Harshal Subhedar, 42, a Mumbai-based senior hr executive, probably hasn't heard of the maxim that greed is permanent and fear is temporary. Despite making returns of over 33 per cent in the past one year on his investment in HDFC Prudence, a balanced fund, he is disappointed because his fund underperformed the BSE Sensex, which registered above 50 per cent returns over the same period.

Like Subhedar, there are many impatient investors out there. Invariably, their greed takes over when they see others making more money than them, and they want the same thing. Wanting the same thing is not bad per se, but to forget the context of your own investment is fatal. The eagerness to earn more and more not only overshadows the not insubstantial returns your existing fund has generated; you also end up forgetting why you chose a balanced fund in the first place.

There are two aspects to investing: growth and capital protection. Let's first look at balanced funds in terms of growth. In the past year, they have reported average returns of 25.4 per cent, with HDFC Prudence giving 33 per cent, where the average returns of diversified funds have been 33 per cent. Does that sound bad to you?

Of course, returns have been lower than either the Sensex or diversified funds. On average, over the past one, two and three years, balanced funds recorded 25.4 per cent, 34 per cent and 31 per cent returns, respectively, while diversified funds gave a fabulous 33 per cent, 49 per cent and 47 per cent, respectively. But remember that the market was on a secular bull run these last three years, and the debt market was dipping on rising interest rates. And also remember that those who invested in pure equity were also being compensated for the sheer risk of being there. As was proved starkly when the market crashed in May.

Returns are certainly important. However, you cannot underpin all your investments on returns alone. It is important to understand the rationale behind balanced funds and the benefits they bring with them. That brings us to the second aspect of investing, capital protection.

Tightrope Walk

As per its basic definition, a balanced fund is one that invests proportionately in debt as well as equity. The primary aim of the balanced fund is to provide both growth and regular income (see Running In Place). The idea is that you are assured of capital protection in case the market tanks while still getting an extra kick whenever the market rises. For the risk-averse investor who wants his investment sweetened without sticking his neck out too much, a balanced fund is perfect. As Umesh Kamath, Fund Manager, CanBank Mutual Fund, says: "These are great for investors looking for moderate growth." Obviously, then, the balanced fund investor should not complain that his fund is not overtaking the Sensex.

INTERVIEW: Ved Prakash Chaturvedi/MD/Tata Asset Management Company "Systematic Investing Evens Out Market Risk"

Do you suggest balanced funds for risk-averse investors? Balanced funds now typically invest up to 65 per cent in equity and the rest in debt. If investors want to be more conservative, then it would be advisable to have a mix of equity and debt funds. Alternatively, if the investor accepts an equity:debt mix of 65:35, then a balanced fund becomes the preferred option. How have balanced funds performed vis-à-vis the CRISIL Balanced Index? By and large, balanced funds have outperformed benchmark indices over long periods. In fact, over the past few years, strong funds have outperformed the benchmark index significantly. This shows that balanced funds have good long-term potential. Are balanced funds truly balanced today when they invest more than 65 per cent in equity? Or are they closer in risk to diversified funds? As you rightly say, the risk in a balanced fund today is higher than when they were investing only 50-60 per cent in equity. However, given the improved long-term fundamentals for equity, investors who want a higher equity mix will find balanced funds a good investment opportunity. What is the best mutual fund strategy for present market conditions? In my view, a systematic approach-investing a fixed amount each month over a long period-is best for the Indian market today. The long-term fundamentals of the equity market, given our economic conditions, are likely to be good. However, there will be short-term swings, so investors should not commit a large amount in one go to equity. A systematic approach helps even out market risks. What is a good fund allocation strategy for the average retail investor? The fund allocation strategy should reflect the investor's lifecycle stage, his or her risk appetite and the individual expectation of returns that each investor has. Ideally, after taking appropriate financial advice, an investor should decide his equity:debt mix.

The fund is particularly useful for investors looking to rebalance their portfolio and earn an income at regular intervals. "It all depends on the asset allocation and risk appetite of every individual," says Hemant Rustagi, CEO, Wiseinvest Advisors.

And it's not just in the investor's interest. "The balanced fund is a potent asset allocation tool for fund managers to move across two asset classes," says Sandeep Neema, Fund Manager of JM Balanced Fund, which recorded 34 per cent returns the past year. As of August 31, the Rs 15-crore fund had 57.4 per cent of its corpus in equity, 29.5 per cent in money market instruments and 13 per cent in debt. In the portfolios of the top 10 balanced funds, debt allocations in the top 10 investments account for 14 per cent to 55 per cent of the total corpus (see Fund Universe).

"The balanced fund is a potent asset allocation tool to move across two asset classes" Sandeep Neema Fund Manager, JM Balanced Fund	"These schemes can be the first step for an investor entering into mutual funds" Sandesh Kirkire CEO, Kotak Mahindra Mutufl Funds	"They are particularly useful for investors looking to rebalance their portfolio" Hemant Rustagi CEO, Wiseinvest Advisors

The option looks particularly palatable at a time when the market is being fairly unpredictable. Typically, when markets slide, as they did over the last few months, balanced funds tend to overtake diversified funds. The latest six-month graph shows that the former registered average returns of 3.33 per cent compared to 2.23 per cent from diversified funds. "When there is uncertainty in the equity market even as interest rates have stabilised, balanced funds are best as they are less volatile," points out Kamath, who handles Can Balanced II (formerly GIC Balanced Fund), a star in its category. In the past one year, it has returned 55.5 per cent.

Interestingly, it's the second best performing fund overall among all fund categories, just a notch short of Sundaram's Select Midcap scheme, which recorded 56.8 per cent returns over the same period. Can Balanced was the only one of its ilk to cross 50 per cent returns; the others registered between 9.4 per cent and 34 per cent.

Strategise

Experts encourage investors to put in place a proper asset allocation strategy to fine-tune portfolios. The balanced fund is one way to do this, especially if you don't have either the time or wherewithal to manage your portfolio yourself. You get yourself a fund manager to constantly monitor and balance your investment across asset classes. "I personally like balanced funds, as they have the flavour of both classes of assets. With huge financial illiteracy in the country, it's the first step for any investor who comes into a mutual fund," says Sandesh Kirkire, CEO, Kotak Mahindra Mutual Fund. Kirkire, in fact, advises investors to allocate about 20 per cent of the equity component of their portfolio in balanced funds.

A contrarian school of thought suggests that investors can get the same benefit of diversification if they invest separately in equity funds and debt funds. This line of argument is based on the theory that in the long term, pure equity outplays all other asset classes, whereas a mix of debt and equity in one fund restricts overall growth. This is borne out by the five-year returns registered by diversified funds and balanced funds, respectively. On average, balanced funds reported 28.5 per cent against 42 per cent by diversified funds.

There is, however, the tax angle. The latest budget declared that if balanced funds wanted to retain tax benefits, they have to invest at least 65 per cent of their corpus in equity. This means long-term capital gains tax on balanced funds is zero, compared to a debt scheme that pays 10 per cent capital gains tax. Second, as in an equity fund, the dividends are tax-free and investors pay Securities Transaction Tax (STT) on redemption. This instantly puts them at an advantage over debt funds.

While active investors might prefer their own balance of equity and debt funds, conservative investors will not do too badly by choosing the balanced fund method of de-risking portfolios.

Cheque's In the Mail

There's nothing as restful as a regular income coming in even after you retire. How best to ensure this.

By Amit Mukherjee

Golden years: Smart retirees plan finances first, all else later

There are those workaholics who can't bear the thought that they won't have an office to go to after they retire. Then there are those who can't wait to start looking for a suitable pond side they can lotus-eat at. But there are very few people really, less than 30 per cent, who think of retirement purely as a cost they need to bear.

The problem is simple-Indians might not expect the government to bear the cost of their old age, but they definitely expect their children to do so. Slowly, this mindset is beginning to change. There is growing awareness of the need to be financially independent, to not look to children or handouts to support you in old age. People are also beginning to see that retiring from work does not mean retiring from life: the new generation of retirees wants as full a life after retirement as before. This means clubs, hobbies, entertainment, travel... the works. And this means money. As much money, or nearly as much, as you earned during your working years.

One of the best ways to organise retirement finances is to ensure that you get a solid regular income, the equivalent of your monthly pay cheque. Retirement planning has essentially three elements-liquidity, regular income and growth. The first meets unforeseen emergencies, the second meets routine household expenses, while the third helps your savings beat inflation.

Typically, experts advise that you set aside about six months of family budget in a savings account to take care of liquidity needs. Growth, of course, is taken care of by a suitable debt:equity mix. And regular income is taken care of by investing funds equivalent to five to six years of your budget in regular income generating instruments (see Life After 60). We look here at the avenues available to ensure this uniform stream.

Many Options

There are two popular post office options: the Monthly Income Scheme (POMIS), popular with its 8 per cent assured returns. And the Time Deposit (POTD), essentially a fixed deposit (FD) variant. The catch with POMIS is that it is taxable and post-tax returns for the highest tax bracket come down to 5.55 per cent. Also, with a six-year tenure, liquidity is an issue. If you withdraw before the third year, there is a deduction of 5 per cent. Its biggest advantage is the assured monthly income. POTD tenures, on the other hand, range from one to five years, and returns range from 6.25 per cent to 7.5 per cent on a quarterly compounding basis. Interest payments are made annually. Premature withdrawals can be made after six months, but you lose some interest. The minimum POTD investment is Rs 200, with no upper limit, while the minimum POMIS investment is Rs 1,000, with Rs 3 lakh the upper limit for individual accounts, and Rs 6 lakh for joint (couple) accounts.

From mutual funds, you have two options: Systematic Withdrawal Plans (SWOs) and Monthly Income Plans (MIPs). Neither offer assured returns, but returns are higher than other instruments.

SWPs let you fix regular investments and withdrawals. There is risk, however, of capital erosion, especially because low returns are made up from your capital. They are useful for periodic income, an option in growth plans that lets you redeem units worth a pre-specified amount at fixed durations (monthly, quarterly, half-yearly or annually). The withdrawals are treated as capital gains, and taxed at 10.5 per cent (for withdrawal before one year). This has given SWPs a distinct edge over dividend plans, because unlike dividend income where the entire amount is taxable, only the capital gains portion of SWP withdrawals is taxed.

As for MIPs, they yield best returns if you use strategy. First, invest in Senior Citizens Savings Scheme (SCSS) and POMIS till your income reaches Rs 1.85 lakh (tax-free limit for senior citizens, assuming there is no other income). Invest this in an MIP, where you can get a tax break and higher returns. You can choose from monthly, quarterly, half-yearly and annual dividend options or the growth option.

Another excellent avenue is SCSS, reserved for people who are 55 and above. You can make a minimum investment of Rs 1,000 (maximum: Rs 15 lakh) for five years at 9 per cent per annum. Earnings are disbursed every quarter, making this the most attractive option in its peer group. Premature encashment is permitted after one year, with a penalty. Liquidation before two years is charged 1.5 per cent of deposit (1 per cent after two years).

Company FDs is another retiree favourite, but make sure you check the lineage of the firm and its safety rating. You get interest payouts every month. There are also bank FDs. They offer a higher (about 0.50 per cent more) interest rate to senior citizens, which, along with the safety factor, makes them attractive.

There are also annuities, tax-deferred investments that guarantee regular payments after retirement, but they are not tax-efficient being treated like salaries. A better bet is a low-cost unit-linked insurance plan (ULIP), from which you can take a tax-free annuity. The 8 per cent bonds score high on safety, but low on liquidity, and the earnings are taxed.

Ideally, organise investments so that you get periodical interest income from one or other source, with your capital working away safely. Once that's in place, it doesn't matter if you want to be a lotus-eater or get another job.

NEWS ROUND-UP

Safety Net
Merchant bankers are trying to tempt retail investors back to IPOs with the promise of protection.

Receiving end: Low-cost pioneer Deccan Aviation's IPO barely made it

First, there was a time of excess, when any new issue was oversubscribed heavily. Then came a time of panic, when issues of reasonably deserving companies like Deccan Aviation got mauled. Now, merchant bankers are actually offering retail investors incentives to invest in IPOs, or at the least, the promise that their money will be safe.

Take a look at the IPO from Usher Agro. The company's public issue that closed on September 11 was being managed by IDBI Capital Market Services. Usher Agro's primary business is that of agri-processing and the company was looking to raise a little over Rs 18 crore. That is not a large issue by any standards and Usher had a reasonably good story to sell but Ananta P. Sarma, Executive Vice President and Head (Investment Banking), IDBI Capital Market Services, believed it needed something more to make the issue attractive. Like an incentive. The incentive itself was quite simple-IDBI Capital decided to offer a unique 'safety net' reserved for resident individual allottees. In terms of numbers, the merchant banker offered to buy back up to 800 equity shares from each of the original resident individual allottees at Rs 15 per share, exactly the issue price. The scheme stays open to investors for six months from the date of share allotment.

Interestingly, this is not the first time that IDBI Capital Market Services has come out with a safety net like this. "We had the same thing for Infotech Enterprises when it went public about 10 years ago. The issue was then priced at Rs 20 and was oversubscribed about 1.4 times," says Sarma. The safety net period was then 15 months unlike six months in the case of Usher Agro.

Another case of merchant bankers playing it safe has been that of Orbit Corporation's IPO, being managed by Edelweiss Capital. Here, the merchant banker promises the investor "one detachable warrant per equity share". The warrant will be converted to an equity share of Orbit Corporation at a later date.

Not everyone is completely convinced though that incentives such as these work. "I am not too sure if something like this will work, since IPO investors look for larger upsides. Also, something like a buyback interests only a limited number of investors," says Ravi Sardana, Senior Vice President, ICICI Securities.

Then there are those who think safety nets are merely a sign of weakness, that such an incentive implies that there is something wrong with the fundamentals of the company. Whether that is true or not, the fact is the retail investor is running scared. Issues like that of Deccan Aviation, GVK Power & Infrastructure, Prime Focus and Unity Infraprojects that should have sailed through easily, did not. Of course, there are signs of change. More recently, Tech Mahindra's issue was oversubscribed 70 times, GMR's about seven times and Voltamp Transformers' 17.65 times. These could send the right signals to investors. If safety nets can succeed in further restoring the confidence of the retail investor, it can't be too bad an idea.

-Krishna Gopalan

Back In The Reckoning
Bank FDs rival post office savings as safe havens.

As short-term bank rates cross the magic 8 per cent mark, fixed deposits (FDs) are slowly coming back into the reckoning. IDBI Bank's popular Suvidha Plus has created quite a flutter with its offer of 8.25 per cent interest on a 500-day savings deposit. Private sector banks like ICICI, YES Bank and IndusInd are also upping their rates (see Time To Get In).

At a time when the equity market is volatile and given that post office savings rates seem to be staying put, the hike in FD rates is cause for joy in investing circles, especially if you are a totally risk-averse investor who has been mourning the drying up of safe, assured return revenue streams. As a senior banker says: "There could be a shifting of post-office savings to bank deposits."

At present, the time deposits, recurring deposits and monthly income schemes offered by the post-office give returns of 6.25 per cent to 8.0 per cent per annum. However, their biggest drawback is that the income does not get any tax breaks. Bank FDs, however, come under the Rs 1 lakh limit of Section 80C, which allows investors to claim tax deductions if they are kept for the long term. Bank FDs also offer much higher liquidity. And the term of post-office savings is way too long compared to banks' short-term deposits of one to two years.

Although depositors are rejoicing the rise in interest rates, it is not clear if the rates will rise much beyond current levels. According to S.N. Paul, Senior Vice President, IndusInd Bank, interest rates could rise by half per cent in the near future. "The rise in the US Fed rate has halted a bit," says Paul. Make hay, is what we say.

-Anand Adhikari

Feel Safe Factor
Can capital protection schemes lure investors back?

New scheme: To protect you

Some years ago, SEBI (Securities & Exchange Board of India) had banned the launch of assured returns schemes by mutual funds. The new animal it has now given its blessings to, the capital protection scheme, is a variant but with a significant difference. Now, the AMC (Asset Management Company) does not assure the investor of protecting returns, only the capital.

The significance of such a scheme in volatile times like these is not lost. "The scheme has huge potential and has already seen interest from investors who never touched equity in the fear of losing their principal," says Arun Panicker, Director (Financial Sector Ratings), CRISIL. The biggest attraction for investors, of course, is the fact that they are assured of their capital even when the market slides.

SEBI has also mandated that asset management companies (AMCs) will get their schemes rated by a registered credit rating agency. Several AMCs have announced the launch of various schemes under this umbrella, and have approached CRISIL for ratings. Meanwhile, the schemes of Franklin Templeton and Reliance Mutual Fund have both been graded AAA. As CRISIL points out, this grade indicates that the schemes offer low default risk, given that the debt portion of the investments is entirely in government securities (G-Sec) and other AAA-rated debt instruments. Other AMCs that have approached CRISIL include HDFC and ING Vysya Mutual Fund.

All capital protection schemes have to be close-ended: investors cannot exit before maturity; nor will the AMC be allowed to repurchase the units before maturity. This allows the fund manager to take long-term positions. The debt portion helps protect capital in a falling market while the equity portion can garner additional returns. The flip side, though, is that the funds attract a 10 per cent capital gains tax.

In their first efforts, Franklin Templeton and Reliance have launched schemes that are largely similar to the Benchmark Split Capital Fund, where the equity portion goes into Nifty and the maximum upside is restricted to 40 per cent of Nifty returns. In days to come, there will no doubt be endless variety in scheme compositions. As Panicker says: "This is just the beginning."

-Mahesh Nayak

The Black Sheep
Serious investors look on them with horror, yet they attract thousands of investors. Just what is it about chit funds?

By Anand Adhikari

"Chit funds continue to be well accepted by society and there is again a rising interest in them" V. Siva Rama Krishna General Secretary/ Chit Fund Association of India

Bollywood comedy Phir Hera Pheri has three greedy friends pooling in Rs 1 crore to invest in Lakshmi Chit Funds run by the glamorous Bipasha Basu. They beg, borrow, even sell their house to raise the cash, only to discover three weeks later that Lakshmi Chit Funds shut shop and stole away into the night.

The problem is, in this instance, art very closely imitates life-stories of chit fund scams are legion in our investing history. The very phrase chit fund conjures up images of shady deals and fly-by-night operators, an image the industry is stuck with.

The intriguing thing, though, is that despite this, they still attract thousands of investors every year and crores of rupees, this despite the expansion of banking into the remotest parts of the country. What started off many decades ago as a financial institution run by and for small farming communities in South India is alive and kicking today despite scores of scandals and bad publicity. "Chit funds continue to be well accepted by society and there is again a rising interest in them," says V. Siva Rama Krishna, General Secretary, Chit Fund Association of India.

In fact, chit funds offer as strong a parallel banking service as the ubiquitous moneylender or pawnbroker, servicing just as wide a network of small businessmen, housewives and salaried individuals (see Fund Facts). According to available figures, chit funds account for about 3.39 per cent household savings at Rs 5,88,656 crore, against about 4.92 per cent invested in shares and debentures.

Double-edged Tool

This popularity continues, despite the rising awareness about mutual funds and the equity market. The recent fluctuation in interest rates helped the industry garner additional investors, say experts. This is because the avenue offers a dual advantage, unlike other financial instruments, where an investor can both borrow money and earn an interest on his deposited amount. The borrowing cost, point out industry sources, is lower than that offered by credit card companies, private banks and unorganised lenders. And earnings on investments can be quite high, ranging from 8 per cent to 16 per cent.

Basically, a chit fund operates like a bank, pooling together money from a diverse group of investors and lending a lump sum to one borrower each month (see The Mechanics). Members continue to pay in, and the fund keeps up the process of collection and distribution till the end of the tenure, thus ensuring that all participants get a profit. During the tenure, a participant can choose to withdraw a lump sum amount for an emergency or big ticket purchase, or he can keep the money in till maturity as investment. Basically, you end up paying interest if you withdraw the money early and you earn interest if you keep the money till maturity. "The thumb rule," says Kamal Bhambhani, Director, Chandra Lakshmi Chit Fund, "is that you can get at least a bank savings rate if you hold on till maturity of the scheme." Although, often, you can earn much more.

Schemes are available for varying maturities, from 12-50 months, and monthly subscriptions range from Rs 400 to Rs 1 lakh. Schemes also vary their membership strength from 25-30 members.

As a thumb rule, the longer you stay in the fund, the more interest you can earn on your investment. Conversely, the demand for borrowing is also highest in the earliest months, as you get the longest tenures then. Members bid for the loan by offering a discount: that is, instead of the entire pooled amount of, say, Rs 1 lakh, they will offer to borrow Rs 60,000 or Rs 80,000. The foregone amount is the discount that is distributed as earnings among the rest of the members and a small part goes to the chit fund as management fees.

Although the borrowing rate sometimes is cheaper than at banks, the catch is that, unlike banks, it is not a fixed rate. How much you pay for your loan will depend on variables like when you borrow, the profile of the other subscribers, and the demand for the money from other members. The biggest hurdle is the default rate. For the fund to function smoothly, members should pay in their subscriptions regularly till the end of the tenure.

Growing Numbers

According to market observers, the credibility of a few large companies has managed to attract investors into the Rs 20,000 crore industry. Take, for instance, the $1.3 billion (Rs 6,110 crore) Chennai-based Shriram Group, which runs the largest chit fund business in the country. The 32-year-old company manages a corpus of Rs 3,200 crore annually, and is also the first fund to launch a life insurance business.

In fact, chit funds have beefed up their distribution force in the last few years. "A lot of young people are coming into the industry," says D. Ramachandran, Chairman, Panchajanya Chit Funds. Possibly, one of the best things to have happened to the industry is regulation. Today, chit fund companies are treated on par with NBFCs (non-banking finance companies), and have been exempted from the requirement to register under Section 45-IA of the RBI Act. Instead, they come under their respective state governments.

The Chit Fund Association, on its part, is being proactive, already lobbying for incorporating investor protection measures into the schemes. "We want insurance coverage for subscribers; there is also a need for self-regulation in the sector," says Rama Krishna.

While these will go a long way towards enhancing the credibility of this institution, the onus, as always, is on the investor to take common sense precautions before investing.

The iPod Wannabes
Some new launches promise to rival this Apple icon. Do they have what it takes?

By Kushan Mitra

IPod: No swan song yet

Whatever competition might think, it actually is still a bit early to dump the Apple iPod into the dustbin of gadget history. Way too early. But, for the first time in its five years of exalted existence, the iPod actually has a couple of competitors that match and sometimes exceed the iPod's legendary ease-of-usability and other features. Creative, a Singapore-based company famous for its sound solutions, has an extremely successful line in mp3 players under the Zen and Nomad brands.

And then there is Microsoft, which, not content with its rather successful foray into consumer electronics with the Xbox, has announced that it too will cut itself a piece of the Apple pie with Zune, an mp3 player with thus-far mysterious specifications. The only news is that the player will hit stores in the us before this holiday season (October onwards), and that although the Zune will support several audio formats, like Apple pushing the AAC format, Microsoft will reportedly push WMA audio encoding. Most players will also have video playback capabilities.

Samsung is the other company making an mp3 push, with bigger and better mp3 players under its Yepp brand. The Korean company has also announced its desire to enter the burgeoning market for online music retailing.

The Online Buzz

One major reason for iPod's triumph has been the success of Apple's iTune music store, which allows users to buy songs and entire albums for download. Several rival services have emerged here, including Napster and Yahoo Music (rumours abound that Google too will make any entry soon), but much of the music they sell are not compatible with iPod players because of different Digital Rights Management (DRM) systems. Owning an iPod means you can only buy music online from the iTunes store, keeping the loop closed and Apple's revenues up but consumer choice low. Most iPod rivals are compatible with music bought from different online music retailers, and Apple might have to pay the price for being more monopolistic than Microsoft ever has been.

However, in India, the concept of online music sales has not really taken off and despite the huge rush for DRM by the music industry globally, Indian consumers are usually digitising their own CDs or downloading pirated music. The current generation of Digital Audio Players have no qualms about what music they play, and will play back an unsigned and likely pirated mp3 just as effortlessly as a DRM track. In future, however, things might not be quite so easy.

As for price, an Apple iPod 60 GB costs $399 (Rs 18,753) in the us and Rs 23,000 in India. Similar capacity players from all manufacturers cost virtually the same, both in the legal and grey markets. But rumours are the Zune might be launched at a slightly lower price. So, is the iPod finished? Not quite. In India, Apple has tied up with hcl Infosystems to increase its distribution and servicing reach. HCL has also launched a website hcllive.in to retail music and videos.

The battle in Digital Audio Players is far from over but in India the market size is still miniscule. People still use their mobile phones to listen to music and mobile music stores from operators such as Hutch and Airtel have been a roaring success. It should come as no surprise if Nokia, Sony Ericsson and Motorola emerge as the Apple and Creative on the Indian digital music scene (See also iPod CEOs on page 184).

Current Affairs
Huge investments are expected in power by 2012.

By Aman Malik

Power sector: Is it still alive with opportunity?

Arecent nationwide survey conducted by the Confederation of Indian Industry (CII) paints a rather bleak picture of the country's power sector, and with good reason. India today has an installed electricity generation capacity of 125,000 mw, a manifold increase from the 1,500 mw of 1947, but still representing a shortfall of 8-9 per cent given the existing electricity demand. India is perennially in the throes of power shortage, despite the fact that when calculated in terms of purchasing power parity, Indians pay the highest prices worldwide for energy.

Ask industry analysts, however, and they will tell you how, despite being so regulated, the power sector is alive with opportunity. The expert committee report on the Integrated Energy Policy, produced by the Planning Commission, calls for an integrated approach to energy planning. It is estimated that by the end of the 12th Five Year Plan, India will add another 70,000 mw of power. In fact, by 2012 this capital-intensive sector is likely to see an investment of Rs 4,80,000 crore (most of it through government participation). Of this, Rs 2,50,000 crore is likely to be spent on power generation and the remaining Rs 2,30,000 crore on transmission and distribution.

"The power sector today is a hot proposition," says a Mumbai-based stock analyst, "but those looking to invest in power sector stocks must stay in for the long term." Traditionally, companies in the sector (whether in the transmission and distribution or generation space) have tended to throw up predictable results. But in the past 12 months, stocks in the T&D space have risen by an average 20 per cent, with some like Areva t&d India rising almost 200 per cent. Even after such an upswing, the stocks look fairly valued given future earnings expectations, with indications that prices will head further north. Tata Power plans to add about 3,000 mw capacity over the next five years. NTPC is looking to sustain a 12 per cent growth rate, while Reliance Energy has aggressive growth plans.

However, it's also true that the government's recent move to allow open access to state electricity boards will impact distribution companies adversely, as they will have to cough up extra cash for grid connectivity. But the market, nevertheless, predicts handsome returns, especially around October 2007. Analysts also predict that the transmission and distribution segment will likely yield higher returns, being far less regulated than the generation sector and thus open to faster and more efficient reforms.