Can We Just Fast-forward This Month Please?

28 10 2008

This month of festivities (Diwali, Dussehra, Durga Puja, and Id) is bringing anything but cheers to Dalal Street. Not that bourses are faring any better elsewhere. In fact, October, particularly its third week, has ominous rings to it in the annals of Wall Street. Here is why:

 

  • October 17, 1907:- The Panic of 1907 began. In this financial crisis the New York Stock Exchange fell close to 50 % from its peak the previous year. There were runs on numerous banks and trusts. This crisis led to the downfall of the Knickerbocker Trust Company – New York City’s third largest trust.
  • October 24, 1929 – Black Thursday. The Great Crash of 1929. October 28 and October 29 were worse, leading to widespread panic and the onset of unprecedented consequences for the US. The collapse continued for a month. This led to the Great Depression.
  • October 19, 1987– Black Monday. On this day, the Dow Jones fell 22.6 % and the S&P-500, 20.4%. Between Oct 14 -19, the market lost 31 percent. The recovery from this crash was relatively quick.
  • October 27, 1997 – Mini-crash caused by the economic crisis in Asia,a.k.a, Asian Flu. On this day, the points lost by Dow Jones still ranks as the sixth in its 112 year existence. The crash halted trading in the NYSE for the first-time ever.

 

In India, on October 24 (Black Friday) 2008, the BSE Sensex shed 1070 points, i.e. it crashed by 10.6 %. In that week on the whole, BSE lost 2400 points.

 

How I wish we had no October in the Gregorian calendar!

 

– G. Mohan

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Credit Card Dues Zoom: RBI

26 10 2008

As per the latest report from the RBI, the credit card dues have zoomed 86% year-on-year to Rs 29,056 crore as on August 29, 2008. This is higher than the 49% growth recorded last year.

 

 

At a time, when interest rates on credit-card dues have been raised by most issuers to 3.5% per month, from 2.5-3.0% per month, a rise of 86 %  is disconcerting.

 

 

This alarming development could be due to some or all of the following reasons :

 

  • The double-digit inflation coupled with the rise in EMI for housing and car loans, the middle class is unable to balance their household budgets, forcing them to spend on their credit-card.
  • With stock markets going through a bearish phase since January this year, the day-traders have lost a source of income, forcing them to borrow money on their credit-card for their living expenses.
  • With banks like ICICI going slow on unsecured personal loans and two-wheeler loans, it is possible that consumers are using the expensive credit cards to fund their consumer durable purchases

 

– G. Mohan

 

 

 





If Warren Buffet were to Pick Stocks in India Now …

19 10 2008

 

Just when the stock markets were tanking all over the world, the Oracle of Omaha, Warren Buffett wrote a article published in the New York Times last Friday, urging people to invest in the equity market. He writes:

 

“I’ve been buying American stocks. Why? A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors. To be sure, investors are right to be wary of highly leveraged entities or businesses in weak competitive positions. But fears regarding the long-term prosperity of the nation’s many sound companies make no sense. These businesses will indeed suffer earnings hiccups, as they always have. But most major companies will be setting new profit records 5, 10 and 20 years from now.”

 

Chandrakant Sampat, who is often referred to as the Warren Buffett of India, goes by the following cardinal rules for picking stocks of the companies which 

 

  • Are in a business that even fools can understand
  • Have very little debt
  • Have free cash flows
  • Don’t have much capital expenditure, which is nothing but deferred cost
  • Has a P/E ratio of 13 to 14 based on current year’s earnings
  • Has a Dividend yield between 3.5 and 4.0 % 

These are classic rules of value investing for identifying companies which will give returns in times, good and bad. The high dividend yield criterion ensures that the companies give returns even in bear markets.  

Using Chandrakant Sampat’s stock-picking rules, barring the first one, I have created a shortlist of stocks which meet the following criteria: 

 

 

·        P/E ratio less than 13 times based on last year’s earnings (current year’s earnings data are not available easily)

·        Dividend Yield of around 3 %

·        Return on Capital Employed of atleast 25 %

·        Debt/ Equity ratio less than 0.25

·        Companies with market-capitalization higher than Rs. 1000 crore

 

 

Here are the eight stocks which clear all the above filters

 

·        Pfizer

·        Tata Consultancy Services

·        Monsanto India

·        Ambuja Cements

·        ACC

·        Indraprastha Gas

·        Biocon

·        Bharat Electronics Ltd

 

Here are the seven stocks which missed the filters narrowly.

 

·        Praj Industries

·        Voltas

·        Infosys

·        Alfa Laval

·        Opto Circuits

·        Gujarat Gas

·        Jindal Saw

 

 

Disclaimer: Readers are advised to look at company specific news and future earnings outlook before investing, as the above selection has been made on historical data only.

 

 

– G. Mohan





How 9xM is Winning the War of Music Channels

12 10 2008

 

Music channels in India vie for viewership in a segment characterized by very low level of product differentiation. In such a crowded and mature category, 9xM, a late entrant from INX Media, has seized the market leadership in no time. This is no mean feat! How did they do it? 

 

Well, my take on this matter is short and simple. 9xM has demonstrated boldness by completely doing away with VJs who tend get boring and jaded faster than you can utter ‘shelf  life’. Besides, 9xM’s clever content strategy has gone the whole hog in using humorous, animated characters who will remain the channel’s permanent brand properties unlike the VJs on whom the channels spend millions to build their brand equity only to see them walk out of the doors at the end of their contracts to resurface peddling sundry wares indiscrimanately on TV  including the rival channels.  

 

Mind you, the basic fare is no different at 9xM. It is the same staple diet of Bollywood hits and remixes. Just like any other music channel! But what makes 9xM’s content different is the way they use witty animated characters in their fillers. 

 

In a very popular series called Bakwas Bandh Kar, two animation characters, Chhote and Bade crack PJs targeted at kids and teenagers. Another interesting character is a cat called Bheeghi Billi who usually narrates his life as a loser musically. They have a few more of such endearing characters e,g. Tapori and Betelnuts in their stable.

 

9xM offers prizes for viewers who send jokes which keep the user-generated content pipeline well oiled and together with the exhaustive use of animation characters keep the production cost low. 

 

It will be interesting though to watch how 9xM sustains this competitive edge as their content strategy is easy to emulate. 

 

– G. Mohan





Why Shahrukh is Missing in the Airtel DTH Launch Ad?

9 10 2008

After a week of teaser campaign, where the most visible prop was a red-colored sofa, Airtel launched its DTH service, Airtel Digital TV today. The advertisement has virtually all the celebrities who have endorsed for Airtel coming together in a single advertisement, TVC as well as the press advertisement. Saif Ali Khan, Kareena Kapoor, AR Rahman, Madhavan, Vidya Balan and cricketers Gautam Gambhir and Zaheer Khan.

 

One celebrity who has been endorsing Airtel for a longtime is conspicuous by his absence. No prizes for guessing that, it is Shahrukh Khan. He is not endorsing Airtel DTH because he has been endorsing Dish TV, a competitor to Airtel.

 

It appears that when Airtel signed up Shahrukh for Airtel mobile services, they had no idea they would one day be in DTH service. In these days of convergence, even when signing up celebrities it is important to keep in mind the future product launches.

 

Even Videocon, a brand which Shahrukh Khan endorses, which is next in line to launch its DTH service, will not be able to use SRK for the same reason.

 

– G. Mohan

 





Quiz on the Global Credit Crisis

7 10 2008

 

 

Q.1:

 

 

 

 What does Warren Buffett refer to as “Weapons of Mass Destruction” ?

 

 

Ans:

 

 

Credit Default Swaps (CDS ). A specific kind of counterparty agreement/ derivative which allows the transfer of third party credit risk  from one party  to the other. One party in the swap  is a lender  and faces  credit  risk  from a third party, and the counterparty in the credit default  swap agrees to insure this risk in exchange  of regular periodic payments  (essentially an insurance premium ). If the third party defaults , the party providing insurance  will have to purchase  from the insured  party the defaulted asset . In turn, the insurer pays the insured the remaining interest on the debt , as well as the principal.

 

Buffet’s prophecy has come true with AIG the insurance company getting virtually destroyed because of CDS. Buffett’s own insurance companies avoided CDS.

 

 

Q.2:

 

 

 

What are “Toxic Debts” and why they are called so?

 

 

Ans:

 

 

 

Toxic debts are poor grade Mortgage Backed Securities or Collateralized Debt Obligations (CDOs) in the books of banks. These are poor because the underlying mortgages have become bad because of defaults by the sub-prime borrowers. These are toxic because their values have to be written down and thereby banks have to incur huge losses.

 

 

Q.3:  

 

 

Why is the US $ 700 Billion bailout being referred as “Privatization of profits and nationalization of losses.”?

 

 

Ans:

 

 

 The financial services companies, investment banks and commercial banks have all made huge profits in the last few years and distributed the same to their shareholders and executives. Now, when they are facing bankruptcy the government is bailing them out by giving them tax-payers’ money.

 

 

Q. 4:

 

 

The US economy is now said to be in the process of “Deleveraging “. What does “Deleveraging” mean?

 

 

Ans:

 

 

 

 A process undertaken by a company in an attempt to reduce its financial leverage. Financial leverage can be beneficial for a company, but if it becomes too risky or harmful, the company may need  to deleverage itself by decreasing the amount  of debt  that it has (by paying it off).Deleveraging is  also called degearing.

 

 

By the way, General Electric has announced its plan to deleverage by issuing US  $ 15 billion worth of equity, out of which 3 Billion worth of equity will be subscribed by Warren Buffett.

 

 

Q.5:  

 

 

Several critics of the bailout plan are concerned about “Moral hazards” in such a package. What are the moral hazards in bailout?

 

 

Ans:

 

 

The risk that the presence of a contract will affect on the behavior of one or more parties. The classic example is in the insurance industry, where coverage against a loss might increase the risk-taking behavior of the insured.

 

If the banks and finance companies, know that there is the government waiting to protect them with a bailout package, in case things go wrong, they may be tempted to take more risk.

 

 

– G. Mohan





ULIP: Robbery in Broad Daylight

5 10 2008

 

Unit Linked Insurance Plan (ULIP) is one of the most popular insurance products being pushed by the private life insurance companies. The attraction about the product is that it offers life cover in addition to providing attractive returns. In addition, investments in ULIP qualify for Income tax rebates.

 

Taken in by the triple-offer and the persuasion of a pesty agent, I took ULIP from Aviva Life Insurance in September 2003. It is a whole-life policy with a life cover for Rs 10 lakh. The annual premium is Rs 21,740. I took the option of investing in the growth fund, which means the units will be invested in the equity markets. In the second year, I opted for the indexation offer, by which the life cover was increased by 5% to Rs 10.50 lakh for a higher premium of Rs 22,828.

 

I have been paying my premiums regularly, as a matter of habit. I receive the policy statements from Aviva every year. I used to casually look at them and file them.

 

Now, after full five years, I have received the policy statement yesterday. After five years, I have paid Rs 1,13,052 as premium but the fund value stands at Rs 87,206 only. I was taken by surprise that even though the equity markets were doing fairly well, except for the last 8 months, the total fund value was much less than the total premiums paid.

 

Aviva claims that the fund is being managed well, as is reflected by the NAV. The NAV of the growth fund has gone up from Rs18.39 in Sept 2004 to Rs 27.21 in Sept 2008, a growth of 50 %.  By conventional logic, when NAV is going up, fund value should also go up. But why the fund value has been going down? I’ve discovered that every year, a significant number of units are being deducted from my account. The statement does not mention any expenditure head for deduction of units.

 

On study of the offer document, I learnt that in the first two years an initial management charge of 5 % was applicable. In the subsequent years an administration charge of Rs 55 per month and a regular management charge of 1% per annum on both initial and accumulation units was applicable.

 

When I realized that the amount being charged was much higher than the above, I thought of surrendering the policy and asked the company about the surrender value for the above policy. I was informed that I would get no more than Rs 30,000. An exit load of nearly 70%, is unheard of in any investment product. I felt trapped.

 

If instead, I had just bought a term insurance policy for Rs 10 lakh, I would have paid an annual premium of Rs 4000 only. For five years, I would have incurred Rs 20,000 as premium and I would have been left with Rs 93,052. If I had invested this amount regularly in a Systematic Investment Plan (SIP) with HDFC Sensex Plus  Fund (a diversified equity fund which invests largely in sensex stocks) , this amount would have become Rs 154,714. HDFC Sensex Plus SIP for the last five years have given a return of 17.6% p.a.  

 

I am convinced that ULIP is a rip-off. AVIVA is not alone. In Deccan Chronicle, Olga Tellis has reported that HDFC Standard Life and Bajaj Allianz charge over 60% as expenses in the first year under their ULIPs and do not disclose the same.

 

The offer documents of ULIPs lack transparency and do not have the requisite disclosures about the charges. The charges are far too high, in comparison with other comparable investment products like Mutual Funds and Bank Deposits. The high agency commissions and large marketing spends are being recovered in a clandestine manner by the insurance companies.

 

It is time the insurance regulator, IRDA, reins in these private insurance companies. In the meanwhile, individuals should stay clear of ULIPs. It is advisable to keep the life insurance needs, investment needs and tax-saving needs separate and handle them accordingly.

 

– G. Mohan








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