002. At that time, the RIL-RPL merger was carried out at the share swap ratio of 1:11, creeping-in a feeling of discontent amongst RPL shareholders on the reasoning of unfavorable ratio of merger.

Later in the year 2006, RIL again came up with plans of setting up yet another refinery in Jamnagar with the view to build a refinery with EOU status. This new refinery is expected to operate with capacity of refining 580,000 barrels per day. RIL had also offered 5% stake in its refining subsidiary to US energy major Chevron corp. Now Chevron has agreed to sell-off its stake in RPL.

My Views on RIL-RPL Merger:

The merger of RPL and RIL would create a global-scale refinery for RIL. The merged entity would be seen as the world’s largest refining capacity at a single location. It would also yield various benefits of synergies, savings in expenses and costs, and it might catapult RIL into an even bigger Indian giant than ever before, in the eyes of the world. The merger would also lead to reduction in the company's earning volatility & risks, with diversified operational presence. It would, in fact, reduce the risk the shareholders of RPL were exposed to as being a stand-alone refinery. Though, RPL refineriy is touted as being one of the most sophisticated & integrated refinery in the world, it would have taken time to stabilize in terms of profits & higher GRMs in the current landscape of competitive environment & global recession.

ADVANTAGE: Reliance Petroleum Shareholders

Earlier, during the merger between RIL and RPL in the year 2002, the merger clause of share swap ratio was considered unfavourable by the RPL shareholders then. This time around the expectations were somewhat same from the RPL shareholders, on the grounds that RIL has more minority shareholders than RPL. At the time of announcement of the merger, the price ratio going by the then prevelant stock prices of RIL and RPL was around 1:17. Finally, the boards of the two companies announced the merger’s swap ratio at 1:16. This has turned out slightly positive for RPL shareholders, who had speculated the ratio of anywhere around 1:20 on the rationale that RIL has a running and a more established refinery.

Another aspect from which RPL shareholders would tend to benefit is they will get to swap their holding in RPL which is a stand-alone refinery for a much diversified RIL which has presence in various businesses apart from just refining.

Rajiv Memani of E&Y who advised RIL on the valuating merger said, "The valuation is fair and reasonable, we have assigned due weightage to relevant factors such as the market price of the shares, the earnings performance and the asset base of the company. The valuation considered all factors including the net asset value and the market price."

RBI Cuts Interest Rates:

Amid constantly declining inflation & lower than expected GDP numbers for the period October to December 2008, RBI governor D Subbarao has announced rate cuts in benchmark interest rates. Reserve Bank of India has lowered the repo rates to 5% and reverse repo rates to 3.5% from immediate effect. Both the benchmark rates are effectively lowered by 50 bps.

My Views: These rate cuts were somewhat discounted by the stock markets during the last week or two on the back of lower inflation numbers. This discounted feeling was further seconded by the fact that GDP growth numbers for the period October to December 2008 came below market expectation & witnessed a sharp slowdown.

Though, Corporate India seems to be content with the RBI’s decision signaling banking sector to further bring down their lending rates in the efforts to stimulate growth and economy. By cut in its key benchmark rates, RBI has clearly indicated to the lending institutions to lend more and not let its money remain parked idle with RBI.

Repo rates is the rate at which RBI lends to the banks & reverse repo rates is, conversely, the rate at which RBI borrows from the banks.

Keki Mistry of HDFC, feels the reverse repo rate cut is more relevant than RBI's repo step. "Currently, there are not too many banks that are borrowing under the repo window because there is so much liquidity in the system. So, everyone is parking money back to RBI through the reverse repo window. Hence, the reduction in the reverse repo is more relevant than the reduction in the repo rate because this means that there will be a further disincentive for banks to just go and park the money with RBI. It will mean that banks will be more willing to go out and lend money to industry, which is the need of the hour." (Source of this Quote: Economic Times)

Auto Sales reports robust sales in February:

Auto sales for the month of February rose unexpectedly for cars and two-wheelers. The recent efforts of lowering of interest rates by a few leading public sector banks had propped up demand for cars and two-wheelers among consumers who were postponing their buying decisions on the back of domestic slowdown and liquidity crunch. Though, Auto Analysts also attribute the rise in demand for automobiles to both declining interest rates and reduction in excise duty during the month of December 2008.

Leading two-wheeler manufacturer Hero Honda recorded a whooping 24% growth in sales followed by 13% for TVS Motors. Though, Bajaj Auto posted a 17% decline in sales for the February 2009. Even Tata Motors reported a 19% drop in sales.

My Views: However, this trend in reversal in fortunes of Auto majors may not be sustainable for long. March and April sales may not be up to the mark for the Automobile sector as the lag effect of the slowdown tightens its grip on the economy, and this even before the lag effect of stimulus packages announced by government and RBI come into effect.

Standing in Foreign Trade:

India’s exports for the month of January slipped by 15.9% on the back of severe recession in key developed markets of US and Europe. Lack of liquidity & consequent delay in demand of export led goods and services from India are touted as the key reason behind tumbling of exports in January.

On the other hand, imports witnessed a negative tick falling 18.1% in the month of January. This fall in demand for imports can be attributed to the over-all slowdown in the domestic economy on the back weaker GDP numbers for the quarter October to December 2008.

Director of ICRIER Rajeev Kumar on the above data said, “The magnitude of contraction in trade suggests that the GDP numbers could be as low as 4% in the fourth quarter. There is no reason to believe that the export data will be better in the coming months. The export figures are expected to stabilize around October as the global economy improves.”

GOLD: Technicals, Fundamentals & likely 'Bubble Formation'

Traditionally, Gold has a terrific store of value as ornaments and jewellery for retail customer and coins and bars for traders and investors. Recently Gold has shot up to unprecedented levels on the back of increased risks and uncertainties around the globe. Gold is known as a safe haven and usually offers inflation adjusted returns over longer term.

Is it a 'Golden' Bubble in the making ??

Technical charts of Gold indicate that it has rallied to crucial Resistance of Rs.15,550. Now, Gold movement can witness two possibilities: one being panic fall to Rs.13,000 levels and stabilizing near to those levels. Gold has a very crucial medium term support at Rs.11,200 which would determine its long term prospects. Though, Gold is highly unlikely to test such lower levels any time soon from the current levels of Rs.15000. However, some bullion analysts are predicting that Gold may stabilize near Rs.13000 levels in medium to long term horizon.

Chartists View: From the charts tracking gold prices of last 10 years, it can be clearly revealed as to how the prices of Gold has escalated starting from the year mid-2007. The roots of the current sub-prime crisis were sowed during the latter half of calender year 2007. So, expectedly the prices of Gold has slowly and gradually risen starting from the period July 2007.

Over the period of time, as the recent global incident of sub-prime crisis slowly graduated into a liquidity crunch, the prices of Gold started to take-off sharply in the last 12 months. Eventually, now the charts of Gold quite resemble the charts of Stock markets which formed a bubble in the last stage of its bull phase.

On the other hand, Gold also stands possibility of touching dizzying heights of Rs.17000 levels on the back of deepening global recession and indiscriminate printing of money by reserve banks the world over in a bid to revive their respective economies. There is every likelihood that Gold soar at higher levels & take a 'U' turn after recording new peaks above Rs.16500 levels.

Is Gold rally backed by Fundamentals?

But, history suggets that whenever there is a bubble in any asset class, Analysts and Market participants have always suppoted the rise in the prices as being on the back of certain 'Fundamentals'. Most of the time Analysts have failed to predict a bubble in any form of Asset class. In case of Commodity rally a year ago, they supported the surge in the prices of various Metals with the base reason being 'Depletion of Natural Resources'. For Food Articles they had come out with a logic of 'Declining Land ratio to Agricultural activities & Growing Population'. For Gold, the fundamental view-point that the Analysts are forecasting is 'Increasing Risk in world environment & fall in value of various Currencies in comparison to real-asset value of Gold.'

Will this reasoning of 'Risk-Inverse' value of Gold hold true to enable the bullion to sustain at soaring levels? Only time will tell whether the Gold is, in deed, the commodity to reckon with or whether it will fall in line to its traditional value as being a mere 'Inflationary Hedge'.

ALERT: Gold charts are somewhat indicating that its price is somewhere in the last few stages of bubble blast. The charts are resembling the over-exuberance that out stock markets used to depict a year back. Investors are suggested to be cautious while buying Gold at every higher levels & traders to follow strict Stop Loss while trading in Gold counters.


Read my previous article on 'Strategy for Investment' which is a must read article for all New investors. It explains in detail as to how to approach the markets & strategizing 'Entry & Exit' related to stock specific decisions.

A Request to Readers:
Readers are requested to post their views/queries/suggestion in the below given 'Comments' section. They can share their thoughts, positive or negative, through this interactive 'Comments' section which will make the blog much more interesting for the readers themselves, in gauging the response to the article & knowing different view points of various investors/traders.

Disclaimer: All data, content and/or reports posted by Viral Rajnikant Dholakia on this site are only for information and educational purpose of visitor/readers of this blog. It does not constitute to be a recommendation/offer/advice to buy or sell assets/securities in any form. Individuals/organizations are requested to take an informed call by consulting their Financial Advisor before acting on any matter/data published on this blog. This blog does not warrant of any kind of accuracy, adequacy and completeness of data, ideas or thoughts published in it. This site and Viral Rajnikant Dholakia assumes no responsibility or liability or loss or damage of any nature for your trading and investment decisions and its consequent results.