Beyond Market - Issue 83.pdf - Online Share Trading

For Private Circulation Volume 1 Issue 83 11th Jun’13 

The yellow metal’s golden run seems to be over and investors can expect 

the price of gold to plummet further during the course of the year

DB Corner – Page 5 

Volume 1 Issue: 83, 11th Jun ’13 

Editor-in-Chief & Publisher: Rakesh Bhandari 

Editor: Tushita Nigam 

Senior Sub-Editor: Kiran V Uchil 

Art Director: Sachin Kamble 

Junior Designer: Sagar Padwal 

Marketing & Operations: 

Divya Bhurat, Shreelatha Gollavathini 

Research Team: 

Sunil Jain, Kunal Shah, 

Dipesh Mehta, Anand Shendge, 

Manav Chopra, Vikas Salunkhe 

HEAD OFFICE 

Nirmal Bang Financial Services Pvt Ltd 

Sonawala Building, 25 Bank Street, 

Fort, Mumbai - 400001 

Tel. 022-3926 7500/7501 

CORPORATE OFFICE 

B-2, 301/302, Marathon Innova, 

Off Ganpatrao Kadam Marg, 

Lower Parel (W), Mumbai - 400 013 

Tel: 022 - 3926 8000/8001 

We, at Beyond Market welcome your views, 

comments and feedback. Do help us to grow 

better as per your liking. This is our attempt to 

reach you better while crossing horizons... 

Web: www.nirmalbang.com 

beyondmarket@nirmalbang.com 

Tel No: 022 - 3926 8047 

Approved 

Approval of the proposal to allow put and call options in mergers and acquisitions 

as well as private equity transactions is hoped to encourage foreign investments 

and clear ambiguity surrounding SCRA – Page 6 

Copper Bull-Dozed 

Copper seems to have lost favour with investors who are no longer treating it as a 

hot favourite due to unfavourable global economic conditions – Page 9 

Notes Of Despair 

The rupee may continue to fall further in the coming times due to worsening 

macroeconomic environment in India as well as abroad – Page 12 

Bait And Watch 

Several realty companies are offering attractive deals to home buyers to boost 

sales. Yet, many are adopting a wait and watch approach before biting the bait – 

Page 15 

In Bad Books 

Public sector banks have earned the wrath of wary investors as their performance 

as illustrated by their quarterly earnings results has been deplorable and leaves a 

lot to be desired – Page 18 

Renewed Interest 

The growing number of TB cases in India is giving enough reasons to pharma 

companies to focus on manufacturing and marketing drugs to treat this infectious 

disease – Page 20 

Painting A Pretty 

High disposal incomes and rising aspirations, coupled with fiscal incentives to the 

housing sector by the government and increased investments in infrastructure and 

automobile sector is likely to boost the paint industry in the country – Page 23 

Exploring Newer Options 

Airline companies are tapping ancillary revenues to offset the fall in passenger 

traffic in tough times that have beset the industry of late – Page 26 

End Of An Affair? 

The yellow metal’s golden run seems to be over and investors can expect the price 

of gold to plummet further during the course of the year – Page 30 

Taking Stock And Decluttering 

Although it is advisable to invest a portion of one’s portfolio in mutual funds, 

timely overhaul of this asset class is important to keep your investments healthy – 

Page 32 

Now Is The Time 

In a falling interest rate scenario, investors should consider long-term debt funds as 

they are likely to give good returns over a period of time – Page 35 

Caplin Point Laboratories Ltd – Page 38 

Important Statistics For The Fortnight Gone By – Page 40 

Divide And Rule 

Both seasoned and amateur investors can use ratios to understand a company’s 

performance better – Page 42 

Important Jargon For The Fortnight – Page 45 

Beyond Market 11th Jun ’13 It’s simplified... 3

LOSING 

ITS SPARKLE 

We Indians share a very special bond with gold. This affair dates back to several centuries. The importance accorded to 

the yellow metal is more than any other precious metal. Further, this bond has been strengthened time and again due to the 

rally in the markets. The latest rally in the yellow metal lasted for as long as 13 years. 

However, it is being felt that the golden run is almost over and the price of gold, which has fallen considerably is likely to 

plummet further in the course of the year. To understand better the reasons for the waning interest in this commodity, read 

our cover story in this issue, which has been written by Kunal Shah, Head of Research – Commodities at Nirmal Bang. 

Apart from this hot topic, we have covered issues like the government’s approval of the proposal to allow call and put options 

in mergers, acquisitions and private equity transactions, which is aimed at bringing in more foreign investments; the losing 

importance of copper, a key barometer of global economic conditions as well as the depreciating Indian rupee and the impact 

it has on the common man. 

On the sectoral front, we have featured articles on the attractive deals being offered to home buyers by realty players to tide 

over falling sales; the dismal quarterly performance of public sector banks as against private banks; the growing tuberculosis 

market in India and how the Indian pharmaceutical industry is reading into it; the likely boost to the paint industry in India 

due to various factors within the industry and how the airline companies are turning to ancillary revenues to make up for the 

drop in footfalls in the industry. 

The Beyond Basics section covers two interesting articles. While one is on the importance of reviewing a mutual fund 

portfolio from time to time and getting rid of non-performing funds, the other talks about long-term debt funds and the 

advantage of investing in them in the current scenario where interest rates have been fallinG. 

Tushita Nigam 

Editor 

4 

Beyond Market 11th Jun ’13 

It’s simplified...

The Nifty has strong 

support at the 5,870 level. 

In the previous fortnight, the 

rupee depreciated due to high 

trade deficit and dollar 

appreciation. This trade 

deficit is expected to continue this 

month too. 

The RBI and the government together 

are taking steps to restrict the import 

of gold, in an attempt to curb the 

consumption of the yellow metal, 

which is widening India’s trade gap. 

The quarterly earnings results of India 

Inc were in line with expectations. 

Although, company managements 

have not cautioned about a further 

decrease in earnings, the recovery 

could, however, take time. Also, the 

India Meteorological Department 

(IMD) has forecasted “normal 

rainfall” this monsoon season. 

On the international front, the 

Japanese index Nikkei performed 

well and has increased by 77% since 

November ’12 on the back of policy 

action by the government. The 

Japanese market is in a correction 

phase and has corrected by around 

17% from its peak. 

The US market too is witnessing a 

correction, with expectations of 

withdrawal of quantitative easing. 

And the Indian market is taking cues 

from these global events. 

The Nifty has strong support at the 

5,870 level. If it breaks this level, 

then avoid buying. Market 

participants are advised to hold 

existing long positions and add if the 

Nifty crosses the 5,980 level. The 

Nifty has upper side resistance 

around the 6,080 level. 

Stocks like Aurobindo Pharma Ltd 

(LTP: `185.70), Sun Pharmaceutical 

Industries Ltd (LTP: `1,018.90), 

United Phosphorus Ltd (LTP: 

`162.75), United Spirits Ltd (LTP: 

`2,496.80), Mahindra & Mahindra 

Financial Services Ltd (LTP: 

`241.95), KPIT Cummins Infosystem 

Ltd (LTP: `116.80), MRF Ltd (LTP: 

`15,200.05) and Lupin Ltd (LTP: 

`753.50) look good from trading and 

investment perspectives. 

In the coming fortnight, market 

participants can look out for inflation 

and trade deficit numbers as well as 

the RBI monetary policy review as 

these are likely to determine the 

course of the marketS. 

Sensex: 19,519.49 

Nifty: 5,921.40 

(As on 6th Jun ’13) 

Disclaimer 

It is safe to assume that my clients and I may have an investment interest in the stocks/sectors 

discussed. Investors are required to take an independent decision before investing. Investment in 

equity is subject to market risk. Our research should not be considered as an advertisement or 

advice, professional or otherwise. The investor is requested to take into consideration all the risk 

factors including their financial condition, suitability to risk return profile and the like and take 

professional advice before investing. 


Approval of the 

proposal to allow put 

and call options in 

mergers and 

acquisitions as well 

as private equity 

transactions is hoped 

to encourage foreign 

investments and 

clear ambiguity 

surrounding SCRA 

6 



R 

ecently the law ministry 

approved a proposal to 

allow ‘put’ and ‘call’ 

options in share purchase 

agreements to permit listed 

companies to buy or sell equity at a 

predetermined price in future, 

clearing to a large extent the 

ambiguity surrounding deal-making 

in India. 

Indian companies can now use put 

and call options in mergers and 

acquisitions and private equity 

transactions, adding flexibility and 

clarity to the deal-making process. 

Not only was the move long overdue, 

the unclear policy was also a 

hindrance in attracting long-term 

foreign flows to India. Following this 

move, a jump in private equity and 

M&A deals seems quite likely. 

A call option gives the holder the 

right to buy a security at a later date at 

a pre-determined price. Thus, a 

private equity (PE) investor or an 

acquiring company can increase its 

stake on exercising its option. 

A put option on the other hand has the 

opposite function. Put option gives 

the holder the right to sell a security at 

a later date for a set price. 

Thus, if a company fails to provide an 

exit to a PE firm via an initial public 

offering (IPO) or some other route or 

fails to meet performance 

benchmarks, a PE firm can exercise 

the put option to exit the investment. 

As things stand now, the Finance 

Ministry in India will go through the 

proposal of the Law Ministry, 

following which the Securities and 

Exchange Board of India (SEBI) will 

do the necessary communication. 

Though it is still not clear how the 

revision in the law would be effected, 

experts think that it could be done 

simply by way of a notification with 

the SEBI amending or repealing its 

earlier notification (of 1st Mar ’00) or 

by amending the Securities Contracts 

(Regulation) Act, 1956 (SCRA), 

which will need an approval from the 

Indian parliament. 

HISTORY OF CALL AND PUT 

OPTIONS 

So far the Indian law had not 

acknowledged call and put option in 

shareholders’ agreement. An 

agreement gets signed whenever there 

is a merger or an acquisition or a 

private equity investment in a 

company. Such a clause of the right to 

buy more securities or sell securities 

at a pre-determined price in a deal 

agreement is not uncommon in the 

global arena. 

However, such an in-built clause in 

the agreement in India is not 

considered valid by SEBI. The 

enforceability of put and call options 

has always been a matter of debate 

with conflicting views on this subject. 

The SEBI has in the past asked 

contracting parties to delete such 

options from their agreements. Last 

year the issue of enforceability of 

these options came up before the 

Bombay High Court in a dispute 

between the MCX Stock Exchange 

and SEBI. 

Further, high profile deals that came 

for SEBI’s scrutiny include the 

Cairn-Vedanta deal and more recently 

the deal involving Diageo and UB 

Group’s United Spirits Ltd where 

SEBI asked for removal of the 

derivative clause in the contract. 

SEBI’s view has been an impediment 

for genuine acquisition transactions. 

It helps to mention that in India such 

derivative contracts do get signed 

between the concerned parties. But, 

this is done outside the ambit of 

SCRA, which is open to inspection by 

SEBI. Promoters and investors resort 

to the Indian Contracts Act to enter 

into separate accord outside the ambit 

of the SCRA. However, the latter was 

subject to a lot of dispute in recent 

times as enforceability of the law was 

very uncertain. 

India is amongst the few countries, 

which did not have such a provision 

on M&As. In most emerging 

countries, where such provisions 

existed, those countries attract huge 

amounts of investments. 

Experts argue that the lack of such a 

clause was one of the key 

impediments to FDI flow into the 

infrastructure sector in India. SEBI 

felt the need for fresh guidelines 

when it realized that some of the deals 

that took place in 2010 and came for 

its approval were in breach of the 

existing guidelines. 

It was then that the regulator decided 

to recommend changes in the 

guidelines, so that derivative 

instruments could also be made part 

of M&A deals. It sent the revised 

guidelines to be vetted by the finance 

ministry, which in turn sent it to the 

law ministry. 

BENEFITS? 

With SEBI reversing its stance on put 

and call options, private equity and 

strategic investors would benefit the 

most. In fact the PE space would be 

the first to feel the positive impact of 

the new guidelines to be cleared by 

the finance ministry and then notified 

by SEBI. 

By exercising the option, they can 

either increase or exit their stake 

comfortably. The flexibility so 

offered to PE firms will help increase 

investor confidence and attract 

foreign capital inflows. Overall the 

move would encourage inflow of 


foreign investments into the country. 

Further, now with call and put options 

getting legal sanction, it will allow 

parties to enter into open and 

transparent agreements, which will go 

a long way in curbing disputes. The 

use of call and put options will allow 

parties to hedge against genuine 

business risks. 

The new provisions will also help 

existing promoters of listed 

companies who are interested in 

selling their stake in a multiple-stage 

deal to get better valuation over a 

period of time. 

BUT DO THE ISSUES END HERE? 

Now, even if call and put options are 

held valid from the SEBI regulations’ 

perspective, these options suffer 

ambiguity from the perspective of the 

Companies Act, 1956. 

There are views that such options 

restrict free transferability of shares in 

case of public companies and, hence, 

should be considered invalid. 

Therefore, there is less clarity on such 

options from the perspective of the 

Companies Act. 

Another issue stems from the Reserve 

Bank of India (RBI) regulation. The 

central bank of the country considers 

an instrument carrying a put option to 

be a debt instrument but it is not 

viewed as an equity instrument. 

The apex bank believes that if there is 

a fixed return through a put and call 

option, then that portion adopts the 

nature of debt and not equity. 

It is considered as external 

commercial borrowing (ECB), which 

is subject to several regulations. 

Therefore, even if the proposal of 

providing legality to put and call 

options is approved by the finance 

ministry, for a foreign PE investor, 

there will still be issues under foreign 

exchange regulations until the RBI 

clarifies its position on the issue of 

put and call options. 

While the freedom of using call and 

put options in shareholders agreement 

will be positive, it will be interesting 

to see as to how the government really 

implements iT. 

The most intelligent strategy in Chess is to be ready with the 

next move. Similarly, currency trading involves moves that 

are a combination of knowledge and skill, backed by years of 

experience. 

Currency Derivatives Trading with us keeps you a few steps 

ahead, always. 

EQUITIES | DERIVATIVES | COMMODITIES* | CURRENCY | MUTUAL FUNDS# | IPOs# | INSURANCE# | DP 

Contact: 022-39268088 | e-mail: currencies@nirmalbang.com | www.nirmalbang.com 

Registered Office: Nirmal Bang Securities Private Limited. 38-B, Khatau Building, 2nd Floor, Alkesh Dinesh Mody Marg, Fort, Mumbai - 400001. Tel: 3926 8600 / 01; Fax: 3926 8610 

Disclaimer: Insurance is a subject matter of solicitation. Mutual Fund investments are subject to market risk. Please read the scheme related document carefully before investing. Please read the Do’s and Don’ts prescribed by Commodity Exchange before trading. Through Nirmal Bang Securities Pvt. Ltd. *Through Nirmal Bang Commodities Pvt. Ltd. # Distributors investment in securities is subject to market risk. investment in securities is subject to market risk 

8 



Copper seems to have 

lost favour with 

investors who are no 

longer treating it as a 

hot favourite due to 

unfavourable global 

economic conditions 

Copper, which is widely 

used across industries, 

sectors, construction and 

household applications, is 

considered to be a true barometer of 

what is happening in an economy. 

Earlier around October ’11 when the 

global economic crisis was once 

again intensifying, copper prices had 

corrected from around $10,000 per 

tonne in January ’11 to $6,500 per 

tonne in October ’11. 

Copper prices have once again started 

correcting from around $8,000 per 

tonne levels in January ’13 to around 

$6,500 per tonne levels currently. 

This is precisely the reason why 

experts around the world have started 

doubting the recent recovery in the 

global economy. Since copper prices 

are lower, there are risks or inherent 

weaknesses in some of the indicators 

which are showing recovery in the 

global economy especially in 

developed countries like the US and 

Europe. Though the debate is on 

about the recovery of the economy 

and its sustainability, here is what role 

copper has played in it. 

COPPER 

Copper is able to predict the global 

economy well before anybody or any 

other indicator can do it. So if you 

read copper prices, you will get an 

idea as to where the economy is 

heading. Copper has actually earned 

this reputation simply because of its 

numerous applications. 

Among metals copper is widely used 

in different industries and products. 

Considering its wide application 

across industries it reflects the mood 

of the economy. 

So, for instance, if copper prices are 

dropping and there is growing 

inventory, it implies that people are 

using less copper and if they are using 

less copper, it signifies that there is 


less demand for products where 

copper is used. 

This effectively means that industries 

are slowing because of low demand 

and thus the economy is slowing. 

In the same manner if the reverse 

thing happens, which is higher copper 

prices and less inventory, it probably 

means that copper demand is high 

because of industry demand and thus 

the economy should be doing well. 

BACK TESTING 

Many believe copper does not have 

any correlation with the equity 

markets and the global economy. 

However, the more reasonable 

explanation is that it does not have a 

perfect correlation. 

It has been proved right on many 

occasions like the dream run of equity 

markets from the year 2003 to 2008, 

when the global economy and equity 

markets moved in tandem with 

copper prices. 

Logically, the base of the theory is 

strong and that has more to do with 

the fact that copper is used across 

industries and products, which is why 

this commodity can predict the actual 

health of the economy. 

But if falling copper prices has to do 

with higher supply, it could distort the 

picture. So the best way to look at 

copper prices as an indicator is to also 

look at supply side issues. 

This is why today many believe that 

copper prices are lower because of 

surplus capacity or availability of 

copper in the global markets. 

The global refined copper surplus is 

estimated at around 98,000 tonne. 

However, one would also notice that 

the surplus in copper is also derived 

from lower demand. 

If there is less demand in the market 

than what is produced, then there will 

be surplus and thus it means lower 

prices. But in any case there is some 

component of lower demand from 

user industries, which is what copper 

is trying to predict. 

NOT ALWAYS RIGHT 

Copper as an indicator is not right all 

the time; it has its weaknesses too. A 

temporary shortage or excess supply 

in the market could influence the 

price of copper in either direction 

leading to wrong indications about 

the health of the economy as well as 

the markets. 

Preferably a combination of other 

indicators like PMI, industrial data 

and price trend of other industrial 

metals could give some idea and help 

in making a better judgment. 

WHAT IT MEANS TODAY 

Of late many have been saying that 

the party for copper seems to be over. 

Owing to liquidity and government 

policies across the world, especially 

in developing economies, the 

significant risk of global economic 

slowdown has reduced. 

In fact world’s major economies like 

the US, Japan and Euro area have 

seen some recovery in the recent past. 

However, this only implies that the 

risk has been reduced, which means 

the structural issues in the US and 

Europe still persist and that continues 

to be a cause of worry. 

Also, the recovery is supported by 

liquidity and low interest rates in the 

developing world, which means 

withdrawal of liquidity could be a risk 

to growth. “Recent good news about 

the United States has come with 

renewed worries about the Euro zone. 

Given strong interconnections 

between countries, an uneven 

recovery is also a dangerous thing. 

Some tail risks have decreased, but it 

is not time for policymakers to relax,” 

stated IMF in its recent world 

economic outlook report. 

Importantly, the recent weakness in 

copper prices could also be explained 

by the fact that investors around the 

world have started worrying about the 

future of the Federal Reserve’s 

monetary stimulus after its chief Ben 

Bernanke raised the prospect of 

cutting back on some of the stimulus 

measures in the next few months. 

Cutting down on stimulus measures, 

reducing its liquidity support and 

possible hike in rates could be the 

biggest risk to demand. This will not 

only impact home sales, but the 

global economy as well. 

More than the developed world, for 

now, the emerging world is more 

important for copper. The GDP of the 

emerging market and developing 

economies grew at 6.4% in 2011, 

which fell to 5.1% in the year 2012. 

In 2013, growth is expected to bounce 

to 5.3% but that is still less than the 

potential of these economies. 

Countries like China, Russia, Brazil 

and Mexico are in the news for the 

economic and industrial slowdown in 

their respective nations. IMF and 

other world agencies have predicted 

that the Chinese economy is running a 

huge risk of a slowdown. 

The Chinese economy which is 

growing at 7% to 8% currently could 

actually drop to may be 5% to 6% 

given the low demand in the domestic 

and international markets. China is 

the main contributor. 

For instance in the year 2012, copper 

demand grew at 3.1%. However, if 

one excludes the demand from China 

the actual global demand declined by 

2.2%, indicating that it is only China 

10 



which has been driving the demand, 

whereas the rest of the world, 

particularly the US, Europe and Japan 

are still lacking the demand. 

Overall these are risks that still exist 

in the developed as well as the 

developing world, which are 

obviously not clearly visible or 

suggested by some of the leading 

indicators as of now. 

This is why many economists now 

argue that base metals, especially 

aluminium and copper, which are 

behaving in contrast with the 

economic forecasts could be the 

warning signs for the global economy 

and the equity markets. 

Many still argue that the economy is 

telling a different story even though 

the US equity index such as Dow has 

passed the crucial 15,000 mark. If the 

base metal is saying something else, 

people may start taking hopes of 

recovery with a little pinch of salt. 

And if one looks at the behavior of the 

base metal prices along with the PMI 

numbers which are down in the US, 

China, Europe, Germany and India, 

the picture may not appear as rosy as 

has been predicted. 

In fact the Chinese PMI numbers in 

May fell to 49.6, which was the 

lowest in many months. China has 

seen contraction in its industrial 

activities in the recent past. 

Also, retail sales numbers, consumer 

confidence, spending on renovation, 

manufacturing activities in the US 

continue to be loweR. 


NOTES OF 

DESPAIR 

The rupee may continue to fall further 

in the coming times due to worsening 

macroeconomic environment in India as 

well as abroad 

12 



The Indian rupee is having 

its worst spell in the last 

one year or so. Not only 

have yearly gains of the 

rupee been wiped out, the hawkish 

stance taken by the central bank too 

has further dwindled its chances of 

appreciation against the greenback. 

Last week the rupee took a fall below 

the psychological level of 56, which 

is the lowest level it has touched since 

September ’12. 

The RBI Governor D Subbarao in a 

recent public appearance mentioned 

how the central bank is in a bind 

because of the worrisome current 

account deficit (CAD) as well as the 

rising inflation. 

According to estimates by 

economists, the year may close with a 

current account deficit of 4.5%. This 

spelt further bad news for the rupee as 

it plummeted downwards to touch its 

worst level in the past 11 months. 

Currency experts are of the opinion 

that the trend of the falling rupee will 

continue till the end of the year as 

they expect little or no change on the 

macroeconomic front domestically 

and internationally. 

If the current trend continues, the 

rupee may touch the level of 60 

against the dollar, before the close of 

the year. 

Here are the major reasons why the 

rupee has been in a free fall (has 

fallen almost 16% in the last four-odd 

months) and the ways in which it can 

impact you. 

THE DOLLAR AND THE EURO 

ZONE WOES 

The main reason for the fall of the 

rupee is the dollar index which is 

going from strength to strength. 

Americans are hopeful of a tapering 

quantitative easing as there has been 

considerable improvement in equities 

as well as the labour market in the US. 

The dollar’s strength can also be 

attributed to the crisis in the Euro 

zone. With economic problems 

intensifying in the Euro zone, the 

dollar is being perceived as a safe 

haven and there has been a flight 

towards the dollar by investors. 

Further, as compared to the other 

central banking authorities in the 

Euro zone, the Federal Reserve of 

America has been talking about asset 

purchases tapering, which implies 

capital preservation, which is further 

encouraging the rise of the dollar. 

To add to its woes, the rupee is not 

only losing against the greenback, but 

also feeling the heat because of the 

crisis in the Euro zone. 

Owing to deteriorating economic 

indicators in the Euro zone, investors 

are currently staying away from what 

they believe are risky investments. 

Add to that, India may see a further 

downgrade in its investment grade 

that has caused the currency to 

weaken further. 

Fundamentally speaking, there could 

not have been a worse time for the 

Indian rupee. High exports coupled 

with a depreciating currency should 

ideally spell good news for any 

country. India, however, does not 

enjoy this privilege. 

Crude oil is the biggest component of 

India’s bill for imports and though the 

price of crude has somewhat helped 

India combat its depreciating 

currency, the Euro zone being in the 

folds of a crisis has weakened its 

prospects further as the Euro zone is 

one of India’s largest trading partners. 

India’s biggest problem now is its 

current account deficit, which stands 

at around 4.3% and depleting foreign 

exchange reserves and the authorities 

can do little to salvage the situation, 

because of worsening trade deficit, 

rising inflation and slowing growth. 

With bleak fundamental outlook in 

the Indian economy, it does indeed 

seem that the rupee will continue to 

be on a slippery slope in the 

forthcoming months. 

THE WEAK RUPEE’S IMPACT 

ON YOU 

With the rupee on a continuous slide, 

consumers and investors will also be 

impacted in more ways than one. 

The first and the most prominent 

impact will be on your petrol and 

diesel bills as consumers. Crude, as 

mentioned earlier, is the largest 

component of the import bill of India. 

Oil companies in India need to pay in 

dollars to import crude oil, which 

means that there are likely to be hikes 

in your fuel costs in the days to come 

as the rise in import cost is passed on 

to the customers. 

A weakening rupee spells disaster for 

students going to study abroad as well 

as Indian tourists travelling abroad as 

they will have to shell out more 

dollars for their expenses and travel to 

foreign lands. 

For investors too, a weakened rupee is 

bad news as it will dent corporate 

profits (those companies that need to 

import raw materials) in the 

forthcoming quarters. This, is turn, 

will reflect negatively on the stock 

prices in the days to come. 

Those planning to invest in gold in the 

near future may, however, be 

encouraged in the latter half of the 

year. Commodities such as gold and 

even silver are priced in dollars. The 

weakening rupee is supportive of the 


yellow metal. This essentially means 

that the price of gold, which was 

down by almost 15% for the year may 

remain supportive due to the fall in 

the rupee. 

WHO WILL GAIN 

There are some others too who will 

gain from a weakened rupee. Largely 

among them are IT firms and other 

exporters who earn a majority of their 

revenues in dollars. 

For instance, a company like Infosys 

gets more than half of its business 

from Europe and North America. A 

weak rupee is also good news for 

nearly 40% of the SMEs with 

export-oriented businesses. 

With their sources of capital drying 

up thick and fast as banks become 

more and more stringent about SME 

lending, they have some reason to 

rejoice as they too stand to gain from 

a weakened rupee. 

The other segment that has some 

reason to rejoice because of the weak 

rupee are the non-resident Indians. 

Remittances have already increased 

as several expats are left with more 

money to send back home. 

In fact the weakening rupee has 

supported the rise in property prices 

in Mumbai in the recent times. 

Property experts say that a lot of 

investments in high end properties are 

being fuelled by expats over the past 

few months. 

Though Mumbai is prominent, there 

are other bigger cities in the country 

too that have witnessed a rise in 

property rates due to a weak rupee in 

recent timeS. 

QUAL 

AT NIRMAL BANG, YOU’RE MORE THAN 

JUST A BUSINESS ASSOCIATE, 

YOU’RE AN EQUAL PARTNER. 

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EQUITIES | DERIVATIVES | COMMODITIES* | CURRENCY | MUTUAL FUNDS | IPOs | INSURANCE | DP 

Contact Person: Gaurav Mohta - 07738380299 & Nilesh Sonawane - 07738380027 

Address: B-2, 301/302, 3rd Floor, Marathon Innova, Off. G. K. Marg, Lower Parel (W), Mumbai - 400013. 

Disclaimer: Insurance is a subject matter of solicitation. Mutual Fund investments are subject to market risk. Please read the scheme-related document carefully before investing. Security is subject to market risk. Please read the Do’s and Don’ts prescribed by Commodity Exchange before trading. The PMS Service is not offering for commodity segment. *Through Nirmal Bang Commodities Pvt. Ltd. #Distributors 

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14 



Several realty companies 

are offering attractive 

deals to home buyers to 

boost sales. Yet, many 

are adopting a wait and 

watch approach before 

biting the bait 

Gone are the days when 

real estate was 

considered to be one of 

the best options for 

investment. Those were the days 

when builders and developers were a 

content lot. 

Times have changed and now the 

sector seems to be ruled by Murphy’s 

law which states, “Anything that can 

go wrong, will go wrong.” 

Real estate developers now face all 

kinds of problems - be it not getting 

requisite approvals for their projects, 

a slowdown in sales, land acquisition 

or farmer issues. 

Currently, everyone is cautious about 

the sector. Foreign investors are 

cautious because of rupee weakness, 

which has weakened 6.27% against 

the US dollar in the last fiscal. 

Banks are cautious about lending to 

the sector because of delays in 

repayment of loans and tightening of 

lending norms by the Reserve Bank 

of India (RBI). 

And the domestic investors and 

buyers are waiting for the right 

opportunity to take a plunge. 

Real estate companies have finally 

realized the problem and they are 


trying to create the ‘right opportunity’ 

for buyers by offering attractive deals. 

A majority of these deals come under 

what is commonly known as the 

‘subvention scheme’. 

The subvention scheme is a modified 

form of home loans, under which a 

buyer pays 20% or so of the unit price 

in advance for a project and the rest 

80% of the amount is paid by the bank 

to the developer. 

Under this scheme, the buyer does not 

have to pay EMI on the home loan to 

the bank for a period of time known 

as the ‘subvention period’, which 

could be for 2 years or alternatively 

till the time the buyer gets the 

possession of the property. 

During this particular period of ‘no 

EMI’, which is usually up to 2 years, 

the developer pays the interest on the 

home loan taken by the buyer directly 

to the bank. 

There are many variants of this 

scheme, offered by developers. 

According to experts, the schemes 

have started to show results in 

Delhi/National Capital Region. And 

developers such as CHD Developers 

Ltd, Indiabulls Real Estate, Nirmal 

Lifestyle and Berry Developer and 

Infrastructure are also offering 

subvention schemes to the buyers. 

Interestingly, many developers are 

collaborating with banks for offers. 

For example, BCC Infrastructure Pvt 

Ltd has collaborated with HDFC 

PMS for its Bharat City project in 

Ghaziabad, where the buyer has to 

pay the standard 20% of the initial 

payment and the remaining bank 

EMIs after possession. 

SARE Homes has collaborated with 

the State Bank of India for their 

project ‘Springview Heights’, a 

township at NH24, Ghaziabad. The 

buyer need not pay bank EMIs for 

three years after the initial payment of 

20% of the home value upfront. 

SARE Homes is offering the same 

scheme for its townships in Old 

Mahabalipuram Road and GST areas 

in Chennai. However, for Chennai 

they have collaborated with ICICI 

Bank instead of State Bank of India. 

While many developers are 

collaborating with banks, Parsvnath 

Developers Ltd has come up with a 

new scheme which is called ‘25:75 

House of Happiness’. 

According to the statement released 

by the company, under this scheme 

the buyer has to make an upfront 

payment of 25% and the rest of the 

amount only after possession. 

What makes this scheme unique is 

that it would not attract any EMIs as 

no bank loan is involved. 

The scheme, says a company official, 

is a move to reach out to first time 

home buyers and would be extended 

to 20 projects of the group, including 

four commercial and 16 residential 

projects underway across the country 

in New Delhi, Greater Noida, 

Sonepat, Ujjain, Bhiwadi, etc. 

In Mumbai, developers are coming up 

with their own variant of the scheme. 

While DB Realty allows buyers to 

pay 19.9% of the cost and the rest 

when the project is completed, 

Sunteck Realty is asking for 30% 

upfront payment. 

However, in case of DB Realty, it is 

charging about 25% more from the 

customers who are opting for such 

schemes in projects like Orchid 

Crown condominium. 

In Karnataka’s capital city, 

Bengaluru, most realty developers are 

taking the traditional route of 

reducing the price to attract buyers. 

While at one point of time, an average 

2BHK apartment was priced at 

around `50-60 lakh, many real estate 

developers are offering Villas, 

spacious luxury apartments and 

Villaments at a price of `50 lakh, `37 

lakh and `47 lakh, respectively. 

Another way to bring back buyers to 

the market is the tried and tested 

formula of affordable housing 

schemes, launched by developers 

such as Jaypee, Wave Infratech and 

Tata Housing. 

Wave Infratech, which has been 

successful in affordable housing 

foray, launched affordable housing 

project, Wave City in Ghaziabad in 

March and has already sold 1,800 

units in a month. 

Jaypee is offering flats in Greater 

Noida at a starting price of `26.5 lakh, 

which goes up to `58.4 lakh, 

depending on the size of the unit. 

Smart Value Homes, a fully owned 

subsidiary of Tata Housing, has four 

projects in Boisar, Vasind, 

Ahmedabad and Bengaluru where it 

is offering affordable housing in the 

price range of `5 lakh to `35 lakh. 

For Eco Village, Supertech’s 

affordable venture near Yamuna 

Expressway, the price range is 

between `30 lakh and `75 lakh. 

Surprisingly, despite all the schemes 

and price reduction, there is still a 

lack of enthusiasm among buyers. 

The reason being the deals offered by 

developers are not as white as they 

appear on paper and there is a general 

lack of trust. 

Experts believe that the Indian buyer 

does not think of buying a property as 

an investment. 

So, factors like proper pricing, good 

16 



location in relation to workplace 

hubs, capital value and immediate 

availability come into play. 

In subvention, only the bank is safe 

because even if the developer stops 

payment, the property is already 

mortgaged and the buyer has to pay 

the rest of the amount. 

Sometimes the scheme turns out to be 

a ‘ponzi’ scheme. What happens is 

that many times a developer launches 

a project without even acquiring the 

land for it and starts collecting money 

from buyers and investors. 

Once the developer has collected 

enough money, he starts the 

paperwork to acquire land. 

So there is some truth, when a 

developer says the project has been 

delayed because of land acquisition or 

lack of permission. In some cases, a 

developer announces a project and 

uses the money he gets from investors 

to pay off interest on debt and repay 

debt that is maturing. 

Now, the developer has no money to 

complete the project; so he announces 

another project and the money he gets 

from this new project is used in the 

development of the previous project. 

This delays projects and the buyer 

does not get possession even after the 

period of no-EMI has ended, which 

results in him paying the interest to 

the bank. This cycle goes on and on. 

While affordable housing seems to be 

a safe option, it too has its own share 

of risk. 

The category is loosely defined and as 

KPMG-Credai (Confederation of 

Real Estate Developer’s Association 

of India) suggests that affordable and 

low-cost housing are often used 

interchangeably in India. But in 

reality they are quite different from 

each other. 

Low-cost housing comprises of bare 

minimum and is generally meant for 

lower economically weaker sections 

of the society, whereas, affordable 

housing comprises of community 

facilities and services like school, 

hospital, etc. 

Some developers who use the term 

affordable housing in reality are 

offering low-cost housing. Also, 

many experts believe that when the 

market is down, many developers 

offer the affordable housing to sell the 

project. But when it again starts to 

bounce back, they increase the price 

by citing value additions to the unit. 

There are many profitable deals out 

there. But to convert the investment 

into successful buying, a thorough 

research about the developer and the 

project is required. A little luck will 

also be an advantagE. 

Micro analysis. Mega gains. 

Trading at Nirmal Bang is based on extensive research and in-depth 

analysis, where we focus on the smallest of details and turn them into 

an advantage for you. 

Over the years, the analytical approach coupled with decades of 

experience has helped us maximize returns for our investors and 

thereby inspire confidence in them. 

EQUITIES* | DERIVATIVES* | COMMODITIES | CURRENCY* | MUTUAL FUNDS^ | IPOs^ | INSURANCE^ | DP* www.nirmalbang.com 

SMS ‘BANG’ to 54646 | Contact at: 022-3926 9404 | e-mail: contact@nirmalbang.com 

Disclaimer: Insurance is a subject matter of solicitation. Mutual Fund investments are subject to market risk. Please read the scheme related document carefully before investing. Please read the Do’s and Don’ts prescribed by Commodity Exchange before trading. The PMS Service is not offering for commodity segment. *Through Nirmal Bang Securities Pvt. Ltd. ^Distributors #Prepared by Research Analyst of Nirmal Bang Commodities Pvt. Ltd. 

REGD. OFFICE: Sonawala Building, 25 Bank Street, Fort, Mumbai - 400 001. Tel: 022 - 39267500 / 7501; Fax: 022 - 39267510 CORPORATE OFFICE: B-2, 301/302, Marathon Innova, Off Ganpatrao Kadam Marg, Lower Parel (W), Mumbai - 400 013. Tel: 022 - 39268000 / 8001; Fax: 022 - 39268010 


Public sector banks have earned the 

wrath of wary investors as their 

performance as illustrated by their 

quarterly earnings results has been 

deplorable and leaves a lot to be desired 

The latest quarterly 

earnings results have 

revealed that although the 

banking sector as a whole 

reported moderate performance, the 

difference in performance between 

public and private sector banks is 

getting wider. 

Public sector banks have over the past 

few quarters faced a slowdown in 

their revenue growth and their cost 

ratios and credit costs have escalated. 

Loan growth is a major concern for 

public sector banks as its stands at 

15% year-on-year (y-o-y) as 

compared to 18% growth (y-o-y) in 

private banks. 

Public sector banks are likely to take a 

further beating in the forthcoming 

quarters as they have to keep aside a 

larger chunk of their capital for 

provisioning requirements. This must 

be done to improve their coverage for 

bad assets or restructured loans. 

The fact that public sector banks have 

moved from the limelight they used to 

attract as behemoths in the system 

some time ago is not without reason. 

The numbers speak of a gory tale. In 

percentage terms, the share of NPAs 

to assets has risen to 3.9% in the latest 

quarter as compared to 3% about six 

months ago. 

In comparison, gross non-performing 

loans (NPLs) of private banks stands 

at 2%. And this story is far from over 

as the next leg of impaired loans is 

likely to show up very soon as 

corporate earnings in the balance 

sheets of some large banks show 

18 



adequate stress, which will tell upon 

bank’s earnings very soon. 

WORRISOME ASSET QUALITY 

The asset quality in the books of 

public sector banks has been a 

standard concern even for banking 

and economic authorities in India. 

The Finance Ministry too has 

imposed stringent norms on these 

banks to address this issue. 

The Finance Ministry is concerned 

for another reason as it has earmarked 

2013 as a year when public sector 

banks are expected to raise money in 

order to meet Basel III requirements. 

But this may not be very successful as 

long as these public sector banks have 

such high quantity of bad assets 

sitting on their books. Needless to say, 

state-run banks are under pressure to 

clean up their books before they can 

even attempt to tap public funds. 

On the other hand, private sector 

banks have impressed with their 

performance. Not only are their 

non-performing assets (NPAs) under 

control, their NIMs or net interest 

margins too have been steady. Loan 

growth at 18% y-o-y also indicates 

that the pace of business has been 

good for private sector banks. 

The blame cannot entirely lay on 

public sector banks as it is largely 

thrust upon them to lend to sectors 

such as infrastructure, especially 

power and energy space that have 

been largely troubled. The massive 

debt restructuring in these spaces has 

hurt the balance sheet of these 

state-run banks. 

Private sector banks on the other hand 

are not under any such compulsion or 

pressure and can choose who they can 

lend to. The gap in asset quality is 

widening now that there is an 

imminent slowdown, which is staring 

us in the face. 

The gap in asset quality between 

public and private sector banks is set 

to widen even further in the days to 

come and this will reflect in the 

banks’ credit cycle. 

LAGGING BEHIND 

It’s not just the asset quality of these 

public sector banks but also 

business-wise PSBs are trailing 

behind their private sector peers. 

Loan growth of public sector banks 

was at 7.16% up to December ’12, the 

growth of private sector banks stood 

at 15.18%. 

Public sector banks who have burnt 

their fingers in the infrastructure 

sector are obviously wary of lending 

to other sectors for fear of further pile 

up of bad assets. 

Private sector banks on the other hand 

have seen loan growth despite the 

cautious approach in a slowdown like 

the one we are witnessing presently. 

Deposits too have grown at a faster 

pace for private sector banks. Private 

sector banks have seen a year-to-date 

growth of 13.96% where as for public 

sector banks it has only been 6.78%. 

VALUATION CALL 

It is now clearly evident that private 

sector banking stocks have been 

favoured by investors. 

The growth and performance of these 

banks has sent their stocks through 

the roof and most banking sector 

analysts would recommend holding 

on to the stocks of private sector 

banks for long-term wealth creation. 

However, the truth is that the wide 

gap between private and public sector 

banks is quite evident in valuations, 

as well. 

While private sector banks are trading 

at 3-4 times their book value, public 

sector banks are seen trading below 1 

time their book value, which makes 

these banks pretty attractive 

according to valuations. 

As an investor one may question the 

logic of shopping for PSBs especially 

at a time when they are far from 

getting their act together, in terms of 

cleaning up of bad loans from their 

books as well as enhancing their core 

business. But there is some merit in 

the argument that it may not be a bad 

idea to invest in some PSBs. 

When the Indian economy improves, 

there will be a case for resurgence of 

these PSB stocks. Therefore, holding 

on to PSBs may prove to be profitable 

for investorS. 

RAZOR-RAZORBLADE MODEL 

A business tactic involving the sale of dependent goods for different prices - one good is sold at a discount, while the 

second dependent good is sold at a considerably higher price is known as razor-razorblade model. When one purchases 

razors, they are not highly priced. But their replacement blades are comparatively more expensive. The video game 

industry is another user of this pricing strategy. They sell game consoles at a relatively low price, recouping lost profits on 

high-priced games. 


Renewed 

Interest 

The growing number of 

TB cases in India is giving 

enough reasons to pharma 

companies to focus on 

manufacturing and 

marketing drugs to treat 

this infectious disease 

20 



Nearly 20 lakh people are 

affected by tuberculosis 

(TB) in India every year. 

Of these, 8.7 lakh cases 

are infectious in nature. It is estimated 

that around 3,30,000 Indians die due 

to TB annually, indicating the 

seriousness of this deadly disease. 

Moreover, as India accounts for 

one-fifth of the global TB cases, 

WHO India states TB as a major 

public health problem in our country. 

A number of Indian and multinational 

pharmaceutical companies have 

anti-tubercular drugs in their 

portfolio. However, anti-infectives in 

particular have remained a major 

therapeutic category of focus for 

pharma companies in India. 

Only recently has there been a shift 

towards non-communicable diseases 

(NCDs) by pharma companies. Indian 

pharma companies like Lupin, 

Macleods Pharma, Cadila and 

Wockhardt have an impressive range 

of anti-TB drugs in their portfolios. 

And among MNCs, Pfizer, Novartis, 

Sanofi and Abbott have been 

manufacturing, marketing and 

researching anti-TB drugs. 

This clearly shows the huge demand 

for anti-TB drugs. However, their 

availability is comparatively limited 

in this segment. 

Presently, R-Cinex (Isoniazid/ 

Rifampin, manufactured by Lupin) 

and Forecox (Ethambutol and 

Isoniazid Ethambutol, manufactured 

by Macleods) are two of the most 

widely prescribed anti-TB drugs in 

the Indian market. 

Both these companies have captured 

close to 15% of the market share in 

India. AKT-4, Combutol, Akurit-4 

and Pyzina are the other majorly 

prescribed drugs for TB. These four 

brands manufactured by Lupin 

constitute approximately 20% sales 

of anti-TB drugs in the market. 

STRATEGIC DESIGN 

Despite the presence of numerous 

domestic and certain international 

pharma firms involved in the 

manufacture and marketing of drugs 

in the country as well as abroad, 

industry experts say that the 

Tuberculosis market is not a very 

lucrative segment for investments as 

it is primarily driven by volumes as 

opposed to value. 

Commercial feasibility indicates a 

much lower RoI as compared to other 

non-communicable diseases 

segments. Most TB programmes are 

driven and regulated by the 

government, thus reducing profit 

margins further and minimizing 

private sector interest. 

Even in terms of requirements, TB is 

more prevalent in developing and 

underdeveloped economies, clearly 

demonstrating how the demand for 

drugs would be largely confined to 

economies where price control is 

deliberate and the scope for profits is 

much more limited. 

The procurement of new drugs that 

are still being tested is a fairly 

complicated process. 

In addition to this, the tuberculosis 

bacteria have evolved over the past 

four decades. This could be the reason 

why Johnson & Johnson’s (J&J’s) 

Sirturo drug was approved by the US 

Food and Drug Administration (FDA) 

under its accelerated approval 

programme for orphan drugs, clearing 

innovative drugs based on promising 

preliminary results. 

While the FDA generally requires a 

lengthy three-stage testing process 

before any approval, Sirturo was 

approved just after two periods of 

study. The second phase of the testing 

process is still going on. 

In spite of a few untoward incidents, 

the FDA permitted its entry with a 

caution. It warned that the drug 

carries risks of potentially dangerous 

heart problems and should be 

prescribed carefully by doctors. 

However, the FDA judged the 

benefits of accelerated approval 

process to outweigh the negative side 

effects, especially when the medical 

fraternity has been told about the 

possible negative side effects, 

necessitating due care in the 

prescription process. 

This is the first TB medication to be 

approved in four decades, the FDA 

informed. The FDA says that Sirturo 

has been approved for use with older 

medications for a very hard-to-treat 

TB strain that has not responded 

properly to other drugs. 

The agency added that Sirturo should 

be prescribed with caution because it 

carried major risks of potentially 

lethal heart problems. 

TREATMENT METHODS 

The treatment of TB usually involves 

taking several antibiotic drugs for at 

least six months and sometimes for as 

long as 12 months. Four of the biggest 

high-burden countries - India, 

Indonesia, Pakistan, and Philippines - 

have a large private sector pharma 

presence, capable of producing 

enough TB drugs to treat all TB 

patients with a full TB drug regimen. 

However, the problem arises in the 

case of multi drug resistance TB 

(MDR-TB) because very few patients 

receive MDR-TB treatment and data 

reveals that the private sector seems 

to be still finding its feet in bridging 

the gap. 

Drug resistance in tuberculosis is a 


serious problem compromising both 

the treatment and control 

programmes. Poor usage of the 

available anti-TB drugs has led to 

progressive drug resistance-multi 

drug resistance (MDR), extensively 

drug-resistance (XDR) and even total 

drug resistance (TDR). 

While drug-sensitive TB is 

completely curable, MDR-TB is 

difficult to treat, XDR and TDR are 

often fatal. Non availability of new 

drugs to treat drug resistant cases 

further complicates the problem. 

The treatment of multi drug resistant 

TB (MDR TB) is more difficult than 

the treatment of drug susceptible TB, 

and it requires the use of ‘second line’ 

or reserve drugs that are more costly, 

cause more side effects and have to be 

taken for up to two years. 

Cure rates for MDR-TB are lower, 

typically ranging from around 50% to 

70%. The drugs that are used for the 

treatment of drug resistant TB are 

grouped according to the 

effectiveness of the drugs, experience 

about their usage and the drug class. 

SOCIAL RESPONSIBILITY 

According to data available in the 

public domain, Lupin has been a trail 

blazer and still remains the 

undisputed global heavy weight in the 

anti-TB drug space. Leave alone 

India, where they have close to 50% 

market share, as per IMS Health data, 

the company is also a global leader in 

a drug like Rifampicin where it has 

close to 80% market share. 

With the highest number of TB cases 

in India, a number of domestic 

pharma companies are engaged in the 

manufacture and marketing of 

anti-TB drugs. 

Lupin also partners with various 

agencies and organizations for their 

TB eradication programmes. It 

supplies anti-tuberculosis drugs to 

many government agencies, the 

national TB programme, the Stop TB 

Partnership and various other 

international agencies. 

Lupin is pre-qualified as a preferred 

supplier to the Global Drug Facility 

(GDF). These formulations are being 

supplied to more than 50 countries 

through GDF procurement. The 

company also supplies to various 

international institutions like Pan 

America Health Organisation 

(PAHO), Medicines Sans Frontier 

(MSF) and the Damien Foundation. 

The company is now looking at 

expanding its offerings in the anti-TB 

range to include Active 

Pharmaceutical Ingredients (APIs) in 

the MDR-TB category. The areas of 

MDR-TB and Paediatric TB provide 

additional opportunity for the 

pharmaceutical company, Lupin to 

strengthen its global leadership. 

In India, the government has been 

implementing the Revised National 

Tuberculosis Control Programme 

(RNTCP), which is based on the 

WHO-recommended DOTS strategy. 

Phase II of the RNTCP started in 

October ’05. 

Since 2006, RNTCP has been 

implementing the WHO 

recommended Stop TB Strategy, 

which in addition to DOTS, addresses 

all the newer issues and challenges in 

TB control. 

RNTCP also offers treatment to 

patients with multi drug resistant TB 

(MDR-TB) at DOTS-Plus sites. One 

of the important activities in this 

process is laboratory strengthening 

for quality assured culture and drug 

susceptibility testing, including the 

use of recommended newer 

technology for rapid detection of 

MDR-TB. 

The majority of funding for RNTCP 

is through government sources, which 

includes a World Bank credit. The 

programme is also supported by funds 

from donor agencies including DFID 

of UK, the Global Fund and USAID. 

The Global Drug Facility (GDF) 

procures about half of the drug 

requirement of RNTCP using funds 

from DFID. 

CAVEAT EMPTOR 

It is a Latin phrase for “let the buyer beware.” The term is primarily used in real property transactions. Essentially, it 

proclaims that the buyer must perform due diligence when purchasing an item or service. 

In other words, consumers need to know their rights and be vigilant in avoiding scams. For example, in the private 

purchase of a used car, caveat emptor places an onus on the buyer to make sure that the car is worth the purchase price. 

This is because once the transaction is complete the buyer will not receive a warranty or return option from the seller. 

22 



High disposable incomes 

and rising aspirations, 

coupled with fiscal 

incentives to the housing 

sector by the government 

and increased investments 

in infrastructure and 

automobile sectors is 

likely to boost the paint 

industry in the country 

Long ago, branding of paint 

companies was less 

intense and done quite 

infrequently. There are, 

however, a few exceptions of paint 

companies such as Asian Paints and 

Berger Paints India, which continue 

to do strong marketing and 

advertising of their products. 

But things have changed in the last 

decade. With increasing incomes and 

flourishing businesses, the awareness 

about paint companies’ brands has 

increased among the masses, thanks 

to the strong recall value of 

well-thought out commercials. 

Despite this, the knowledge and 

information of the paint industry is 

very inadequate especially when one 

takes into account the fact that the 

paint industry is expected to grow 

almost two times the country’s GDP 

in the next five years. 

Painting 

A Pretty 

Picture 


And with experts expecting a 

re-rating of the paint industry, it is 

quite appropriate to understand the 

dynamics that drive the industry. 

Because in understanding these 

dynamics, one would comprehend the 

increasing role paint industry would 

play in India’s growth story. Here is a 

low-down on India’s paints industry. 

THE INDUSTRY 

At present 35% of India’s paint 

market is controlled by the 

unorganized part of the industry, 

while a majority 65% is controlled by 

the organized sector. It is estimated 

that there are about 2,000 units, which 

have small and medium sized 

manufacturing plants. 

In the organized part of the industry, 

there are players such as Asian Paints, 

Kansai Nerolac, Berger Paints and 

ICI. Interestingly, these players have 

been able to dominate the industry 

due to some strong barriers of entry 

for new players. These barriers 

include distribution network, working 

capital efficiency and technology. 

Besides, any new player has to face 

the challenge of bargaining power of 

suppliers and high availability of 

choices in the form of 

long-established players. 

These factors present strong 

competition to any new player, 

making it tough for a new entrant to 

establish its presence strongly and 

penetrate deeply. It is observed that 

companies in the organized part of the 

sector focus on brand building and 

these companies develop new 

products with a bit of differentiation 

and charge these products higher than 

their unorganized peers. 

India’s paint industry is mostly raw 

material-intensive with strong 

co-relation to international 

demand-supply situation. Typically, 

price fluctuations in pigments such as 

titanium dioxide and solvents and 

crude derivatives impact domestic 

production costs of paint and its 

related products. 

It is estimated that production cost of 

paint industry is highly susceptible to 

crude oil prices since 60% to 65% of 

ingredients used in the paint industry 

are based on oil and crude derivatives. 

Besides, nearly 30% to 35% of raw 

materials used in the paint industry 

are imported, indicating that costs are 

susceptible to currency fluctuations. 

At present, due to increase in global 

capacity and adequate supply, prices 

of titanium dioxide and other raw 

materials have come down. 

It is estimated that softening of raw 

material costs would help paint 

companies in enhancing their gross 

operating margins by 100-150 bps in 

the next couple of years. 

THE BASICS 

In the last five years ending FY12, 

India’s paint industry has grown at a 

compound annual growth rate 

(CAGR) of 15% in FY12. Economic 

growth, rural and urban development, 

changing lifestyles and rising 

aspirations have contributed to the 

growth of the paint industry. 

It is estimated that paint volumes 

have increased and volumes have 

been closely related with GDP growth 

rate. And experts estimate that paint 

volumes have grown on an average 

2.1 times the GDP. 

Going ahead, with enhancement in 

individual lifestyles and aspirations, 

India’s paint industry is expected to 

grow at a CAGR of 15% for the next 

three years to be an industry of around 

`44,300 crore by FY15E. 

The paint industry can be divided into 

two parts. One is decorative paints, 

the other is industrial paints. 

Decorative paints has 77% market 

share, while industrial paints form the 

remaining 23% of market share of the 

paint industry. 

At present, emulsion constitutes a 

majority share of decorative paints. 

Besides, it is the fastest growing 

segment of the paint industry. The 

growth of India’s paint industry is 

coming from new pockets - primarily 

from tier-II and tier-III cities 

indicating the increasing acceptance 

of branded paint products. This also 

indicates a shift in the demand from 

unorganized players to organized 

players. This has also shifted the 

focus of demand to premium paint 

segment - emulsion category from 

‘distemper and primer’ category. 

At present, the supply in the industry 

exceeds demand both in decorative 

and industrial paints segments. The 

demand for decorative paints hinges 

on the housing sector and adequate 

monsoon, while the demand for 

industrial paints is connected to user 

industries like auto, engineering and 

consumer durables. 

a) Decoratives 

The decoratives segment includes 

exterior and interior wall paints, 

wood finishes, enamel and ancillary 

products such as primer and putties. 

At present, it is estimated that 

decorative paints account for over 

77.3% of the overall paint market in 

India. Asian Paints is the market 

leader in this segment. 

A substantial portion of decorative 

paints arises from household painting, 

architectural and other display 

purposes. The peak business period 

for decorative paints is during the 

festive season from September to 

December. The prices are high in this 

period and hence, it is a high margin 

business for paint companies. 

24 



) Industrial 

The industrial segment of the paint 

industry includes automotive 

coatings, powder coatings and 

protective coatings. Kansai Nerolac is 

the market leader in this segment. 

This segment caters to sectors such as 

automobile engineering and 

consumer durables. 

In terms of business, the industrial 

paint segment is more technologically 

intensive than the decorative 

segment. With increasing investments 

in infrastructure from the government 

and private entities, these two 

segments are expected to do well in 

the coming quarters. 

GOING AHEAD 

As regards the two segments, the 

decorative segment is expected to 

show high growth owing to fiscal 

incentives by the government to the 

housing sector. This should benefit 

long-established players immensely. 

Besides, the demand for industrial 

paints is expected to increase given 

the increasing investments in 

infrastructure and automobile sectors. 

The demand for industrial paints 

would also be boosted by domestic 

and global automotive companies’ 

expansion plans. This works well for 

paint manufacturers like Kansai 

Nerolac and Asian-PPG. 

Experts believe that increased 

industrial paint demand, especially 

powder coatings and high 

performance coatings will also 

enhance revenue growth of paint 

majors in the medium term. 

In the coming quarters, with changing 

business dynamics, from business to 

business (B2B) to business to 

consumers (B2C) has worked in 

favour of organized players. 

These players’ aggressive marketing 

initiatives, which include allowing 

customers to participate in the paint 

selection process, creating awareness 

about product differentiating features 

like zero volatile organic compound 

(VOC), and low VOC, have gone 

down well with customers. 

Apart from this, these companies 

have also developed concept stores 

like ‘Colour World, Impression 

Stores, Kids World’ for customers to 

touch and feel ‘textures, designs, 

glow and Disney themes’, unique 

professional services of product 

consultancy as well as colour 

consultancy through ‘home solutions 

and home stylers.’ 

Interactive call centre and simulation 

software-based websites have 

garnered huge customer acceptance in 

recent years. These initiatives should 

give paint companies strong business 

opportunities in tier-II and tier-III 

cities, which will provide a huge bank 

of customers who have high 

aspirations to enhance their lifestyles 

and live life at a level comparable to 

posh urban citieS. 

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Insignificant growth in passenger traffic 

has marred the prospects of airline 

companies. According to the website of 

the Directorate General of Civil Aviation 

(DGCA), in the last four months ending April 

there has been a decline of 0.35% in passenger 

traffic to 2 crore in comparison with the same 

period last year. 

This has resulted in stiff competition with most 

players resorting to introducing discounts in 

tickets for immediate and future travels. As a 

result of this, there has been pressure on yields of 

a number of airline companies as well as subdued 

growth in revenues. 

However, to compensate the fall in passenger 

traffic, airline companies have not resorted to 

price wars this time around. These companies are 

focusing on ancillary revenues. 

A case in point is the increasing charges for 

check-in of baggage depending on its weight. 

Such small sources of revenues are known as 

ancillary revenues. It is estimated that ancillary 

revenues have added meaningful growth to the 

topline of most airlines across the globe. 

EXPLORING 

NEWER 

OPTIONS 

Airline companies are 

tapping ancillary revenues 

to offset the fall in 

passenger traffic in tough 

times that have beset the 

industry of late 

26 



Hence, one cannot ignore these 

revenues. This time we present to you 

the emergence of ancillary revenues 

and how going ahead, it is going to 

ensure consistent flow of revenues 

through various sources even in times 

of weak passenger traffic. 

 

Ancillary revenues are revenues, 

which airline companies make 

through sources other than the sale of 

tickets. This can be through baggage 

fees, food as well as other 

requirements on flights. 

Basically, ancillary revenues can be 

classified as revenues which airline 

companies earn beyond the sale of 

tickets in the overall travel experience 

of a passenger. 

Most low-cost carriers in Europe and 

the United States have skillfully 

employed this concept to create a 

crucial component of their toplines. 

According to various sources, 

ancillary revenues have been 

classified into categories such as à la 

carte features, commission-based 

products and frequent flier activities. 

One of the earliest proponents of 

ancillary revenues was Europe’s 

low-cost airline company Ryanair. It 

has been observed that Ryanair 

charged pay-per-view entertainment, 

onboard shopping, internet gaming, 

car hire and hotel bookings. These 

revenues formed a meaningful and 

significant portion of the airline 

company’s total revenues. 

One of the chief reasons for the 

emergence of ancillary revenues in 

airline companies’ total revenues is 

the realization of limitations of the 

price war strategy. 

For instance, if a country has four 

airlines, it is quite natural that the 

fourth player would find it difficult to 

emulate and sustain the price war 

strategy followed by its three peers. 

Hence, the fourth player has to come 

out with a strategy to outdo its peers 

and in the process also make money. 

The increasing revenues from 

Ryanair benefited the company and it 

has also convinced other airlines to 

emulate Ryanair. This put the seeds of 

the growing importance of ancillary 

revenues. Slowly it became an 

industry trend. 

Another reason for this huge 

acceptance of ancillary revenues is 

the cyclical nature of the airline 

industry. Strong dependence on crude 

oil prices, erratic passenger traffic and 

overall business and political 

environment make business for 

airline companies cyclical. 

Hence, having a meaningful portion 

of total revenues from sources other 

than the sale of tickets helps airline 

companies to reduce their dependence 

on these factors. 

A STUDY 

According to a study published by 

Amadeus and IdeaWorks, it was 

estimated that airline companies’ 

ancillary revenues would increase to 

$22.6 billion in 2010 from $13.5 

billion in 2009, a growth of 67%. 

In 2009, it has been estimated that in 

the United States, the contribution of 

ancillary revenues to the total 

revenues of most airline companies 

was in the range of 22% to 30%. 

The study divided airlines into four 

categories based on their ability to 

generate ancillary revenues. These 

categories are: 

 

This category represents a catch-all 

for the largest number of airline 

carriers. The ancillary revenue 

activity for airlines may consist of 

fees associated with excess or heavy 

bags and limited partner activity for a 

frequent flier programme. 

The average percentage of revenue 

remained at 2.9%. Examples include 

Air Canada, Air New Zealand, Copa, 

Etihad, Finnair and also South 

African Airways. 

 

US-based majors generate strong 

ancillary revenue through a 

combination of frequent flier revenue 

and baggage fees. 

The percentage of revenue for this 

group was 10.1%, which is a drop 

from the 2011 rate of 11.9%. 

Examples include Alaska, American 

and United. 

 

These carriers generate the highest 

activity as a percentage of operating 

revenue. The percentage of revenue 

achieved by this group was 19.7%, 

which is down slightly from 19.8% 

for the year 2011. Examples include 

AirAsia, Allegiant Air, easyJet and 

Spirit Airlines. 

 

LCCs throughout the world typically 

rely upon a mix of à la carte fees to 

generate good levels of ancillary 

revenue. The percentage of revenue 

for this group was 7.2% and is above 

last year’s 6.5%. Examples include 

Jazeera Airways, JetBlue, Norwegian, 

Pegasus, Southwest and GOL. 

It was found that ancillary revenue 

would reach $36.1 billion worldwide 

in 2012. The study took into account a 

large list of 176 airlines. The study 

found that the US airline category 


produces a significant share of global 

ancillary revenue. It estimated that 

around $12.4 billion result (34.3% of 

the global total) is generated by just 

six airlines: Alaska Airlines, 

American, Delta, Hawaiian, United, 

and the US Airways. 

The joint study by Amadeus and 

IdeaWorks Company observed that a 

majority of ancillary revenue for 

major US airlines is generated by the 

sale of frequent flier miles notably 

those linked to airline credit cards. 

This financial activity exceeds $6 

billion annually in the US alone. 

Baggage fees for US carriers 

represent approximately 20% of their 

ancillary receipts. The remaining 

revenue for airlines is produced by an 

array of à la carte as well as 

commission-based products. 

Other sources include onboard sale of 

food, beverages, wifi and 

commissions from hotel bookings. In 

addition, airlines offer an 

ever-increasing selection of services 

that add to traveller convenience such 

as priority security screening, early 

boarding, exit row seat assignments 

and single visit access to lounges at 

the airports. 

Interestingly, the study makes an 

interesting point as regards the future 

trend of ancillary revenues. 

It says, “The current situation has 

made ancillary revenue more 

attractive and needed, for airlines all 

over the world. If airlines were to 

forego the revenue contribution from 

the provision of ancillary services, it 

would mean a loss for a great number. 

Ancillary revenue provides good 

amount of cash to buy new aircraft 

interiors, invest in new equipment 

and provide funds for expansion.” 

GOING AHEAD... 

Going ahead, the trend of weak 

passenger traffic is expected to 

continue given the economic 

slowdown and expectation of high 

crude oil prices. Considering these 

factors, ancillary revenues should 

compensate for the loss of revenues 

due to weak passenger traffic and 

high expenditure. It is estimated that 

India’s airline companies earn 3% to 

5% of the total revenue from ancillary 

services alone. 

Experts are of the opinion that airline 

companies can enhance this 

contribution in the range of 6% to 8% 

in the coming quarters. 

In the Indian context, though the size 

of ancillary revenues would not be as 

big as their western counterparts, yet 

it forms a meaningful portion of the 

total revenues. 

Jet Airways plans to double its 

ancillary income to 10% in the next 

two years, Air India plans to sell 

meals on board like budget carriers, 

providing choice to customers to save 

some amount on ticket charges. 

In a good business season, this rate 

can fetch the company anywhere 

between `125 crore and `200 crore. 

Industry sources say that budget 

carrier IndiGo has over 6% income 

from ancillary services and the airline 

is consistently taking new steps to 

increase the share of ancillary 

revenues in the coming quarterS. 

CHINESE WALL 

It is the ethical barrier between different divisions of a financial (or other) institution(s) to avoid conflict of interest. A 

Chinese Wall is said to exist, for example, between the corporate-advisory area and the broking department of a financial 

services organization to separate those giving corporate advice on company takeovers from those advising clients about 

buying shares. 

The “wall” is thrown up to prevent leaks of corporate inside information, which could influence the advice given to clients 

making investments and allow staff to take advantage of facts that are not yet known to the general public. 

Maintaining client confidentiality is crucial to any firm, particularly large multiservice businesses. Where firms are 

providing a wide range of services, clients must be able to trust that the information about themselves will not be exploited 

for the benefit of other clients with different interests. And that means clients must be able to trust in Chinese Walls. 

Some Wall Street scandals in recent years, have made some people doubt the effectiveness of Chinese Walls, as 

well-placed executives of respectable firms have traded illegally on inside information for their own benefit. 

28 



G 

old prices have rallied 

from $300/ounce to 

$1,900/ounce in the last 

13 years. And the yellow 

metal has outperformed most asset 

classes in the last five years. 

Traditionally, buying gold is 

considered to be an auspicious form 

of investment in India. 

In the past five years, gold has 

generated a tremendous amount of 

wealth (which is still notional as most 

people have not booked their profits) 

for millions in the country. 

In India, especially in rural areas 

where awareness about other 

financial instruments is very low, gold 

is still one of most preferred 

investments after land. 

In the last decade no one has seen any 

bear market in gold and there is a 

notion amongst a majority of Indians 

that gold prices will continue to 

The yellow metal’s 

golden run seems to 

be over and investors 

can expect the price of 

gold to plummet 

further during the 

course of the year 

appreciate. But they must be aware of 

the scenario when real interest rates 

start picking up or even the 

expectation of real rates shooting up, 

gold prices correct sharply. 

For more than 20 years – from 1981 

to 2000 – there was a bear market in 

gold, with real rates moving up in the 

US. And a decade before that, gold 

prices shot up from 1971 to 1980, 

with a regime of negative real rates 

that continued during this period. 

Either the retailers are not aware of 

these statistics or they are ignoring it. 

In the last two months we have seen a 

significant correction in the prices of 

gold. It was followed by a sharp pull 

30 



ack owing to strong physical 

demand from India and China. 

We believe more than physical 

demand it is other factors such as the 

US dollar outlook going forward, 

interest rate expectations, investment 

demand, additional quantitative 

easing programme or withdrawal of 

the same and various other macro 

factors that are more important in 

determining the outlook of gold. 

Interestingly, despite massive 

liquidity infusion drives by the central 

bankers, inflation and inflationary 

expectations remain subdued. 

Moreover, in spite of rising money 

supply and negative rate regime, gold 

prices corrected, raised doubts in the 

minds of many and created ambiguity 

among gold bulls. 

The fact is that the global economy is 

actually overcoming a rough patch 

and showing signs of stability. There 

is more than one evidence which 

points to the fact that in spite certain 

bitter spots, the global economy is 

continuing to recover. 

The US economy is showing 

significant strength since the start of 

the year and most economic 

indicators are pointing towards 

sustainable recovery. 

Even the dollar index has been 

moving up. During the current quarter 

or the one after that, we may see the 

Federal Reserve reducing the pace of 

its bond purchase programme and 

stop it later on. 

We have never witnessed such huge 

unconventional programmes in 

history. Therefore, there is a lot of 

ambiguity about what will happen 

after the tapering off of the bond 

purchase programme or its end. 

But in both the scenarios, we are of 

the view that prices of the yellow 

metal are likely to correct. This means 

that if the economy continues to 

improve, only then will the bond 

purchase programme end and gold 

prices will drop. 

There has been major redemption in 

gold ETFs. Since the start of the year, 

we have been observing a moderate 

growth in ETFs and investment 

demand is likely to remain lacklustre, 

going forward. 

The 10-year US bond yield has been 

moving up from 1.80 to 2.00 since the 

last two quarters and is likely to shoot 

up further to test 2.25 – 2.30, thus 

reducing the appeal of gold, the safe 

haven instrument. 

The biggest lesson this crisis has 

taught us is that in spite of gold’s safe 

haven status, investing in it does not 

lead to economic growth. 

Investing in gold has never led to 

economic growth and never will. 

Hence, all your gold investments will 

neither lead to economic growth nor 

will they give you any returns until 

you sell them. 

Therefore, the strong physical 

demand from Asia seen recently will 

not be enough for gold prices to move 

up. It cannot bring any sustainable 

rally in gold. 

We believe the yellow metal’s golden 

run is over and during the course of 

the year the price of gold will keep 

drifting lower. Yet, there is euphoria 

among people to buy gold in India. 

This is a classic example of an asset 

bubble burst. But people are still not 

realizing it. 

AN AFFAIR WITH GOLD IS 

COSTING A LOT TO OUR 

NATION 

Gold’s share in India’s total import 

bill has risen from 8% in 2001-02 to 

almost 12% in 2011-2012, in value 

terms from $4.17 billion to $56 

billion during the same period. 

Last month when gold prices dropped 

sharply, the frenzy to buy gold was 

quite evident and there were long 

queues at jewellery stores across the 

country to buy gold. 

Premiums in the spot market shot up 

and the country’s gold imports rose 

138% to about $7.5 billion, which is 

one of the main reasons as to why 

India’s trade deficit worsened to 

$17.8 billion in April from $10.3 

billion in March this year. And in 

spite of good inflows, rupee moved 

up from 54.5 to 57, which breeds 

inflation, going forward. 

Everything we import has been 5.5% 

more expensive in the last two 

months due to weakness in the Indian 

rupee, which eventually will lead to 

tighter monetary policies by the 

Indian central bank, hurting growth 

prospects of our country. 

Our love for gold has become a major 

cause of concern for the Indian 

government as all efforts so far to 

curb gold imports have failed and 

imports in the yellow metal continue 

to remain robust. 

Investing in gold has not led to 

economic growth and never will. If 

our gold imports drop by 20% to 

25%, which roughly comes to $11 

billion to $16 billion, and this amount 

is diverted into the real economy, then 

it will boost the economy and reduce 

our trade deficit dramatically. Hence, 

it will have a dual advantage. 

The time has come for Indians to 

break-up their affair with gold to 

reduce the country’s current account 

deficit and to protect the people from 

losses in an event where gold prices 

drop sharply in the months to comE. 


Taking Stock And 

DECLUTTERING 

Although it is advisable to invest a portion of one’s portfolio 

in mutual funds, timely overhaul of this asset class is 

important to keep your investments healthy 

Although mutual funds 

(MFs) form a huge 

chunk of our investment 

corpus, most of us 

hardly ever dabble in them or keep 

track of them as religiously as we 

would of direct equities. 

We treat mutual funds almost as a 

fixed investment instrument and, 

therefore, miss out on booking profits 

or getting out of the fund when the 

losses are still small. 

This may be because: 

1. Most of us feel that mutual funds 

are a relatively safer investment than 

stocks and, hence, we would not lose 

as much as we would with direct 

stocks and still maintain a good 

equity exposure. 

2. Keeping track of mutual fund NAV 

is not as easy as tracking stock rates, 

which are constantly flashing on TV, 

newspapers and readily available with 

brokers. Mutual fund tracking needs 

some effort. 

3. Individuals often invest in mutual 

funds since they are regarded as a 

tax-saving instrument instead of an 

investment instrument and, hence, it 

has a compulsory lock-in before 

which we cannot sell. And even after 

the lock-in period is over, we 

completely forget about it. 

4. Many of us have ongoing SIPs in 

mutual funds and, hence, we feel that 

whatever be the markets, in the long 

run we will definitely make money 

due to rupee cost averaging. 

5. Most of us do not bother to find out 

the exact portfolio or weightages of 

the various stocks in a mutual fund 

scheme and, therefore, are not able to 

take decisions. 

Buying a mutual fund is a relatively 

32 



easy affair done either during the New 

Fund Offer (NFO) or finding the best 

existing mutual fund schemes based 

on the previous track record, dividend 

history and stock portfolio analysis. 

Selling, on the other hand, is a new 

ball game altogether. Selling is 

referred to as ‘redemption’ in mutual 

fund parlance. 

Let us understand why, when and how 

investors can sell their respective 

mutual fund holdings. 

INTERNAL/PERSONAL 

REASONS 

Need For Funds 

This would be the prime reason for 

redeeming your mutual funds. Say 

there is an emergency in the family or 

you need some additional cash to buy 

a house or a car. 

In such a scenario, it would always be 

better to fund your needs through 

your own corpus instead of borrowing 

money on high interest rates. 

Levels Hit 

Like in stocks, you should exit if your 

mutual fund hits your target returns. 

Say, if you had aimed for a 70% 

return from your mutual fund in a 

three-year period and your fund gave 

a 75% return in one-and-a-half years 

itself, then you can redeem your 

mutual fund schemes. 

Similarly, if your stop loss level is hit, 

you should exit. For example, if you 

have bought a mutual fund at an NAV 

of `10 and 40% to 45% is the 

maximum loss that you can bear, then 

you should exit at an NAV of 6 or 

maximum of 5.50. 

Growth In Confidence 

Many first time stock market entrants 

enter through the mutual fund route 

because of lack of knowledge, time, 

and research. And this is the right way 

to do. 

But over a period of time, many of 

them develop the expertise of picking 

up quality stocks, achieving adequate 

diversification and consistently 

outperforming the index and, hence, 

prefer to redeem their MFs and invest 

directly in equities. 

Portfolio Rebalancing 

With time, our risks, goals and 

priorities change drastically. For 

example, as you near your retirement, 

your goal is more about capital 

protection with moderate returns and 

low risk. 

So, you would do well to sell some of 

your equity-oriented mutual funds 

and shift to some other mutual funds 

which have lower equity exposure 

and more debt and fixed income 

exposure. Also, some of this 

redeemed amount can be invested in 

other asset classes such as bank FDs, 

bonds, gold, etc. 

Downsizing 

Many times, an investor bites more 

than he can chew. That is, he 

accumulates far more mutual funds in 

his kitty than he can effectively 

monitor and manage. 

The first sign of this is when you 

cannot recollect the names of a 

number of mutual fund schemes from 

your own portfolio. The best thing is 

to redeem a few of the funds that have 

consistently performed badly. 

Instead, they should keep just 4 to 5 

better performing mutual fund 

schemes in their portfolio. These 

funds should have diverse objectives 

such as equity-oriented index funds, 

monthly income funds, FMPs, debt 

funds, etc. 

Gut feeling 

If you have a negative personal view 

about the markets or certain sectors 

on which your mutual fund has some 

amount of exposure and you want to 

get out before it can impact your 

returns, then it is time to trust your gut 

and get out. 

EXTERNAL REASONS 

Consistent Underperformance 

Consistent underperformance of a 

scheme is the most important factor to 

consider when selling your mutual 

funds. For this, compare the fund with 

the benchmark index or peer group 

mutual funds. 

If you notice that while most peer 

funds have given returns of 20% to 

25% in a 1- to 3-year period and your 

fund has given a mere 5% return or if 

peers have shown an average loss of 

10% to 12%, whereas your mutual 

fund has shown a loss of 24%, please 

exit the fund. 

To cement your decision, check if the 

underperformance is consistent for a 

number of years and not just a one-off 

event. If it is so, then simply get rid of 

such a laggard. 

Change In Fund Structure 

The original objective of holding 

value-oriented stocks are slowly 

being replaced by focus on growthoriented 

stocks. Even the low beta 

ones are being replaced by high beta 

stocks. Also the original weightages 

given to the stocks in the portfolio 

may be seeing a change. 

For example, the weightages of 

sectors like fast moving consumer 

goods (FMCG) as well as capital 

goods is reduced and exposure to 

rate-sensitive sectors such as banks, 

autos, etc, is increased. 


Although this may yield good returns, 

if it does not suit your investment 

style, you should exit. 

Change In Fund Manager 

How can you explain the difference in 

performance and returns of two 

purely pharma or IT focussed funds? 

It is the expertise and efficiency of the 

fund manager in picking out the 

winners and constantly getting rid of 

the laggards. 

Many of us invest in a mutual fund 

solely on the basis of the name of the 

fund manager with a proven stellar 

past track record. 

And if mid-way, the fund manager of 

that fund changes, then you might be 

sceptical of the new manager and, 

hence, opt to sell the fund. Yet, it 

would be prudent to wait for a while 

and give the new fund manager time 

to prove his worth. 

Change In Fund Size 

If a fund becomes too large, then it 

can become difficult for the fund 

manager to manage it effectively. 

This is not as much apparent in 

large-cap focussed funds as on funds 

with mid- and small-cap focus where 

liquidity is less, risk is more, and 

buying and selling of huge quantities 

becomes problematic. 

Congruency 

Sometimes funds or schemes from the 

same fund house or from the same 

fund manger have similar stocks in 

their portfolios. 

In such a case, it does not make sense 

to hold multiple funds with same 

stocks in your portfolio, because you 

are not adequately diversifying and it 

is best to keep only one such fund in 

your kitty. 

DIFFERENT WAYS TO SELL 

YOUR MUTUAL FUNDS 

Clear The Cobwebs 

If you have a number of mutual funds 

in your portfolio, it is always 

advisable to sell off the laggards and 

gross underperformers first. They 

bring down the overall returns 

achieved by the better performing 

funds as well. 

Free Your Holdings 

If you are sitting on a profit, you can 

sell those number of units which will 

recover your initial capital invested, 

and you can stay invested in the 

remaining units. This way you will 

not risk losing your base capital 

during a downturn. 

Over a period of time, if you practice 

this religiously you might end up with 

a portfolio consisting purely of free 

units with no investment corpus from 

your side. 

SWP (Systematic Withdrawal 

Plan) 

We all know about SIP or Systematic 

Investment Plan. SWP or Systematic 

Withdrawal Plan on the other hand, is 

the exact opposite of SIP. 

While in an SIP you are investing a 

fixed amount at fixed intervals, in an 

SWP, you are systematically 

withdrawing fixed amounts at fixed 

intervals from your mutual fund. It 

can act as a secondary regular, fixed 

income source for you. 

STP (Systematic Transfer Plan) 

The Systematic Transfer Plan (STP) 

is a type of portfolio rebalancing and 

asset reallocating tool. 

In an STP, you withdraw fixed 

amounts from an existing scheme of a 

mutual fund and invest that amount in 

a different scheme. 

For example, if you feel that equity 

markets have reached a peak and a 

fall is very much on the cards, but at 

the same time you do not want to get 

out of equities completely as you do 

not want to be left out if there is a 

further rise in the stock, here is what 

you can do. 

You can start a systematic transfer 

plan, whereby a fixed amount will be 

transferred from your equity–oriented 

scheme to a debt-oriented scheme at 

regular intervals. 

This way, you will not only add a debt 

component to your existing portfolio, 

but also will continue maintaining a 

fair degree of equity exposure to 

benefit if the stock markets are seen 

rising any further. 

DTP or Dividend Transfer Plan 

This too is a type of portfolio 

rebalancing tool. Here the dividend 

that is given out by a scheme is 

withdrawn and invested as an SIP in a 

different scheme. 

Therefore, instead of reinvesting that 

dividend in the same scheme and risk 

losing that dividend in case of a fall in 

that fund, the dividend is invested in a 

different scheme with a different 

theme, such as debt, index, MIP, etc. 

So while your investment corpus in 

the base scheme remains intact, you 

now have a whole new mutual fund 

scheme in your portfolio without 

having to make a fresh investment. 

Remember mutual fund investments 

should ideally be done with a 

long-term time horizon and an 

investor should not sell the mutual 

fund units merely by looking at the 

ups and downs faced by the stocks 

markets alonE. 

34 



NOW IS THE TIME 

In a falling interest rate scenario, investors should consider 

long-term debt funds as they are likely to give good returns 

over a period of time 

In the past few years, several 

investors have managed to 

generate decent returns by 

investing in products such as 

bank fixed deposits (FDs) and Fixed 

Maturity Plans (FMPs). 

But now things are changing for the 

better with interest rates set to come 

down as inflation along with 

commodity prices is plummeting, 

which might ease fiscal deficit and in 

turn lead to the much needed cut in 

interest rates. 

But we are not aware of the quantum 

of the rate cut and the outcome of the 

monetary policies of the Reserve 

Bank of India (RBI). We have already 


seen few rate cuts in the past and 

market participants in general are 

expecting a further decline in interest 

rates in 2013-14. 

So what should investors do when 

equity markets turn volatile and 

returns of bank FDs start heading 

southwards? In a scenario where 

interest rates are likely to come down, 

investors should have a decent 

exposure to long-term debt fund 

products such as income funds or 

bond funds. 

Long-term debt funds include income 

funds and gilt funds. Income funds 

invest in long duration papers of 

government securities and debt 

instruments issued by corporates. 

Such papers or securities can be as 

low as one to three years and can even 

go up to 20 years. 

Gilt funds on the other hand invest 

only in long-term government 

securities, which are issued by the 

central government as well as the 

state government. 

First let us try and understand why 

interest rate is such a critical aspect 

for returns in debt mutual funds. It is a 

thumb rule that interest rates are 

inversely related to bond prices, 

which means that bond prices rise 

when interest rates fall and vice versa. 

But many investors are curious to 

know how it functions in the real 

sense and how interest paid on any 

bond or securities is fixed. This is 

what actually happens, as most 

changes takes place only during the 

fall or rise of interest rates. 

Say a fund manager buys a bond 

maturing after 10 years and pays out 

interest of 9.5% per annum. In such a 

scenario when interest rates fall, 

newer bonds are sold at 8.5%, which 

results in the old bond having more 

value than the new one. 

So fund managers hold longer 

duration bonds as they can easily 

make profits by selling such bonds in 

a falling interest rate scenario. 

Hence, net asset value (NAV) of any 

debt fund replicates prices of 

underlying securities (in this case 

long-term securities or bonds). So 

when interest rates fall, the net asset 

value of such funds rises. 

Making appropriate scheme selection 

as well as having the right time 

horizon would be the key to 

investment success. It is important for 

investors to know that the major 

differentiator between different types 

of income funds is the maturity 

duration of their portfolios. Currently, 

many income funds and gilt funds 

have an average maturity of over 

12-15 years. 

In fact, the returns on gilt funds and 

income funds have already touched 

double digits in the last six months. 

On an average, gilt funds give returns 

of 10.1%, while income funds give 

returns of 9%. 

Many funds in the income category 

have given returns as high as 17% in 

the last one year. SBI Income Fund 

and ICICI Prudential Income Funds 

top the charts with returns of 16.85% 

and 16.23%, respectively in the last 

one year. 

This is not the first time when we are 

seeing a decline in interest rates and 

some recovery in debt funds. For the 

whole decade since 1994 to 2003 

when interest rates were coming 

down, debt funds gave spectacular 

returns. Some funds even gave double 

digit returns. 

But after the economic meltdown of 

2008, the Reserve Bank of India 

(RBI) has been steadily hiking rates, 

which has negatively impacted debt 

funds and they have remained out of 

favour for quite some time. 

The Reserve Bank of India has often 

been criticized for not taking strong 

measures to boost growth and lower 

interest rates. But the RBI had clearly 

stated that interest rates will be 

brought down only when they feel it 

is comfortable. 

So inflation is down as it was a year 

back and the current account deficit 

(CAD) is expected to come down 

following the fall in crude and gold 

prices, which makes it very tempting 

to cut rates. 

However, before getting into 

long-term debt funds investors should 

keep in mind that both gilt and 

income funds carry market risks 

owing to interest rate movements. 

Also, there might be credit risks as 

income funds invest in corporate 

paper. However, such credit risks are 

less in gilt funds as they invest only in 

government securities. 

Ideally, gilt funds are meant for 

conservative investors who want 

safety of their investments. These 

funds also open a window for small 

retail investors seeking to invest in 

government securities which is 

mainly dominated by large 

institutional investors. 

Investors should, therefore remain 

very careful about high volatility in 

gilt funds compared with other debt 

funds as these are prone to interest 

rate fluctuations. 

On the other hand, income funds tend 

to provide more stable returns in the 

long term and also have the flexibility 

of taking exposure to bonds or 

securities where they invest (invest in 

higher maturity when interest rates 

will fall and vice versa) according to 

the interest rate scenario. 

Income funds also provide investors 

36 



exposure to high rated corporate 

securities that trade at higher yields 

compared with gilt prices, providing a 

cushion to additional risk. 

In the current situation, long-term 

corporate papers usually get around 

50-70 basis points as against 

government securities. 

Investments in such products is not 

entirely risk free as income funds 

have both credit risk as well as 

interest rate risks. Investors having an 

investment horizon of around 12-15 

months can look at investing in such 

investment schemes. 

Short-term players should completely 

stay away from income funds as the 

NAV might witness some volatility. 

Allocation to gilt and income funds, 

based on the time horizon should be 

considered by investors. 

A falling interest rate scenario gives 

confidence to investors that these 

instruments could give inflationbeating 

returns. 

Even in the past as said earlier, 

long-term debt funds have given 

superior returns in a falling interest 

rate scenario. There is potential for 

bond markets to rally further based on 

the expectation that the central bank 

may continue monetary easing on 

account of softening inflation and 

slowing growth. 

But major factors that could trigger 

the fall in interest rates is commodity 

and gold prices coming off, which can 

bring down the current account deficit 

and it should give the RBI more 

flexibility and space as far as 

monetary easing is concerned. 

Many fund managers and industry 

players are expecting over 75-100 

basis points cut in the benchmark 

repo rate in the current financial year. 

This itself makes long-term debt 

funds an ideal investment avenue for 

retail investors who can earn on 

interest and appreciation toO. 

Debt Fund Performance 

NAV (as on 31st May'13) Annualized (%) CAGR (%) Fund Fact 

Scheme Name Latest 

NAV(`) 

6 Months 9 Months 1 Year 3 Year 5 Year Since 

Inception 

AUM 

(` in cr) 

Expense 

Ratio 

Exit 

Load 

Lock 

In Period 

SBI Magnum Income(G) 

Birla SL Income Plus(G) 

SBI Dynamic Bond(G) 

ICICI Pru Income-Reg(G) 

UTI Bond Fund(G) 

30.5319 

56.3095 

15.4618 

39.2596 

36.7047 

19.32 

21.19 

19.42 

19.15 

18.99 

17.18 

18.05 

16.92 

17.12 

16.63 

15.98 

15.48 

15.21 

15.17 

15.14 

10.50 

9.86 

11.87 

9.02 

10.68 

8.02 

10.10 

7.31 

10.61 

9.29 

7.99 

10.30 

4.75 

9.61 

9.08 

4920.69 

4568.99 

6556.84 

4441.82 

2738.43 

1.7700 

1.5500 

1.7500 

1.7600 

1.9700 

1.0000 

1.0000 

1.0000 

1.0000 

1.0000 

1year 

365 days 

365 days 

1year 

365 days 

Source: ACE MF 

 

 

 

 

 

 

 

CREATIVE DESTRUCTION 

It is a term coined by Joseph Schumpeter in his work entitled “Capitalism, Socialism and Democracy” (1942) to denote 

“the process of industrial mutation that incessantly revolutionizes the economic structure from within, incessantly 

destroying the old one, incessantly creating a new one.” 

Creative destruction occurs when something new kills something older. A popular example of this is personal computers. 

The industry, led by Microsoft and Intel, destroyed many mainframe computer companies. But in doing so, entrepreneurs 

created one of the most important inventions of this century. 

Schumpeter goes on to say that the “process of creative destruction is an essential fact about capitalism.” Unfortunately, 

while a great concept, this became one of the most overused buzzwords of the dotcom boom (and bust), with nearly every 

technology CEO talking about how creative destruction would replace the old economy with the new. 


100 100 100 100 100 100 100 100 100 

0 100 100 100 100 100 100 100 100 10 

100 CAPLIN 100 100 POINT 100 LABORATORIES 100 100 100 LIMITED 

100 100 

I 

ncorporated in the year 1990, 

Caplin Point Laboratories (CPL) 

manufactures pharmaceutical 

formulations in the form of tablets, 

ointments and capsules, liquid orals 

and oral powders. 

The company is constructing a 

facility, which would be in compliance 

with the US Food and Drug 

Administration (FDA), the UK 

MHRA and other regulatory bodies 

for multiple dosage forms such as 

liquid injectibles, ophthalmic drugs 

and lyophilized bio-tech products. 

With the commencement of this 

facility in 2013, CPL will be starting 

operations in fully-regulated markets 

of Europe, United States of America, 

Mexico and Brazil. 

SHIFT IN BUSINESS MODEL AT 

AN OPPORTUNE TIME 

The company management has been 

proactive enough to shift the business 

model at the right juncture. The 

company has shifted from conventional 

style of exports (diminishing 

margins) to sale points at strategic 

locations in Central/South America 

and parts of Africa. 

The company has more than 1,500 

products registered in various 

countries with more number of 

registrations in the offing. 

CPL is not just a manufacturer and 

exporter, but also the importer and 

distributor of its products by its 

collaborators. Secondly, working 

capital issues have been impacting the 

industry. However, the company’s 

differentiated strategy has helped it 

chip a significant portion of net sales 

as advances. The net sales to 

advances figure for FY12 (June-year 

ending) stood at 34%. 

CLEAN BALANCE SHEET 

The company has a clean balance 

sheet with net cash and cash equivalents 

totaling to more than `27 crore 

(more than 25% of the present market 

cap). The expansion plan to the extent 

of `75 crore would be majorly funded 

through internal accruals. 

The commencement of operations in 

these facilities would begin in various 

phases as highlighted in the table: 

Commencement Of Operations In Phases 

Particulars 

Details 

CP I 

CP II 

CP II 

CP IV 

Source: Company, Nirmal Bang Research 

Near Puducherry (Manufacturer of parenterals, sterile powder for injection, 

lyophilized products, tablets, capsules, liquid) 

Tamil Nadu (R&D) 

Baddi (tablets, capsules, ointments, creams, dry syrup) 

Under construction – dedicated facility for formulation development, 

product development in sterile and non-sterile dosage forms 

EARNINGS BACKED BY DIVIDENDS 

The earnings of the company have been backed by a proportionate increase in dividends. With the commencement of the 

new facility, we expect this trend to continue going forward as well. 

Earnings And Dividends 

Particulars (`Cr) FY07 FY08 

FY09 

FY10 

FY11 

FY12 

FY13E 

Net Sales 

PAT 

Dividend 

37.9 

1.4 

0 

62.3 

1.04 

0 

59.1 

2.2 

0 

58.1 

3.3 

10% 

83.1 

6.3 

15% 

107.2 

8.2 

20% 

120.2 

17.1 

30-35% 

Source: Company, Nirmal Bang Research 

38 




With the net profit almost trebling compared to FY11 and doubling compared to the previous year, we expect the dividend 

of Caplin Point Laboratories Ltd to be minimum `3 (30%) for FY13, translating into a dividend yield of approximately 

4.5% at the given price at present. 

RETURN RATIOS HAVE IMPROVED SIGNIFICANTLY 

On the back of improvement in earnings, the return ratios of the company have improved significantly. We have modeled 

a PAT of `17 crore for FY13E on net sales of `120 crore for FY13E (June-year ending). With the commencement of the 

new facility in FY14E, we expect the ratios to improve further. 

Return Ratios 

Particulars FY07 FY08 

FY09 

FY10 

FY11 

FY12 

H1 FY13E* 

RoE 

RoCE 

14.1 

18.6 

5.2 

8.1 

11.7 

15.1 

15.9 

15.3 

21.4 

28.2 

29.1 

33.1 

42.04 

56.6 

Source: Company, Nirmal Bang Research, *June year-ending 

Like any other pharma company catering to the western world, Caplin Point Laboratories is also exposed to the risk with 

regard to regulations. However, considering the improvement in profitability and return ratios, backed by an increase in 

dividends, the risk seems to be worth the returnS. 

Note: The market price of Caplin Point Laboratories as on 6th Jun ’13 is `61.10 

SMS ‘BANG’ to 54646 

Contact at: 022-3926 9404, E-mail: contact@nirmalbang.com 

Registered Office: 38-B, Khatau Building, 2nd Floor, Alkesh Dinesh Mody Marg, Fort, Mumbai - 400 001. Tel: 264 1234 / 3027 2000 / 2005; Fax: 30272006 

Corporate Office: B-2, 301/302, 3rd Floor, Marathon Innova, Off Ganpatrao Kadam Marg, Lower Parel (W), Mumbai - 400 013. Tel.: 39268000 / 8001 Fax: 39268010 

EQUITIES | DERIVATIVES | COMMODITIES* | CURRENCY | MUTUAL FUNDS # | IPOs # | INSURANCE # | DP 

Disclaimer: Insurance is a subject matter of solicitation. Mutual Fund investments are subject to market risk. Please read the scheme related document carefully before investing. Please read the Do’s and Don’ts prescribed by Commodity Exchange before trading. The PMS Service is not offering for commodity segment. *Through Nirmal Bang Commodities Pvt. Ltd. 

# Distributors 


TECHNICAL OUTLOOK FOR THE FORTNIGHT 

The Nifty started the May 

series expiry with a strong 

positive momentum. It 

gained more than 4% in 

first half of the May series to touch a 

52-week high of 6,229.5 level on the 

20th of May. 

Continuous improvement in monthly 

inflation, coupled with less-thanexpected 

IIP number, improved 

optimism of RBI regarding further 

rate cut. In addition to this, heavy 

buying by FIIs was the major reason 

for the rallies in the markets. 

But the markets corrected thereafter. 

The Nifty Futures May series expired 

at 6,124, which is much below the 

52-week high of 6,229. Negative 

global cues, led by the downfall in 

Nikkei caused a trend reversal in 

Nifty Futures. 

According to government data, 

India’s fourth quarter GDP increased 

by 4.8% on a year-on-year (y-o-y) 

basis. The Q4 GDP growth was 

slightly better as compared to 4.7% 

growth in Q3 FY13, which was the 

lowest in the last 15 quarters. With a 

4.8% increase in Q4, India’s FY13 

GDP growth recorded at mere 5%, 

the lowest GDP growth registered in 

the past 10 years. 

On the Nifty Options front, at the start 

of the June series, highest OI build 

up is witnessed at 5900PE and 

6200CE, (highest being at 5900 Put) 

to the tune of 6.64 million and 6.23 

million (as on 5th June), respectively. 

India VIX, which measures the 

immediate 30-day volatility in the 

market, has been very choppy of late 

and is trading in the range of 15-19 

[(currently at 16.96) (as on 5th June)]. 

Going forward, we believe that it has 

already formed a strong base of 15 

and we may see an upward breakout. 

Levels of 19 and 22 can be seen on 

India VIX in the days to come. 

The Put Call Ratio-Open Interest 

(PCR-OI) for Nifty Options remained 

at the upper end throughout the May 

expiry and traded between a narrow 

range of 0.98-1.25 since the start of 

the previous expiry. 

The current PCR-OI stands at 0.98 (as 

on 4th June), which seems to be a 

very good trend indicator. The PCR- 

OI near 1 indicates a balance position 

for the markets. 

OPTIONS STRATEGY 

SHORT STRADDLE ON NIFTY 

(June Series) 

It can be initiated by ‘selling 6000CE 

and 6000PE of the June series’. The 

net combined premium inflow comes 

around `191, (which is also the 

maximum profit) and it can be 

achieved if the Nifty June series 

expires at 6,000. 

The break-even is at 5,808-6,192. 

(Traders will incur `50 per unit loss in 

case of Nifty Futures expiry beyond 

break-even points). There is 

unlimited loss beyond the break-even 

range. Traders can square off their 

strategy when the combined rate of 

the Straddle crosses 240+ or comes 

below 100, whichever is earlier. 

The short-term trend has slightly 

turned positive. But the overall 

medium trend remains cautious and 

weak. The Index has observed 

volatile trading sessions since the past 

few weeks. 

The Nifty has been fairly 

range-bound between 6,200 and 

5,800 levels since the past couple of 

weeks and continues to trade with a 

sideways bias. The current month’s 

Nifty option suggests that the market 

will trade in the tight range of 

6,200-5,800 and a big move could be 

seen only if the Nifty closes on either 

side of the range. 

The Nifty is keeping a positive 

closing above the 50-DMA. 

However, the Nifty is facing a strong 

support of 5,850 level, that is, 50% 

Fibonacci Retracement. The 

important oscillator RSI is showing a 

positive cross over in daily chart, 

indicating strength and MACD on the 

daily chart has turned positive. Once 

it manages to close above the 5,920 

level at least for one more trading 

session, the upward trend will 

confirm for a target of the 5,970 level. 

In the immediate term, the 5,850/ 

5,800 level is the cluster support for 

the Nifty since it is supported by the 

trend line. Till the time 5,970/6,100 

level is intact, there is a valid 

possibility that the Nifty may try to 

scale higher. 

In an alternative scenario, if the Nifty 

breaches the level of 5,780 on a 

closing basis, then a further sell-off 

till the recent swing low of 5,500 is 

likely and below that a downside till 

5,400 cannot be ruled out. 

Traders having long positions are 

advised to hold their existing long 

positions and protect their capital 

with a strict stop loss of 5,850. The 

Bank Nifty has closed below the 

important support of 12,400 level and 

if it closes below 12,250 level, one 

can expect further weakness and 

decline to 12,000 levels. There is a 

strong resistance at 12,380 and 

12,400 levels on the upsidE. 

40 



PRICE TO BOOK VALUE 

The table represents companies listed on the 

BSE that are low on Price to Book Value 

Company Name 

Book Value Current Market Price 

Price / 

(as on 11th 06th Nov'10 June'13) 

Book Value 

Gammon India Ltd 

Housing Development & Infrastructure Ltd 

Patel Engineering Ltd 

GOL Offshore Ltd 

Prakash Industries Ltd 

Shipping Corporation Of India Ltd 

IVRCL Ltd 

Welspun Corp Ltd 

Bajaj Hindusthan Ltd 

Jyoti Structures Ltd 

Uflex Ltd 

NCC Ltd 

BEML Ltd 

Punjab & Sind Bank 

Monnet Ispat & Energy Ltd 

Jindal Poly Films Ltd 

Simplex Infrastructures Ltd 

Rolta India Ltd 

Punj Lloyd Ltd 

Indiabulls Power Ltd 

HCL Infosystems Ltd 

Orchid Chemicals & Pharmaceuticals Ltd 

Anant Raj Industries Ltd 

Amtek Auto Ltd 

Mercator Ltd 

Indian Overseas Bank 

Gujarat Narmada Valley Fertilizers Company Ltd 

United Bank Of India 

Jai Corp Ltd 

SRF Ltd 

Usha Martin Ltd 

Anant Raj Industries Ltd 

Hindustan Oil Exploration Co Ltd 

Onmobile Global Ltd 

Titagarh Wagons Ltd 

SREI Infrastructure Finance Ltd 

Jindal Saw Ltd 

Reliance Infrastructure Ltd 

Dhanlaxmi Bank Ltd 

GVK Power & Infrastructure Ltd 

Reliance Communications Ltd 

Tata Steel Ltd 

Escorts Ltd 

DB Realty Ltd 

IDBI Bank Ltd 

India Cements Ltd 

Sintex Industries Ltd 

Indiabulls Real Estate Ltd 

Steel Authority Of India 

Indian Bank 

117.29 

243.00 

209.37 

264.17 

146.31 

142.04 

73.89 

167.45 

64.03 

87.61 

205.71 

93.57 

499.50 

173.38 

402.57 

420.79 

259.66 

152.84 

115.77 

20.27 

86.01 

130.47 

9.47 

200.50 

27.35 

133.20 

174.81 

119.01 

115.93 

345.16 

50.70 

130.14 

92.55 

73.26 

314.90 

52.62 

134.84 

733.72 

77.28 

15.84 

221.75 

568.46 

128.16 

140.43 

145.89 

119.10 

88.51 

127.30 

99.32 

242.89 

18.85 

41.75 

42.80 

58.05 

34.35 

35.25 

18.85 

47.05 

18.40 

26.85 

64.90 

30.45 

171.70 

60.15 

145.00 

156.80 

99.35 

58.75 

44.95 

7.91 

33.70 

52.50 

4.03 

87.10 

12.10 

59.80 

78.90 

53.95 

54.35 

162.65 

23.95 

61.95 

44.30 

35.30 

152.75 

25.90 

67.80 

372.75 

39.40 

8.18 

116.35 

299.15 

67.65 

74.80 

78.55 

65.40 

49.25 

72.30 

57.45 

140.65 

0.16 

0.17 

0.20 

0.22 

0.23 

0.25 

0.26 

0.28 

0.29 

0.31 

0.32 

0.33 

0.34 

0.35 

0.36 

0.37 

0.38 

0.38 

0.39 

0.39 

0.39 

0.40 

0.43 

0.43 

0.44 

0.45 

0.45 

0.45 

0.47 

0.47 

0.47 

0.48 

0.48 

0.48 

0.49 

0.49 

0.50 

0.51 

0.51 

0.52 

0.52 

0.53 

0.53 

0.53 

0.54 

0.55 

0.56 

0.57 

0.58 

0.58 

Source: Capital Line 


Investing in markets has never 

been an easy task - both for 

seasoned as well as 

inexperienced investors. The 

only difference between the two is 

that a seasoned investor has the 

experience of dealing with losses 

while an inexperienced one does not. 

Yet, an inexperienced investor can 

make sound investment decisions 

with the use of certain financial ratios. 

These ratios provide the scope for 

evaluation of the past performance of 

a company and help an investor gauge 

the possible future course of growth 

of the company. 

This article explains to you certain 

operational and performance-related 

financial ratios, which will help you 

understand a company better. 

DEBT RATIOS 

Understanding the extent of leverage 

of a company is very important when 

it comes to investing in a company. 

Higher the debt of a company in an 

Both seasoned and 

amateur investors can 

use ratios to understand 

a company’s 

performance better 

industry, not so capital-intensive, 

clearer is the sign of mismanagement 

of business. While capital-intensive 

industries such as infrastructure 

(roads, power, construction and oil 

and gas) and airlines would have high 

debt on their books, it is important to 

gauge the operating profit of these 

companies in terms of its topline. 

Here are a few debt ratios: 

 

This ratio provides information about 

the company’s total liabilities to its 

total shareholders’ equity. It gives an 

investor the measurement of how 

much suppliers, lenders, creditors and 

other obligators have committed to a 

particular company. Since the debt to 

equity ratio provides a bird’s eye view 

of the leverage position of a company, 

it is a very important ratio among 

most financial ratios. 

Debt To Equity: Total Liabilities/ 

Shareholder’s Equity. 

It means lower the debt position of a 

company, better is its operations and 

vice versa. More so, it shows high 

equity base, indicating the fact that 

the company is a quality enterprise. 

 

Capitalization ratio of a company 

measures the ability of the debt part of 

capital structure to support the 

company’s operations and eventually 

growth. It is very meaningful as it 

provides a key insight into the extent 

of the leverage of a company. 

Capitalization Ratio: Long-term Debt 

/(Long-term Debt + Shareholders’ 

Equity) 

42 



The interest coverage ratio is used to 

find out how easily a company can 

pay interest expenses on its 

outstanding debt. The ratio is 

calculated by dividing a company‘s 

earnings before interest and taxes 

(EBIT) by the company’s interest 

expenses for the same period. 

The lower the ratio, more is the 

company burdened by debt expense. 

Experts believe that when a 

company’s interest coverage ratio is 

only 1.5 or lower, its ability to service 

its interest expense is in doubt. 

 

 

This ratio gives a clear picture of the 

productivity of a company’s fixed 

assets, which can comprise of 

property, plant and equipment in 

relation to its sales. For most 

companies, their investment in fixed 

assets represents the single largest 

component of their total assets. 

This annual turnover ratio is designed 

to reflect a company’s efficiency in 

managing these significant assets. To 

put it simply, higher the turnover rate 

every fiscal, better it is for a company. 

Fixed Asset Turnover = Revenue/ 

 

 

 

This ratio indicates how profitable a 

company is in comparison with its 

total assets. It throws light on how 

better a company management 

 

Experts believe that higher the return, 

the more efficient is the management 

in utilizing its asset base. The ROA 

ratio is expressed as a percentage. 

Return On Assets: Net 

Income/Average Total Assets 

 

This ratio indicates how profitable a 

company is by comparing its net 

income to its average shareholders' 

equity. The return on equity ratio 

(ROE) shows how much the 

shareholders earned from their 

investment in the company. The 

higher the ratio percentage, the more 

efficient the management is in 

utilizing its equity base and the better 

returns it gives to investors. 

Return On Equity: Net Income/ 

Average Shareholders’ Equity 

 

The return on capital employed 

(ROCE) ratio is an extension of return 

on equity (ROE) ratio. It is 

constructed by adding a company’s 

debt liabilities or funded debt to 

equity to give a clear picture of a 

company’s total capital employed. It 

is a better parameter which gives a 

comprehensive profitability of a 

company since it assesses the 

company’s ability to generate returns 

from its available capital base. 

Return On Capital Employed: EBIT/ 

Capital Employed 

Capital Employed: Average Debt 

Liabilities + Average Shareholders’ 

Equity 

 

 

 

picture of the amount shareholders 

are paying for the assets of a 

 

 

of a company’s assets reflected on its 

 

balance sheet assets and balance sheet 

liabilities and presents an idea of the 

amount one would get if he/she were 

to liquidate a company. 

 

 

 

 

of the widely used investment 

valuation parameters. The financial 

reporting of both companies and 

investment research services uses a 

 

 

 

 

 

 

have no relevance and meaning as 

 

forward earnings of a company. 

Because it is believed that the past 

performance of a company does not 

guarantee that it would perform with 

the same growth as in the past. 

 

 

 

 

 

annual percentage and is calculated as 

the company’s annual cash dividend 

per share divided by the current price 

 

 

dividend-paying companies. 

 

 

 

a novice investor, both these 

individuals can use these ratios to 

 

investment decision 


IMPORTANT JARGON 

FOR THE FORTNIGHT 

GOODWILL IMPAIRMENT 

Recently Tata Steel announced $1.6 billion impairment, 

mainly of its goodwill asset from takeover of Corus, the 

British steelmaker. This did not come as a surprise to 

many. In the recent past, in India as well as abroad, many 

companies have resorted to goodwill write-offs. 

Goodwill asset on the balance sheets of companies have 

always been a controversial subject in accounting. There is 

a grey area in which goodwill assets are defined, 

accounted and impaired. In India, accounting standard 

(AS) 38, 36 and 103 pertain to treatments given to 

goodwill assets. 

What Is Goodwill Asset And How Is It Accounted For 

Goodwill is an intangible asset. There are many ways of 

defining a goodwill asset. It can be defined as a set of 

unidentified intangible assets. They can be influenced by 

other intangible assets. From an accounting view, goodwill 

is the excess of total consideration paid for the business 

over its net assets (assets-liability) in an acquisition. 

Indian accounting standard defines goodwill as, “An asset 

representing the future economic benefits arising from 

other assets acquired in a business combination that are not 

individually identified and seperately recognized.” 

Typically, goodwill is expected to be smaller within 

intangible assets and more importantly justifiable. If 

company X pays `100 for acquiring company Y, which has 

a book value of `80, the extra `20 paid for the acquisition 

gets accounted into the books of company X as goodwill. 

The excess payment may be attributable to reputation, 

business connections, synergies, intangible benefits such 

as assembled workforce, and so on. The goodwill gets 

recorded as an asset in the buyer’s financial statements. 

Why Is Impairment Needed 

In accounting, the term impairment is used in the context 

of an asset, the value of which has declined. An asset gets 

impaired if the value stated in the balance sheet exceeds its 

resale value. And the difference between the two values 

gives the impairment loss on account of that asset. Since 

goodwill is an indefinite asset, it does not depreciate like 

fixed assets or amortized like other intangible assets. 

It is tested for impairment on an annual basis, typically at 

the financial year end to assess if the goodwill amount will 

continue to be carried at the original value or needs to be 

written down. The treatment is the same irrespective of 

whether the acquired entity is Indian or foreign. Each year, 

the goodwill balance is compared to its estimated market 

value. If the book value is low, no adjustment is permitted. 

But, if the book value is high, the balance must be 

impaired by marking it down to fair value. Thus to give a 

fair idea of its assets, companies take impairment of 

goodwill assets. 

What Triggers Impairment 

Indicators for impairment could be external or internal. It 

could include technological obsolescence of the product or 

asset, economic meltdown, high interest rates, plans to 

discontinue a particular business and adverse economic 

performance of an asset. For instance, Tata Steel has 

estimated impairment charges for FY13 mainly due to 

weaker macroeconomic and market conditions in Europe. 

What It Means To Investors 

Impairment of goodwill assets can be viewed as an 

admission of the company’s management of the fact that 

not all went as planned regarding a merger or acquisition. 


Recent years have been characterized by continuously 

high merger and acquisition activity. 

A company’s management in its drive to acquire 

companies at any cost (happens mostly during a bull run) 

tends to pay more in terms of goodwill, thereby bloating 

goodwill balances. Acquisitions are done based on higher 

premium, ignoring the true value of the assets. For 

investors, impairment could indicate that there are 

concerns with regard to a company’s earnings in the near 

future. There are other implications on the company’s 

books as an impairment charge would reduce the net worth 

or book value of a company. 

While goodwill impairment would give investors a truer 

picture of a company’s worth, one that is more in 

accordance with reality, doubts can be raised about the 

management’s capability if a company writes off 

substantial amounts on account of asset impairment. A 

good management should assess and communicate 

whether there are any indicators of asset impairment so 

that investors can take informed decisions. 

GUIDELINES FOR ALGO TRADING 

Algorithmic trading is picking up in India. Ever since 

the Securities and Exchange Board of India (SEBI) 

allowed algorithmic trading on Indian stock exchanges in 

2008, its share of the overall turnover on the Indian 

bourses has augmented. 

It is estimated that currently one-third of the total trades on 

the Indian bourses are algorithmic trades. However, such 

machine-generated trades have been accused of flash 

crashes. Regulators world over are busy tightening the 

noose on algorithmic trading, and SEBI is in the forefront. 

SEBI recently announced guidelines for algorithmic 

trading in India which came into effect from 27th May. 

The broader guidelines were framed in March ’12. 

What Is Algorithmic Trading? 

Algorithmic (Algo) trading refers to orders generated by 

use of advanced mathematical models that involve 

automated execution of trade. The models do the decision 

making like handling the trade timing and the buy and sell 

price without any human intervention. It is synonymous 

with “program trading”, “auto-trading”, “black-box 

trading” and “high-frequency trading.” It is mostly used 

by large institutional investors. Proponents believe algo 

trading can lead to efficient price discovery that is less 

influenced by human behavioural biases and reduce 

impact costs. The opponents, on the other hand, argue that 

such machines fulfill no social objective and gives rise to 

adverse side-effects on market liquidity and volatility. It 

has raised concerns that algo exposes small investors to 

possible systemic risks. 

The New Guidelines 

New guidelines mandate stock brokers and traders offering 

algo facility to subject their algorithmic trading system to 

audit every six months so as to ensure compliance with the 

requirements prescribed by SEBI and the stock exchanges. 

Such audits would need to be undertaken by a system 

auditor with relevant certifications. Stock exchanges will 

have to periodically review their surveillance 

arrangements in order to better detect and investigate 

market manipulation and market disruptions. 

Further, the new guidelines dis-incentivises excessive 

flood of orders. Exchanges have been asked to double the 

fine for higher order-to-trade ratio. This will prevent order 

flooding as many algo trades give a high number of orders, 

while the number of actual executed trades remain low. 

Higher order-to-trade ratio puts stress on the trading 

system while hampering the price discovery mechanism. 

Brokers with repetitive instances of high daily 

order-to-trade ratio will face additional penalty in the form 

of suspension of their proprietary trading book. 

The SEBI has also allowed the stock exchanges to impose 

suitable penalties in case of failure of the stock broker or 

trading member to take satisfactory corrective action 

within the time period specified by the bourses. 

Algorithms would not be allowed to quote beyond a 

certain number of securities per orders. 

What It Means To Retail Investors? 

As technology comes at a cost, retail investors will always 

be pitted against cash rich institutional investors as far as 

algo trading is concerned. While algo trading helps in 

better price discovery, it would be difficult to compete 

with machines and life would be difficult, especially for 

day traders as machines would be ahead of them, always. 

With the new guideline, the SEBI has signalled that it has 

plans to ban algo trading. Instead, it has taken the bull by 

its horn by putting adequate regulations. With the 

guidelines, the market regulator has acknowledged that 

certain algos are useful to both investors and traders. 

Experts hail the new guidelines as sensible response to 

ever-changing world of stock marketS. 

46

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