Tata... Cyrus

As soon as the news, of the unceremonious ouster of Cyrus Mistry, filtered in. Apologists for the group rallied on TV channels, extolling virtues of the legendary Tata (and reminding us that he can do no wrong). I has questioned the manner in which the drama was played out, almost like that of a place coup. I also questioned that lack of information offered to investors, especially for group companies in the listed space.

The sheen of Corporate Governance that the Group once enjoyed, is wearing off. The underlying message that seems o be given is, a CEO cannot survive unless he/she pays obeisance to the old guard.

There has been value destruction and clarity has still not emerged. Both sides continue to wash dirty linen in public. Brand Tata has taken a beating. The nervousness of investors apparent in the below table:

Name		24-Oct	25-Oct	26-Oct	4-Nov
Tata Metaliks		422	405.5	385.25	350
Tata Chem		577	557	549.5	508
Tata Comm		669	654	636	611
Tata Steel		426	415	398	399
Tata coffee		134	131	130	121
Tata Power		83.6	82.35	80.65	75.9
Tata Global		153.85	149.5	145	128
Tata Sponge		637	620	614	566
Titan		377	368	374	369
Tata Elxsi		1333	1311	1272	1243
Timken		600	592	588	566
TCS		2427	2398	2396	2305
Rallis		236	232	225	212
Tata Motor		559	554	529	508
Tata Motor DVR		363	360	345	327
TTML		7.5	7.76	7.61	6.67
Voltas		393	396	385	362

(4th Nov rates at 1130 hrs)

Responses given to ADC on Questions relating to Markets.

 What is driving the markets crazy?

There are several factors that are on the minds of traders (investors can ignore many such factors) like the conflict in Yemen, Strong economic data from the US and its resultant impact on emerging markets, the untimely rains and its impact on crops leading to further inflationary trends and its possible impact on the RBI policy with respect to further reducing interest rates. Add to this the volatility in international prices of crude and its impact on the Rupee and the ability of the government to pass contentious legislations successfully.

- With the markets yo-yo-ing 500- 600 points alternatively ...what according to you is the reason for such volatility?

Many times the volatility is witnessed due to technical factors also, which seems to be also contributing to the see saw. Our markets have seen stocks surging, and soon we shall have the result season, where the expectations are that the results of individual companies may not keep pace with the prices already risen, hence that has added to selling pressure. Add to this the expiry of March contracts on the FNO segment. We also have to account for some positions being pared on account of the Financial year end when liquidity is generally tight and the focus is mainly on closing the books. Alternately, factors like expectations of a further rate cut and firming of prices for year end NAV’s try to  tilt the scales on the other side.

- With the weather playing the spoil sport with current crops ...and danger of El Nino looming large .. where do you see the markets six months from now...

Predicting markets is something like predicting the weather.., the kind of weather we have lately had has impacted crops and will lead to a situation where prices go up further. This inflationary impact could have a bearing of further rate cuts unless it is balanced by prices of crude falling. This is in the immediate short term, by second/third week of July we should know the monsoon situation clearly, and that will largely dictate the trend for the market thereon. Although initial assessments are that we may have a near normal monsoon. By September I see the Sensex between 30000-31000.

- At what level do u see the markets by December 2015 

If we get atleast two interest rate cuts by the RBI till December 2015 the markets will be in the range of 32000-33000 during the period Sept- Dec 2015.

- Any suggestion for the small investors  

For the small investors, the best bet is to keep investing small portions of money regularly either directly in select high quality blue chip stocks or go the Mutual Fund route. Either way they should not react adversely to the volatility and be aware that even hard core professionals find it difficult to time markets. It is finally the Rupee cost averaging that will work in their favour.

Alpha of a Stock Demystified!

·         What alpha of a stock means to investors? Simply put, Alpha is a measure of an investment's performance compared to a benchmark, such as the S&P BSE 30. It's a mathematical estimate of the return, based usually on the growth of earnings per share.Alpha is one of five technical risk ratios; the others are beta, standard deviation, R-squared, and the Sharpe ratio. These are all statistical measurements used in modern portfolio theory (MPT). All of these indicators are intended to help investors determine the risk-reward profile of a mutual fund. Simply stated, alpha is often considered to represent the value that a portfolio manager adds to or subtracts from a fund's return.

·         Can you explain with the help of an example how an investor can calculate alpha of a stock? A positive alpha of 1.0 means the stock has outperformed its benchmark index by 1 percent. A similar negative alpha of 1.0 would indicate an underperformance of 1 percent.

Let’s assume company XYZ’s stock has a return on investment of 12% for the year and a beta of + 1.5; our benchmark is the S&P BSE30 which was up 10% during the period. Is this a good investment?

A beta of 1.5 implies volatility 50% greater than the benchmark; therefore the stock should have had a return of 15% to compensate for the additional risk taken by owning a higher risk investment. The stock only had a return of 12%; three percent lower than the rate of return needed to compensate for the additional risk. The Alpha for this stock was -3 and tells us it was not a good investment even though the return was higher than the benchmark.

·         What negative or positive alpha signify to investors? How good is it to invest in high alpha stocks  A positive alpha of 1.0 means the fund has outperformed its benchmark index by 1%. Correspondingly, a similar negative alpha would indicate an underperformance of 1%.

·         What are the qualities of high alpha stocks? High-return stocks tend to have strong sales growth, strong earnings growth and realize high returns on invested capital. there are typically three ways stocks might achieve multi -fold gains. "The first is that it is truly a growth company and consistently puts up high-growth numbers. The second is a company that may be near bankruptcy or is really deep value and it comes back from the dead. The third is a little of both: A company that may be under the radar screen, perhaps with a checkered history, and it's really cheap, but not because it's a horrible company. It's just been neglected and hasn't performed very well, but maybe new management comes in and the company starts doing better."

·         What are the advantages and shortcomings of alpha?  Positive alpha is achieved with asset allocation, diversification, risk management, valuation strategies, and choosing individual investments with strategic advantages.

·         Can you suggest two stocks from the CNX Alpha index which can give positive return to investors in the next 24 months? Please give reasons. CNX Alpha Index aims to measure the performance of securities listed on NSE with high alphas. It is a well-diversified 50 stock index accounting for 12 sectors of the economy, in order to make the 50 stock index investible and replicable, criteria’s such as turnover, liquidity and market capitalization are applied while selection of securities. Weights of securities in the index are assigned based on the alpha values i.e. security with highest alpha in the index gets highest weight

Our company policy prohibits individual stock suggestions but going by the fact that Automobiles & Industrial Manufacturing have the highest weight in the Index, companies from these sectors can be a good bet.

(As narrated to MoneyToday)

Diwali Week in 1998 (Blast from the past!)

While rummaging through  my Papers, I came across this article that I had written in 1998 and I thought I must share it.

The Diwali lights were still lit, but the shimmer was missing, the crackers were burning, but the sound was muffled. The “Muhurat Trading” was on but the excitement & fervour was clearly missing.

All in all, a very dull start to Samvat year 2055, was witnessed on Monday. The usual enthusiasm had clearly taken a back seat. Hoards of Brokers, with family in tow, were seen exchanging greetings on Dalal Street. The Muhurat tip was – “Go long on Onions & short on Shares”

The Sensex opened at 2855 and closed after an hour of trading at 2845, a loss of 8 points. The NSE was on upto 7.30 (i.e. one hour more than the BSE) and markets fell further. Truly a lacklustre Muhurat Trading session.

Tuesday saw the Sensex slip by another 90 points and it closed at 2764.16. This was partly due to continued selling by the FII’s and also end account considerations on the NSE. Vloumes were low due to looming holidays on the BSE. (Both Wednesday & Thursday the BSE was closed and NSE was closed only on Wednesday)

Thursday, was the first day of the new settlement on the NSE and markets saw some buying on counters like RIL, SBI, Tisco & Telco. Hectic selling was witnessed on HLL. By late Thursay evening the murmurings of buy-back was heard and the press reports on Friday only confirmed the same.

On Friday, both the NSE & BSE saw good all round buying as the Bears scurried for cover and the Bulls took charge. The Sensex closed at 2784 (+27 points). The Kerb rates were firm and continued to rise over the weekend. SBI posted results which were largely ignored.

On Monday the markets spurred by the buy back saw a rally of 105 points. The focus had now shifted firmly away form Unit 64 to the buy back euphoria.

Tuesday the markets held out the rally of the previous day and closed with a net gain of 6 points at 2895.

The outlook for the rest of the week depends largely on the market movements on Wednesday. One can expect bouts of selling as the markets have moved up but the ground realities have not changed significantly. The markets are expected to be range bound with a downside of 2750, where fresh entry may be considered.

BSE-USE Merger (Transcript of Interview on CNBC)

Below is the transcript of Rajnikant Patel and Alok Churiwala’s interview with CNBC-TV18’s Latha Venkatesh and Ekta Batra.

Latha: What does this mean, is this a big difference for BSE in terms of size? 

Patel: More than size I think it is positive for BSE in the way that both the exchanges now can look at synergy and a larger pie of business and consolidation which is a good thing. I think it is a step in the right direction. Now whether it will actually increase the BSEs volume, of course the addition of USE volume definitely will come in, in the segment in which they are trading but how positively it will impact the other segments of BSE's volume that remains to be seen.

Latha: What are the strengths of USE? Which segments of BSE gets strengthened you think?

Patel: Currency futures is what USE trades in. So, that is a segment which probably will add on to the BSEs overall pie. That is what the USE was initially formed for, to concentrate exclusively on that area which segment will now add more to BSEs existing volume in that particular region. What is happening otherwise the market was getting split on two or three – NSE is trading in the segment, BSE is there, USE, MCX-SX. Now, bringing BSE and USE together would consolidate at trading volume.

Latha: What do you see as the big gain for the BSE broker and more importantly for the exchange itself? 

Churiwala: I think it is a great deal both from the perspective of the BSE as well as USE. Primarily from the BSE, they are buying into a competitor so as to say because USE was on the currency segment. BSE has just launched its currency segment and they are doing volumes of little over Rs 5000 crore on a daily basis. So, that is one positive that immediately flows out of this deal. Secondly, the linkages that USE has with banks, BSE will be able to leverage on this relationship. Thirdly, the brokers who have erstwhile been on USE will now also be directly able to access the BSE platform to start with probably the currency platform and with the blessings of the regulator the futures and options and cash trading platforms as well. From the USEs perspective if we look at the shareholder of the USE, USE as a exchange was going nowhere and I think they will now be buying into an exchange which is got 130-140-year-old history, which is probably also on the verge of listing. From existing BSE brokers perspective if we see it is again a great positive because willy nilly a valuation is being discovered for the exchange, a valuation is being discovered through an M&A deal, through an independent third-party valuation, which is close to almost Rs 4000 crore. All in all I think it is a win-win for all parties concerned. 

Ekta: Do you think that the possible BSE listing would fructify or is even on the cards?

Churiwala: The BSE brokers who also hold almost 40 percent shareholders of the BSE Limited have been waiting for this listing since the last seven years. I believe that BSE has also applied for in-principle permission to list with Securities and Exchange Board of India (Sebi) for over a year now. So, there are moves in that direction and in a market place so dynamic I think we should be seeing the BSE listing sooner rather than later. Across the globe you will see large cross-border exchanges buying into each other and it is only a question of time before Indian exchanges also come on that radar. While on this I would also like to make one more point that foreign bourses cannot buy into Indian exchanges over 5 percent as the regulation stands today. I think it is about time that is seriously looked into because until any foreign player can take a serious stake in an Indian entity the strategic nature of a relationship will never fructify.

Full text of Interview with The Afternoon D & C dated 21st April 2014.

Q-do you feel the markets at the current levels are overbought

The Sensex is currently in the mid 22000 range and Nifty is upwards of 6500. The Sensex has given a return of 4.8% (3 months), 9.10% (6 months) and a whopping 18.80%(1 year). So one can safely surmise that the smart money has not only already invested but is already reaping good returns. At current levels the dice is loaded against the market with a major event risk that has to be factored in. That said, traders and investor have shown a cautious approach and the rally has not run wild. This can be borne out from that fact that the markets have witnessed healthy corrections from time to time and post each such correction the market has continued its upward move. Even if we look fundamentally, the markets have not been discounted very richly over the earnings of the next couple of years. Hence I would not say that the markets are over priced but it can be said that they may be temporarily over bought.

Q- The rally would be short term and we will see major correction in the short term, your comment .

Most of the current euphoria in the markets is based on the ‘Modi Wave’ and its resultant impact on the economy and markets. The elections will throw out the results in less than a months time, but even in the event that the best case scenario also come true, the markets will see a healthy bout of selling, as the traders would like to take home profits. Alternately If the election result is anything short of a healthy majority then there would be severe selling by both, the long purchasers (who will scurry to book whatever little profit that may be left) and the short sellers who will then try to capitalise on the below expectation election results. This would be the major correction in the short term.

Q-there seems to be no retail participation in the rally .your advice to the common investors.

The current state of participation or rather lack of participation by the Retail Investors is a cause of concern for not only the entire broking community but also the Regulators and Senior Officials of Ministry of Finance. But the causes of low investor interest are many.

To name a few dearth of good quality IPO’s, The indiscriminate destruction of confidence & wealth caused by throw away pricing of follow up Offers of Public Sector Undertakings by Govt. of India, The inability to create confidence in the minds of the retail investing public that the Markets are a credible place to invest savings and Promoting the Future & Options System of trading as against Investing wisely for the long term.

That said, at the current moment the investors should not get swayed by the current momentum but draw out a strategy based on a long term approach. I think the common investor should pass the one time opportunity of seeing an election rally and concentrate on building a quality portfolio, consolidating it from time to time based on sound advice from professionals. The expectations of returns should be pegged at a realistic levels keeping ones risk appetite in mind.

Q- which are the sectors u would say are safe to invest in the current markets?

The market has been favouring  IT, Pharma, FMCG and Banking but the best companies in these sectors are not cheap. Whereas it does require some expertise to identify the potential gems hidden in the midcap scape in these sectors. Investors could consider some rather beaten down and out of favour sectors like Realty and Metals.

Q- According to many global fund managers European markets as well as the US markets are likely to do well in the coming quarters... your comment and what do u see happening to Indian markets in such a scenario...

In my recent interactions with Global Investors, Intermediaries & Fund Managers the one thing that clearly comes across is the fact that they are once again watching India closely, and would they like to re invest in the markets with renewed vigour, but that will happen after there is clarity as to who forms the new Government and what are their policies. Irrespective of the US and European markets doing well, if we can address the niggling worries and set on a course to remove bottlenecks and encourage businesses,  money will once again flow from all those Foreign Investors who are still waiting on the sidelines.

Q- What are the short term and long term levels do u see in the markets.

The Sensex will be in the range of 20500-24500 (which means a 8-10% range in either direction) for the next 30-45 days. Over the long term (a horizon of 3-5 years) the Sensex should be in the range of 19000 – 32000.

"Should you buy in panic"?

 

- Do you feel that it is a winning strategy to invest when there is panic in the market? 

There is absolutely no doubt that Investors, especially, first time investors, who hitherto have zero exposure to Equity should make the most of the PANIC in the markets and cherry pick stocks in times like these. The challenge is, however, they would need a lot of courage to do so as they would be acting contrary to popular perceptions and trends of the day. If we borrow from the wisdom of the great Oracle of Omaha, Mr. Warren Buffet, he says, “Be Fearful when others are Greedy, and be Greedy when other are Fearful”. By reading the newspapers, it is amply clear that the currently investors are “Fearful” , so its safe to conclude that the time is right for the first time investor to take the plunge.

- What are the safeguards one should keep in mind ?

The question that now arises is how to make the choice for the winning investment.  The investors today are spoilt for choice. Depending of one’s investment goals, the ability to take risks, access to professional advise the investor could either invest through Mutual Funds or go the direct Equity route. The direct equity route would require a more hands on approach and more involvement on the part of the Investor as opposed to Mutual Funds. The investor should also consider the Systematic Investment Planning option, so as to give the best of Rupee Cost Averaging. Clearly the Investors should define investment horizon and have a disciplined approach. For the new investors, trading and speculative activities such as Equity or Commodity Futures and Options are not recommended, as these activities require considerable skill and personal involvement of the individuals. Needless to say, there lies a greater risk of losing the Capital.

-Given the current market scenario, What would be your suggestion to the investors?

- What is your short term and long term perspective on the market

In the short run it is very difficult, if not impossible to call the markets. In a situation where the economy is currently going through perhaps its worst crisis, it make the task even worse. Consider the following, our economy is faced with a rising Current account deficit, Weak Rupee (at its all time low), Risk of Spiralling Fiscal Deficit, Parliamentary logjam, Uncertainty caused by upcoming Election, Investor Confidence at an all time low and a falling Sensex, Fuel price hike, Inflation , slowdown of economy, Looming fears of a Sovereign Downgrade. With all these factors at large, they are enough to scare even the hardiest of Dalal Street veterans, but the one fact that investors can take hope from is that current valuations have factored in most of the above. While I’m not suggesting that the downtrend may not play out longer but now is definitely a time to Start. The Government seems to be biting the bullet, three important bills have already made it through. It remains to be seen if the reform oriented bills like pension and insurance see light of day. Once elections are announced , the pall of gloom that seems to be enveloping the markets currently, may well lift. Also we need to bear in mind that India, this year has had a good monsoon, and this will be the silver lining.

- Which sectors/companies  should one pick  in the current scenario

The favourites currently are Consumer Staples, Pharma and IT. But one must bear in mind that these sectors have been doing well and the stocks have reached high level and the valuations are perceived to be rich at the moment. What investors need to look at are low PE, Dividend paying companies with a reasonably good management in the mid cap space. But the lay investors needs to identify these under guidance from a professional. A much safe haven can be provided by large cap index based stocks that may not be doing the best today but over time will certainly add value to the investor portfolio. NHPC 52 w hi 29- lo 14.65 current 16, Asian Paints 52 w hi 524 – lo 361 current 408 , HDFC Bank 52 w hi 727- lo 528 current 570 & Larsen 52 w hi 1146 – lo 678 current  710 are few examples of such stocks.