Tuesday, August 26, 2008

Power Grid Corporation Result Analysis : Strong operational performance

Power Grid Corporation for the first quarter ended Jun’08 reported 33% increase in sales at Rs 1294.03 crore. The operating margin expanded by 40 bps to 82.5% propelling the operating profit up by 33% to Rs 1068.14 crore. However spurt in other income and depreciation charges dented the PBT by 35% to Rs 354.24 crore. The PAT settled at Rs 305.69 crore with a fall of 32% y-o-y after accounting for tax and prior period item.

Quarterly performance

Revenue for the quarter ended Jun’08 reported 33% increase to Rs 1294.03 crore compared to Rs 975.47 crore in the corresponding previous quarter. The income from transmission contributed almost 94% of the total revenue with an increase of 39% to Rs 1214.14 crore. Consultancy income also inched up by 5% to Rs 33.09 crore. While the income from telecom and short term open access – transmission charges declined by 32% and 48% to Rs 40.66 crore and Rs 6.14 crore respectively.

The operating margin expanded by 40 bps to 82.5% propelling the operating profit up by 33% to Rs 1068.14 crore. Further with the other income increasing by 42% to Rs 113.88 crore, the PBIDT increased by 34% to Rs 1182.02 crore. Other income included Rs 34.24 crore of interest on bonds and long term advances; Rs 12.42 crore of Lease income, Rs 28.97 crore of Interest from banks and Rs 18.35 crore of Interest from banks.

The staff cost for the period, which formed a part of expenditure, increased by 42% to Rs 151.59 crore. Based on the recommendations of the committee formed by GOI, a sum of Rs 28.72 crore (net of amount charged to construction) has been charged to P/L on account of wage revision provision for the quarter against Rs 22.34 crore for the quarter ended Jun ’08.

The interest cost increased by whopping 400% to Rs 563.99 crore out of which Rs 73.55 crore is towards FERV as adjustment in borrowing cost, Rs 23.60 crore is towards rebate to customers and Rs 122.96 crore is towards FERV above domestic borrowing cost. Further with the depreciation provision increasing by 17% to Rs 263.79 crore, the PBT declined by 35% to Rs 354.24 crore. After accounting for a prior period item of Rs 0.59 crore and tax provision of Rs 47.96 crore, the PAT for the quarter declined by 32% to Rs 305.69 crore.

Without considering the impact of FERV, net profit after tax for the quarter ending June 2008 is Rs 3650.70 million as against Rs. 2538.40 million for the quarter ending June 2007. The increase of 43.82% is due to commissioning of new transmission assets of Rs 24853.90 million in the current quarter and also the impact of commissioning of assets of Rs 59581.90 million during last year in various stages.

In respect of Foreign-Currency loans contracted on or after April 01, 2004, FERV which is accounted for on accrual basis and hitherto taken to Profit & Loss Account during construction stage is now being accounted for, with retrospective effect from April 01, 2006 i.e. the year of first withdrawal of these loans, as deferred foreign currency fluctuation asset liability account’ with a corresponding credit/debit to Profit & Loss Account / deferred income in accordance with the above referred opinion of EAC of ICAI and in tune with the ‘matching’ concept of income and expenditure. This has resulted in increase in Profit by Rs. 717.70 million for the current quarter in the Profit & loss account.

There is a swing of Rs 2577.20 million on account of FERV between the quarters ending June 2008 and June 2007. A gain of Rs 1983.40 million, which was accounted for during the quarter ended June 2007, was reversed at the end of Financial Year 2007-08 in accordance with the opinions of EAC of ICAI. During the current quarter, FERV loss of Rs 593.80 million has been accounted for which includes reversal of Rs 510.80 million gain, accounted for in 2007-08, in accordance with the change of accounting treatment as stated above.

Out of Rs 1965.10 million i.e., Rs. 735.50 million & 1229.60 million stated at Sr. No, 5(b) & (d) respectively of the Unaudited Results (Rs. 1983.40 million gain in the corresponding quarter of the last year), charged to Profit & Loss account, a sum of Rs 1371.30 million including Rs 717.70 million as stated above and (Nil in the corresponding quarter of the last year) is recoverable from SEB’s and the same is included in transmission income. The balance Amount of Rs 593.80 million has been charged to Profit & loss Account.

The scrip of the company currently trades at Rs 98.

Wednesday, August 20, 2008

ABG Shipyard leads gainers in ‘A` group

ABG Shipyard surged 6.88% to Rs 398.25. It topped gainers in BSE`s `A` group shares. The stock is one among the 39 stocks to be included for trading in the futures & options segment on the National Stock Exchange from tomorrow, 21 August 2008.

Engineers India gained 6.76% to Rs 623. It was the second biggest gainer in A group. On 25 July 2008, the company posted 33% rise in net profit to Rs 50.63 crore on 67.7% surge net sales to Rs 252.44 crore in Q1 June 2008 over Q1 June 2007.

India Infoline jumped 6.39% to Rs 146.50 and was the third biggest gainer among the BSE ‘A` group shares. On 8 July 2008, its subsidiary India Infoline Insurance Brokers received approval from Insurance Regulatory & Development Authority for insurance broking business.

Steel Authority of India advanced 5.53% to Rs 147.85. It was the fourth biggest gainer in A group.

Rashtriya Chemicals & Fertilisers soared 5.07% to Rs 68.35. It was the fifth biggest gainer in A group. Fertiliser stocks spurted on reports that the ministry of fertilisers has cleared Rs 22,000 crore in cash as fertiliser subsidy, reducing concerns of cash flow problems for the companies.

Asian Markets Rebound As Shanghai Surged By 7.6%

The stock markets across the Asian region closed on a mix note after Wall Street fell for a second day on inflation worries, continued weakness in the financial sector and a rebound in crude oil prices. On Wall Street, the Dow Industrials lost 1.14%, the broader S&P 500 dropped 0.93% and the tech-heavy Nasdaq fell 1.35%. The Labor Department released its report on wholesale price inflation in the month of July, showing that prices increased by much more than expected due in part to a continued increase in energy prices.

Asian financial stocks were weak, but resources were higher on stronger commodity prices. Oil prices rebounded, jumping back above $114 barrel after the dollar weakened against the euro and heating oil prices rose sharply. Light, sweet crude for September delivery rose by $1.66 to settle at $114.53 on the New York Mercantile Exchange ahead of the expiry of the September contract on Wednesday. In late Asian session Wednesday, oil was up 66 cents at $115.19 a barrel by 4:08 a.m. ET.

On the currency front, the U.S. dollar declined on profit taking following recent rally and weakness in the U.S. stock market. The dollar traded in the upper 109-yen levels in early Tokyo deals, down from lower 110-yen levels late Tuesday. The dollar was quoted at 110.00-110.02 yen compared to yesterday`s close of 110.00-110.03 yen in Tokyo.

However, the Australian dollar closed firmer amid a rebound in commodity prices and a weaker U.S. dollar. The Aussie finished the session at US$0.8716-0.8720, up from Tuesday`s close of US$0.8642-0.8645.

The New Zealand dollar edged closer to two-week highs supported by a weaker U.S. dollar and stronger commodity prices. The kiwi, which has lost 6% over the past month, finished the local session at US$0.7150-0.7160, slightly below the peak of US$0.7162 hit on Monday, compared to US$0.7080-0.7086 late Tuesday. In the early Asian trade the kiwi was quoted higher at US$0.7138 in early local trade.

The South Korean won edged up against the U.S. dollar. The local unit closed at 1,049.30 a dollar; up from 1,051.80 a dollar at open as foreign exchange authorities unloaded some of their dollar holdings to prop up the local currency.

Coming back in equities the Japanese market closed lower for the second consecutive trading session. After a weak opening, tracking Wall Street`s plunge overnight, the market briefly traded in positive territory in the afternoon session as sentiment improved following a rally in the Chinese market. The benchmark Nikkei 225 index fell 0.1% to finish at 12,851.69 and the broader Topix index closed down 0.2% at 1,233.37.

On the economic front, Japan`s all-industry activity index dropped 0.9% on month in June, the Ministry of Economy, Trade and Industry reported Wednesday. The decline matched the estimates of most analysts. The index for the three months to June rose 0.5% from the previous quarter. The ministry also said that the index in June was 1.2% below its level a year earlier.

Meanwhile, the Bank of Japan said in its monthly report of Recent Economic and Financial Developments for August that the Japanese economic growth has been sluggish. According to the central bank, high energy and material prices and weak exports growth contributed to the sluggishness.

The Chinese market closed sharply higher on speculation that the government will soon undertake measures to boost the economy and the stock market. The gains came after Chinese Vice-Premier Li Keqiang said that there was a need to increase household incomes and rural consumption to cope with a weakening global economy. Brokerages, property developers and banks surged.

The benchmark Shanghai Composite Index jumped 7.6% - its largest percentage gains since late April to finish at 2,523.28. In Shenzhen, the All Share index soared 7.2% to 712.82.

On the economic front, there was some relief for the policymakers as the enterprise commodity price index, a measure of wholesale prices, rose 9.4 pct year-on-year in July, compared with a 9.5 pct year-on-year rise in June. Compared with the preceding month, the index was up 0.7 pct.

The People`s Bank of China said in a statement that prices of coal, electricity and oil products rose 26.7 pct year-on-year in July and were 4.7 pct higher than the preceding month. Coal prices in July surged 53.5 pct from a year earlier and were up 6.1 pct from the previous month. Crude oil prices rose 46.8 pct year-on-year and 4.1 pct month-on-month. Prices of electricity rose 2.9 pct year-on-year and were up 2.7 pct compared with June.

Non-ferrous metal prices fell 3.2 pct year-on-year and were up 0.6 pct month-on-month, while iron ore prices rose 45 pct from a year earlier and 3.3 pct from the previous month. Prices of steel products were up 44.1 pct year-on-year and 0.9 pct month-on-month.

Copper prices fell 1.4 pct year-on-year and were up 0.5 pct from June, while prices of gold rose 26.1 pct year-on-year and were up 5.4 pct month-on-month. Agricultural product prices in July were up 6.8 pct year-on-year and were up 0.3 pct month-on-month.

In Hong Kong, the Hang Seng China Enterprises tracked Shanghai stocks higher to end 4.3% up at 11,179.16. The benchmark Hang Seng Index rose 2.2% to 20,931.26.

The Australian stock market closed higher, recouping some of yesterday`s losses. The market started off higher, and extended its gains as resources stocks rose on stronger commodity prices. The benchmark S&P/ASX 200 index closed up 1.3% at 4,929.5 after plunging 2.4% on yesterday. The broader All Ordinaries index advanced 1.4% to finish at 4,997.5.

On the economic front, a forward-looking index of Australian economic growth declined in June to an annualized rate of 2.0%. The index, published by Westpac Bank and Melbourne University, shrank from a reading of 2.4% in May. The coincident index, measuring current economic activity, showed an annualized growth rate of 2.4% in June, down from May`s reading of 2.7%.

Australia`s Department of Employment and Workplace Relations said that the skilled job vacancies fell 1.7% on month in August. The index for the month stood at 88.4.

The New Zealand stock market closed higherending a two-day losing streak. The market started off weak, but staged a strong recovery and moved into positive terrain in late trade. The benchmark NZX 50 Index closed up 0.39% at 3,332.03 and the broader NZX All Capital Index advanced 0.47% to finish at 3,356.37.

The South Korean market closed lower for the third consecutive trading session on Wednesday. The market started off weak on Wall Street`s fall overnight, but recovered ground and moved into positive territory by afternoon and finished the session slightly below the flat line. Investors sold tech and shipyard shares, but bought steel and chemical stocks. The benchmark Korea Composite Stock Price Index or KOSPI declined 0.05% to finish at 1,540.71.

The Indian market surged in mid-afternoon trade to hit new intra-day high. The BSE 30-share Sensex closed up by 0.92% to 14,678.23. Key benchmark indices had surged in opening trade today on bargain hunting after sustained fall in the last five successive trading sessions. Strong Asian cues aided the recovery. The S&P CNX Nifty gained by 1.09% to 4,415.75.

Elsewhere, Taiwan`s weighted index gained 0.89% to 7,040.90 while Singapore`s Straits Times index increased by 0.86% to 2,751.75. In Malaysia the KLSE Composite Index was up by 0.35% to 1,073.21. In Indonesia, the Jakarta Composite increased 1.33% to 2,069.70.

In the other part of the world, European shares edged higher from two-week lows, as miners and oil producers advanced on the back of an up tick in crude-oil futures and investors also dipped a toe back into the battered financial sector.

Tracking the globe it was a similar story around the regions in Europe following the Asian market rebound. Of national indexes, U.K. FTSE 100 index rose 0.8% to 5,362.30, while the French CAC-40 index climbed 0.7% to 4,362.16 and the German DAX 30 index advanced 0.4% to 6,307.02.

On the economic front, the Bank of England released the minutes of monetary Policy meeting in which the committee voted 7-2 to keep the bank rate at 5.0% in August, with one member voting for a rise and one for a cut. The minutes showed the MPC as a whole agreed that a case could be made for a rate cut, even if most were worried that such a move would send a signal that they cared more about growth than inflation. The main issue for the committee was how persistent inflation was likely to be and how large a margin of spare capacity would be necessary to offset it.

Looking ahead the day left with leading economic indicators for Canada, which will be followed by retail sales for the same. In the evening we have EIA crude oil stock change for US for the week ended on 16 August 2008. In the late evening we have merchandise trade balance for the Japan

Market ends higher amid late volatility

The market ended with decent gains after it had posted losses for the last five successive trading sessions. However, the market came off from a intra-day high hit in late trade.

Asian stocks rebounded from a two-year low as Chinese shares surged on hopes the government will introduce a stimulus package to boost the slowing economy and aid the stock and property markets. European markets which opened after Indian market were in green.

The BSE 30-share Sensex provisionally rose 144.72 points or 1% to 14,688.45. At day`s high of 14,746.20, the index gained 202.47 points in late trade. At the day`s low of 14,584.03, the Sensex was up 40.30 points in mid-morning trade.

The S&P CNX Nifty was up 52.3 points or 1.2% to 4,421.50.

The BSE clocked a turnover of Rs 4,233 crore today, 20 August 2008 as compares to turnover of Rs 3,972.48 crore on 19 august 2008.

The BSE Mid-Cap index was up 1.02% to 5,825.29 and the BSE Small-Cap index was up 0.66% at 7,059.21.

The market breadth was strong on BSE with 1,648 shares advancing as compared to 984 that declined. 85 shares remained unchanged.

India`s largest private sector firm by market capitalisation and oil refiner Reliance Industries rose 1.03% to Rs 2,244.15. It came off from sessions high of Rs 2,258.40

Large-cap diversified firm Grasim Industries rose 3.48% to Rs 2,025.15. It recovered from session`s low of Rs 1,955.

India`s largest electric equipment maker by sales Bharat Heavy Electricals rose 3.64% to Rs 1,734.90. It came off from session`s high of Rs 1,743 hit in late trade.

India`s largest real estate player by market capitalization DLF rose 1.9% to Rs 509.90. It came off from its high of Rs 514.50 hit in late trade.

India`a largest engineering and construction firm by sales Larsen & Toubro rose 1.59% to Rs 2,717. It came off from session`s high of Rs 2,725 hit in late trade. As per reports, L&T is close to buying equity stake in coal mines in Australia and Indonesia to increase its focus on the power sector. In the next couple of years, L&T hopes to have 4,000-6,000 megawatt (MW) of power plants under development and the equity in coal mines abroad will be to feed these power plants.

India`s largest listed telecom services provider by sales Bharti Airtel rose 2.99% to Rs 815.25. It recovered from the session`s low of Rs 793.

India`s second largest private sector bank by net profit HDFC Bank rose 2.52% to Rs 1,237.90. It recovered from session`s low of Rs 1,202.05.

India`s largest drug maker by sales Ranbaxy Laboratories rose 2.72% to Rs 505.65. It recovered from session`s low of Rs 489.

Mahindra & Mahindra (down 2.08% to Rs 549.55), ONGC (down 2.52% to Rs 1,035.85), Satyam Computer Services (down 0.74% to Rs 402.65), ICICI Bank (down 0.01% to Rs 678.30), edged lower from the Sensex pack.

Reliance Infrastructure (up 1.55% to Rs 1,009.70), NTPC (up 1.41% to Rs 183.95), Jaiprakash Associates (up 1.27% to Rs 171.40) edged higher from the Sensex pack.

India`s second largest IT exporter by sales Infosys was rose 0.32% to Rs 1,699. The stock recovered from session`s low of Rs 1,680.10. Infosys Technologies chief executive S. Gopalakrishnan today, 20 August 2008, said the business environment remained challenging but there was no move by clients for lower prices.

India`s second largest telecom services provider by sales Reliance Communications (RCom) rose 3.76% to Rs 414.85. It had touched a high of Rs 418.20 in late trade. The company on Tuesday launched satellite television operation under the name Big TV. It will compete with Dish TV, state-owned Prasar Bharti`s DD Direct, Sun TV`s DTH arm and Tata Sky, a venture of the Tata Group and News Corp.

European markets were in green. France`s CAC40, Germany`s DAX and UK`s FTSE 100 were up between 0.51% to 0.92%.

Most of the Asian markets were trading higher today, 20 August 2008. China`s Shanghai Composite, Taiwan`s Taiwan Weighted, Hong Kong`s Hang Seng and Singapore`s Straits Times rose between 0.39% to 7.63%. However, Japan`s Nikkei andSouth Korea`s Seoul Composite fell between 0.05% to 0.1%.

US markets declined for a second straight day yesterday, 20 August 2008, as an inflation report agitated a market already rattled by worries about the financial sector. The Dow Jones industrial average plunged 130.84 points, or 1.14%, to 11,348.55. The S&P 500 index lost 11.90 points, or 0.93%, to 1,266.70, and the Nasdaq Composite index slipped 32.62 points, or 1.35%, to 2,384.36.

Tuesday, August 19, 2008

Top seven equity funds

Seven equity funds managed to multiply their NAV by ten times in the last five years. A big achievement considering that they also managed to outperform their respective benchmark index by a wide margin.

So how much return did these G-7 funds manage to get? SBI Contra gave an absolute return of 1227% in the last five years, SBI Global 1115%, Sundaram BNP Paribas Select Midcap 1046%, Reliance Growth 1169% and Birla Equity 913%. HDFC Taxsver and DSP equity earned a return of 925% each.

Returns were calculated as on Sep 30, 2007 and only for growth options

The year 2003 and 2005 have been major return getters for these funds. Almost 60% of the total five year returns were earned during these two years. If Rs 1000 is the total return earned by an investors, Rs 374 was earned in '03 and Rs 192 in '05. The bearish phase of 2002 was a drag with only Rs 62 earned. The years 2004 and 2006 were almost identical giving around Rs 140 each.

2003 - the year when the great Indian stock market bull run actually started (in April '03) - was a major return getter. Around 38% of overall returns earned over the five year period was achieved during the calendar year 2003. Larger exposure to midcaps helped many of these funds to give higher returns than the Sensex. During the year '03, Sensex was up 73% while ET Midcap was up by a huge percentage of 177%. During the year, all the above mentioned funds managed to give more than 100% returns. Sundaram Select Midcap gave a return of 157% in '03, Reliance Growth 156%, DSP Equity 130%, HDFC Taxsaver 121% and Birla Equity 119%.

The year 2004 saw a slower growth compared to the previous year. Around 14% of five year returns were earned during this year. Again it was the year of midcap with ET midcap giving a return of 36% as compared to 13% for Sensex. While the share price appreciation slowed down during the year, exposure to midcaps added zing to NAV prices. SBI Magnum Global (69%), SBI Magnum contra (65%) and HDFC Taxsaver (49%) were among the highest return getters in '04 and almost all the players managed to give better returns than Sensex.

Sensex hit the fast lane in '05 with the index going up by 42%. During the same period, ET midcap gave a higher return of 50%. By this time the returns between midcap and largecap indices had narrowed. SBI Global (78%), SBI Contra (71%) and HDFC Taxsaver (75%) were the top performers.

Starting 2006, the midcaps didn't see as much appreciation as the large cap index like Sensex or Nifty. In '06, Sensex was up 47% while ET Midcap was up 36%. From this year onwards outpeformance was increasingly becoming difficult for equity fund managers. While traditionally, these fund managers used the midcap route to beat sensex returns, the year 2006 was the year of midcaps. HDFC Taxsaver and Birla Equity gave lesser return than Sensex in this year while Sundaram Select midcap gave the highest return of 61%. During this year, sharp appreciation of some realty stocks benefited the Sundaram fund much more than the rest.

The nine months of year 2007 have seen almost same movement of Sensex and ET midcap - both were up 25% during the year till date. Birla Equity was the top performer with a return of 41% while SBI Global and HDFC Taxsaver lagged the Sensex returns.

Fiem Industries board to consider dividend

Fiem Industries announced that a meeting of the board of directors of the company will be held on Aug. 29, 2008, to consider the recommendation of dividend and approve the annual accounts for the financial year 2007-08.

FIEM Industries registered a 9.84% decline in net profits of Rs 21.89 million for the quarter ended in June 2008 from a profit of Rs 24.28 million for the quarter ended in June 2007. Net Sales rose 9.71% to Rs 471.59 million for the quarter ended June 2008 from Rs 429.87 million for the quarter ended June 2007.

Shares of the company gained Rs 0.25, or 0.45%, to settle at Rs 55.9. The total volume of shares traded was 98 at the BSE (Tuesday).

Wednesday, August 13, 2008

Oil to resume climb above $150: says Japaneese Energy Expert

Oil prices are likely to top $150 a barrel this year despite their recent slide on the dollar's rise against the euro and concerns that high prices may hurt growth in big economies, a Japanese commodity and energy expert said.

A slowdown in U.S., euro zone and Japanese economies may dampen growth in China and other emerging markets, but underlying demand for oil from rapidly developing nations remains solid as they seek to catch up with developed countries, Akio Shibata, director at the Marubeni Research Institute, told Reuters.

"This is a transition period as China and other emerging countries move towards becoming developed nations, and their underlying demand will persist at least in the next 15 to 20 years to keep upward pressure on energy costs," Shibata said.

Shibata provides regular updates to Japanese Ministry of Finance officials on the situation in commodities markets, and has been on several government panel on food and energy issues.

While a global economic slowdown may hit China and India, both nations are expected to grow relatively fast, and a drop in oil prices would only reinforce their demand, he said.

"It's unlikely that oil prices will fall back to double digits. Demand in these countries has not fallen to levels a year ago, and as long as they grow, there will be fresh demand for resources each year and that accumulative demand will keep supply tight."

Also, the cost of exploiting oil has risen while the supply of oil which can be removed cheaply is peaking out, Shibata said. The dollar also remains vulnerable as the U.S. housing market has yet to hit a bottom and credit market jitters persist.

"It looks unclear if the dollar will keep rising above 110 yen. If the dollar reverses its course and falls, oil will resume its climb and get back on a rising trend again," Shibata said.

Speculative and investor money will continue to flow into the oil market given the prospect for tight supply. Oil also remains vulnerable to concerns about supply disruptions and hurricanes.

"I think $200 is a possibility. Players see tight supply both in light of current and future fundamentals, which will draw money from speculative funds," Shibata said.

U.S. crude fell to a three-month low this week, dropping more than $30 in a month after hitting a record high $147.27 on July 11.

Oil prices have risen seven-fold since the start of 2002 amid surging demand from China and other emerging markets, and jumped 50 percent this year alone.

The rise in oil prices to a record peak highlights the limit to the industrial structures of developed countries that have relied on an assumption energy costs will remain relatively low the way they did until around 2000, Shibata said.

"It's a message from the market that developed countries are not doing enough to tackle the issue of global warming, or invest in innovations to save energy and boost efficiency in the use of energy and resources," Shibata said.

The recent steep drop in oil prices may delay action to tackle the urgent issue of global warming and seek alternatives to energy resources which are becoming scarce, Shibata said.

"Since swift action is not taken to change the industrial structure of developed countries that had been supported by cheaply available resources, the latest price drop is likely to be a temporary adjustment," he said.

Sunday, August 3, 2008

Park ur Money in Right Sector

After assessing that an economy is worth investing in, one needs to decide the industry where one can park one’s money. For, while the economy may be doing outstandingly well, not every industry in the economy would be a good bargain buy. Here is a list of 15 factors that you might like to consider in your search for the right industry

Sales: It is sales that bring in profit to an industry. What is important is not the absolute level of sales but its growth trend. While there is nothing like an “ideal growth” because growth is also a function of the base level of sales (given the mathematics of a low base, the growth levels tend to be high, when sales levels are low) and while it can differ from industry to industry, sales should grow at least at two times the inflation levels. Sales (market share) is the key metric for FMCG industries.

Return on Capital Employed: Look at the ROCE in the industry. ROCE measures how productively money is used. Capital employed is the sum of equity funds and loan funds. Return refers to EBIT. Hence ROCE here is pretax ROCE. Again, while this can vary from industry to industry, it makes little meaning in investing in an industry whose ROCE is less than 15 per cent.

Competition: While competition pushes an organisation to stretch and is, hence, welcome, an overhang of it would lead to unhealthy practices such as price cuts and unrealistic cost reductions. Price cuts merely transfer the profit margin from the industry competitors to the customer. Competition eats into profits and can, over time, erode profitability and convert the industry into a commodity. Price-driven competition can often threaten the very survival of an industry. The airlines industry comes as an example.

Critical cost component: Getting to know the critical cost component is important. You must also know whether the industry has control over that component. For instance, for the tobacco industry, indirect tax is a critical cost component. The industry has no control over it. For some industry, imported raw material may be the key cost component.

Technology: Technology is the new mantra. Technology has done wonders to the way we live and transact business. Mobiles, Internet and e-commerce have all revolutionised our lives. Any industry that does not embrace technology is doomed. If an industry is still old-fashioned and keeps away from technology, you must keep away from that industry.

Governmental promotion: Governmental support can go a long distance in propelling the growth of an industry. The Information Technology industry is the best example of this, with IT having flourished thanks to a series of governmental concessions such as tax sops, cheap land allocation and, most importantly, non-interference in its functioning (!). You would love an industry that has such pampering and backing.

Skilled manpower: Does the industry enjoy technically skilled manpower? It’s important to figure out what is driving success. Skilled manpower helps to maintain product quality and offer customised products, thereby resulting in better customer satisfaction. The mammoth growth of the IT, ITES industry in India is not merely on account of cost arbitrage but efficiency arbitrage as well, with a slew of well trained, English speaking, high-on-IQ manpower being available.

Constant Innovation: Does the industry constantly reinvent itself? This is more critical in the case of industries that experience rapid changing technology/customer expectations and have to spend huge sums of money in constantly upgrading to newer product versions. Industries such as Pharmaceutical and Consumer electronics spend huge sums of money towards R&D to ensure that their products stay “latest”.

Supply-side constraints: Some industries perennially face lack of supplies at reasonable prices, which hamper their ability to exploit favourable market conditions. Take the fact that the demand for crude has opened up a huge market for oil exploration companies. But worldwide shortages of drilling equipment, such as rigs and offshore diving vessels, have slowed down the exploration activity.

Commoditised products: Where the products sold by players in an industry are not unique, then customers make their choices purely based on pricing. For example, agro-based industries such as sugar, cotton, are price takers, since customers try to pull down the prices close to the cost of production.

Regulatory constraints: A highly regulated industry generally has very little scope to enjoy pricing independence and margin improvement. For example, despite strong customer base and established products, the cigarette industry struggles to protect its margins as the government constantly toys with excise duty on cigarettes.

Cyclical demand: If the demand is highly cyclical, the margins come under pressure since the industry has to constantly spend cash to “be on alert” should an opportunity come. For instance, the demand for drilling equipment is cyclical. However, manufacturers of these equipment would have to continue incurring maintenance capex to keep their production facilities in shape, till the next wave of demand comes through.

Growing domestic demand: An industry that enjoys a growing domestic demand is insulated from happenings in the global market place including exchange rates. Currently, FMCG, Retail and real-estate enjoy this advantage.

Expanding export market: This is not to belittle an export-driven industry. Such industries generally enjoy higher margins due to their relatively lower cost base. In addition, export markets of developed countries are huge in size, offering potential for the exporter to grow his sales rapidly. Companies such as TCS and Infosys have been able to maintain high sales and decent margins for the last several years because of the export factor.

Macro trends: Rising interest rates, unfavourable currency movements, change in fiscal policies, etc, can impact industries. Rising interest rates have slowed down growth of banking industries as credit intakes slow down. Similarly, recent depreciation of the rupee has had negative impact on industries such as paint that rely on imported raw materials.

Surely, you will, by now, have got a good understanding of what to look for in an industry.

Penny stocks stun markets

How would you react if a financial advisor told you that your investment could appreciate by 14,555% in just seven months? It sounds unbelievable and most people would laugh it off.
But that’s just what happened in the case of Temptation Foods, a stock listed on the BSE. The stock zoomed from Rs 1.52 on March 1 to Rs 222.75 on Thursday, up precisely 14,555%. And it isn’t an isolated case. At least 16 BSE scrips have given returns of over 1,000% in just under one year.
Solix Technologies raced ahead 8,900% from Rs 1.8 on February 27 to Rs 160.35. And Innovative Foods, a scrip trading at Rs 1.8 on September 15 last year, rose to Rs 160.35—up a whopping 808%. The stock had stopped trading for over five months, but was re-listed on the BSE after its equity capital was reduced and another company was merged with Innovative Foods.
Among the 16 stocks, Solix Technologies, Indiaco Ventures and Biogreen Industries have spurted without substantial volume to justify widespread investor interest.
In this group, one stock needs a special mention: Jai Corp, a stock that gained over 2,400% to Rs 7,701 now from Rs 307 on October 5. The company is run by Anand Jain, the right-hand man of Mukesh Ambani. And market players feel that with the senior Ambani’s businesses going from strength to strength, there could be more money to be made in Jai Corp. The rise in the stock price was accompanied by good volumes.
But before you rush to your investment advisor to reshuffle your portfolio, take a closer look at the rise in share price of these stocks. When scrips like these start to rally, the volumes are typically low, pointing out that just a few people are trading in the counter. It is these few initial players who have a personal interest in the stock that drive most of these meteoric gains by floating stories about the company in question.
These stories about future growth of the firm, whether it’s a merger or a takeover rumour, almost never take place. As the stock gains momentum on the back of these stories, more investors jump on the bandwagon to get a piece of the action. And once it climbs to a certain level these early players or operators exit the counter, leaving a lot of investors stuck.
‘‘None of these stocks would be in any decent fund manager’s portfolio. They generally have poor fundamentals, poor following and low liquidity. They are usually small- to mid-caps, and their sudden rise would be driven mainly by rumours,’’ said Arun Kejriwal, KRIS, an investment advisory firm. For all practical purposes picking up these stocks is more of a gamble and definitely not a smart investment idea. If one buys into a stock that’s quickly rising, one might make some gains but should be equally prepared to lose it all.
On its part, market regulator Sebi keeps a constant watch on any unusual rise in stock price.