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)

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.

Interview with Business Standard (Ahmedabad)

Benchmark indices (Sensex and Nifty) are near its all time high of 2008. What factors do you think contributed to the rise of market? Specially when in July – Aug the country was talking about policy paralysis, slowing economy, fiscal deficits and poor monsoon? 

The last time one saw the indices close to current levels was only a couple of years back. The Indian Investor in Capital Markets has had to exhibit great patience. The gloomy scenario that existed in the country looks to be changing, with the government exhibiting some urgency in addressing certain reforms like FDI in retail and increase in price of Petroleum products, to reduce burden of subsidy, Increase in Railway Fares etc. While it can be argued that these measure could give rise to further inflation, no one can dispute that it will they will go some way in addressing the Fiscal deficit situation in the country.Internationally, too, the fiscal cliff was averted. The markets are now looking forward to some stimulus by way of the RBI reducing Interest rates 

What the sectors and companies which has contributed to current rally?

In the current rally the FMCG and Banking stocks have been the favourite of the markets

What do you think liquidity or fundamentals as the key driver for the current rally? 

While the fundamentals of any stock have to also bear out and support, the main driver of this rally has been liquidity. The unabated flows that we have seen through out the last year has contributed to the rally.

Do you think this is the right to time enter the market? Or one should stay invested in the market? Or get out of the market with profit booking seat on sidelines and wait for fall to re enter? 

For Investors who have not invetsed in the markets ever, this is a time to enter the markets by making use of the Rajiv Gandhi Equity Savings Scheme. This will give the first time investor a tax saving on Investments upto Rs50,000/-. For investors who are already invested, they could wait before booking profits,as the outlook for the current year looks promising

Which are stocks/ sectors you would recommend someone to invest in the market? – The shocks which can derail the rally and stimulus that can sustain it. 

As our company policy prohibits  I don't recommend specific individual stocks through the media. But the sectors that the investors should be looking at, currently, are those sectors that have not participated in the rally viz the telecom sector, real estate or mining sector. The union budget is round the corner and the market has pinned its hopes that policy inaction which is preventing these sectors from performing, will be addressed shortly.If  such policy action is missed out in the Budget and the budget turns to be just populist exercise (bearing the elections, next year, in mind) the markets can, once again. begin to stagnate.

What is your expectation of the market by the end 2013? 

Its always unwise to try to predict the markets but I think that the Sensex should be around 21500 by Dec 2013

Retail participation in the current rally specially after 2011 is coming down. Do you think only big boys are getting the benefit of the market? 

There are several factors that have contributed to the retail investor shying away from  the equity markets. The emphasis, in recent times,  has been on real assets like real estate and gold.Because of Securities Transaction Tax we  have seen a flight to speculative and intraday traders to other markets where such a tax is absent. We certainly hope that this anomaly of a tax arbitrage is addressed in the Budget. I disagree that its only the big boys who are getting the benefit, the fact of the matter is that markets do not discriminate and a s an old Dalal Street saying goes "  the tea becomes only as sweet as the sugar you put in it".

Financial Inclusion & Capital Market

Rangarajan’s committee on financial inclusion defines it as:
“the process of ensuring access to financial services and timely and adequate credit where needed by vulnerable groups such as weaker sections and low income groups at an affordable cost.”
The financial services include the entire gamut - savings, loans, insurance, credit, payments.
The financial system has to provide its function of transferring resources from surplus to deficit units but both deficit and surplus units are those with low incomes, poor background .
By providing these services, the aim is to help them come out of poverty. So far, the focus has only been on delivering credit (it is called as microfinance but is microcredit) and that has been quite successful.
Rationale or the need for Financial Inclusion: Why is it so important?

Finance has come a long way since the time when it wasn’t recognized as a factor for growth and development. It is now attributed as the brain of an economic system and most economies strive to make their financial systems more efficient. It also keeps policymakers on their toes as any problem in this sector could freeze the entire economy and even lead to a contagion.

Reserve Bank of India data shows that as many as 139 districts suffer from massive financial exclusion, with the adult population per branch in these districts being above 20,000 and only 3 percent with borrowings from banks. On the assumption that each adult has only one bank account (which does not hold good in practice, so that actual coverage is likely to be worse) on an all India basis, 59 percent of the adult population in the country has bank accounts. 41 percent of the population is, therefore, un banked. In rural areas the coverage is 39 percent against 60 percent in urban areas. The un banked population is higher in the poorer regions of the country, and is the worst in the North-Eastern and Eastern regions. Its not surprising that these very regions are also suffering from Naxalism.

Financial Inclusion is delivery of not only banking, but also other financial, services like insurance, pension, remittance, mutual funds, etc. delivered at affordable, though market driven costs.
Opening a no-frills account is just a beginning to a continuous process of providing banking and financial services.
Once the first step of safety of savings is achieved, the poor require access to schemes and products which allow their savings to grow at rates which provide them growth beyond mere inflation protection.

So where does Capital market figure and what can be role of Broking houses

The role of capital markets is vital for inclusive growth in wealth distribution and making capital available to investors.
Capital markets can create greater financial inclusion by introducing new products and services tailored to suit investors’ preference for risk and return as well as borrowers’ project needs and risk appetite.

• Innovation,
• Credit Counselling,
  Financial Education and

Proper Segment Identification constitute the possible strategies to achieve this.


A well-developed capital market creates a sustainable low-cost distribution mechanism for distributing multiple financial products and services across the country.

Indian households are among highest savers in the world but less than 1 per cent of the population participates in capital markets. Given a savings rate of 29% and the fact that more than 50 per cent of household savings continue to be in relatively unproductive assets, prospects lie in driving these savings into the financial system and channelising them into productive investments. Through financial inclusion, capital markets can actually generate productive investments

For the Capital markets herein lies a great once in a lifetime business opportunity for decades to come

How can Financial Inclusion in Capital Markets be achieved?

Identify Target segment : Once the exercise of UID / Aadhar is completed, the govt. will have a repository of credible information and the same can be used effectively by targeting the needy. Here the Capital Market participants are involved in asstisting the govt. in issuing these ID’s.

Educate them- Financial Education is the key… BTI too could paly an important role in aiding and assisting this process. There are several Social Religious & Behavioural aspects that need to be addressed. Dr.Shariq’s efforts are precisely in that direction.

Making available multiple products & Services to the masses: Money Transfer, Loans , Insurance etc

Simplification of procedures : Simplify KYC’s, (Provision for compulsory PAN nos)

Product Innovation & Diversification: SEBI has allowed online distribution of mutual funds units through the stock exchanges and retail investors are encouraged to invest in mutual funds. India has more than 200,000 such terminals and allowing investors in over 1,500 towns to invest in the Mutual funds through Stock Exchange terminal will provide accessibility to more investors. The network of brokering companies has spread to semi-urban areas and is now increasing its focus on retail investors. Such cross selling facilities creates enough products and services for each intermediary to have economies of scale and also promotes financial inclusion.

Customisation: Apropriate & Affordfable services to those that need them.



Low cost of delivery..using mobile phones, internet and leveraging Information Technology : In India, there are 70-80 million internet users and 5.2 million broadband internet connections.However, internet penetration rate is merely 7 per cent for a billion population as compared to 25 per cent in China and Singapore, and 75 per cent in the United States. This signifies the great potential for internet trading.

It is widely recognized in economic literature that there are at least five different types of capital - physical (roads, buildings, plant and machinery, infrastructure), natural (land, water, forests, livestock, weather), human (nutrition, health, education, skills, competencies), social (kinship groups, associations, trust, norms, institutions) and financial. One of the causes as well as consequences of poverty and backwardness is inadequate access to all these forms of capital. Thus to look at financial inclusion in an isolated way is not the solution.

Friends, the next few decades clearly belong to us, but it is up to us to seize the moment, recognize the challenges and address them.. It is up to us to transform the Indian Capital Markets from an Emerging Market to a Well Developed Market.

To List or not to List..

The fact that, India is on the verge of a great Economic boom is well known and acknowledged by the world. If such is the scenario, the future of its Capital Markets can definitely not be bleak. Hence, it brings into cynosure the MII’s like Stock Exchanges, Depositories, Clearing Corporations etc. Business has grown manifold, from a single exchange dealing only in Cash & Forward we now have many exchanges dealing in several segments- Cash/Futures in Equites/Commodities/ Currencies etc, all functioning in a competitive environment and getting the best deal for investors (especially the small investors). From a paltry volume of Rs.500 crores daily, our exchanges now turnover Rs.2,00,000/- crores and the same is expected to grow exponentially.

As the markets expand and deepen, herein, lies the opportunity for the small investors. They should be allowed to participate in this process by way of being allowed to invest in shares of Stock Exchanges viz NSE, BSE, MCX, USE etc. This is possible only if these exchanges are allowed to be listed. This would be no different than investing in Stocks belonging to the PSU basket.

There are misgivings that certain speculative tendencies will emerge and upset the independent working of such institutions/companies. It is noteworthy that there are already enough checks and balances in the system to detect/prevent such occurrences.

While there may be some merit in the argument that profit should not be the sole motive..

There are already examples of listed companies whose profits earned/distributed are regulated viz. Listed Power Companies.

The NSE was founded on the basis of a ‘Model Stock Exchange’. It was formed as

A ‘For Profit’ Corporate entity. It has made Road Shows to investor abroad. This had increased the hope of local small investors that the exchange would be listed some time in the near future giving them an opportunity to invest and be a part of its success.

The BSE & other regional exchanges which were ‘Not for Profit’ , Association of Persons were corporatised into ‘For Profit’ Corporate entities. This sent a signal to the small investors that they would be listed some time in the future.

Internationally, too, the scene is no different. There are several leading exchanges that

Not only self listed but are examples and models of successful running of exchanges and they too play the role of regulating themselves.

Given our strong regulatory system, we should be able to overcome and cope with whatever challenge that may arise. Another issues is raised with respect to “Monitoring Mechanism’ but should the small investor be deprived of this Golden Opportunity to invest just because of lack of forming appropriate mechanisms and it also gives rise to the question that are monitoring mechanisms not already adequate and do the small investors desist from entering a system which is inadequate?