D-street: Standing tall, but for how long?

If you missed out on the 10k rally, sit back, relax and understand that you missed the boat. Cruising in the stratosphere above 10k (the market closed at 10,626.78 on March 2), Dalal Street shows few opportunities to make money anymore. There's little upside left, say experts, but not everybody agrees. Restless investment managers are betting on a further rise, on the back of FII inflows, which have now touched Rs 1,84,560 crore since the early 90s, of which 60 per cent (about Rs 1,16,000 crore) has come in the past three years.

So, is the market over-heated? Although experts say The Street is reasonably valued today, there are others who point out that we could see a difference in coming days. "Demand (from investors) is expected to outstrip the supply (of stocks) in future," warns Girish Nadkarni, COO, IL&FS Investsmart.

But let's first look at the concept of valuation itself. Basically, valuation is the process of determining a company's worth. One way of doing this is to compare the company's ruling stock price with how much each share has earned, that is, the earnings per share. This is called the price-earnings or p-e ratio. When a company's P-E is high, the market is obviously willing to pay much more for the stock, expecting even better days ahead. And, either the stock has to live up to those earnings expectations or see its price come crashing down.

While the p-e ratio alone is hardly a comprehensive overview of the stock, it's a useful number that indicates if the stock is under-valued, fairly valued or over-valued. Today, corporate earnings are growing at over 15 per cent, while P-E ratios are also reigning at similar levels, which is why experts conclude that this market is a fairly valued one.

There is, however, reason to expect volatility. According to S. Naganath, President & Chief Investment officer, DSP Merrill Lynch, there is a possibility of P-Es climbing higher, given the vast liquidity coming in from foreign shores. "That possibility cannot be ruled out, in view of the robust growth in the Indian economy," says Naganath, hinting that even if the earnings growth slows down, the p-e escalation could push the market north.

That's what happened during the Harshad Mehta bull run of 1992, when the market p-e soared to 50, or during the more recent tech-driven Ketan Parekh rally of 1999-2000, when P-Es touched 25, both times without a corresponding earnings growth.

Even as P-Es rule at 17-18 in the present rally, there is the possibility that they will spiral up. And fund managers and investors are worried that earnings growth could simultaneously plummet due to high oil prices and steeply rising global interest rates. Undoubtedly, maintaining earnings growth will be the most challenging task in 2006-07 for corporate India, though Naganath is optimistic: "We feel the corporate sector can maintain an earnings growth of 15 per cent CAGR in the next 15 years."

On the other hand, rising global interest rates will affect short-term inflows from hedge funds and also impact domestic consumption behaviour. As S. Ramesh, Executive Director, Kotak Mahindra Capital, says: "The key risks to the markets remain continuing corporate performance and rise in global interest rates, which could result in outflow of funds from the markets."

Experts advise sectoral rotation and are bullish about IT, banking, oil and capital goods, which stayed out of the 10k limelight in the past year

Another possibility: a reviving debt market may see the portfolio mix of hedge funds and institutional investors changing; while domestic MFs diversify into debt in their close-ended and tax-saving schemes.

Factoring all this in, it's clear that it's not going to be all roses on Dalal Street from here on, which makes life fairly uncertain for the small investor. Which is why we present here a post-10k investment strategy for you.

Go For Equity

World over, equity as an asset class has given superior returns in the long term compared to debt, gold, real estate or other avenues. With the market peaking at 10k in just over three years, valuations certainly look expensive but if one has a long-term horizon-three to five years or five to 10 years-there's ample scope for earning decent gains. And you could look at about 15 per cent returns (annualised) over that period.

Try Sectoral Rotation

Experts advise sectoral rotation. For instance, the fast moving consumer goods (FMCG) sector has bounced back after being down in the dumps for many years. In fact, the FMCG index (over a dozen companies) has outperformed the Sensex in the last one year. Similarly, look at sectors like oil, pharma, it, public sector undertakings and metals that have stayed away from the 10k limelight in the past year. "I'm bullish about capital goods, real estate and construction, it, BPO services and banking. If the economy expands, these sectors will do well," says Ramesh.

Review Overpriced Sectors

"Valuations are a bit high in engineering and capital goods," observes Girish Nadkarni," COO, IL&FS Investsmart, but it could be worth it. As Asit Koticha, MD and CIO, ask Raymond James, says, engineering and capital goods might look expensive in relative terms, but their super growth potential of 35-40 per cent makes them attractive investments. "Massive investments are planned in roads, airports, ports and power, and that will keep this sector busy over the next three to five years," says Koticha.

Follow A Bottom-up Approach

Following a sector story doesn't mean doing so blindly just because it has underperformed or looks promising for the future. Your stock-picking strategy should be to pick value at every fall in the market. "One could look at past performance in recent quarters, expansion plans, funding mix, management reputation and price history," advises a fund manager.

Go For Mutual Funds

MFs are the ideal vehicle if you don't have the time or patience to track the market. Rookie investors should take the systematic investment plan (sip) route into equity to neutralise market fluctuations over the long term. Typically, a long-term investor should choose a close-ended scheme so that he can experiment with debt as well as mid-cap stocks. "Investors looking for short-term stay in a mf can buy diversified equity funds in infrastructure, services and mid-cap areas," says the CEO of a MF.

INTERVIEW: SUSHIL MUHNOT/MD/IDBI Capital Market Services
"There Is Still Potential To Make Money in the Market"

IDBI Capital Market Services is upping its presence in retail equity after many years of focus on institutional investors. Managing Director Sushil Muhnot, who is aggressively building a strong franchise model for retail trading, spoke to BT about 10k and the road ahead for small investors. Excerpts:

From 3K levels in Jan 2003, the market has skyrocketed to 10K in a little over three years. Is there still scope for making money in the market?

At 10k, the market looks reasonably valued. In fact, if you look at the run-up from 9k to 10k, the rally was driven solely by front line stocks. Therefore, there is still potential to make money in the market. Investors getting in at this level into mid-caps should look at the three-five year track record of the company and sector financials and management history before putting their money in.

Is the sectoral story over now?

Some sectors like cement, sugar, tea and auto-ancillaries have been buoyant in the last couple of months. Investors should note that the long-term direction is clear-the focus is on agriculture, small and medium enterprises and infrastructure. For instance, any sops for agriculture will directly aid sectors like pesticides, seed, tractors, and agriculture equipment companies.

Is there enough good quality paper coming into the market for small investors?

If you have a good secondary market, the primary market follows suit. We have seen good quality IPOs from across sectors. In oil and gas, most companies are public sector, where there is a possibility of disinvestment. I see more construction companies entering the market. But I would advise investors to avoid small issues that don't have a good management or performance track record.

What kind of returns should one expect from these levels?

If you follow prudent investment norms, and stay a bit longer- maybe a year-you can expect about 15 per cent returns from this market.

Not So Healthy
With public sector insurers wanting to tweak medical cover, it bodes ill for customers.
By Nitya varadarajan

It's about a decade now since the public sector general insurance companies launched Mediclaim or individual health policies. And, as if to celebrate the anniversary, they are suddenly upping the ante on Mediclaim.

For starters, they want the premium slabs, which they say haven't been touched in years, revised. A senior industry official says that he would like premiums hiked by 40 per cent. It's another story that policyholders have actually been paying 6 per cent more on premium during the last three years to cover third-party administrator service costs.

The second major change proposed is to insist on family cover. Individuals per se are to be denied cover unless they insure all family members for a uniform sum. Third, companies want to increase the minimum cover from Rs 15,000 to Rs 50,000-1,00,000.

Insurers would also like to load premiums for senior citizens by 100 per cent, over and above the actual rate applicable (whether or not they have had claims outgo), or discontinue their policy. Other proposals include introducing caps or sub-limits on hospitalisation expenses like room rent, surgeon's fee, or medicines, while raising the maximum sum insured to Rs 1 crore from the present Rs 5 lakh. And making pre-approval health checks mandatory for all age groups. In fact, insurers have already incorporated many of these measures quietly.

According to the IRDA (Insurance Regulatory and Development Authority), these measures have not yet been submitted as a formal proposal. It has asked public sector insurers for the rationale behind the proposals, saying that they are tantamount to changing the face of the coverage. If IRDA does not sign off, then consumers can heave a sigh of relief.

So, why are insurers feeling so bloody-minded? The health portfolio of all insurance companies (and public sector insurers have an 80 per cent share of the health cover market) incurs heavy losses due to a very high claims ratio. Claims outgo losses are roughly 130 per cent (which, however, does not factor in the income from investment returns on the total premiums of Rs 1,400 crore). Companies now want higher premiums and stringent underwriting to counter this.

Much of the loss, however, arises because of the heavy discounts offered by insurers to companies on corporate group health plans, mostly in order to sell lucrative packages for fire and property covers. Corporate policies have low premiums and offer wide benefits, like coverage of pre-existing diseases, maternity costs and floater covers for families (additional members covered at 10-20 per cent extra). Admits a spokesperson from Cholamandalam ms General Insurance: "Group policies offer a lot of concessions and the cross-subsidisation (by individual policies) is proving inadequate."

If these changes are allowed to take shape, Mediclaim in its present form will probably become prohibitively expensive, and its place taken by a host of smaller policies for various conditions. Says a United India official: "Mediclaim (as it is) will continue, but will gradually be phased out." The private sector could follow suit. Or new health insurance companies waiting in the wings could bottom out rates and give public sector insurers a run for money.

Already, private companies like Cholamandalam (who have no plans to hike rates) offer value-adds that should make public sector insurers sit up. For instance, Chola has separate low premiums for people under the age of 18, and if a policyholder has not been hospitalised for a disease for two years before taking the policy, Chola does not treat it as a pre-existing condition. Besides, the company has negotiated with 3,000 hospitals for lower rates for its policyholders.

With other private players also aggressively marketing their health covers, public sector firms will increasingly find the going tough enough without making polices more customer unfriendly. In fact, if these firms care to go back in time, they did have sub-limits on policies about a decade ago, but the queues for grievance redress grew so long that this had to be dropped. Reintroducing this, and the other proposals, could set dissatisfied customers on the warpath again.

AROUND THE WORLD ON EMI
Travel never looked easier. Just book your tickets and pay over the next three years.
By Anand Adhikari

Athree-country Europe tour for an EMI (equated monthly instalment) of Rs 2,982, for a couple with a 12-year-old kid. The offer comes from SOTC India, in association with its exclusive bank partner Kotak Mahindra.

The seven-day tour takes the family to Switzerland, Austria and Italy, and costs Rs 86,000, which covers air fare, accommodation, food and sightseeing. Sounds good?

SOTC is not the only company offering such attractive packages, as the travel industry woos customers with an array of offers. From Cox and Kings to Raj Travels to Kesari Tours, tours on EMI are getting popular. "Foreign tours are now well within the reach of the middle class. Rising income levels and attractive discount offers from tour operators are helping the industry," says Himanshu Patil, Director, Kesari Tours.

As the average Indian's spending power has gone up, so too has his interest in overseas travel and the willingness to shell out money. Obviously, it helps that easy loans are up for grabs. Interest rates for travel agent loans are 7.5-11.25 per cent and, as Arup Sen, Executive Director, Cox & Kings, says: "The market has matured. People no longer have reservations about taking a loan for a holiday. This was something that was unheard of even, say, 10 years ago."

Realising the potential, fund-flush banks have also jumped into the fray, and are promoting travel loans, especially as the margins are higher compared to housing, auto or other mortgage loans. Then, of course, there are the bank personal loans that can be used for travel. However, interest rates here are slightly higher-10.5-14.5 per cent.

Take a look at the loans from travel agents. "The documentation process is much speedier. You can avail a loan within a maximum week's time," says Patil. Cox & Kings offers a loyalty bonus in the form of a pre-approved loan from a bank for any traveller who has travelled with them in the last three years. Says Sen: "Documentation is minimum. We need the last salary certificate, bank account details, etc. The processing is quick and the passenger gets his loan in 48 hours."

A Kotak Bank officer sits in the SOTC office to guide the prospective traveller and tell him how much EMI he has to pay, the interest rate, the loan duration and other loan details. "It's quicker getting a loan than a visa," says a SOTC official. In rare cases, travel companies or banks ask for your payment track record on a credit card, personal loan, car or home loan, along with your income documents. "Today, 20 per cent of the travellers who approach us opt for EMI schemes," says Patil.

With three sources of travel loans, how do you decide which to choose? Each has its advantages and disadvantages. For instance, the travel agent works through exclusive bank partners who offer shorter repayment schedules-12-36 months-compared to the banks' standalone travel or personal loans, where repayment periods could be 48-60 months from some banks. Travel agents, however, are a one-stop shop for both loan and itinerary. Then, although EMIs are reasonable for travel agent loans, there is the compulsion of being tied into a package tour with little flexibility.

"The advantage is that you can see the world at such a reasonable price," says Sen. So, for instance, there's a Cox & Kings tour costing Rs 89,999, where the EMI works out to Rs 3,186 per month for a 36-month tenure. And for its domestic holidays, called Bharat Deko packages, EMIs start from Rs 1,120 per month for 36 months. For the first time, the middle class person can afford to travel, and by the time he repays the loan (in three years), he is ready for the next holiday.

On the other hand, you have bank travel loans like the Desh Videsh Yatra from Bank of Baroda. At 10.50 per cent interest and a repayment schedule of 36 months, it's very competitive. Plus, loan amounts are flexible, ranging from Rs 25,000 to Rs 10 lakh. However, you do need a third-party guarantor for loans above Rs 2 lakh. The advantage here is that you can make your own schedules, select the hotels and travel alone. With a loan like SBI's Easy Travel Loan, you also get a long repayment tenure of four years. The interest here is 12.75 per cent for a Rs 24,000-Rs 2.5-lakh loan.

Bank personal loans offer even better tenures, ranging from 48 months to 60 months, but the loans themselves are expensive. ICICI Bank offers the longest repayment schedule of 60 months, with loan amounts ranging from Rs 20,000 to Rs 15 lakh, but interest rates are 14-18 per cent. You don't, however, require security or collateral.

As competition hots up, soon airlines and hotels too could hitch their wagons to the EMI star. Clearly, it's time to pack your bags.

The Churning Pot
Constantly pulling out money to invest in new schemes might give short-term gains, but what about long-term capital growth?

By Anand Adhikari

"Churning is driven by investors' need to book profits at every rise" Naval Bir Kumar MD, Standard Chartered Asset Management Company

Sandesh Pathak, 30, works for a UK-based BPO. From early 2005 till date, on his mutual fund (MF) distributor's advice, Pathak has pulled out his money from existing schemes and invested in new fund offerings (NFOs) four times over. The result? Pathak's Rs 50,000 is Rs 1 lakh.

At first sight, Pathak's 'churning' strategy appears great. In fact, as our story on NFOs shows (see A Siren Song), investors have made solid money from NFOs. The question is, at what cost? What investors like Pathak don't realise is the tremendous pressure churning puts on fund managers and other small investors who are in the scheme for the long term. Churning goes against the basic principle of MFs-long-term capital growth. Says Naval Bir Kumar, Managing Director (MD), Standard Chartered Asset Management Company: "It's driven by investors' drive to need profits at every rise."

And who gains the most? No prizes if you said distributors. "Every NFO application gets us a commission, whereas equity IPO commissions are subject to allotment," says a distributor. In fact, the commission on mf equity schemes is much higher than that on other investment classes like debt, equity IPOs, bonds, etc.

And then there are the incentives for exceeding NFO targets. Last June, SEBI Chairman M. Damodaran regretted that new schemes were being driven by rebates and incentives at the cost of investor interest. Sushil Muhnot, MD, IDBI Capital Market, defends distributors: "We sell mf schemes based on product attributes and individual needs."

However, SEBI remains serious about regulating distributors and is making MFs responsible for the former. Its code of conduct for intermediaries forbids commission-driven malpractices such as recommending products solely because of higher commissions; or encouraging over-transacting of investments to earn higher commissions at the cost of investors paying higher transaction fees and taxes.

Meanwhile, fund houses themselves are launching a barrage of new schemes, making no effort to market existing ones. "New schemes, higher commissions and foreign junkets are the private sector way of growing assets under management (AUMs)," says the CEO of a public sector mf.

How can the phenomenon be discouraged? "You can increase the exit load (presently 1-2.5 per cent)," says a fund manager. However, as Kumar points out, returns are high enough to take care of the exit load cost. Some experts suggest making all schemes close-ended, as the only way to develop a long-term investment cult in the industry.

Right now, funds don't seem inclined to listen in the mad rush to increase assets under management.

NEWS ROUND-UP

Mid-rung Pharma Starts Climbing

The focus on contract research and manufacturing (CRAM) and on building scale through inorganic growth has helped boost mid-tier pharma companies like Divis Laboratories, Matrix Laboratories and Nicholas Piramal. Analysts say the patent regime has seen these companies re-focus on R&D and scale. "Stocks such as Divis, Matrix and even Nicholas Piramal are a good bet for investors in the long term, up to 2008," says Manish Sonthalia, Vice President (Equities), Motilal Oswal. Matrix is trading at around Rs 257.35, but experts predict it could touch Rs 300-340 soon. There's similar bullishness on Nicholas Piramal (Rs 242.50, expected to cross Rs 300). With the Indian CRAM market just about $150 million (Rs 675 crore) compared to a global market that will touch $26 billion (Rs 1,17,000 crore) in five years, the best is yet to come.

-Rahul Sachitanand

Upside down? Not for pharma stocks

Who's Afraid Of Avian Flu?

Certainly not Dalal Street, which barely registered a blip on the day the news broke. There has been some impact since, but largely sectoral. Poultry stocks were hit, of course, as were hotel stocks, while pharma stocks climbed, especially Cipla because of its avian flu antidote. "The market is being too sanguine," says Jayant R. Pai, Vice President, Parag Parikh Financial Advisory Services, "there's bound to be some impact in the days to come. A lot depends on the government's crisis management." It may have been a good time to buy over-valued hotel stocks on the decline, but the post-budget rally on the stock markets has put paid to that approach. Still, watch what's happening carefully. More bad news on the bird flu front could cause a mini-crash in the markets.

-Vaishna Roy

The Story's Over
The time has come to start booking profits on your mid-caps.

Now, they say the sensex will hit 12,000. Clearly, we're in the middle of a formidable bull run. Interestingly, the large caps have led this run, with the mid-caps not contributing too much (see Mid-caps Cool Down).

Of course, many stocks that began as pure mid-caps at the start of the rally have become large cap stocks or at least large mid-cap stocks. As a result, it has become too expensive for retail investors to get in. Also, mid-caps are always a long-term play and this time is no exception. As Cholamandalam AMC's CIO Tridib Pathak says, a mid-cap investor's outlook has to be different. "He has to give himself a two-three year horizon. It is not right to compare the way mid-cap stocks have moved against the movement of the Sensex during the same period."

Given that the bull run shows no signs of slowing down, where does this leave the investor as far as mid-caps are concerned? According to Dawnay Day AV Financial Services' Vice Chairman and MD, Alok Vajpeyi, there is still a lot of liquidity in the market. And whether mid-cap or large cap, it makes sense for investors to become stock-pickers across sectors at these levels. "It's necessary that investors look at the fundamentals very closely. The mid-cap story is not for the uninitiated."

In that case, is the mid-cap rally over for the retail investor? For those who got in at the beginning of this bull run, the returns have been fairly phenomenal. Today, the situation is different. It's time, points out Karvy Stockbroking's Vice President Ambareesh Baliga, to book profits on mid-caps and not the time to buy. "The fact is that if and when the market starts to fall, the mid-caps will fall faster and harder."

Krishna Gopalan

SMARTBYTES

Till Death Do Us Part

Knot a problem: We have life insurance

Those of you who are married and intend staying that way, should take a look at Jeevan Saathi from LIC, which covers a couple for little more than the premium payable on one policy. On the death of, say, the wife, the entire sum assured is payable to the husband and the premium for the remaining term is waived, though the policy continues. Upon his death, the legal heir or nominee also gets the sum assured. However, if both survive, they get the endowment benefits due to one policy only and not two policies. The total premium per annum (Rs 1 lakh sum assured; couple's mean age 30; 30-year term) is about Rs 4,400, vis-à-vis roughly Rs 3,300 each if the couple were to take out individual endowment policies. Also, the accident benefits, at four times the sum assured, are hefty. If life insurance is your chief objective, then Jeevan Saathi is a good bet. However, for investment purposes, two individual policies are better.

-Nitya Vardarajan

Go for a rail card: And get points

Get A Ticket To Ride

Forget trains being fuddy-duddy-rail travel has never been as with it as it is now. Starting with online bookings at www.irctc.co.in, you now have a special railways credit card launched by SBI Card and Indian Railway Catering and Tourism Corporation. The card's just like any credit card, but the bonus is that you accumulate points for redemption against any class of train ticket. Plus, the card can be used as a platform ticket, and for online ticket purchases (except AC-3 tier and non-AC-2 tier), which fetch bonus points worth 4-10 per cent of ticket value. For online use, you pay Rs 60 per ticket as a surcharge, and the card comes for a subscription fee of Rs 500 (annual renewal: Rs 300). The Railways has also authorised over 1,000 rail travel service agents, who can buy tickets online for you (if you cannot access the net) at Rs 25 per head (Rs 15 for non-AC travel). Fighting a grim battle against low-cost airlines, Railways is clearly pulling out all stops.

Kumarkaushalam

Value-picker's Corner

MUKAND LTD; PRICE: RS 86

Mukand Ltd, in the news recently when it sold 25 acres in central Mumbai for Rs 221 crore, holds promise. Profits moved from a marginal Rs 1.83 crore in 2004 to a substantial Rs 185 crore in 2005. EPS (earnings per share) rose from an insignificant Rs 0.77 in 2004 to Rs 25.27 in 2005. Says K.R. Choksey's Director and Head of Research, Jigar Shah: "The company is diversified, with presence in steel, machinery and infrastructure. The way forward looks impressive." Another positive: a proposed hike in capacity for rolled steel products. Considering that both steel and infrastructure are healthy stories, with tremendous potential, Mukand looks good for the long term.

-Krishna Gopalan

Trend-spotting

The impressive numbers recorded by Hindustan Lever Ltd (HLL) for 2005 have been a major trigger for the fast moving consumer goods counter. HLL recorded double-digit growth for the first time in six years, with a Rs 11,000-crore turnover. First Global's Director, Shankar Sharma, is bullish on the sector: "HLL has been a good turnaround story. ITC looks good, and the company is in categories where the potential is huge. Besides, the ITC stock does not look expensive." According to Sharma, the HLL scrip could hit Rs 300. For investors, the FMCG sector looks promising, but the horizon for investing here will be upwards of 12 months.

-Krishna Gopalan