There
is a story about making money in the stock market. It is said
that if you ask 10 people how to make money from stocks, you will
end up with 10,000 answers. The truth is, there are no simple
answers. Equity investment is a process that requires continuous
tracking of companies, industries and the economy. Despite this
basic fact, though, there are literally tens of thousands of investors
out there who buy stocks like they would buy lottery tickets:
tic-tac-toe and hey, let's go with Company X. Of course, they
lose their shirts, but seem quite willing to do the same over
again.
Now, the thing is, if you do this kind of
thing with a large company, say, an Infosys or a Reliance, the
chances you will end with egg in the face are fairly low. The
odds against a blue-blooded stock turning belly-up are quite high.
However, the same shying-at-coconuts approach to stocks in the
mid-cap space could be fatal. And this is the biggest and most
telling difference between a large-cap and mid-cap stock. As Abhay
Aima, Country Head (Equities and Private Banking Group), HDFC
Bank, says: "Large-caps have historically been less risk-prone
than mid-caps."
Of course, mid-cap stocks are always hugely more attractive, if
for nothing else but their prices. These are stocks that show
tremendous growth promise and are available at bargain prices.
There is obviously the temptation to assume that all low-priced
mid-cap stocks will grow by leaps and bounds, but nothing could
be further from the truth. Before buying, you have to analyse
if the stock has the potential to grow exponentially. If your
analysis is correct, your buy could be a multi-bagger. This is
why research is so important, much more so than for large-cap
stocks. Remember, the amount of information available in the public
domain about large-caps is far greater than that for mid-caps.
The other important criterion for investing
in mid-caps is investment horizon. Since these are growth stories,
it would be foolish to buy them for instant gains. Instead, buy
them for the long term, which means a two to three year time horizon
(see Caution: Bump Ahead).
What Are They?
Defining mid-caps has always been
tricky. |
There are no
industry standards yet on the right classification of mid-caps.
one school classifies mid-cap stocks as those with market
capitalisations between Rs 1,000 crore and Rs 3,500 crore.
That, of course, will also depend on the stage the market
is in. In a bull run, the range will obviously be stretched
at both ends of the band.
The BSE Mid-cap Index has stocks like Adlabs Films, Yes
Bank and Videocon Industries. Adlabs Films' market cap is
at about Rs 1,200 crore, Yes Bank's at about Rs 2,330 crore
while Videocon Industries' is a huge Rs 9,250 crore. The
NSE's classification includes companies with market cap
between Rs 750 crore and Rs 7,500 crore, the band into which
our five stocks fall.
|
|
Caution: Bump Ahead
Mid-caps are inherently more risky than
large-caps, so take the road with care. |
ALWAYS
» Look
for value in the stock at the right price
» Have
a long-term outlook-never less than two to three years
» Do
your research, and keep updating it
» Monitor
stock performance at regular intervals
NEVER
» Panic
if your stock's performance is affected by government policies
» Get
unnerved by technical factors; you are here for the long
term
» Get
into mid-caps with the aim of making a quick buck and exiting
» Pay
too much for a mid-cap stock. You'll suffer worst in downturn
|
When you invest in a mid-cap today, you could
be buying tomorrow's blue-chip. Videocon Industries, which still
figures in BSE's mid-cap index, has a market capitalisation of
a massive Rs 9,250 crore. It obviously did not start off that
way. Interestingly, India has the highest proportion of mid-cap
stocks that have eventually become large-caps.
The mid-cap story is not about size or stock
price alone. "It is about the business and at what stage
of business the company is in. Also, the company's business potential
at the time of investing is important," says Aima. A pharmaceutical
company depending totally on exports, for instance, and with a
total order book of $10 million (Rs 47 crore), stands to gain
enormously if it wins an order to the tune of $3 million (around
Rs 14 crore). Needless to say, the loss of an order of the same
value could be perilous to the company's very future. The impact
on the company's earnings per share (EPS) and the resultant P-E
(price-earnings) multiple could be huge. On the other hand, a
loss or gain of the same order would mean little to a company
whose turnover is about Rs 1,000 crore.
Investing Right
A volatile market frightens average investors
off even large-cap stocks going cheap, but it positively panics
them about mid-caps. The fact, of course, is that this is the
best time to buy. Quite a few mid-caps have fallen sharply from
their May highs, with some falling by as much as 50 per cent.
"At these levels, they offer enormous value. For people with
a two to three year time frame, there is merit and value in the
mid-cap story," says Alok Vajpeyi, Vice-Chairman and Managing
Director, Dawnay Day AV Financial Services.
So, even today, there are solid mid-caps
to be had at good valuations, if you look carefully and do your
homework. "The investor has to look for a company with good
management, robust earnings and a good business," says Vajpeyi.
The Good Lookers
Why business looks good in the
long term for these mid-cap firms. |
LIBERTY SHOES: New product range to
cater to wider income group. Launching concept stores called
Revolutions to address lifestyle market. Tie-up with Pantaloon
for multi-brand footwear stores.
PRITHVI INFOSOLUTIONS: In the past three years,
revenues have grown at 42 per cent CAGR. Good distribution
of clients, with no one client accounting for more than
5 per cent of revenues.
NITCO TILES: Leading player in tiles industry,
provides entire flooring solutions range unlike its peers.
Policy changes have increased its marble imports. Strong
growth in vitrified tiles business from increasing construction
work.
MERCATOR LINES: Among fastest-growing shipping
companies. Aggressively adding capacities. Judicious tonnage
division between time and spot charters counters market
fluctuations and provides earnings stability.
SADBHAV ENGINEERING: Potential in the business
of road construction and mining. Includes work on the Mumbai-Nashik
expressway and lignite mining from Gujarat Heavy Chemicals.
|
|
The Fund Story
In the long run, mid-cap mutual funds
have outperformed the Sensex. |
![](grfx/134.jpg) |
Staying power: Gives long-term
gains |
Don't get fooled by June. The
massive selling by FIIs during that month dragged mid-cap
funds down heavily. Ten funds recorded an average return of
-8.7 per cent over the past three months compared to -6.2
per cent from the CNX Mid-cap Index. Leaving aside this temporary
MIS-step, however, mid-cap funds have largely outstripped
market averages.
In fact, over two and three years, mid-cap funds have
even overtaken the broader BSE Sensex and the S&P CNX
Nifty. On an average, they recorded 54.3 per cent and 62
per cent returns over two and three years, respectively,
while the BSE Sensex returned 51 per cent and 41 per cent,
and Nifty 45.4 per cent and 37 per cent, respectively, over
the same period. Says Tridib Pathak, CIO, DBS Cholamandalam
AMC: "India being a growth story, mid-cap is the story
of evolution. Today's mid-cap is the large-cap of tomorrow
and this is the reason why, over a longer period of time,
they have delivered better returns than the broader indices.
However, investors have to be patient as the investment
horizon is longer than that for large-cap stocks."
Despite the recent poor run in mid-cap funds, fund managers
say they should form part of your overall equity portfolio,
with a three to five year horizon. With 14-15 per cent of
the overall market cap accounted for by mid-cap stocks,
fund managers recommend a minimum 15 per cent of total equity
exposure in mid-cap funds.
|
The five stocks
we have picked from the space (see Numbers Talk) show solid financials
and good valuations. Sadbhav Engineering, for instance, in the
booming infrastructure space, has shown steadily growing turnover
and profits. It has a road construction order backlog worth roughly
Rs 1,000 crore, according to a Karvy Stock Broking report.
Or take Liberty Shoes. Not only is the footwear
industry on a growth path but, as Arun Kejriwal, Director of Mumbai-based
KRIS Securities, says: "Liberty seems to have a good range,
with prices that cater to every market segment." Post-vat
(value added tax), the price differential between the organised
and unorganised sectors can only fall, points out Kejriwal.
Often, it is the business model that proves
the company is on the right track. V.K. Sharma, Director and Head
of Research, Anagram Stock Broking, cites the case of Mercator
Lines. "The shipping company has entered oil exploration
by acquiring offshore rigs. It seems to be deploying them at good
rates, which ensures that the risk is mitigated." According
to him, returns from this stock will be good.
Steady growth is one sure sign of solidity.
Prithvi Infosolutions' revenues have grown at a CAGR (compounded
annual growth rate) of 84 per cent over the past seven years.
Its other advantage is its presence across a healthy range of
verticals, from banking and finance to logistics and manufacturing.
The prospects of the industry a company is
in, is another factor that makes a difference. Take the case of
Nitco Tiles. This company, says Kejriwal, will gain from the housing
boom: "The demand for tiles can only increase." Nitco
also imports a large part of its requirements from China at low
duty levels, besides manufacturing them. "While margins on
imported tiles are greater than locally manufactured tiles, the
blended margins are a healthy 16-17 per cent," points out
Kejriwal.
In a nutshell, identify niche
businesses, identify leaders in their respective industries, and
look sharply for healthy financials. If you can get all this and
a healthy valuation, you are half-way home.
-additional reporting by
Mahesh Nayak
Poor Specifics
Sector
play is not always the winning gambit it's made out to be.
By Mahesh Nayak
Raj
Menon is a regular equity player. He was one of the original investors
who put in Rs 10,000 in Franklin Templeton's Infotech Fund launched
in August 1998. Till July 2006, Menon's investment has grown close
to Rs 84,000, a profit of 740 per cent. That sounds good.
Here's something, however, that takes the
sheen out of the performance. If Menon had been a keen equity
tracker and exited the it fund in 2000 when the rally was losing
steam, he would have made nearly Rs 1.2 lakh in 18 months.
That pretty much sums up the sector funds
story. They can give excellent returns, no doubt, but a lot depends
on timing. For seasoned investors who can time their entries and
exits perfectly, sector funds can give a terrific kick to portfolios.
For the average investor, who usually just dumps his money in
and watches it grow passively, sector play is not the unqualified
winner it is made out to be.
Some Numbers
Does It Suit You?
What's the profile of a sector
fund investor? |
![](grfx/138.jpg) |
Sector fund: Suits active investors |
Sector funds are not for everybody.
for one, the risk is way too high. They are recommended only
for experienced market players. As Ved Prakash Chaturvedi,
Managing Director, Tata Mutual Fund, says: "A sector
fund is only for active investors. For beginners and passive
investors, it's a clear no-no. When actively managed, sector
funds do wonders in generating investor wealth."
Sector funds need active management because any sector-whether
pharma or IT-remains attractive from an investment perspective
only for a certain period. Investors should know when to
enter and exit if they want to maximise returns. Most investors
make the mistake of either entering the fund at the wrong
time, or staying invested too long.
However, good management of sector funds can produce impressive
returns; thus, it works very well for investors who already
have well-diversified portfolios. A small percentage of
the portfolio can be put into sector funds to produce aggressive
growth.
Sector funds also make sense for investors who think there
is growth potential in a particular sector but don't have
the time or wherewithal to research individual stocks. However,
the caveat of timing your entries and exits remains.
Sector fund investors will usually accept a degree of
risk in a portion of their portfolio while ensuring that
it is otherwise well diversified. They are active stock
trackers who are comfortable keeping a sharp eye on their
investment.
|
In the past year, diversified equity funds
have, on an average, outperformed sector funds. The former generated
nearly 35 per cent returns compared to the latter's 27 per cent.
While this sounds excellent compared to a bank FD or a savings
deposit where interest rates are as low as 3.5 per cent, given
the equal risk level of sector and diversified funds, the latter's
superior performance stands out. Again, a lot depends on specific
sectors. In the past year, sector funds generated returns between
0.3 per cent and 51.3 per cent. Of these, seven of the top 10
funds were invested in it, while two were FMCG and one was a power
fund. Average one-year returns from banking sector funds, however,
were as low as 2.8 per cent.
UTI Software was the biggest gainer among
sector funds, recording one-year returns in excess of 50 per cent,
followed by Magnum it (48 per cent) and Franklin Infotech (47
per cent). The impressive performance of these three came from
software giant Infosys Technologies. All three funds are heavily
invested (22 per cent, 20 per cent and 40 per cent of portfolios,
respectively) in Infosys. In the past 12 months, Infosys has risen
56 per cent (Sensex: 48 per cent). If Infosys had given a less
than stellar performance, it sector funds would have had a very
different story to tell. This heavy dependence on a single stock
bodes ill.
Also, just one sector fund, UTI Software,
delivered returns above 50 per cent. In the same period, 11 diversified
funds generated over 50 per cent returns, with Sundaram BNP Paribas
Select Mid-cap posting returns of 61 per cent.
Diversified Results
"Pure thematic play is completely ruled
out. The India story is all about growth, across sectors, and
in this scenario diversified funds make more sense than sector
funds," says Sandesh Kirkire, CEO, Kotak Mahindra AMC. "Also,
investors don't know when to get out. They are exposed to negatives
due to global factors or government regulations."
Sector funds bet purely on the perceived
upside in a particular sector, much like how a contra fund manager
hopes to generate high returns by trading in mispriced stocks.
However, the difference is that the sector fund manager has just
the one sector to find his picks, thus making it highly under-diversified.
With a much smaller search universe, chances are high that the
fund manager will be forced to invest in stocks that the market
has already discounted heavily, thus impacting returns.
The secular bull run of the past three years
has seen sector funds do well, but there is little guarantee that
they will continue in this vein during a downturn. This, however,
is something investors forget while buying sector funds. They
use past performance as a guide to the sector's potential, which
is dangerous.
Second, as the market has consolidated, the
rise has been purely stock specific, and fund managers now pick
stocks using the bottom-up approach. "Unlike last year, the
market has become a stock-pickers' market. Select stocks will
do well, not sectors," says Gagan Banga, Executive Director,
Indiabulls Financial Services.
Third, sectors are active only for specific
periods. You should know when to enter and exit to generate the
best returns. A better idea, according to Ved Prakash Chaturvedi,
Managing Director, Tata Mutual Fund, would be to invest in theme-based
funds such as infrastructure or a rural India theme. "It
diversifies the risk of being exposed to one sector," he
points out.
In an otherwise well diversified portfolio,
sector funds can make up 10-12 per cent of an investor's equity
portfolio. Otherwise, pure vanilla diversified funds can give
far higher returns than any sector fund, however much the concerned
sector is in favour this season.
NEWS ROUND-UP
Realty Check
Realty funds are hot, but not yet for retail
investors.
In
march 2005, the real estate sector was opened up to foreign investment
through the foreign direct investment route. This brought in several
foreign funds, investing directly in land projects. "The
last 15 months have seen a flood of money coming into real estate,"
says Ashwin Ramesh, Principal, Primary Real Estate Advisors.
Indian firms are not far behind, with Future
Group's Kshitij Venture Capital Fund, Ajay Piramal Group's IndiaReit
Fund, the Anand Rathi Realty Fund, and others setting up real
estate funds over the last couple of years.
The total realty fund corpus in India is
about Rs 6,000 crore. However, retail participation is as yet
minimal, with 90 per cent of the investment being institutional.
Of the remaining 10 per cent, a large chunk is accounted for by
HNIS (high networth individuals).
Comparison with other funds like equity or
debt is difficult because real estate funds are a different ball
game. "Real estate is a completely different asset class.
The risks are different and so is the return profile," says
Kishore Gotety, Director (Investments), ICICI Ventures. In fact,
it takes anywhere from one to three years for a fund to start
investing, he points out.
Funds invest across the realty spectrum:
From retail, commercial and residential properties to entertainment
areas and special economic zones (SEZs).
As more funds come in, the industry is getting
more organised. The growth potential is high, but as of now, fund
management skills stay unproven. As Ajit Dayal, Director, Quantum
Asset Management, says: "There is great promise and such
funds are a fabulous idea, but we need to know if these people
really understand the real estate business." Our advice as
always: wait and watch.
-Ahona Ghosh
Dear Gold
So dear to our hearts and becoming
so hard to buy.
Chances
are gold will get even more astronomical in the next few months.
All the signs are in place: inflation in the us market is set
to climb, more hedge funds are likely to be pumped into the global
gold market, and the marriage season in India is upon us. Many
bullion traders anticipate prices to touch new highs, possibly
even Rs 2,000 more than present rates (about Rs 9,500/10g).
"The current us situation and pressure
from hedge funds may see gold prices hitting Rs 12,000/10g,"
says Pritviraj Kothari, a leading bullion trader in Mumbai. Since
May, gold prices have been volatile, hitting a high of Rs 10,715/10g
that month, then a low of Rs 8,335 in June and again climbing
to Rs 10,120 in July.
While the top might be anything from Rs 10,200
to Rs 12,000, prices are unlikely to fall below the Rs 8,700/10g
mark, says Mumbai-based bullion trader Suresh Hundia. The only
events that could cause a slide are falling crude or metal prices,
both of which seem unlikely. In fact, Hundia predicts prices crossing
the Rs 10,000/10g mark within a week or so.
The price of the yellow metal in the international
market had touched $730 or Rs 34,310 an ounce, a 26-year high,
around mid-May this year because of huge investments by hedge
funds. The effects were felt in the India market, and gold prices
in Mumbai hit an all-time high of Rs 10,715/10g at the time. Experts
put the level of volatility in gold prices in the April-July period
at a high 15-16 per cent.
Interestingly, while global demand for gold
jewellery fell 24 per cent during the six months between January
and June 2006, investment demand rose over 40 per cent to touch
Rs 2.83 crore during the same period, as per World Gold Council
data. In the price-sensitive Indian market, the demand for jewellery
during the same period declined drastically by 43 per cent.
-Amit Mukherjee
Property Issues
Some bargains to be had in real estate.
![](grfx/142a.jpg) |
Dream house: Right time to home in on
a good deal |
Schools
have just reopened and the rains are at their unpredictable best.
Add to that the shraadha paksha period between July and August
during which certain communities don't buy or invest in property
and what do you get? A yearly phenomenon of stability in residential
property prices, a fall in enquiries by as much as 20-25 per cent,
and thus the best time to wrangle that better finish or polish
from the builder.
But don't mistake this phase for a downturn,
caution property consultants. Says Pranay Vakil, Chairman, Knight
Frank, a property consultancy, "This is not a slowdown or
the beginning of a downward trend. It is just that prices depend
on volumes and since volumes are low during July-August, property
prices tend to stabilise."
Pritam Chibukula, National Director (Office
Leasing and Retail), Colliers International, too, calls for caution
before making investment decisions based on the recent stability
in prices. "There is a lot of supply coming in, so, if people
are looking to buy property for investment or self-use, we would
advise them to wait and watch."
July saw residential property prices stabilise
in Delhi, Mumbai, Bangalore and Chennai. While there has been
a slowdown in the number of deals in the last few weeks in Mumbai,
in Delhi, demand shifted towards the South Delhi borough of Greater
Kailash-I as a result of spiralling prices in the Lutyens zone,
and in Chennai, the demand was affected due to increasing interest
rates.
The trend, however, does not apply to commercial
property. According to Colliers International, despite the volatility
in the stock market, demand for office space continued to remain
strong, thus driving up rentals by 7-10 per cent across the four
metros. The wait and watch game continues, for now.
-Shivani Lath
SMARTBYTES
Cyber Bookings
As
the battle among low-cost carriers intensifies, the airlines are
trying to build viable business models around an array of allied
services. In a recent move, low-cost carrier SpiceJet announced
the launch of Spicejet Hotels, an online hotel booking facility.
SpiceJet has tied up with more than 100 hotels
in 13 major cities across the country to launch a booking site
that allows you to make web reservations even as you book your
air tickets. "The site will provide instant confirmation
with details of reservation and confirmation number," says
Siddhanta Sharma, Chairman, SpiceJet.
The good news is that booking the rooms online
will get you a discount. "Being online reduces operational
costs, so rooms will be available at rates that are 15-30 per
cent cheaper," says SpiceJet's Sharma. Set up in collaboration
with Yatra Online, the hotels online will range from two-star
to five-star, plus some as yet unspecified budget hotels.
-Amit Mukherjee
Reining In The Cable Guys
![](grfx/142b.jpg) |
Good news: Consumer-friendly CAS rules
being made |
The Conditional Access
System (CAS) confusion is yet to be sorted out, but Telecom Regulatory
Authority of India (TRAI) has made some consumer-friendly recommendations.
TRAI has asked the Ministry of Information and Broadcasting not
to dilute the inter-operability condition among different direct-to-home
operators. This means consumers can shift from one operator to
another without changing set-top boxes. Cable operators have been
asked to set up customer service centres and attend to complaints
within eight hours. They have to respond to pay channel requests
within five working days, and can't take channels off air without
prior notice. These are certainly steps in the right direction.
-Kapil Bajaj
All In
The Family
Are family floater policies really as smart
as they are made out to be? Find out where they score and where
they lose.
By Nitya Varadarajan
![](grfx/144.jpg) |
Punjabi, 42, Bangalore-based
businessman with family
POLICY: Cholamandalam MS Family Health Floater
COVER: Rs 3 lakh
PREMIUM: Rs 7,000 per annum
"The floater cover makes the policy attractive. I don't
have a general health policy, and I find this value for money" |
If
you are a suit-and-tie employee for a large corporate entity,
you are probably acquainted with floater plans. For years, this
cover was available only to corporate employees as part of the
group policy. The premium was paid by the employee, and the cover
extended to the spouse, two children, sometimes parents. These
policies offered a host of benefits not found in Mediclaim, for
instance, pre-existing illness cover and maternity benefits.
Now, finally, the floater concept comes to
the rest of us as well. Three insurers have launched this policy,
and more will doubtless follow suit.
Just what is a family floater cover? It means
paying a single premium and buying a health policy that covers
the entire family. Of course, there are conditions about age of
members and so on, but more of that later. Basically, the floater
allows all members to avail of one policy to the extent of the
cover. So, for instance, if the wife is hospitalised and uses
about one-third of the cover, others in the family can still use
the remaining amount till the next renewal. However, if the entire
cover is used up by one or two members, the others cannot avail
of any cover that year.
Premiums for a floater health cover are not
huge. Says Shivakumar Shankar, Head (Retail), Cholamandalam MS
General Insurance (Chola MS): "We came up with a family floater
to encourage more people to take health insurance. It provides
for exigencies for children at an affordable rate." Generally,
the slab rates for floater covers don't include any premium charges
for children up to 18, which means they get free cover. The cover
also comes with the advantage of not requiring any health check-ups
till age 45.
Cost Factor
Compared to individual Mediclaim policies
for each member of the family, the floater plan works out cheaper.
Take a family of four, two parents between 30 and 35, and two
children below 18. If they take the Chola floater cover (see Premium
Calculator) for Rs 2 lakh, their premium outgo will be Rs 5,860
per annum. If, on the other hand, all four members buy a traditional
Rs 2 lakh healthcare policy each, their total outgo will be Rs
10,272 per annum.
Says Sarthak Chandra, Head (Sales), Max Healthplan,
"A family of six (eldest member 58), will pay Rs 22,404 per
annum for a floater of Rs 5 lakh, but regular health plans of
Rs 5 lakh per individual will work out to Rs 55,000 per annum."
The Advantage
Some good things about floater
plans. |
»
One premium buys you cover for the entire
family, to the extent of the sum assured
»
The single premium makes them cheaper than regular Mediclaim
policies; of course, the cover is also correspondingly low
»
Children up to age 18 are not included in premium charges,
so their cover is essentially free. A couple with young kids
would find this is useful
»
Floaters work well when a family thinks one or two members
are healthy enough not to warrant a full Mediclaim cover
»
Some floaters, allowing renewals up to age 70, make it easier
for senior citizens to get health cover, which is becoming
increasingly difficult under the regular Mediclaim policies
»
Some floaters cover a fairly comprehensive list of day-care
procedures, including pre- and post-hospitalisation costs,
which are difficult to cover under regular Mediclaim policies |
While this sounds good, don't lose sight of
the fact that the floater plan is Rs 2 lakh divided by, say, four
members: that is, Rs 50,000 cover per person, and even one hospitalisation
for appendicitis could cost more.
Where the floater plan makes sense is when
the family thinks a particular member is healthy enough not to
need a full cover. Or when a family has young children who can
be covered for free under a floater.
Another compelling argument for floater policies
is the advantage to senior citizens. If you buy an ICICI Lombard
floater healthcare policy today, with renewals, the policy is
available to you till the age of 70. On the other hand, renewing
your regular Mediclaim policy after 60 has just been made very
difficult, in many cases impossible, by both public and private
insurers.
None of these policies, however, allow retirees
above 60 to enter a new policy. ICICI Lombard and Max Healthcare
have an upper age entry limit of 59 (with health check-ups mandatory
above 45), while the age limit for Chola is 45. The former allow
renewals up to age 70, while the latter allows renewals only up
to age 65. However, premiums are fixed by the age of the oldest
member under the cover. Including your retired father will thus
up your outgo.
Ideally, while buying a floater plan, try
and find the features (see What's Inside) that you and your family
are likely to need the most. If your family includes a senior
citizen, then take a plan that includes home nursing. The trick
is to calculate the premium outgo before deciding between an ordinary
versus floater plan.
Good
Medicine
The mid-cap companies seem to be the antidote
to pharma woes.
By Aman Malik
![](grfx/148.jpg) |
After a sluggish 2005-06, mid-size firms
are seeing some real action |
The
last 12 months have been quite an annus miserabilis for the pharmaceutical
industry. And coming after the impressive performance of 2004-05,
the sluggish growth through 2005-06 was especially daunting. The
new patent regime, some significant legal reverses, plus increasingly
tough global regulations and competition took their toll on the
industry. The year saw no big product launches either in India
or in the US and orders for almost all companies were hard to
come by. "The fact that not many outsourcing contracts were
signed during 2005-06 really hit the pharma companies hard,"
says a Mumbai-based stock analyst.
But the present fiscal promises to be a different
story altogether. "fy07 has already seen some action and
the sector as a whole is poised for high growth," points
out Shahina Mukadam of IDBI Capital Market. In June this year,
Dr. Reddy's announced the us launch of its generic version of
Merck & Co's Proscar drug to treat enlarged prostates; in
July, it got the go-ahead to sell its version of the diabetes
drug Glucophage in the us; reports indicate that Ranbaxy Laboratories
is on the verge of acquiring Russian generic drugs maker Akrikhin
for $100 million or Rs 470 crore. In short, the action has started
again.
The real action though might be brewing in
mid-sized pharma companies. Ahmedabad-based Dishman Pharmaceuticals
took over Swiss company Cabbogen Amcis AG from Solutia Europe
(SESA) for about Rs 350 crore in late August. Others like Cadila,
Jubilant and Aurobindo are scouting for buying opportunities in
the US and Europe. Mid-caps like Orchid Pharma, Shasun Chemicals
and Aurobindo notched first quarter growth figures in the range
of 15-20 per cent compared to marginal growth from large-cap companies
and a decline for MNC. Analysts point out that these companies
are seeking to diversify their product range and are bullish on
the lucrative contract research and marketing services (CRAMS)
and generic spaces.
"The midcap companies anticipate good
earnings in the current fiscal, so they have all the more reason
not to buckle under market forces, at least not in the medium
to long term," says Mukadam. Also, post-crash, valuations
of some of these companies do look more attractive.
SECTOR
WATCH
Viable Choice
RNBC deposits offer higher rates and are
not as risky as before.
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Interesting times: For RNBCs |
Deposit
is quite the magic word these days, with reports indicating that
Indians, eschewing gold because of its escalating price, have
actually swelled the fixed deposits (FD) corpus instead. It's
interesting to note that quite a bit of this is going into the
coffers of the Residuary Non-banking Companies (RNBCs). That's
about 8 per cent of public deposits with all non-banking finance
companies (NBFCs) and 1.20 per cent of the aggregate deposits
with all scheduled commercial banks. Of the four RNBCs in the
country, the two largest, Peerless General Finance and Investment
Company and Sahara India Financial Corporation, account for 99.98
per cent of all RNBC deposits.
The attraction is clear: higher interest
rates of 8.5-8.75 per cent compared to 7.5-8.25 per cent offered
by banks. Added to this are various freebies and add-ons. For
instance, the FD from Peerless comes with free accidental death
insurance and critical illness cover, while taking a Sahara FD
gets you an easy and higher liquidity, 'Death Help' (for nominee)
and 'Children Welfare Plan'.
An RNBC is basically a NBFC that is allowed
to accept public deposits, but does not fall into the standard
NBFC category of leasing, hire-purchase or loan company. Right
now, banks are not too bothered about the higher rates or freebies.
"There is a huge mismatch in the original balance sheet of
these companies. In order to marginalise this gap, they mobilise
deposits with higher rates. Any discerning depositor will come
to recognised banks only," says a bank spokesman.
RNBCs, however, might not be as risky as
once perceived to be, being fully regulated by RBI and with transparency
enforced in advertising and promotion, as Naresh Pachisia, Certified
Financial Planner and Director, Financial Planning Standard Board
of India, points out. He adds: "Depositors, I believe, have
more opportunity and more choice now. Having said that, I still
think mutual funds and debt funds are better options, the marginally
lower returns notwithstanding."
-Ritwik Mukherjee
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