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For Private Circulation Volume 1 Issue 45 04th Feb ’11<br />
BETWEEN EXTREMES<br />
A short-term halt in the recent rally of copper is likely as the red<br />
metal appears <strong>to</strong> be getting caught between the QE2 by the US<br />
and the monetary tightening measures by China
Volume 1 Issue: 45, 04th Feb ’11<br />
Edi<strong>to</strong>r-in-Chief & Publisher: Rakesh Bhandari<br />
Edi<strong>to</strong>r: Tushita Nigam<br />
Senior Sub-Edi<strong>to</strong>r: Kiran V Uchil<br />
Art Direc<strong>to</strong>r: Sachin Kamble<br />
Junior Designer: <strong>Sagar</strong> Padwal<br />
Marketing & Operations:<br />
Dwiti Bhuta, Savio Pashana<br />
Research Team:<br />
Kunal Shah, Michael Pillai, Hussain Nagarwala,<br />
Vikash Bairoliya, Runjhun Jain, Usha Sharda,<br />
Sunit Mehta.<br />
HEAD OFFICE<br />
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Alkesh Dinesh Mody Marg, Fort, Mumbai - 400 001<br />
Tel: 022 - 22641234, 3027 2000<br />
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Off Ganpatrao Kadam Marg,<br />
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Web: www.nirmalbang.com<br />
We, at Beyond Market welcome your views,<br />
comments, inputs and feedback.<br />
Do help us <strong>to</strong> grow better as per your liking.<br />
This is our attempt <strong>to</strong> reach you better while<br />
crossing horizons...<br />
beyondmarket@nirmalbang.com<br />
Tel No: 022 - 3926 8047<br />
Beyond Market 04th Feb ’11<br />
DB Corner – Page 5<br />
Back To Basics<br />
Thanks <strong>to</strong> benign inflation, the Reserve Bank of India has returned <strong>to</strong> its rate hike spree and this<br />
time, less is more – Page 6<br />
Serious Hurdles<br />
The global economic recovery could take a beating if other key issues are not dealt with at the<br />
right time – Page 8<br />
Aim High<br />
A promising outlook makes the infrastructure sec<strong>to</strong>r a lucrative investment option for inves<strong>to</strong>rs<br />
with a long-term perspective – Page 12<br />
Survival Instinct<br />
Right from increasing tariffs <strong>to</strong> adopting the low-cost carrier model, airline companies are doing<br />
everything they can <strong>to</strong> stay afloat while making profits – Page 15<br />
A Medical Breakthrough<br />
The embryonic stem cell research is a big opportunity for the pharma sec<strong>to</strong>r and a boon <strong>to</strong><br />
patients suffering from a range of devastating diseases – Page 18<br />
Better Safe Than Sorry<br />
Policyholders must make sure that they pay their premiums on time or else they may have <strong>to</strong><br />
face the wrath of the insurance companies – Page 22<br />
Orchid Chemicals & Pharmaceuticals Ltd: Making The Right Moves<br />
Through its rich product portfolio and right expansion plans, the company is trying <strong>to</strong> find the<br />
right balance between growth and profitability – Page 24<br />
Between Extremes<br />
A short-term halt in the recent rally of copper is likely as the red metal appears <strong>to</strong> be getting<br />
caught between the QE2 by the US and the monetary tightening measures by China– Page 28<br />
Fortnightly Outlook For Commodities – Page 32<br />
Fortnightly Outlook For Currencies – Page 33<br />
E-way To Mutual Funds<br />
Investing in mutual funds online is now simpler than before, especially due <strong>to</strong> inves<strong>to</strong>r-friendly<br />
features offered by fund houses – Page 35<br />
Capital Gains<br />
A Capital Protection Fund is for an inves<strong>to</strong>r who seeks a high level of security without risks, yet<br />
wishes <strong>to</strong> profit from positive s<strong>to</strong>ck market developments – Page 38<br />
Important Statistics For The Fortnight Gone By – Page 40<br />
UK Sinha: The Rightful Heir<br />
Thanks <strong>to</strong> his vast experience, fifty-nine-year-old IAS officer, UK Sinha, seems <strong>to</strong> be a suitable<br />
successor <strong>to</strong> CB Bhave as the SEBI chief – Page 47<br />
A Wake-up Call<br />
If you are an inves<strong>to</strong>r, it is advisable <strong>to</strong> learn from other people’s mistakes instead of staying<br />
oblivious <strong>to</strong> scams and frauds – Page 49<br />
Who Dares Wins<br />
Bravehearts can battle rough seas or volatility in the markets following events like the budget<br />
with straddles and strangles – Page 52<br />
It’s simplified...<br />
3
4<br />
Halted In The Tracks<br />
While most commodities saw a correction due <strong>to</strong> several economic reasons, which affected their prices, copper is the only commodity<br />
that has not shown signs of any substantial correction and has been on a strong footing since a while now. The red metal is considered<br />
a reliable indica<strong>to</strong>r of the health of an economy due <strong>to</strong> its heavy usage in the infrastructure sec<strong>to</strong>r.<br />
However, the commodity research desk at Nirmal Bang feels that copper prices are likely <strong>to</strong> match the red metal’s fundamentals soon.<br />
Copper production will outpace demand and, thus, see a correction in the near future. A halt in the rallying prices of copper is likely from<br />
a short-term view. The team holds the wide-ranging issues in the emerging markets responsible for the correction. Hence, we deemed<br />
this <strong>to</strong>pic important for our readers.<br />
Apart from this, there is a piece on the recent rate hike by the Reserve Bank of India (RBI) in its third quarter Monetary Policy Review. The<br />
rate hike was necessitated <strong>to</strong> rein in the rising rate of inflation. The menace of inflation continues <strong>to</strong> be a major cause of worry in the<br />
domestic markets. Globally <strong>to</strong>o, there are several issues that need <strong>to</strong> be addressed on a war footing <strong>to</strong> res<strong>to</strong>re balance in the economies.<br />
Further, we have covered infrastructure, airline and pharma sec<strong>to</strong>rs due <strong>to</strong> the immense growth potential they offer. While the<br />
infrastructure sec<strong>to</strong>r holds great potential with a long-term perspective, the substantial efforts put in by airline companies <strong>to</strong> beat<br />
industry blues cannot be undermined. Moreover, the pharma sec<strong>to</strong>r is pinning hopes on embryonic stem cell research, which it considers<br />
as the next big thing.<br />
The mutual fund industry’s attempts <strong>to</strong> make the process of trading and investing through mutual funds simpler by offering online<br />
trading is a breakthrough in industry parlance. Hence, the magazine has featured an article on the same.<br />
The recent appointment of UK Sinha <strong>to</strong> the post of the SEBI Chairman has been covered in the Beyond People section. He succeeds CB<br />
Bhave, who brought about revolutionary changes in the financial sec<strong>to</strong>r. Only time will tell how well Sinha performs his role as the chief<br />
of SEBI.<br />
And last but not the least, there is an article on ways people can avoid getting duped by fraudsters. The case in point is the relationship<br />
manager of Citibank’s Gurgaon branch who cheated rich individuals of their hard-earned money. This, we hope, will help you stay on<br />
the guard and prevent falling prey <strong>to</strong> vested interestS.<br />
Beyond Market 04th Feb ’11<br />
Tushita Nigam<br />
Edi<strong>to</strong>r<br />
It’s simplified...
Market participants are<br />
advised <strong>to</strong> remain cautious<br />
in the coming fortnight.<br />
In the previous fortnight, the Reserve Bank of India<br />
(RBI) hiked interest rates <strong>to</strong> control the menace of<br />
inflation, which has been on a steep rise since the<br />
past few months.<br />
The central bank, in its third quarter Monetary Policy<br />
Review, raised its key policy rates by 25 basis points. The<br />
repo rate was hiked <strong>to</strong> 6.5% and the reverse repo rate <strong>to</strong><br />
5.5%, in line with market expectations. But indications of<br />
further rate tightening and other concerns caused a fall in<br />
the markets.<br />
The quarterly results of most companies announced so<br />
far, have met market expectations. But how far the<br />
companies will manage <strong>to</strong> sustain themselves in the<br />
backdrop of rising commodity prices and higher interest<br />
rates, which could affect margins in the coming quarter,<br />
needs <strong>to</strong> be seen.<br />
Market participants are advised <strong>to</strong> remain cautious.<br />
However, they can look at buying around the support<br />
level of 5,420 on the Nifty. If it breaks this level, inves<strong>to</strong>rs<br />
are advised <strong>to</strong> avoid fresh buying. On the upper side,<br />
the Nifty has resistance at the 5,750 and 5,900 levels.<br />
S<strong>to</strong>cks like Orchid Chemicals & Pharmaceuticals Ltd<br />
(LTP: `294), Panacea Biotec Ltd (LTP: `195.20), Gujarat<br />
Beyond Market 04th Feb ’11<br />
State Fertilizers & Chemicals Ltd (LTP: `338.35), Praj<br />
Industries Ltd (LTP: `74.70) and IFB Industries Ltd<br />
(LTP: `113.50) have declared positive results for the<br />
December quarter. These s<strong>to</strong>cks, therefore, can be bought<br />
at the current prices as well as on declines from an investment<br />
perspective.<br />
There is a fear that the ongoing crisis in Egypt may<br />
spread <strong>to</strong> other Middle East regions, leading <strong>to</strong> a rise in<br />
crude oil prices, thus negatively impacting India. Other<br />
geopolitical tensions could also upset the markets.<br />
But, internal problems pose a bigger threat <strong>to</strong> the<br />
economy and markets at large, instead of the prevailing<br />
global issueS.<br />
Sensex: 18,327.76<br />
Nifty: 5,505.90<br />
(As on 31st Jan ’11)<br />
Disclaimer<br />
It is safe <strong>to</strong> assume that my clients and I may have an investment interest in<br />
the s<strong>to</strong>cks/sec<strong>to</strong>rs discussed. Inves<strong>to</strong>rs are required <strong>to</strong> take an independent<br />
decision before investing. Investment in equity is subject <strong>to</strong> market risk. Our<br />
research should not be considered as an advertisement or advice, professional<br />
or otherwise. The inves<strong>to</strong>r is requested <strong>to</strong> take in<strong>to</strong> consideration all the risk<br />
fac<strong>to</strong>rs including their financial condition, suitability <strong>to</strong> risk return profile and<br />
the like and take professional advice before investing.<br />
It’s simplified...<br />
5
6<br />
Macro economic management is quite a task<br />
for s<strong>to</strong>ck market regula<strong>to</strong>rs. At times, they<br />
act against general expectations and at<br />
others, they know exactly what is coming<br />
their way.<br />
Going by this theory, when the Reserve Bank of India<br />
(RBI) increased the repo and reverse repo rates by 25<br />
basis points (hundred basis points make a per cent) each,<br />
at its Third Quarter Review of Monetary Policy for<br />
2010-11, not many were surprised.<br />
Post the latest hike, the repo rate (rate at which banks<br />
borrow from the RBI) stands at 6.5% and the reverse<br />
repo rate (rate at which banks park their surplus liquidity<br />
with the RBI) stands at 5.5%.<br />
After the latest round of rate hikes, the central bank<br />
cumulatively increased the repo rate by 175 basis points<br />
and the reverse repo rate by 225 basis points, since<br />
mid-March ’10 when it gradually moved away from its<br />
easy money policy.<br />
Although the cash reserve ratio (CRR) has not been<br />
altered in the recent policy review, it has gone up by 100<br />
basis points over the past 10 months. Banks on their part<br />
have responded <strong>to</strong> this calibrated tightening by raising<br />
their deposit and lending rates, suggesting strong<br />
monetary policy transmission.<br />
Beyond Market 04th Feb ’11<br />
ack<br />
o<br />
o<br />
asics<br />
asics<br />
Thanks <strong>to</strong> benign in�ation, the Reserve<br />
Bank of India has returned <strong>to</strong> its rate hike<br />
spree and this time, less is more<br />
So what prompted the RBI <strong>to</strong> give up its pause? Inflation.<br />
“Inflation is clearly the dominant concern,” said RBI<br />
Governor D Subbarao. “Even as the rate itself remains<br />
unacceptably high, the reversal in the direction of<br />
inflation is striking.”<br />
Talking about the contribu<strong>to</strong>rs <strong>to</strong> inflation, Subbarao said<br />
primary food articles’ inflation has again risen sharply<br />
while non-food articles inflation and fuel inflation are<br />
already at higher levels.<br />
“There are signs of food and fuel price increases spilling<br />
over <strong>to</strong> generalized inflation,” he said adding that there<br />
has been a sharp rise in global commodity prices, which<br />
has heightened upside risks of domestic inflation.<br />
Beyond inflation, growth has moved close <strong>to</strong> its<br />
pre-crisis trajec<strong>to</strong>ry even in the face of an uncertain<br />
global recovery. And the uncertainty with regard <strong>to</strong><br />
global recovery has reduced. But inflation is truly a cause<br />
of concern, even though the moderation in headline<br />
inflation observed between August and November ’10<br />
was along the projected trajec<strong>to</strong>ry of the RBI.<br />
The trend, however, reversed when the year-on-year<br />
(y-o-y) inflation moved up from 7.4% in November ’10<br />
<strong>to</strong> 8.4% in December ’10, mainly on the back of a sharp<br />
increase in the prices of vegetables, mineral oils as well<br />
as minerals.<br />
It’s simplified...
According <strong>to</strong> the RBI, going forward, the inflation<br />
outlook will be shaped on the basis of how the food price<br />
situation, both domestic and global, evolves, how global<br />
commodity prices behave and the extent <strong>to</strong> which<br />
demand side pressures may manifest.<br />
On its part, the RBI has raised the baseline projection of<br />
WPI inflation for March ’11 from 5.5% <strong>to</strong> 7%, based on<br />
several considerations. First, the upside risks <strong>to</strong> inflation<br />
that the RBI had mentioned in the mid-quarter review of<br />
December ’10, have materialized as reflected in the<br />
increase in prices of metals and non-administered fuel.<br />
Second, there have been some transi<strong>to</strong>ry supply shocks,<br />
which triggered a sharp increase in vegetable prices.<br />
Third, petroleum and aviation turbine fuel prices went up<br />
in early January, which will add 9 bps <strong>to</strong> WPI inflation.<br />
“While the impact of transi<strong>to</strong>ry fac<strong>to</strong>rs is expected <strong>to</strong><br />
dissipate, price pressures on account of demand-supply<br />
imbalances with respect <strong>to</strong> some commodities will<br />
persist,” said Subbarao.<br />
Regarding the domestic economy, the 8.9% GDP growth<br />
in the first half of 2010-11 suggests that the economy is<br />
operating close <strong>to</strong> its trend growth rate, powered mainly<br />
by domestic fac<strong>to</strong>rs. With the risks <strong>to</strong> growth in 2010-11<br />
being on the upside, the baseline projection of real GDP<br />
growth is retained at 8.5%, with an upside bias.<br />
Therefore, technically the economy has been and may<br />
continue <strong>to</strong> be in a high growth - high inflation scenario.<br />
“Gradual increase in interest rates would perhaps be the<br />
best approach <strong>to</strong> manage inflation without disrupting<br />
growth,” said an economist.<br />
Of late, the shift in policy priority has been fast. While<br />
hiking both repo and reverse repo rates by 25 basis<br />
points, the November policy review had almost explicitly<br />
indicated the central bank’s preference for a pause in rate<br />
action in the near term.<br />
It was geared <strong>to</strong>wards fine-tuning the exit, hinting more<br />
at nuanced and directed policy measures in the subsequent<br />
months like prudential norms, including provisioning<br />
requirements, risk weights for banks’ exposure<br />
<strong>to</strong>wards sec<strong>to</strong>rs like real estate.<br />
The RBI’s December mid-quarter policy action was<br />
centered on tackling the excessive tightness in the<br />
banking system’s liquidity, which included reduction in<br />
SLR, while keeping rates on hold as expected.<br />
“Since then, banking system liquidity has gradually<br />
improved from an ‘excessive deficit’ mode and carries<br />
promise <strong>to</strong> improve further during February-March on<br />
government spending,” stated a Barclays Capital report.<br />
Beyond Market 04th Feb ’11<br />
“The sequential softening in inflation until November<br />
and the RBI’s stated preference for a near-term pause<br />
earlier triggered expectations of policy rates staying on<br />
hold until March,” the report added.<br />
Despite the hawkish rhe<strong>to</strong>ric during its last policy<br />
announcement on 16th Dec ’10, economists at Barclays<br />
Capital believe that the RBI would have ideally avoided<br />
a January rate hike in case of a stable inflation print and<br />
no fresh pressure on inflation expectations.<br />
The unexpected rise in the December inflation print has,<br />
however, turned out <strong>to</strong> be a game changer, and had been<br />
the key <strong>to</strong> push the central bank <strong>to</strong> front-load another rate<br />
hike in January, despite the source of the pick-up coming<br />
largely from volatile food articles.<br />
“The current inflation spike is almost entirely due <strong>to</strong> a<br />
supply shock, for which monetary policy is not as<br />
effective,” stated the report, wherein the economists<br />
fac<strong>to</strong>red in a further hike of 75 basis points in the repo<br />
rate during 2011, with a renewed front-loading bias.<br />
On the monetary and liquidity scenario, while the y-o-y<br />
money supply growth at 16.5% in December ’10 was<br />
close <strong>to</strong> RBI’s indicative projection of 17%, non-food<br />
credit growth at 24.4% was much above the indicative<br />
projection of 20% set by the RBI.<br />
“Credit expansion in the recent period has been rather<br />
sharp, far outpacing the expansion in deposits,” said<br />
Subbarao. “Rapid credit growth without a commensurate<br />
increase in deposits is not sustainable.” Tight liquidity<br />
conditions persisted throughout the third quarter of<br />
2010-11, for which the RBI has announced the extension<br />
of the liquidity measures <strong>to</strong> address the still tight domestic<br />
liquidity conditions.<br />
Firstly, the additional liquidity support <strong>to</strong> scheduled<br />
commercial banks under the liquid adjustment facility<br />
(LAF), currently set <strong>to</strong> expire on 28th January, was<br />
extended <strong>to</strong> 8th April. Secondly, the second LAF (SLAF)<br />
will be conducted on a daily basis until 8th April.<br />
The RBI has been quite vocal about the fact that the<br />
effectiveness of the monetary policy is muted in the<br />
presence of a large fiscal deficit. So, all eyes are now set<br />
on the coming budget in February, wherein the fiscal<br />
picture would get clear.<br />
If the fiscal situation is not able <strong>to</strong> tackle inflationary<br />
pressures well, the RBI may hike rates again in its next<br />
mid-quarter review in March. So, for now, pause is past<br />
and the steps that the RBI has been taking periodically<br />
since mid-March ’10 are set <strong>to</strong> continue. A lot depends<br />
on how the numbers play up in the coming weekS.<br />
It’s simplified...<br />
7
8<br />
Beyond Market 04th Feb ’11<br />
The global economic<br />
recovery could take a<br />
beating if other key issues are<br />
not dealt with at the right time<br />
Post the financial crisis of 2008, it is now mostly<br />
proved and believed by economists that India is<br />
not yet decoupled from the rest of the world.<br />
And despite its relatively less dependence on exports and<br />
foreign money, there are striking examples of what could<br />
happen <strong>to</strong> its economy and the markets when unfavourable<br />
things happen in the rest of the world, especially in<br />
the developed countries.<br />
Needless <strong>to</strong> say, <strong>to</strong>day the money managers are more<br />
worried about the global risks than what could happen in<br />
the domestic economy as a result of the hike in interest<br />
rates and soaring inflation.<br />
As global risks have taken centre stage, it is worth<br />
keeping an eye on some of the key problem areas that<br />
could drastically impact the Indian economy and the<br />
s<strong>to</strong>ck markets <strong>to</strong>o.<br />
The United Nations (UN) estimates that between 2007<br />
and 2009, as many as 30 million jobs were lost around<br />
the world as a result of the financial crisis and the recession<br />
that followed.<br />
It is further estimated that 81 million people are without<br />
jobs. In this backdrop, the global economy still needs <strong>to</strong><br />
create at least another 22 million new jobs in order <strong>to</strong><br />
return <strong>to</strong> the pre-crisis level of global employment. It also<br />
says that at the current speed of recovery, this would take<br />
at least five years.<br />
In addition <strong>to</strong> high levels of unemployment and austerity,<br />
the UN has said that high levels of volatility in foreign<br />
exchange markets and conflict between major economies<br />
It’s simplified...
over policies that affect exchange rates are the main<br />
threats <strong>to</strong> growth.<br />
Here are a few issues that need <strong>to</strong> be watched closely in<br />
the coming year.<br />
EUROPE: THE REAL TEST<br />
Despite the recent recovery and the measures taken <strong>to</strong><br />
arrest the problems in the Euro zone, the European crisis<br />
is far from over.<br />
Europe is recovering from the deepest recession. Following<br />
a 4.6% contraction in 2009, the GDP is projected <strong>to</strong><br />
increase substantially in 2010 and 2011. However, many<br />
economists believe that these GDP figures could come<br />
down as there is a greater possibility that the sovereign<br />
debt crisis may recur again in the next one year.<br />
The New York-based Economist Nouriel Roubini, who<br />
predicted the global financial crisis, had earlier said that<br />
the key risk <strong>to</strong> the world economy in 2011 is the likely<br />
spread of Europe’s debt crisis.<br />
He says that the problems of the Euro zone could spread<br />
<strong>to</strong> Portugal, Spain and Belgium <strong>to</strong>o. Essentially, this<br />
means that there is a danger that the crisis could continue<br />
<strong>to</strong> travel from one county <strong>to</strong> another.<br />
The UN has said the pursuit of austerity measures by a<br />
number of European countries could push the Euro zone<br />
back in<strong>to</strong> recession in 2011. Austerity measures are often<br />
used by governments <strong>to</strong> reduce their deficit spending,<br />
usually in the form of higher taxes, reduction in the<br />
amount of benefits and public services offered.<br />
When the sovereign debt crisis hit the Euro zone, the<br />
inves<strong>to</strong>rs cited excessive concerns over fiscal deficit and<br />
debt. Concerns initially started with countries like Portugal,<br />
Ireland, Italy, Greece and Spain, collectively referred<br />
<strong>to</strong> as the PIIGS.<br />
Most of these countries were having very high debts as<br />
compared <strong>to</strong> the size of their economies. Greece, the<br />
most troubled country, has debts in excess of 140%<br />
compared <strong>to</strong> its economic size, followed by Italy at 118%<br />
and Ireland at 95%.<br />
Not only high debt, but also high fiscal deficit in these<br />
countries is an equally worrying fac<strong>to</strong>r. Countries like<br />
Portugal, Greece and Ireland have fiscal deficits in the<br />
range of 9% <strong>to</strong> 12%, which is very significant as they are<br />
already sitting on huge debts. High fiscal deficit also<br />
means that the nations in the Euro zone have very less<br />
headroom for more spending. Instead, they will have <strong>to</strong><br />
cut their expenditures.<br />
Beyond Market 04th Feb ’11<br />
As a result of high public debt in relation <strong>to</strong> the size of the<br />
economy, the questions about their abilities <strong>to</strong> repay such<br />
debt, especially in times of tepid economic recovery, are<br />
being raised.<br />
To deal with the situation, either the governments will<br />
have <strong>to</strong> default or if not, bring down government expenditure.<br />
In May ’10, the 27-member states of the European<br />
Union agreed <strong>to</strong> create the European Financial Stability<br />
Facility (EFSF), a legal instrument aimed at preserving<br />
financial stability in Europe, by providing financial<br />
assistance <strong>to</strong> the Euro zone states in difficulty.<br />
The authorities have been able <strong>to</strong> postpone the problem<br />
by announcing the rescue package. However, many<br />
economists still believe that the problems are far from<br />
over as debt levels and fiscal deficits continue <strong>to</strong> be<br />
extremely high.<br />
Also, there are chances that the crisis, which was<br />
restricted <strong>to</strong> a few countries, could spread <strong>to</strong> other<br />
nations, which are vulnerable or have poor economic<br />
fundamentals. Most experienced watchers of the Euro<br />
zone are expecting another serious crisis, which could<br />
blow out in 2011. This is also <strong>to</strong> do with the fact that<br />
many of these countries will need rollover funds in the<br />
current year.<br />
Meanwhile, emerging markets guru Mark Mobius in his<br />
blog has said: “Greece, Spain, Portugal and Ireland<br />
continue <strong>to</strong> have problems in managing their debts.<br />
While they obviously do not want <strong>to</strong> default; looking at<br />
the numbers, I think it may be quite difficult for them <strong>to</strong><br />
avoid it. The question now is how they can restructure<br />
their debt or raise more debt <strong>to</strong> repay the old debt.”<br />
UNITED STATES: LIMPING FORWARD<br />
While the Euro zone crisis seems large, the process of<br />
economic recovery in the US is no less daunting. It has<br />
come a long way since the sub-prime crisis of 2008,<br />
which was followed by the collapse of the banking<br />
system and subsequently the financial meltdown in the<br />
US. This led <strong>to</strong> massive job losses and drop in retail<br />
sales, something that was not seen in decades, and caused<br />
widespread depression in the US economy.<br />
Now, the situation is improving. The unemployment rate<br />
and retail sales are better than they were following the<br />
financial meltdown. Even the fourth quarter ending 2010<br />
GDP numbers are expected <strong>to</strong> be strong as against the<br />
September quarter. Consumer spending, industrial<br />
growth and capacity utilization numbers, although<br />
marginal, are recovering from their earlier lows. This has<br />
led <strong>to</strong> renewed confidence in the US economy and thus<br />
the US markets. Its currency <strong>to</strong>o, has seen some improve<br />
It’s simplified...<br />
9
10<br />
ment in the past couple of months. However, despite<br />
improving numbers, economists still feel that unemployment<br />
figures are still high. Besides, the housing market<br />
continues <strong>to</strong> be weak.<br />
Moreover, the government is pumping in trillions of<br />
dollars in<strong>to</strong> the economy <strong>to</strong> revive it. Post the 2008 crisis,<br />
it has spent more than $2.5 trillion, rescued several banks<br />
and kept its interest rates very low.<br />
Its spending is far higher than its revenues, leading <strong>to</strong> a<br />
deficit in government finances and thus, straining its<br />
balance sheet.<br />
But the real impact will be visible on the overall demand<br />
and economic growth only after the government<br />
withdraws the stimulus and repairs it balance sheet, even<br />
if it involves monetary tightening.<br />
The US economic recovery is also important because it<br />
commands almost 25% of the world GDP. Though the<br />
economic recovery is for good, whether it will withstand<br />
the test of time is what needs <strong>to</strong> be seen.<br />
CHINA : THE DEFIANT DRAGON<br />
Similarly, problems are not limited <strong>to</strong> the global super<br />
powers – Europe and the US. Chinese authorities <strong>to</strong>o<br />
have a lot of problems that need <strong>to</strong> be addressed. Western<br />
countries are now reluctant <strong>to</strong> import goods from China<br />
as demands have shrunk. Also, with tremendous pressure<br />
on China <strong>to</strong> revalue its currency, exports in this economy<br />
have taken a beating.<br />
Renowned inves<strong>to</strong>r Marc Faber, who is known for his<br />
ability <strong>to</strong> predict events and bubbles, in late 2010, had<br />
said that China has considerable risk of a slowdown. In<br />
one of his interviews, he had said that there is a 99%<br />
possibility that China will witness a considerable<br />
slowdown and there is another 30% chance that the<br />
markets will crash.<br />
He said if growth in China slows down, it will have a<br />
devastating impact on the prices of industrial commodities<br />
and also on those who supply these commodities.<br />
Even Author Richard Duncan in his new book titled ‘The<br />
Corruption of Capitalism’ says that every boom busts,<br />
and China’s boom will be no exception.<br />
On the contrary, the Chinese economy continues <strong>to</strong> roar.<br />
The only difference <strong>to</strong>day is that Chinese policymakers<br />
<strong>to</strong>o feel that they need <strong>to</strong> shift from the export-driven<br />
economy <strong>to</strong> one led by domestic consumption, which is<br />
possible given the huge population of the country. To<br />
achieve this, China will have <strong>to</strong> reduce its dependence on<br />
the western world without hurting its economic growth.<br />
Beyond Market 04th Feb ’11<br />
All developments, good or bad, will eventually impact<br />
the industrial commodities. Only time will tell how it<br />
would affect the global economies. In fact, China has<br />
already begun the process of tightening its interest rates<br />
and reigning in its appreciating currency. Therefore, the<br />
current year would be very important in this regard.<br />
CURRENCY WAR – THE BATTLE FOR<br />
SUPREMACY<br />
Globally, the faith in paper currencies is reducing. The<br />
logic given is that countries, especially from the developed<br />
world, have made all sorts of attempts <strong>to</strong> revive<br />
their sagging economies through excessive money<br />
printing, very high debt <strong>to</strong> GDP (both public and<br />
private), off-balance sheet liabilities, rescue of banks and<br />
temporary stimulus, <strong>to</strong> name a few.<br />
While this is one part of the s<strong>to</strong>ry, the other part is that<br />
there is enormous pressure on countries <strong>to</strong> manage their<br />
currencies in such a manner that they help their own<br />
countries favourably, while ensuring that others do not<br />
have an undue advantage.<br />
A cheap currency not only helps exports but only attracts<br />
foreign investments. For instance, China saw huge<br />
exports and foreign investments as a result of which it<br />
has accumulated the largest foreign exchange reserves in<br />
the world.<br />
But now world leaders ,especially the US, want China <strong>to</strong><br />
revalue its currency that has been kept low artificially. It<br />
is quite logical as China runs a huge trade surplus or $268<br />
billion (as of 2008) with the US. An economist recently<br />
said that as much as 40% of the Chinese economy could<br />
be attributed <strong>to</strong> its dependence on exports <strong>to</strong> the US.<br />
Meanwhile, several economists believe that the Chinese<br />
currency - the renminbi (RMB) is undervalued by about<br />
25% <strong>to</strong> 30% against the dollar. Today at a time when<br />
domestic employment is a priority, countries such as<br />
USA, Europe and Japan, among other nations, want <strong>to</strong><br />
protect their domestic industries and jobs against cheaper<br />
imports of goods.<br />
This is also the reason why countries want their currencies<br />
<strong>to</strong> devalue or keep them undervalued <strong>to</strong> remain<br />
competitive in the world market. Considering these<br />
issues, it is important <strong>to</strong> see how different currencies are<br />
valued against each other in the coming times.<br />
The European debt crisis, sluggish economic recovery in<br />
the United States, the suspected bubble formation in<br />
China and the ongoing currency war among countries<br />
need <strong>to</strong> be addressed on a war footing <strong>to</strong> res<strong>to</strong>re balance<br />
in the global economieS.<br />
It’s simplified...
12<br />
Beyond Market 04th Feb ’11<br />
It’s simplified...
In the last one year, shares of infrastructure companies<br />
have been hammered out of shape, mostly over<br />
concerns about slower order inflows and execution.<br />
Shares fell further in the second quarter ended 30th Sept<br />
’10, when infrastructure companies delivered financial<br />
results because of slow progress on projects as well as<br />
heavy monsoon.<br />
In 2010, the monsoon season went on for an extended<br />
period, which is a negative for infrastructure companies,<br />
as construction activity slows down during this period.<br />
This caused a delay in completion of projects, which was<br />
subsequently reflected in depressed earnings of<br />
infrastructure firms, during the second quarter.<br />
Market experts, however, believe the correction in<br />
infrastructure s<strong>to</strong>cks over the last one year, offers an<br />
opportunity for inves<strong>to</strong>rs <strong>to</strong> add some of the s<strong>to</strong>cks <strong>to</strong><br />
their portfolio. It is, indeed, a good time <strong>to</strong> buy shares of<br />
infrastructure companies.<br />
Infrastructure is a very lucrative area for investment,<br />
which is evident in the interest that is being shown in the<br />
sec<strong>to</strong>r by individual inves<strong>to</strong>rs, fund houses and<br />
infrastructure finance companies. Mutual funds have<br />
increased their exposure <strong>to</strong> infrastructure shares, with<br />
domestic fund managers launching numerous specialized<br />
funds <strong>to</strong> invest in the sec<strong>to</strong>r.<br />
Also, in the last one year, a large number of infrastructure<br />
finance companies such as IFCI Ltd and IDFC Ltd, have<br />
started investing in the sec<strong>to</strong>r by issuing bonds. The<br />
infrastructure bonds have become an attractive investment<br />
option, considering that the bonds give an<br />
additional tax saving of `20,000 over and above the `1<br />
lakh tax deduction allowed under section 80C of the<br />
Income-tax Act. Besides, foreign institutional inves<strong>to</strong>rs<br />
have also started investing in infrastructure s<strong>to</strong>cks.<br />
It is not <strong>to</strong>o hard <strong>to</strong> see why there is so much interest in<br />
the sec<strong>to</strong>r, given the fact that every government sees<br />
infrastructure development as a priority. It has become an<br />
important focus area even for India, which has seen its<br />
Gross Domestic Product (GDP) grow at an average rate<br />
of 8% year-on-year (y-o-y).<br />
In order <strong>to</strong> keep the growth momentum going or <strong>to</strong><br />
achieve higher growth, India needs <strong>to</strong> develop infrastructure<br />
such as airports, roads, power generation plants and<br />
water treatment plants, among others.<br />
Perhaps, realizing this, the Indian government has<br />
increased its spend on infrastructure projects. According<br />
<strong>to</strong> a report on savings and investments brought out by the<br />
Central Statistical Organization, the overall investment<br />
Beyond Market 04th Feb ’11<br />
in infrastructure went up from `253,035 crore in 2007-08<br />
<strong>to</strong> `307,282 crore in 2008-09, a rise of 21.4%, marginally<br />
less than the 22% growth in the previous year when the<br />
economy grew by 9.2%.<br />
The investment <strong>to</strong> GDP ratio of this segment, which<br />
includes electricity, gas, water supply, railways, road,<br />
airports, ports, s<strong>to</strong>rage and communication, has also gone<br />
up from 5.1% of the GDP at market prices in 2007-08 <strong>to</strong><br />
5.5% in 2008-09.<br />
In the past, infrastructure was solely funded and managed<br />
by the government. This has changed now with the<br />
government opening up the sec<strong>to</strong>r <strong>to</strong> private companies<br />
and inves<strong>to</strong>rs.<br />
For instance, power generation is largely done by private<br />
power companies; road projects are executed by private<br />
companies on a build-operate-transfer (BOT) model and<br />
the government has adopted a public-private partnership<br />
(PPP) model for port projects.<br />
Apart from the government, infrastructure is now being<br />
funded as investment by companies such as LIC Housing<br />
Finance Ltd, which has issued about $1 billion worth of<br />
infrastructure bonds <strong>to</strong> help fund India’s deficit in roads<br />
and power plants.<br />
Analysts feel that even if other sec<strong>to</strong>rs in the market do<br />
not perform well, the infrastructure sec<strong>to</strong>r will always do<br />
well, considering that it is much needed in a growing<br />
economy such as ours.<br />
While inves<strong>to</strong>rs may be put off by the second quarter<br />
numbers of companies, they would do well <strong>to</strong> discount<br />
earnings during this quarter, because the second half of a<br />
fiscal generally tends <strong>to</strong> be better than the first half, for<br />
infrastructure companies.<br />
In the second half of a fiscal, infrastructure companies<br />
book around three-fifths of their annual revenues. The<br />
reason is that, construction activity picks up after the<br />
monsoon ends.<br />
This fiscal <strong>to</strong>o, analysts expect infrastructure firms <strong>to</strong><br />
post better results in the December quarter as compared<br />
<strong>to</strong> the September quarter. Profitability of these firms,<br />
however, is expected <strong>to</strong> be low in the December quarter<br />
because of high interest costs. Analysts also expect<br />
earnings before interest, tax, depreciation and amortization<br />
(EBITDA) margins <strong>to</strong> be under pressure due <strong>to</strong><br />
soaring commodity prices.<br />
But, in spite of concerns related <strong>to</strong> the sec<strong>to</strong>r, the increasing<br />
order book of infrastructure companies is expected <strong>to</strong><br />
drive their growth in the long-term, which makes their<br />
It’s simplified...<br />
13
14<br />
s<strong>to</strong>cks profitable bets. The trick <strong>to</strong> investing in infrastructure<br />
s<strong>to</strong>cks is <strong>to</strong> buy them from a long-term perspective.<br />
A long-term investment will ensure that inves<strong>to</strong>rs book<br />
heavy profits.<br />
There are many s<strong>to</strong>cks that inves<strong>to</strong>rs can choose from.<br />
For example, they can choose <strong>to</strong> invest in an energy<br />
company, a construction or an urban waste management<br />
company, since the industry is so divergent.<br />
Analysts, however, caution that investing in infrastructure<br />
s<strong>to</strong>cks is not without its risks. The first risk relates <strong>to</strong><br />
the fact that the sec<strong>to</strong>r has a long gestation period, which<br />
means earnings in the short term could be less.<br />
The second is financial risk, where being over-leveraged<br />
can expose a project <strong>to</strong> volatility in interest rates, thus<br />
impacting the profit of a company. Also, infrastructure is<br />
highly capital-intensive and large amounts of capital can<br />
be tied up in projects for a long time.<br />
The next risk is the possibility of construction cost<br />
overruns, when a project sees cost escalation either<br />
because of an unexpected delay in the project or due <strong>to</strong><br />
several other fac<strong>to</strong>rs.<br />
Typically, construction of infrastructure projects is done<br />
through multi-year contracts, which expose the project <strong>to</strong><br />
cost escalations either because of a delay in the project or<br />
the rise in commodity prices. This can drag down the<br />
Beyond Market 04th Feb ’11<br />
revenue and profitability of a project.<br />
In the case of <strong>to</strong>ll roads and bridges, there is a risk that the<br />
company developing the project may not get the<br />
expected demand. In fact, investing in s<strong>to</strong>cks of companies<br />
that develop <strong>to</strong>ll roads, ports and airports is considered<br />
<strong>to</strong> be a high-risk investment.<br />
There is also a political and regula<strong>to</strong>ry risk associated<br />
with infrastructure projects. Infrastructure investments<br />
are subject <strong>to</strong> government regulations, which means that<br />
any change in government regulations or policies can<br />
impact a project. A more recent risk that has come up is<br />
the delay or cost escalation of a project because of<br />
environmental concerns, such as the Vedanta mining<br />
project in Orissa.<br />
The bot<strong>to</strong>m line though is that his<strong>to</strong>rically infrastructure<br />
investments have been lucrative. There are, however,<br />
critics who warn of bubbles and <strong>to</strong>o much money chasing<br />
<strong>to</strong>o few projects.<br />
Still, with a promising outlook for infrastructure in the<br />
future years, investing in this sec<strong>to</strong>r could prove beneficial.<br />
The good thing is that during an economic recession,<br />
governments tend <strong>to</strong> invest more in infrastructure <strong>to</strong><br />
stimulate growth, which can provide inves<strong>to</strong>rs with a<br />
hedge in investments during a downturn. Overall,<br />
infrastructure remains a sec<strong>to</strong>r with extremely high<br />
potential for returnS.<br />
Your financial success is our concern. At Nirmal Bang, it’s a relationship beyond broking...<br />
SMS ‘BANG’ <strong>to</strong> <strong>54646</strong> | e-<strong>mail</strong>: contact@nirmalbang.com | www.nirmalbang.com<br />
It’s simplified...
SURVIVAL INSTINCT<br />
Right from increasing tari�s <strong>to</strong> adopting the low-cost<br />
carrier model, airline companies are doing everything<br />
they can <strong>to</strong> stay a�oat while making pro�ts<br />
Beyond Market 04th Feb ’11<br />
It’s simplified...<br />
15
16<br />
After a prolonged lull in the economy, the previous<br />
year was quite good for the airline industry<br />
as business and leisure travel got the necessary<br />
push. In fact, domestic passenger traffic<br />
grew over 20% during this period, fuelling hopes of<br />
better December quarter results of airline companies.<br />
However, the only worry in the coming quarters could be<br />
abnormal movement in the crude oil prices that are<br />
hovering around $90 per barrel. It is estimated that if<br />
crude oil prices breach the $90-mark, airline companies<br />
would start feeling the pinch.<br />
Further, capacity expansion plans that are likely <strong>to</strong><br />
happen after FY13 could also spoil the joyride for these<br />
companies. But it would not be as bad as the effect of the<br />
rise in crude oil prices.<br />
Even if we assume that the revenues of airline companies<br />
are the same and crude oil prices move up by $1 per<br />
barrel and that the companies do not pass on the cost <strong>to</strong><br />
travelers in terms of ticket prices, then the margins would<br />
come down by 350-400 basis points.<br />
THE INDUSTRY<br />
The airline business is cyclical in nature. At present, the<br />
industry is on an upward curve. After a period of<br />
prolonged losses, airline companies are now seeing a<br />
revival, with demand growing faster than supply.<br />
Strong economic growth, range-bound fuel prices and<br />
the return of pricing power show an uptrend for the<br />
industry. The fortunes of the aviation industry are linked<br />
closely <strong>to</strong> the state of the economy.<br />
And with growth being more or less broad-based,<br />
business as well as leisure travels are expected <strong>to</strong> pick up<br />
further, a far cry from the scenario a few months ago,<br />
when several airlines had piled up huge losses, and in<br />
some cases, defaulted on payments <strong>to</strong>o.<br />
Airline companies have learnt their lesson on increasing<br />
their profits the hard way, in the past five years. Although<br />
airline companies increased their capacities, the demand<br />
from travellers did not match with the capacity expansion.<br />
This resulted in a price war among airline companies.<br />
During the five year period from FY04 <strong>to</strong> FY08, the<br />
industry players faced consistent losses or profits, which<br />
were erratic and generated mainly in the form of<br />
non-business income.<br />
This was followed by the financial meltdown. In this<br />
situation, the airline companies had <strong>to</strong> weigh their<br />
options <strong>to</strong> lessen their debt burdens and follow an<br />
economical model.<br />
Beyond Market 04th Feb ’11<br />
Over the past two years, Jet Airways acquired Air<br />
Sahara, while Kingfisher <strong>to</strong>ok over Air Deccan. The<br />
government went on <strong>to</strong> merge Air India and Indian<br />
Airlines. A few other insignificant players faded out of<br />
the scene. However, this process of consolidation did not<br />
have a deep impact other than increasing the market<br />
share, as both the <strong>to</strong>pline and bot<strong>to</strong>mline of airlines<br />
continued <strong>to</strong> stagnate.<br />
Airline companies, especially full service carriers,<br />
realized that in order <strong>to</strong> boost their <strong>to</strong>pline, it was crucial<br />
for airline companies <strong>to</strong> first apply brakes on capacity<br />
addition and secondly, give importance <strong>to</strong> a low-cost<br />
carrier (LCC) service <strong>to</strong> create a hybrid business model.<br />
LOW-COST CARRIER MODEL<br />
Low-cost Carrier (LCC) has now become an important<br />
part of the business model of airline companies in India.<br />
Since business has been seasonal, it is immensely important<br />
that the industry keeps the LCC model intact in its<br />
core business model.<br />
Cheaper ticket price of a low-cost carrier ensures better<br />
passenger load fac<strong>to</strong>r and, in turn, a good <strong>to</strong>pline for<br />
many airlines. Among the cost-conscious Indian travellers,<br />
an LCC player, such as SpiceJet, Go Air and IndiGo<br />
would remain the first preference.<br />
Most often, it is only when fliers fail <strong>to</strong> get a seat in a<br />
no-frills airline, do they opt for full-service carriers.<br />
Realizing this, full-service carriers, such as Jet Airways<br />
and Kingfisher Airlines, started offering LCC services.<br />
Jet Airways launched JetLite and Jet Konnect services,<br />
while Kingfisher Airlines started Kingfisher Red. These<br />
initiatives work on low costs and have helped enhance<br />
the revenues of the respective airline companies.<br />
The swift adoption of the LCC model has enabled Jet<br />
Airways <strong>to</strong> report consistent profits during the past three<br />
consecutive quarters. As opposed <strong>to</strong> this, Kingfisher,<br />
which was late in adopting this, continues <strong>to</strong> report losses<br />
and now has a negative net worth.<br />
On the sidelines, pure LCC players, such as SpiceJet,<br />
IndiGo and GoAir, continue <strong>to</strong> thrive, with the three of<br />
them commanding close <strong>to</strong> 34% of the market share<br />
<strong>to</strong>day. SpiceJet was the first among the three listed<br />
players <strong>to</strong> bounce back after the slowdown and post a net<br />
profit for FY10. Rising debt burden and interest outgo<br />
have weighed down heavily on full-service carriers.<br />
In FY10 alone, both Jet Airways and Kingfisher Airlines<br />
paid almost `1,100 crore each <strong>to</strong>wards interest costs,<br />
while carrying a pile of debt several times their equity<br />
It’s simplified...
ase. As a result, these players chose <strong>to</strong> adopt a leaseback<br />
model <strong>to</strong> acquire new aircrafts without increasing debt.<br />
Take for instance, Jet Airways. The company now has<br />
60% owned and 40% leased aircraft. It has dry leased<br />
three long-haul Boeing 777-300ERs <strong>to</strong> Thai Airways and<br />
THY-Turkish Airlines.<br />
IN THE COMING QUARTERS<br />
Owing <strong>to</strong> growth, not much change is expected on the<br />
supply side. Better occupancy is also helping airline<br />
players increase their ticket tariffs, or revenues per<br />
passenger per kilometre.<br />
The improvement in sentiments has prompted Jet<br />
Airways <strong>to</strong> convert 60% of its flights <strong>to</strong> full service<br />
mode. Crude oil prices, that had wreaked havoc on the<br />
industry due <strong>to</strong> high volatility a couple of years ago, have<br />
remained range-bound over the past one year.<br />
No capacity additions have been planned for the coming<br />
months. Companies such as Jet Airways and Air India<br />
have deferred some of their earlier orders for new<br />
aircraft. At present, there are around 380 aircrafts in the<br />
industry and analysts estimate that if passenger growth<br />
continues within 15% <strong>to</strong> 18%, around 150 aircrafts can<br />
be accommodated over the next five years.<br />
Passenger traffic has grown despite the rise in ticket<br />
prices. Domestic airlines showed a growth of 25.1% in<br />
passenger traffic in November, on a year-on-year basis.<br />
This growth has increased prospects of the upcoming<br />
December quarter for airline companies as the most<br />
profitable in the last five fiscals. The growth in net profits<br />
of airline companies has been uneven due <strong>to</strong> fac<strong>to</strong>rs such<br />
as mounting debts or high crude oil prices.<br />
FY11 has been a year of resolving issues that slowed<br />
down the recovery of the airline industry. Toning down<br />
the impact of profit-squeezing debts, which has been a<br />
task for airline companies for years, <strong>to</strong>day, has been dealt<br />
with <strong>to</strong> a reasonable extent.<br />
Measures such as conversion of rupee-denominated debt<br />
<strong>to</strong> US dollar-denomination at an interest rate (average<br />
interest rate of 6.8%) less than 50% of rupeedenominated<br />
interest rate (12.25%) and debt-<strong>to</strong>-equity by<br />
airline companies are steps in the right direction <strong>to</strong> keep<br />
in check rising interest costs.<br />
This would result in enhancement of net profits,<br />
especially for Jet Airways in particular, and Kingfisher<br />
Airlines in the near future. The only concern that would<br />
dash the hopes of the smooth growth of airline companies<br />
is unfavourable movement in crude oil prices.<br />
Beyond Market 04th Feb ’11<br />
At present, it is believed that crude oil prices, which are<br />
trading in the range of $85-$90 per barrel, may breach<br />
the $95 per barrel-mark sometime in the March’11<br />
quarter. Airline companies may not feel the negative<br />
impact of the increase in the December’10 quarter.<br />
In the December ’10 quarter, airline companies would<br />
record a sharp improvement in net profits. Considering<br />
the average price movement of aviation turbine fuel<br />
(ATF) in the September ’10 and December ’10 quarter,<br />
there has been a rise of 5% in the price of ATF.<br />
Though fuel cost constitutes around 35%-40% of the<br />
<strong>to</strong>tal expenditure of airline companies, this rise in fuel<br />
prices so far has been easily absorbed in the system.<br />
The demand growth in recent months is one of the chief<br />
reasons why airline companies are not feeling the pinch<br />
of the rise in fuel prices. In November last year, there has<br />
been a demand growth of around 25% in comparison <strong>to</strong><br />
the corresponding period in 2009.<br />
Besides this, the sharp increase in ticket prices by airline<br />
companies would also negate the impact of the rise in<br />
fuel prices and enhance earnings of airline companies.<br />
Moreover, debt-restructuring measures <strong>to</strong>o would<br />
enhance net profits for companies. These measures<br />
would lessen interest costs in the December ’10 quarter<br />
itself, especially for Jet Airways.<br />
Jet Airways had converted around `1,200 crore worth of<br />
its non-aircraft debt in US dollar denomination by the<br />
September ’10 quarter. This would save the company an<br />
interest cost of around US $15 million annually (around<br />
`67.5 crore) and around `16.87 crore in the December<br />
’10 quarter for the company.<br />
For Kingfisher Airlines, the benefit of reduction in<br />
interest cost due <strong>to</strong> conversion of debt of `2,003 crore <strong>to</strong><br />
equity would be gauged by the March ’11 quarter.<br />
The coming two quarters would be good for all airline<br />
companies, considering the fact that the December and<br />
the March quarters are holiday seasons. This will ensure<br />
higher yields and improvement in capacity utilization,<br />
leading <strong>to</strong> an improvement in the quarterly financial<br />
results, thus making the industry attractive for inves<strong>to</strong>rs.<br />
While the industry has been lobbying the government for<br />
allowing foreign airlines <strong>to</strong> pick up minority stake in<br />
domestic airlines, any development on this front will<br />
spell good news for the industry.<br />
Also, most capacity additions for airline companies - Jet<br />
Airways India, Indigo Airlines and SpiceJet - is likely <strong>to</strong><br />
happen in installments over the next five yearS.<br />
It’s simplified...<br />
17
18<br />
Beyond Market 04th Feb ’11<br />
A Medical<br />
Breakthrough<br />
The embryonic stem cell research is a<br />
big opportunity for the pharma sec<strong>to</strong>r<br />
and a boon <strong>to</strong> patients su�ering from a<br />
range of devastating diseases<br />
It’s simplified...
India is one of the few countries in the world that is<br />
seriously pursuing stem cell research. But regenerative<br />
medicine comprising stem cell therapies and<br />
tissue engineered products are in a nascent stage in<br />
our country.<br />
As per industry estimates, about 164.4 million patients<br />
who will be suffering from diabetes, cardiovascular<br />
disorders, neurological disorders, burns and wounds,<br />
osteoarthritis, osteoporosis, degenerative and traumatic<br />
disorders of bone and cartilage, liver disorders by the end<br />
of 2011, will benefit from stem cell therapies in India.<br />
Stem cell therapies have already demonstrated reasonable<br />
efficacy in treating certain ocular, cardiovascular<br />
and neurological disorders. Stem cell research is a niche<br />
industry and has been gaining considerable attention in<br />
India over the last few years.<br />
The industry is well-positioned <strong>to</strong> have a promising<br />
future. According <strong>to</strong> Stem Cell Global Foundation, a<br />
Delhi-based organization, stem cell banking was worth<br />
`100 crore in India in 2008-09. It is expected <strong>to</strong> grow <strong>to</strong><br />
an estimated `140 crore, a 35% rise, by 2010-11. In<br />
India, over 55 programmes have reportedly been identified<br />
and supported on various aspects of stem cell<br />
research till now.<br />
The sentiments for the industry are upbeat, as reflected<br />
by a prediction of an overall increase in stem cell banking<br />
cus<strong>to</strong>mers in India from around 25,000 currently <strong>to</strong> about<br />
1,00,000 by 2012.<br />
Growing awareness about the benefits and the potential<br />
applications of stem cell technology <strong>to</strong> develop cures for<br />
chronic diseases, which do not respond <strong>to</strong> conventional<br />
treatment has facilitated the setting up of various firms in<br />
this segment.<br />
Research in this field is being promoted by the government<br />
as well as several institutes and hospitals. More<br />
than 20 research organizations and 15 companies are<br />
working on stem cells in India. There are many institutions<br />
conducting research in stem cell therapy like the<br />
AIIMS, New Delhi.<br />
But clinical trials in the true sense are few and far<br />
between. By clinical trials, it means that they should be<br />
double blind, randomized placebo-controlled trials, with<br />
definite inclusion and exclusion criteria and with definite<br />
start and end points.<br />
The clinical trials should also throw light on how a<br />
particular stem cell has or has not worked. It should not<br />
vaguely state that the trial has been beneficial. Instead,<br />
definite parameters need <strong>to</strong> be set before the actual trial<br />
Beyond Market 04th Feb ’11<br />
<strong>to</strong> gauge the degree of improvement.<br />
The industry is dominated by companies involved in<br />
umbilical cord blood banking. There are several companies<br />
and institutions engaged in various aspects of stem<br />
cell research. These include LifeCell, CryoStemCell and<br />
Reliance Life Sciences.<br />
Some firms have also begun identifying and developing<br />
cell-based therapy treatments for various disease areas,<br />
including cardiovascular diseases, stroke, diabetes and<br />
retinal degeneration.<br />
Recognizing the potential of this field, the Department of<br />
Biotechnology has allocated more than `300 crore over<br />
the last five years <strong>to</strong>wards basic and applied research in<br />
stem-cell technology.<br />
Bengaluru-based National Centre for Biological<br />
Sciences (NCBS) is the key organization leading the<br />
government’s efforts in the field of stem cell technology.<br />
And the major players in this industry are prominent<br />
public-funded institutes like LV Prasad Eye Institute,<br />
CMC Vellore, IISc, NCCS, NBRC, CCMB, NCBS,<br />
CDFD, Nizams, TIFR, Nimhans, PGI Chandigarh,<br />
AIIMS as well as IIH (ICMR).<br />
On the other hand, private sec<strong>to</strong>r companies include<br />
Reliance Life Sciences, LifeCell, Pacific Stem Cells –<br />
Hyderabad, Stempeutics Research Pvt Ltd, Nichi-In<br />
Centre for Regenerative Medicine, LifeLine Hospitals<br />
and Manipal Hospital - Bengaluru.<br />
The regenerative medicine and stem cell technologies<br />
market is expected <strong>to</strong> grow <strong>to</strong> a US $500 billion business<br />
globally over the next 20 years. Recognizing the potential,<br />
several institutes and companies have ventured in<strong>to</strong><br />
this field in India.<br />
In stem cell research, AIIMS, LV Prasad Eye Institute,<br />
Centre for Stem Cell Research at CMC Vellore and<br />
National Centre for Cell Sciences are some institutes<br />
focusing on regeneration of damaged muscles due <strong>to</strong><br />
heart attack, stroke or damage <strong>to</strong> cornea. Companies in<br />
the private sec<strong>to</strong>r <strong>to</strong>o have started coming <strong>to</strong> the forefront<br />
in this field.<br />
CURRENT SCENARIO<br />
In India, the stem cell industry mainly focuses on using<br />
adult stem cells for treating various diseases. These cells<br />
are called Mesenchymal Stem Cells, Mesenchymal<br />
Stromal Cells, Mesenchymal Adult Progeni<strong>to</strong>r Cells<br />
(MAPC), Human Somatic Stem Cells, among other<br />
names. The other area of banking, cord blood stem cells,<br />
is not an active research area in India. Usually, it involves<br />
It’s simplified...<br />
19
20<br />
companies licensing technology from an overseas<br />
company or a subsidiary of the overseas company <strong>to</strong> set<br />
up a cord blood bank.<br />
Indian companies which have not imported the technology<br />
have used previously published pro<strong>to</strong>cols for<br />
banking cord blood. Thus, industry experts do not<br />
consider this as a research area for stem cells.<br />
In the adult stem cell space, the major players are<br />
Reliance Life Sciences, Stempeutics and International<br />
Stem Cell Services. These companies are focusing on a<br />
variety of disorders like myocardial infarction, neuronal<br />
stroke, critical limb ischemia, etc, as potential diseases<br />
that can be treated with stem cell-based therapies.<br />
THERAPEUTIC PRESENCE<br />
Stem cell therapies are currently in the evolving stage.<br />
Moreover, they are primarily au<strong>to</strong>logous therapies. The<br />
stem cell-based therapy on the au<strong>to</strong>logous mode is evolving<br />
as the new branch of therapy <strong>to</strong> address a spectrum of<br />
clinical disorders, for which traditional medicine does<br />
not offer any cure. These include haema<strong>to</strong>logical<br />
disorders, both congenital and acquired, leukaemia,<br />
metabolic disorders, bone and cartilage defects, corneal<br />
blindness, neuro-degenerative disorders, etc.<br />
Only when they shift <strong>to</strong> allogenic therapies would the<br />
larger business opportunities open up. This would necessitate<br />
a lot of basic research work in immunological<br />
aspects of stem cell therapies.<br />
Stem cells are being utilised <strong>to</strong> treat a wide range of<br />
diseases - over 100 - across the globe. Key therapeutic<br />
areas include cardiovascular, central nervous system<br />
(CNS), orthopaedics, derma<strong>to</strong>logy, paediatrics, endocrinology,<br />
gastroenterology, oncology and immunology.<br />
The main areas for research include lung disease, arthritis,<br />
incontinence, osteoporosis, diabetes, cancer, orthopaedics,<br />
infertility, Alzheimer’s disease, burns,<br />
Parkinson’s disease, liver failure, multiple sclerosis,<br />
critical limb ischemia, multiple myeloma, NH lymphoma<br />
and leukaemia.<br />
In India, all the therapeutic areas have more opportunity,<br />
but principally in areas of myocardial tissue regeneration,<br />
neuronal tissue regeneration, pancreatic tissue<br />
regeneration and skin and soft tissue regeneration.<br />
These areas will show promise and are sure <strong>to</strong> become<br />
the talk of the <strong>to</strong>wn, considering the number of people<br />
who get affected by cerebral stroke and myocardial<br />
infarction. More and more young people are falling prey<br />
<strong>to</strong> cardiovascular ailments than ever before because of<br />
Beyond Market 04th Feb ’11<br />
lifestyle changes, for the worse. Diabetes is becoming a<br />
menace and will become the biggest reason for morbidity<br />
<strong>to</strong>day and mortality <strong>to</strong>morrow.<br />
Beta cell regeneration will be able <strong>to</strong> cure diabetes. Skin<br />
and soft tissue regeneration will be used in lieu of split<br />
skin grafts and <strong>to</strong> cover and regenerate skin in burn<br />
wounds, amputation stump covering and non-healing<br />
chronic ulcers.<br />
REGULATION MATTERS A LOT<br />
‘Stem Cell Research and Therapy Guidelines’ drafted by<br />
the ICMR and the DBT in 2007 put forward the general<br />
principles for stem cell research and therapy keeping in<br />
view the ethical issues.<br />
In addition, it looks <strong>to</strong> provide specific guidelines for<br />
derivation, propagation, differentiation, characterization,<br />
banking and also the use of human stem cells for research<br />
and therapy.<br />
Industry experts say that the process of granting approval<br />
for clinical trials using stem cells needs <strong>to</strong> be harmonized<br />
better. Since ICMR and DBT have formulated these<br />
guidelines, they should also regulate therapeutic trials<br />
involving stem cells.<br />
Alternatively, if the Drug Controller General of India<br />
(DCGI) aims <strong>to</strong> regulate stem cell trials (as is the current<br />
procedure), it should assemble a set of people with the<br />
required technical expertise <strong>to</strong> review these applications.<br />
This can be modelled on CBER, which is part of the<br />
US-FDA. If DCGI regulates these trials there will be no<br />
conflict of interest since DCGI does not fund stem cell<br />
research, unlike DBT or ICMR.<br />
Organizations Active In Stem Cell Research<br />
��������������������������������������������������������������<br />
areas such as mesenchymal stem cells, cancer biology and<br />
cardiovascular research as well as clinical trials for myocardial<br />
infarction, critical limb ischemia, cerebral stroke and<br />
multiple sclerosis<br />
�������������������������������������������������������������<br />
cell-based therapies in areas of cardiac disorders, neural<br />
degeneration, spinal cord injury, metabolic disorders, ophthalmic<br />
diseases, haema<strong>to</strong>logical diseases, oncological diseases,<br />
burns and wounds, diabetic and venous ulcers as well as<br />
cartilage disorders<br />
�������������������������������������������������������������<br />
including corneal stem cells, cancer stem cells and tissue<br />
engineering<br />
It’s simplified...
GUIDELINES ON STEM CELL RESEARCH<br />
�������������������������������������� To provide<br />
a separate mechanism for review and moni<strong>to</strong>ring for<br />
research and therapy in the field of human stem cells, one<br />
at the National level called as National Apex Committee<br />
for Stem Cell Research and Therapy (NAC-SCRT) and<br />
the other at the institutional level called Institutional<br />
Committee for Stem Cell Research and Therapy<br />
(IC-SCRT)<br />
��������������������������������������������������-<br />
����� Human embryonic stem (hES) cells, derived from<br />
blas<strong>to</strong>cysts; Human embryonic germ (hEG) cells,<br />
derived from primordial germ cells of the foetus and<br />
Human somatic stem (hSS) cells, derived from foetal or<br />
adult tissues or organs, including umbilical cord<br />
blood/placenta<br />
�� ��������������� ��� ��������� ��� ����� ������ ����� ��<br />
������������ Permissible areas of research, restricted<br />
areas of research and prohibited areas of research<br />
�������������������������������������������������<br />
�������������������������������������������<br />
Beyond Market 04th Feb ’11<br />
�����������������������������������������������<br />
������������������������������������������������<br />
�� ������������ ��� ��������� ������������ ��� �������� ������<br />
for generation of hES cell lines<br />
��������������������������������������������<br />
�������������������������������������������<br />
�����������������������������<br />
�������������������������������������<br />
���� ����������� ���� ����� ������� �������� ���� ������ments<br />
in the area of stem cell research aimed at stimulating<br />
this industry. However, the growth momentum of the<br />
���������������������������������������������������������<br />
��������������������<br />
What is required is a much stronger mechanism for<br />
continuous moni<strong>to</strong>ring and reviewing of stem cell<br />
research, technologies and techniques so as <strong>to</strong> ensure and<br />
develop confidence in the safety and efficacy of the<br />
practices being adopteD.<br />
SMS ‘BANG’ <strong>to</strong> <strong>54646</strong><br />
<strong>Contact</strong> at: 022-3926 9404, E-<strong>mail</strong>: contact@nirmalbang.com<br />
BSE SEBI REGN No. INB011072759, INF011072759 & INE011072759, NSE SEBI REGN No. INB230939139, INF230939139 & INE230939139 DP SEBI REGN. No NSDL: IN-DP-NSDL-136-2000, CDS(I)l: IN-DP-CDSL-37-99, AMFI REGN. No. arn-49454 NCDEX REGN. NO. 00362, FMC Code-0075, MCX REGN. No. 16590, FMC Code-MCX/TCM/CORP/0490, MCX SX-INE260939139, PMS-INP000002981<br />
EQUITIES | DERIVATIVES | COMMODITIES* | CURRENCY | MUTUAL FUNDS # | IPOs # | INSURANCE # | PMS | DP<br />
Disclaimer: Insurance is a subject matter of solicitation. Mutual Fund investments are subject <strong>to</strong> 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 o�ering for commodity segment. *Through Nirmal Bang Commodities Pvt. Ltd. # Distribu<strong>to</strong>rs<br />
It’s simplified...<br />
21
etter SAFE than<br />
SORRY<br />
22<br />
Policyholders must make sure that they pay their premiums on time or else they may<br />
have <strong>to</strong> face the wrath of the insurance companies<br />
Sanjeev Patel, software professional and the only<br />
working member of his family comprising two<br />
kids and his wife had taken a traditional life<br />
insurance policy for the security of his family,<br />
as they are all dependent on him.<br />
This policy is seven-years-old and Patel ensured that<br />
each of the premium payments were made in a timely<br />
manner. One day on the way back from work, in a very<br />
tragic incident while crossing the road, he met with an<br />
accident and lost his life. Fortunately for his family who<br />
were entirely dependent on his income, the sum assured<br />
on his policy helped them overcome the financial loss.<br />
If it were not for the timely payment of premiums by<br />
Patel, his policy would have lapsed, causing immense<br />
financial strain <strong>to</strong> his family as the insurance company<br />
would not have been liable <strong>to</strong> make any payments <strong>to</strong> the<br />
family and they would have found themselves in a<br />
situation of financial strain.<br />
Note that insurance companies honour the commitments<br />
if and only if the policy is active. Hence, in a traditional<br />
life insurance policy if you have paid the premium for<br />
three years and missed the premium for the fourth year,<br />
the policy becomes inactive. Even though we know its<br />
importance - security <strong>to</strong> family members, insurance<br />
companies indicate that many policies lapse.<br />
It could be due <strong>to</strong> various reasons. But carelessness <strong>to</strong>ps<br />
the list. In order <strong>to</strong> ensure that the policyholder remembers<br />
<strong>to</strong> pay the premium, insurance companies send a<br />
reminder for premium payment wherein they also<br />
mention the grace period within which the premium<br />
should be paid.<br />
Beyond Market 04th Feb ’11<br />
For monthly premium payments, the grace period is 15<br />
days and for quarterly and annual payments it is 30 days.<br />
If you fail <strong>to</strong> pay the premium even within the grace<br />
period, the insurer sends a communiqué <strong>to</strong> you announcing<br />
that the policy has lapsed.<br />
In September ’10, IRDA came out with a new set of<br />
regulations for ULIPs and health insurance products.<br />
Traditional policies already follow a certain set of guidelines<br />
outlined by the IRDA.<br />
TRADITIONAL POLICIES<br />
Do You Need To Take A New Policy If Your Policy<br />
Has Lapsed?<br />
Policy revival is possible but there are certain rules and<br />
regulations governing the same. Revival reinstates the<br />
benefits <strong>to</strong> the beneficiaries. According <strong>to</strong> the insurance<br />
regula<strong>to</strong>r IRDA, if a policy has been in force for at least<br />
three years, the insured has the chance <strong>to</strong> revive it for a<br />
period of up <strong>to</strong> two years.<br />
��� Within The First Six Months Of Lapsation: If the<br />
policy is revived within the six months of lapsation, then<br />
the process involves just paying off the premium which<br />
was overdue along with the interest and your policy will<br />
be revived.<br />
�� � � After The First Six Months of Lapsation: If the<br />
policy is revived after six months of lapsation, you need<br />
<strong>to</strong> pay the interest, outstanding premium amount and<br />
penalty. This will differ from policy <strong>to</strong> policy.<br />
If the policy was inactive for at least three years, the<br />
death benefit ceases and the surrender charge may be as<br />
high as 100%, resulting in the family getting no money.<br />
It’s simplified...
While IRDA has stated that the lapsed policy can be<br />
revived within a period of two years if the policy was in<br />
force for at least three years, the insurance company can<br />
decline an application for revival if it is not convinced<br />
about the integrity of your application, that is, the<br />
insurance company would like <strong>to</strong> make sure there is no<br />
intended or suspected fraud.<br />
Therefore, the insurer can impose conditions such as<br />
asking you <strong>to</strong> take a medical test before the policy is<br />
revived so as <strong>to</strong> make sure that you, the insured have not<br />
developed a new medical condition during the period<br />
when the policy had lapsed.<br />
Even after the revival of the policy, if the insured<br />
commits suicide within one year of the policy’s revival,<br />
the insurance company can reject the insurance claim.<br />
Also, if the insured dies within a period of two years of<br />
the policy revival, the insurance company reserves the<br />
right <strong>to</strong> conduct an enquiry before paying off the claim <strong>to</strong><br />
the beneficiaries.<br />
Can Beneficiaries File A Claim If The Policy Has<br />
Lapsed?<br />
This will entirely depend on the time period for which the<br />
policy was active.<br />
If the policy was active for a period of less than three<br />
years and an insurance claim is filed by the beneficiaries,<br />
the insurance company has no obligation <strong>to</strong> pay off<br />
anything. In certain exceptional cases, the insurer might<br />
be willing <strong>to</strong> pay the beneficiaries the premium payments<br />
made by the insured.<br />
If the policy was active for a period of more than three<br />
years, as per IRDA, the dependents can get some benefit.<br />
Again here, the beneficiaries will not be entitled <strong>to</strong> the<br />
full sum assured. The insurance company will pay a<br />
reduced sum assured based on some pre-defined formula,<br />
which is typically the number of payments made <strong>to</strong> the<br />
<strong>to</strong>tal number payable.<br />
What If You Cannot Afford The Premiums?<br />
Insurance companies do provide policy holders with the<br />
opportunity <strong>to</strong> reduce the premium payment amount<br />
along with the sum assured, so that they can continue <strong>to</strong><br />
have insurance coverage. Also, you can change the<br />
frequency of premium payment <strong>to</strong> monthly or quarterly<br />
from annually.<br />
UNIT LINKED INSURANCE POLICY (ULIP)<br />
If you have taken an ULIP, which is an investment-cuminsurance<br />
product, rules differ because of the lock-in<br />
period and the investment component. Last year, IRDA<br />
came out with a set of guidelines that govern ULIPs,<br />
Beyond Market 04th Feb ’11<br />
effective from 1st Sept ’10. Under the new set of guidelines,<br />
the policyholder can either seek revival of the<br />
lapsed policy or let go of the ULIP.<br />
Like a traditional policy, if the policyholder is not able <strong>to</strong><br />
pay the premium within the due date, it can be paid<br />
within the grace period given by the insurance company,<br />
which is typically 15 days for monthly payment policies<br />
and 30 days for policies where premium has <strong>to</strong> be paid<br />
quarterly or annually. Beyond this grace period, the<br />
policy will be discontinued (new terminology for lapsation).<br />
If your policy is discontinued, then you are left<br />
with two options, revive the policy or surrender the same.<br />
���� Policy Revival: Within 15 days of a policy’s discontinuation,<br />
the insurance firm will send the policyholder a<br />
notice <strong>to</strong> which he will have <strong>to</strong> respond within 30 days.<br />
He can pay off the outstanding premium and revive the<br />
policy. If he does not want <strong>to</strong> revive the policy, the<br />
insurance company will deduct a discontinuation charge,<br />
not exceeding `6,000, and then return the fund value<br />
���� Surrender The Policy: If the policyholder wishes <strong>to</strong><br />
surrender the policy before the lock-in period of five<br />
years (increased from 3 years), the fund which is called<br />
the discontinuance fund will be given <strong>to</strong> him only after<br />
five years. In the interim period, the fund will keep<br />
earning a minimum interest of 3.5% per annum. His<br />
policy stands terminated once he gets this money back.<br />
HEALTH INSURANCE POLICIES<br />
Health insurance is a one-year renewable product. Till<br />
the regula<strong>to</strong>r stepped in in March ’09, health insurers did<br />
not provide grace period <strong>to</strong> policyholders, which meant<br />
that there was a break in the policy and, hence, it could<br />
not be renewed and no health coverage. IRDA has now<br />
changed it. Health insurers have <strong>to</strong> manda<strong>to</strong>rily state the<br />
terms and conditions for renewal along with the indicative<br />
premiums for future renewals. Also, a grace period<br />
of 15 days will be provided <strong>to</strong> renew the policy.<br />
The earlier you buy your life insurance policy, the better<br />
because you get the benefit of age and hence the mortality<br />
charge will be lower, resulting in lower premiums.<br />
Having bought the policy early, make sure you do not let<br />
the policy lapse. Take necessary steps <strong>to</strong> make sure that<br />
the payments are made in time because it is for the wellbeing<br />
of your family.<br />
In case of health insurance, it is even more critical <strong>to</strong><br />
renew your policy in a timely manner as for every claimfree<br />
year, insurance companies offer benefits such as<br />
increase in the sum assured. Also, pre-existing<br />
conditions/diseases will be covered after continuous<br />
renewal for 2-3 years, depending on the kind of policY.<br />
It’s simplified...<br />
23
24<br />
Making The Right Moves<br />
Orchid Chemicals & Pharmaceuticals Ltd<br />
(Orchid) is a leading pharmaceutical<br />
company headquartered in Chennai, India.<br />
The company is involved in the development,<br />
manufacture and marketing of diverse bulk actives,<br />
formulations and nutraceuticals. With exports spanning<br />
more than 75 countries, Orchid Pharma is the largest<br />
manufacturer-exporter of cephalosporin bulk actives in<br />
India and is ranked amongst the <strong>to</strong>p five cephalosporin<br />
producers in the world.<br />
Due <strong>to</strong> mounting debts and unfavourable economic<br />
conditions, Orchid Pharma was facing operational<br />
difficulties till FY10. To overcome these issues, the<br />
company sold its generic injectable formulations<br />
business for US$ 400 mn <strong>to</strong> Hospira in March ’10. The<br />
agreement covered sale of assets, products, product in the<br />
pipeline and the team <strong>to</strong> manage the transferred assets.<br />
Beyond Market 04th Feb ’11<br />
Through its rich product<br />
portfolio and right expansion<br />
plans, the company is trying <strong>to</strong><br />
�nd the right balance between<br />
growth and pro�tability<br />
BUSINESS OVERVIEW<br />
Orchid Chemicals &<br />
Pharmaceu�cals<br />
Source: Company, Nirmal Bang Research<br />
API<br />
FORMULATION<br />
R & D<br />
CRAMS<br />
Cephalosporin<br />
Penicillin<br />
Carbapenems<br />
NPNC<br />
Cephalosporin<br />
NPNC<br />
NDDS<br />
NCE<br />
BIOTICS<br />
ACTIVE PHARMACEUTICAL INGREDIENTS<br />
(API)<br />
Currently, Orchid Pharma gets 70% of its <strong>to</strong>tal revenues<br />
from API. The company has become API-skewed after it<br />
sold its injectable formulations division <strong>to</strong> Hospira. The<br />
transaction was completed in Mar ’10 and included a<br />
supply agreement between the two companies where<br />
Orchid Pharma would supply API <strong>to</strong> Hospira for the<br />
injectables for 10 years at pre-determined volumes and<br />
prices. This ensures stability of margins for Orchid<br />
Pharma, going forward.<br />
It’s simplified...
Niche Product Segment: Orchid Pharma supplies APIs<br />
for cephalosporins, penicillins, sterile carbapenems and<br />
non-penicillin non-cephalosporins products (NPNC).<br />
These are difficult-<strong>to</strong>-manufacture products with high<br />
entry barriers and, hence, with limited competition.<br />
Orchid Pharma has the largest cephalosporin API facility<br />
in Chennai and has been approved by USFDA,<br />
UKMHRA and other regula<strong>to</strong>ry agencies.<br />
It has cumulative DMF (drug master file) filings of 81<br />
spread across cephalosporins, NPNC, beta-lactums,<br />
carbapenems, etc.<br />
It has also filed 21 COS (Certificate of Suitability) for the<br />
European markets.<br />
FORMULATIONS<br />
Orchid Pharma is making efforts <strong>to</strong> increase its contribution<br />
from formulations, from the current 30% <strong>to</strong> 50% of<br />
its <strong>to</strong>tal revenues in the future.<br />
As a matter of strategy, the company is targeting niche<br />
product segments with attractive margins and in areas<br />
where it has the required expertise.<br />
It has developed a strong product portfolio in oral cephalosporins<br />
and in NPNC (non-penicillin<br />
non-cephalosporin) and will continue <strong>to</strong> market oral<br />
formulations in the domestic, regulated and semiregulated<br />
markets.<br />
For regulated markets, the pharma company is relying on<br />
the partnership model for front-end exercise. Orchid<br />
Pharma has acquired a front-end company called Karalex<br />
Pharma, LLC <strong>to</strong> expand its presence in the sales and<br />
marketing of generic products.<br />
Cumulatively, the company has filed 39 ANDAs including<br />
eight Para-IV FTF filings. Of these, it has already<br />
settled four Para-IV with innova<strong>to</strong>rs. This is a huge<br />
success for any company and would ensure momentum<br />
of growth in the long run.<br />
RESEARCH & DEVELOPMENT<br />
Orchid Pharma also undertakes research and development<br />
activities. It has a wholly-owned subsidiary -<br />
ORLL (Orchid Research Labora<strong>to</strong>ries Ltd), which<br />
focuses on NDDS, NCE and CRAMS for research. It has<br />
130 scientists.<br />
The pharmaceuticals company has developed a healthy<br />
product pipeline in the R&D segment. They are under<br />
various stages as shown in the chart.<br />
Beyond Market 04th Feb ’11<br />
��������������������<br />
������������<br />
Segment NCE Di�covery<br />
1 Tyrozine - TZD, Non-PPAR Molecule<br />
Diabetes 2 DPP IV Inhibi<strong>to</strong>r<br />
3 Novel<br />
1 Th1/Th2 Cy<strong>to</strong>kine Synthase Inhibi<strong>to</strong>r<br />
Inflammation 2 PDE IV Inhibi<strong>to</strong>r<br />
3 TNF � Inhibi<strong>to</strong>r<br />
Oncology 1 STAT 3 / IL-6 Inhibi<strong>to</strong>r<br />
(Non-Cy<strong>to</strong><strong>to</strong>xic) 2 HDAC Inhibi<strong>to</strong>r<br />
1 Oxazolidinone<br />
Anti-Infectives 2 Cephalosporin<br />
3 Betalactamase Inhibi<strong>to</strong>r<br />
Clotting Disorders 1 Oral Direct Thrombin Inhibi<strong>to</strong>r<br />
Obesity 1 Novel<br />
CNS 1 Novel<br />
Source: Company, Nirmal Bang Research<br />
INVESTMENT RATIONALE<br />
������������������������������������������������������<br />
We believe the deal is beneficial for Orchid Pharma in<br />
the long term as huge debts and economic slowdown had<br />
hampered the overall growth of the company, due <strong>to</strong><br />
which it was not able <strong>to</strong> realize the true potential of its<br />
healthy and attractive product portfolio.<br />
As per the agreement, Orchid Chemicals & Pharmaceuticals<br />
Ltd transferred its generic injectable business <strong>to</strong><br />
Hospira and received $400 million in cash. Also, Orchid<br />
Pharma managed <strong>to</strong> get 10 years’ API supply agreement<br />
from Hospira for the sold injectable formulations, at a<br />
pre-determined volume and price.<br />
On one hand, this would ensure growth momentum and<br />
on the other hand, it would provide stability <strong>to</strong> the<br />
pharma company’s margins.<br />
Other Benefits From This Transaction<br />
�� Orchid Pharma had huge debts of around `2,985 crore<br />
in its books as on 29th Mar ’10. After the business<br />
transaction, Orchid Pharma could repay around `1,400<br />
crore worth of loans. This significantly deleveraged the<br />
company’s balance sheet and at the same time improved<br />
its financial ratios.<br />
�� Hospira’s formidable presence in the global injectables<br />
market should translate in<strong>to</strong> higher demand for<br />
formulations and, hence, for Orchid Pharma’s APIs.<br />
�����������������������������<br />
Orchid Pharma has adopted a combination of various<br />
marketing strategies <strong>to</strong> reach different geographies as the<br />
characteristic of each market is unique.<br />
����Regulated Market<br />
The company has presence in all regulated markets,<br />
namely the US, EU, Australia and Japan. These markets<br />
It’s simplified...<br />
25
26<br />
accounted for 49% of the company’s formulations<br />
revenue in 2009-10.<br />
As Orchid Pharma does not have the expertise in frontend<br />
marketing in regulated markets, it is tying up with<br />
large distribution chains for wider coverage. For the<br />
same reason, it has also acquired US-based company,<br />
Karalex Pharma.<br />
����Semi-regulated Market<br />
Orchid Pharma derives 51% of its formulations revenues<br />
from the semi-regulated markets. The pharma company<br />
focuses on branded generics in semi-regulated markets,<br />
including India.<br />
The company has its own distribution network in most<br />
countries, thereby enabling it <strong>to</strong> control the <strong>to</strong>tal network.<br />
This results in quality control as well as better margins<br />
for the company.<br />
����������������������������<br />
To be different from the rest, the company has chosen a<br />
unique business segment <strong>to</strong> position itself. Antiinfectives<br />
is a high-margin, high-entry barrier segment<br />
and hence, keeps a check on competition. And <strong>to</strong><br />
leverage the same benefit, Orchid Chemicals & Pharmaceuticals<br />
Ltd has lined up a healthy product pipeline for<br />
the future <strong>to</strong>o.<br />
It has filed 80 DMFs in the US and 21 COS in Europe in<br />
the API segment. Additionally, the company has filed 36<br />
ANDAs in the US and 18 dossiers in EU, for the formulation<br />
division.<br />
The company plans <strong>to</strong> file 20-22 products every year for<br />
the next three consecutive years, <strong>to</strong> keep its product<br />
portfolio strong.<br />
We believe that the API supply deal with Hospira would<br />
also provide further benefit, once Hospira gets product<br />
approvals for the carbapenems facility, which will also<br />
add <strong>to</strong> the revenues of Orchid Pharma.<br />
�����������������������<br />
By selling its business <strong>to</strong> Hospira, Orchid Pharma paid<br />
off its debts, making the company’s balance sheet less<br />
leveraged and thus increasing the cash flow of the<br />
company <strong>to</strong>o.<br />
The debt <strong>to</strong> equity ratio of the company improved from<br />
4.4 pre-deal <strong>to</strong> around 1.3 after the deal. This provides<br />
further headroom <strong>to</strong> the company <strong>to</strong> leverage it for any<br />
future expansion.<br />
Beyond Market 04th Feb ’11<br />
����<br />
Movement of currency could adversely impact the<br />
pharma company’s profitability.<br />
�������������<br />
We believe Orchid Chemicals & Pharmaceuticals Ltd is<br />
left with enough engines <strong>to</strong> keep its growth momentum<br />
going. It has a rich product portfolio.<br />
The company is also expanding its wings in different<br />
geographies by combining various strategies like acquiring<br />
front-end marketing companies, tying-up with<br />
distribu<strong>to</strong>rs or by having a direct presence in areas it has<br />
the requisite expertise. The company is targeting both<br />
regulated and semi-regulated markets.<br />
Orchid Pharma has a planned strategy <strong>to</strong> build its product<br />
portfolio. For the same reason, it has lined-up 20 <strong>to</strong> 22<br />
product launches every year.<br />
The company management is confident of taking its<br />
formulations contribution of 30% <strong>to</strong> 50% in the near<br />
future <strong>to</strong> balance the API – formulations mix.<br />
����������<br />
Particulars (` in Cr) FY09 FY10* 6M FY11<br />
9M FY11<br />
Sales<br />
EBIDTA<br />
% Margin<br />
Adj. PAT#<br />
% Margin<br />
EPS<br />
Equity<br />
Debt<br />
Debt: Equity<br />
1,211.30<br />
285.7<br />
23.60%<br />
(52.2)<br />
-4.30%<br />
(7.4)<br />
670.2<br />
2,596.80<br />
3.9<br />
1,251.00<br />
(171.2)<br />
-13.70%<br />
(555.2)<br />
-44.40%<br />
(78.8)<br />
979.6<br />
1,629.50<br />
1.7<br />
712.7<br />
161.6<br />
22.70%<br />
45.6<br />
6.40%<br />
6.5<br />
1,046.20<br />
1,726.80<br />
1.7<br />
1,159.00<br />
283.3<br />
24.40%<br />
98.2<br />
8.50%<br />
13.9<br />
NA<br />
NA<br />
NA<br />
Source: Company, Nirmal Bang Research<br />
������������������������������������������������������������������������������<br />
We find relief in the fact that the promoters of the<br />
company are increasing their stake by 5% (the maximum<br />
limit set by SEBI) every year. They currently hold a<br />
reasonable 31% in the company.<br />
We believe it is a positive development from the<br />
company’s point of view as this shows the management’s<br />
commitment <strong>to</strong>wards the business. The management is<br />
confident of achieving $350 million in revenues with<br />
22% EBITDA margins in FY11, translating in<strong>to</strong> an EPS<br />
of `22.<br />
On the valuation front, we believe that Orchid Pharma is<br />
available at attractive valuations and has a significant<br />
potential upside from the current level��<br />
It’s simplified...
Nirmal Bang in association with Zee Business invites you <strong>to</strong> be a part of Beyond , the<br />
one-of-its-kind commodity camp, where market mavens like Anjani Sinha, MD & CEO, National<br />
Spot Exchange and Kunal Shah, Head – Commodity Research, Nirmal Bang Commodities Pvt Ltd<br />
will discuss opportunities in the commodity markets with Amish Devgan, Commodity Edi<strong>to</strong>r and<br />
Anchor, Zee Business.<br />
Date: 18th February, 2011<br />
Time: 6.30 pm<br />
Venue: Ludhiana<br />
To register,<br />
MAIL: beyondmandi@nirmalbang.com<br />
SMS: ‘BANG COM’ <strong>to</strong> <strong>54646</strong>
28<br />
BETWEEN EXTREMES<br />
The prices of commodities rose considerably in<br />
2010. Copper prices surged 30% last year. The<br />
bull run in commodities can be attributed <strong>to</strong> a<br />
host of fac<strong>to</strong>rs.<br />
Some of them are:<br />
Launch Of Copper Exchange Traded Funds (ETFs)<br />
Due <strong>to</strong> its usage in major sec<strong>to</strong>rs, especially construction<br />
and electrical applications, copper prices are considered<br />
as good economic indica<strong>to</strong>rs. Besides, with the recent<br />
launch of copper ETFs, backed by physical warehousing<br />
of the red metal, there has been a change in the nature of<br />
demand for this commodity.<br />
Beyond Market 04th Feb ’11<br />
A short-term halt in the recent rally of copper is<br />
likely as the red metal appears <strong>to</strong> be getting caught<br />
between the QE2 by the US and the monetary<br />
tightening measures by China<br />
ETF Securities, JPMorgan Chase & Co and BlackRock<br />
Inc, last year, announced the introduction of copper<br />
ETFs. These ETFs are aimed at providing inves<strong>to</strong>rs<br />
access <strong>to</strong> the red metal in the form of an equity-like<br />
product. The launch of copper ETFs has been the driving<br />
fac<strong>to</strong>r for the prices of this commodity. In fact, the<br />
demand for copper has been inelastic during this period.<br />
Additional Quantitative Easing (QE2)<br />
The second round of quantitative easing or QE2 in the<br />
US is a $600 billion asset purchase programme, spread<br />
over eight months and is aimed at stimulating growth in<br />
the US economy. However, the pumping of money in<strong>to</strong><br />
It’s simplified...
the economy has led <strong>to</strong> higher liquidity. Moreover, high<br />
growth and inflationary expectations owing <strong>to</strong> increased<br />
liquidity are being discounted, leading <strong>to</strong> the rise in the<br />
prices of major commodities, including copper. Also, the<br />
weakness in the US dollar against major trading currencies<br />
of the world is supporting the prices of metals,<br />
tracing a his<strong>to</strong>rical inverse relationship between the US<br />
currency and metals.<br />
LME 3M Copper And US Dollar<br />
US $ / Tonne<br />
9500<br />
9000<br />
8500<br />
8000<br />
7500<br />
7000<br />
6500<br />
6000<br />
1/4/2010<br />
1/25/2010<br />
2/15/2010<br />
3/8/2010<br />
3/29/2010<br />
4/21/2010<br />
5/13/2010<br />
6/4/2010<br />
6/25/2010<br />
7/16/2010<br />
8/6/2010<br />
8/27/2010<br />
9/20/2010<br />
10/11/2010<br />
11/1/2010<br />
11/22/2010<br />
12/13/2010<br />
Source: Reuters, NB Research<br />
Beyond Market 04th Feb ’11<br />
LME 3M Copper Price Dollar Index<br />
90<br />
88<br />
86<br />
84<br />
82<br />
80<br />
78<br />
76<br />
74<br />
Since the past one year, the US dollar and copper have<br />
witnessed an inverse correlation of 67%. And, if we<br />
consider the data during the past six months, we see a<br />
stronger inverse relation of 83% between the US<br />
currency and the red metal.<br />
Declining Exchange Warehouse S<strong>to</strong>cks<br />
Copper s<strong>to</strong>cks held by major exchange-recognized<br />
warehouses have been continuously declining. At the<br />
start of Oc<strong>to</strong>ber ’10, the combined inven<strong>to</strong>ries from<br />
COMEX (converted <strong>to</strong> metric <strong>to</strong>ns), the LME and<br />
Shanghai Futures Exchange s<strong>to</strong>od at 5,38,252 metric<br />
<strong>to</strong>nnes, down 32% from a high of 7,93,184 metric <strong>to</strong>nnes<br />
in the last week of February ’10. It is also believed that<br />
nearly 50%-70% copper s<strong>to</strong>cks at LME warehouses are<br />
being cornered by a particular organization.<br />
Supply Constraints<br />
The year 2010 saw a huge number of strikes in major<br />
copper-producing mines like Chile’s Collhuasi and<br />
Peru’s Cerro Verde, which impacted copper supply<br />
majorly. Moreover, s<strong>to</strong>ppage in operations at major ports<br />
exporting copper led <strong>to</strong> a decline in the supply of the red<br />
metal. Declining ore grades was also a cause of worry in<br />
the previous year.<br />
According <strong>to</strong> experts, copper supply is expected <strong>to</strong> lag<br />
demand for the coming two years. International Copper<br />
Study Group estimates that the world refined copper<br />
consumption exceeded production by 3,63,000 metric<br />
<strong>to</strong>nnes between January and August ’10. Also, the full<br />
year-end copper balance is estimated <strong>to</strong> be around<br />
5,81,000 metric <strong>to</strong>nnes in deficit. And for the year 2011,<br />
the deficit in refined copper market is expected <strong>to</strong> be<br />
around 4,00,000 metric <strong>to</strong>nne.<br />
Production Of Copper<br />
World Mine Production<br />
World Primary Refined Production<br />
World Secondary Refined Production<br />
Total Refined Production<br />
World Refined Consumption<br />
Surplus / Deficit<br />
Exchange Reported S<strong>to</strong>cks (LME+ COMEX+SHFE)<br />
Source: ICSG, NB Research<br />
Source: Reuters, NB Research<br />
Source: Reuters, NB Research<br />
2009 2010 (E) 2011 (F)<br />
15910<br />
15465<br />
2831<br />
18296<br />
18118<br />
178<br />
1426<br />
16235<br />
15639<br />
3351<br />
18989<br />
19571<br />
-581<br />
-<br />
17076<br />
-<br />
-<br />
19294<br />
19729<br />
-435<br />
-<br />
Launch of copper ETFs, QE2, declining exchange<br />
warehouse s<strong>to</strong>cks and supply constraints widened the<br />
demand-supply gap of the red metal, thus supporting<br />
copper prices at major exchanges around the world.<br />
While we have discussed the fac<strong>to</strong>rs responsible for the<br />
30% rise in copper prices, it would not be right <strong>to</strong> ignore<br />
the other side of the s<strong>to</strong>ry, especially inflationary<br />
concerns in emerging economies, including China, the<br />
world’s major consumer of copper.<br />
Inflation In Emerging Markets<br />
Increased liquidity due <strong>to</strong> additional quantitative easing<br />
by the US has pushed commodity prices higher, thus<br />
s<strong>to</strong>king inflationary pressures in emerging markets. High<br />
prices of crude oil, metals as well as agricultural products<br />
have been responsible for growing inflation in the emerging<br />
markets.<br />
Chinese CPI<br />
% Change<br />
6<br />
5<br />
4<br />
3<br />
2<br />
1<br />
0<br />
-1<br />
-2<br />
-3<br />
Indian WPI<br />
% Change<br />
12<br />
10<br />
8<br />
6<br />
4<br />
2<br />
0<br />
-2<br />
-4<br />
Chinese CPI<br />
12/31/2008<br />
3/31/2009<br />
4/30/2009<br />
6/30/2009<br />
7/31/2009<br />
8/31/2009<br />
9/30/2009<br />
11/30/2009<br />
12/31/2009<br />
3/31/2010<br />
4/30/2010<br />
5/31/2010<br />
6/30/2010<br />
8/31/2010<br />
9/30/2010<br />
11/30/2010<br />
Indian WPI<br />
1/2/2009<br />
1/30/2009<br />
2/27/2009<br />
3/27/2009<br />
4/17/2009<br />
5/8/2009<br />
6/5/2009<br />
6/30/2009<br />
7/24/2009<br />
8/21/2009<br />
9/11/2009<br />
10/2/2009<br />
10/30/2009<br />
4/30/2010<br />
9/30/2010<br />
It’s simplified...<br />
29
30<br />
Brazil CPI<br />
% Change<br />
7<br />
6.5<br />
6<br />
5.5<br />
5<br />
4.5<br />
4<br />
1/1/2008<br />
3/1/2008<br />
5/1/2008<br />
7/1/2008<br />
9/1/2008<br />
11/1/2008<br />
1/1/2009<br />
3/1/2009<br />
5/1/2009<br />
7/1/2009<br />
9/1/2009<br />
11/1/2009<br />
1/1/2010<br />
3/1/2010<br />
5/1/2010<br />
7/1/2010<br />
9/1/2010<br />
11/1/2010<br />
Source: Reuters, NB Research<br />
Beyond Market 04th Feb ’11<br />
Brazil CPI<br />
Emerging economies like India, China and Brazil have<br />
been affected the most due <strong>to</strong> the rise in prices of essential<br />
commodities, forcing their respective governments <strong>to</strong><br />
initiate steps <strong>to</strong> control price hike and, thus, inflation.<br />
China has already initiated monetary tightening<br />
measures. Brazil <strong>to</strong>o raised its interest rates by 50 bps<br />
taking it <strong>to</strong> 11.25% currently. India, on the other hand, is<br />
expected <strong>to</strong> follow suit.<br />
This step would increase input costs, thus directly<br />
impacting margins and reducing profits of businesses. In<br />
addition <strong>to</strong> this, less credit offtake will affect the overall<br />
growth of the economy, resulting in a slowdown in the<br />
emerging nations.<br />
Chinese Monetary Tightening Measures<br />
China has undertaken a series of steps <strong>to</strong> control rising<br />
inflation since the past few months. It increased its bank<br />
reserve requirement ratio (RRR) – the seventh time in<br />
recent months and for the fourth time in the past two<br />
months - <strong>to</strong> restrict money supply in a bid <strong>to</strong> curb the<br />
spiraling rate of inflation.<br />
Following the hike, major banks in China will now have<br />
<strong>to</strong> set aside 19% of their reserves, while small and<br />
medium banks will have <strong>to</strong> maintain 15.5% reserve, a<br />
record high for the country’s financial institutions.<br />
World Bank On China<br />
The World Bank has predicted a slowdown in China’s<br />
economic growth. It says: “China’s GDP growth is set <strong>to</strong><br />
slow down this year and the next, <strong>to</strong> below 9% and the<br />
key challenge for the economy is <strong>to</strong> ensure that<br />
anti-inflationary measures do not ‘significantly’ reduce<br />
economic growth.”<br />
The World Bank has also stated that the growth rate in<br />
China will be 8.7% for this calendar year as against 10%<br />
in 2010.<br />
China’s Copper Consumption<br />
China is the highest consumer of copper in the world and<br />
accounts for nearly 27% of the <strong>to</strong>tal global consumption.<br />
The his<strong>to</strong>rical relationship between Chinese GDP growth<br />
rate and copper prices for these periods, states that there<br />
is almost an 80% positive correlation between Chinese<br />
GDP growth and the growth in the price of the red metal.<br />
China GDP And LME 3M Copper<br />
13<br />
10000<br />
12<br />
9000<br />
11<br />
8000<br />
10<br />
7000<br />
9<br />
6000<br />
8<br />
5000<br />
7<br />
4000<br />
6<br />
3000<br />
% Change<br />
12/31/2008<br />
3/31/2009<br />
Source: Reuters, NB Research<br />
6/30/2009<br />
9/30/2009<br />
12/31/2009<br />
3/31/2010<br />
6/30/2010<br />
9/30/2010<br />
12/31/2010<br />
China GDP Growth LME Copper 3M<br />
Source: China Academy Of Social Sciences, XAN SABARIS / CHINA DAILY<br />
US $ / Tonne<br />
Rising Property Prices – A Matter Of Concern in<br />
China<br />
Owning a house in major metros in China is getting<br />
costlier by the day. In Beijing and Shanghai alone,<br />
property prices have gone up by almost 40% from the<br />
previous year.<br />
The National Bureau of Statistics in China states that<br />
despite the steps taken by the Chinese government,<br />
property rates in major Chinese cities grew by 6.4% in<br />
December ’10 as compared <strong>to</strong> November ’10.<br />
Property Price Rise in Chinese Cities<br />
Wuhan<br />
Shenzhen<br />
Beijing<br />
Shijiazhuang<br />
Lanzhou<br />
Tianjin<br />
Qingdao<br />
Nanning<br />
Hangzhou<br />
Fuzhou<br />
0.00% 20.00% 40.00% 60.00% 80.00%<br />
Percentage Rise<br />
The above graph shows percentage rise in the prices of<br />
houses in major Chinese cities in the year 2010 as<br />
compared <strong>to</strong> the year before that.<br />
It’s simplified...
Hence, over the past year, Chinese officials have undertaken<br />
measures like hike in RRR and interest rates, <strong>to</strong><br />
curb speculation in property markets, while sucking up<br />
excess liquidity <strong>to</strong>o.<br />
The Chinese government is also considering of levying<br />
new real estate tax, on a trial basis, in major metros <strong>to</strong><br />
tackle the stubborn rise in property prices. The new tax<br />
policy is expected <strong>to</strong> be levied on high-end residential<br />
properties. This measure is likely <strong>to</strong> put short-term<br />
breaks on the construction sec<strong>to</strong>r.<br />
Hence, less credit offtake and low construction activity<br />
are likely <strong>to</strong> directly impact the prices of major metals,<br />
including copper.<br />
Refined copper output by Chinese smelters saw a 12%<br />
rise between January and November of 2010 as against<br />
the corresponding period in 2009. It was the highest<br />
monthly production in the past two years, in November,<br />
adding fresh copper cathodes in the Chinese markets.<br />
China Refined Copper Output<br />
Tonnes<br />
500000<br />
450000<br />
400000<br />
350000<br />
300000<br />
250000<br />
10/31/2008<br />
12/31/2008<br />
Source: Reuters, NB Research<br />
2/28/2009<br />
4/30/2009<br />
6/30/2009<br />
Beyond Market 04th Feb ’11<br />
8/31/2009<br />
10/31/2009<br />
China Re�ned Copper Output<br />
12/31/2009<br />
2/28/2010<br />
4/30/2010<br />
SHORT-TERM OUTLOOK<br />
6/30/2010<br />
8/31/2010<br />
10/31/2010<br />
China Refined Copper Imports<br />
Tonnes<br />
400000<br />
350000<br />
300000<br />
250000<br />
200000<br />
150000<br />
100000<br />
50000<br />
Source: Reuters, NB Research<br />
0<br />
11/30/2008<br />
1/31/2009<br />
3/31/2009<br />
5/31/2009<br />
7/31/2009<br />
9/30/2009<br />
China Re�ned Copper Imports<br />
As far as Chinese refined copper imports are concerned,<br />
there has been a 9% decline from January ’10 <strong>to</strong> November<br />
’10 as against the corresponding period in the year<br />
2009. This has been mainly due <strong>to</strong> the closure of the<br />
profitable arbitrage window between copper prices on<br />
the London Metal Exchange (LME) and the Shanghai<br />
Futures Exchange.<br />
In 2009, Chinese traders made fast cash by capturing the<br />
difference in the prices of copper. But this phenomenon<br />
did not prove successful for them in the second half of<br />
2010. Also, many end users have refrained from making<br />
fresh buys in Chinese markets due <strong>to</strong> the record high<br />
prices of copper in recent months.<br />
The introduction of new copper supplies in the Chinese<br />
markets and slowing imports of the red metal could<br />
narrow down the demand-supply gap, thus affecting<br />
copper prices in the near term.<br />
We find copper getting caught between the QE2, which has been doled out <strong>to</strong> support<br />
economic recovery in the US, and the monetary tightening measures initiated by China.<br />
Thus, a short-term halt in the recent rally of copper is likely. Despite signs of recovery in<br />
the western world, the ongoing problems in the emerging markets could drag the prices of<br />
the red metal loweR.<br />
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11/30/2009<br />
1/31/2010<br />
3/31/2010<br />
5/31/2010<br />
7/31/2010<br />
9/30/2010<br />
11/30/2010<br />
It’s simplified...<br />
31
32<br />
Fortnightly Outlook For Commodities<br />
In the previous fortnight, commodities saw the much<br />
awaited correction, especially in precious metals<br />
and energies. While base metals remained firm,<br />
agricultural commodities continued <strong>to</strong> trade at their<br />
2010 highs. But the US dollar has been declining rapidly<br />
against the basket of currencies, inspite of profit-taking<br />
in commodities.<br />
Also, while developed economies are recovering from<br />
the after-effects of the financial meltdown by way of<br />
quantitative easing, which many believe <strong>to</strong> be the cause<br />
of inflation, emerging markets, which have been the<br />
growth engines of global recovery, are finding it difficult<br />
<strong>to</strong> win the battle against inflation. In fact, scores of<br />
people <strong>to</strong>ok <strong>to</strong> the streets in Egypt seeking an end <strong>to</strong> the<br />
30-year rule of President Hosni Mubarak.<br />
But many believe that additional quantitative easing or<br />
the QE2 is one of the major reasons for inflationary woes<br />
and the Federal Reserve does not appear <strong>to</strong> be in any<br />
mood <strong>to</strong> s<strong>to</strong>p this anytime soon. However, despite rate<br />
hikes in emerging markets, inflationary expectations<br />
could be high for the coming months as this hot money is<br />
likely <strong>to</strong> find its way in<strong>to</strong> commodities.<br />
PRECIOUS METALS<br />
Precious metal prices <strong>to</strong>ok a beating in the last fortnight,<br />
as interest rate hikes in the emerging markets and a<br />
strong set of economic reports from the United States<br />
resulted in profit-taking in this complex. Besides, inves<strong>to</strong>rs<br />
were seen booking profits from their long positions.<br />
Exchange Traded Funds (ETFs) of these precious metals<br />
saw good redemptions and the world’s largest gold and<br />
silver ETF’s holdings declined by more than 5% during<br />
the month. Gold prices declined <strong>to</strong> `19,600/10 gm from<br />
`20,800/10 gm and silver prices dropped from<br />
`46,000/kg <strong>to</strong> `41,250/kg.<br />
But gold and silver futures jumped 2% and 3% respectively,<br />
on safe haven demand amid escalating tensions in<br />
Egypt <strong>to</strong>wards the end of the fortnight. We believe gold<br />
futures will find stiff resistance at `20,200/10 gm and<br />
silver at `43,800/kg, in the next fortnight.<br />
ENERGIES<br />
Despite OPEC officials’ remarks on the increase in<br />
production of crude oil, its prices plummeted <strong>to</strong><br />
$85.50/barrel from $92/barrel, in the previous fortnight.<br />
In addition <strong>to</strong> this, the weakness in the dollar further hit<br />
Beyond Market 04th Feb ’11<br />
the price of crude oil. However, <strong>to</strong>wards the end of the<br />
fortnight, oil futures increased 4.3% <strong>to</strong> $89.34.<br />
Moreover, high food prices and rising inflation in North<br />
Africa and the ongoing protests in Egypt, could hit<br />
supplies of crude oil as the Suez Canal, which connects<br />
the Mediterranean and Red Sea, is located in Egypt.<br />
Thus, these geopolitical concerns are dominating the<br />
crude oil markets more than fundamentals, pushing the<br />
rally in this complex <strong>to</strong> $94/barrel <strong>to</strong> $95/barrel. But the<br />
oil prices may drift lower, once these risks subside.<br />
BASE METALS<br />
While zinc and lead performed poorly owing <strong>to</strong> rising<br />
production in China and increased surplus globally,<br />
nickel met expectations and tested the highs of `1,230/kg<br />
due <strong>to</strong> the drop in pig iron production in China, in the<br />
previous fortnight. Floods in Australia <strong>to</strong>o hit the supply<br />
of base metals.<br />
Further, the introduction of new Exchange Traded Funds<br />
(ETFs) for metals and the additional quantitative easing<br />
helped base metals remain firm in the previous fortnight.<br />
We believe China’s attempts <strong>to</strong> control inflation will hurt<br />
the demand for non-ferrous metals and we expect prices<br />
<strong>to</strong> remain weak, in the coming fortnight.<br />
However, China’s copper refining capacity got a boost,<br />
as Yunnan Copper Industry, China’s third-largest<br />
producer, added 1,00,000 <strong>to</strong>nnes of capacity. It plans <strong>to</strong><br />
expand the same by 5,00,000 <strong>to</strong>nnes per year, over the<br />
next five years. The refined copper production reached a<br />
record of 4.8 million <strong>to</strong>nnes in 2010 in China, the world’s<br />
largest producer of copper.<br />
AGRO COMMODITIES<br />
We believe that the rise in the prices of food items may<br />
cause protests and social unrest <strong>to</strong> grow globally, as was<br />
visible in parts of the world in the previous fortnight. The<br />
bull run in agricultural commodities has been partly due<br />
<strong>to</strong> weather uncertainties. In the Indian context, agricultural<br />
commodities like cumin seed and coriander may<br />
remain buoyant in the coming fortnight.<br />
The excellent rally in guar seed in the past fortnight may<br />
continue and we remain bullish on this commodity. We<br />
also recommend market participants <strong>to</strong> go long between<br />
`2,650/quintal and `2,750/quintal in cumin seed.<br />
Further, profit-taking in oilseeds looks likely due <strong>to</strong> the<br />
improvement in weather conditions in ArgentinA.<br />
It’s simplified...
Fortnightly Outlook For Currencies<br />
The fortnight gone by witnessed a good downside<br />
trend in the US dollar against most major<br />
currencies. Risk buying was the overall <strong>to</strong>ne in<br />
the financial markets and made inves<strong>to</strong>rs dump<br />
the US dollar in favour of high-yielding currencies. The<br />
US Dollar Index, which measures the greenback’s<br />
strength versus a weighted basket of major currencies,<br />
struck a low of 77.81 later in the fortnight.<br />
In the coming fortnight, the markets would focus on the<br />
stance of the Federal Reserve Bank, as its chief Ben<br />
Bernanke may adopt a dovish <strong>to</strong>ne, stressing the importance<br />
of their full employment mandate and dismiss<br />
inflationary concerns for the time being. This development<br />
may drive the US dollar index even lower, <strong>to</strong>wards<br />
the 77-mark.<br />
In the other major currencies, the euro enjoyed the best<br />
of the trading, hitting $1.37 against the US dollar. The<br />
latest numbers from the Commodity Futures Trading<br />
Commission (CFTC) showed a reversal in specula<strong>to</strong>rs’<br />
position from net short <strong>to</strong> net long, which lent support <strong>to</strong><br />
the euro. Also, ECB President Jean-Claude Trichet<br />
warned of rising Euro zone inflation, leading markets <strong>to</strong><br />
speculate that a rate increase may be forthcoming.<br />
The markets were seen acknowledging this in bond<br />
pricing <strong>to</strong>o, with the spread between the US dollar and<br />
euro two-year note rising 110 basis points, whereas less<br />
than a month ago, the difference was 73 basis points.<br />
Meanwhile, peripheral yield spreads eased <strong>to</strong>o, giving<br />
further boost <strong>to</strong> the euro.<br />
Going forward, we do not see a rapid rise in the euro as<br />
most of the short covering has already been done. In the<br />
best case scenario, the euro may test the mark of $1.3850<br />
against the US dollar. However, debt concerns are still<br />
looming large in the Euro zone and the markets would<br />
keep an eye on the forthcoming debt supply from the<br />
peripheral nations.<br />
Any signs of weakness in demand may trigger a strong<br />
sell-off in the euro. We recommend inves<strong>to</strong>rs <strong>to</strong> go<br />
cautiously long in the euro for a target of $1.3850 and<br />
look forward <strong>to</strong> going short at these levels.<br />
The sterling tested $1.60 against the US dollar, largely<br />
after a release by the Office for National Statistics<br />
revealed that UK inflation, measured by the consumer<br />
price index, rose by 0.4% in December <strong>to</strong> stand at 3.7%,<br />
much higher than the targeted value of 2%. The broadbased<br />
Retail Price Index (RPI) which includes items<br />
Beyond Market 04th Feb ’11<br />
such as mortgage interest costs also rose in December,<br />
climbing <strong>to</strong> 4.8% from 4.7%. The RPI figure for the year<br />
as a whole was 4.6%, the highest annual rate seen since<br />
1991.<br />
However, the sterling <strong>to</strong>ok a beating <strong>to</strong>wards the end of<br />
the fortnight when the Office for National Statistics<br />
(ONS) revealed that the UK economy contracted by<br />
0.5% in Q4 2010. This came as a shock <strong>to</strong> many, thus<br />
pulling the sterling back <strong>to</strong> $1.58 against the US dollar.<br />
Going forward, the sterling may continue <strong>to</strong> remain<br />
under pressure since the government’s austerity<br />
measures will lead <strong>to</strong> a further cooling of the economy,<br />
which may slow inflation as a consequence. Additionally,<br />
we do not expect any rate hike by the Bank of<br />
England in the near future as the Bank may adopt a wait<br />
and watch policy over the next few months. We recommend<br />
inves<strong>to</strong>rs <strong>to</strong> sell the sterling at the levels of $1.59,<br />
for a target of $1.56-1.55 against the US dollar.<br />
The Japanese yen traded with an appreciation bias in the<br />
last fortnight. The USDJPY pair may trade in the broad<br />
range of 82-83.50 in the coming fortnight.<br />
The Indian rupee traded in the broad range of 45.30-<br />
45.80, mostly with a depreciation bias as the traction in<br />
the domestic equity markets, coupled with high crude oil<br />
prices undermined the Indian unit even as the US dollar<br />
weakened overseas.<br />
In the local market, the focus was on the quarterly review<br />
of the RBI monetary policy, which raised rates by 25 bps<br />
in line with expectations. The policy statement, underscoring<br />
strong inflationary pressures and easing growth<br />
momentum, had a negative bearing on the s<strong>to</strong>ck market,<br />
leading <strong>to</strong> a strong sell-off in the Indian rupee. The rupee<br />
settled in the fortnight at 45.70 against the US dollar.<br />
In the coming fortnight, the rupee dollar-pair could trade<br />
in the range of 45.40 – 46.00 with a depreciation bias. In<br />
the local market, we expect a good dollar demand from<br />
oil importers on account of high crude oil prices.<br />
Globally, the most awaited event will be the first estimate<br />
of the fourth quarter US GDP numbers.<br />
Any improvement in risk appetite against the backdrop<br />
of robust GDP number may not be <strong>to</strong>o supportive for the<br />
rupee, as that would s<strong>to</strong>ke crude oil prices and may not be<br />
<strong>to</strong>o supportive of the local s<strong>to</strong>ck market. The rupee could<br />
therefore, continue <strong>to</strong> trade with a weakening bias against<br />
the US dollar in the coming fortnighT.<br />
It’s simplified...<br />
33
on<br />
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e-way a To Mutual Funds<br />
Beyond Market 04th Feb ’11<br />
Investing in mutual<br />
funds online is now<br />
simpler than before,<br />
especially due <strong>to</strong><br />
inves<strong>to</strong>r-friendly<br />
features o�ered by<br />
fund houses<br />
If f you do not have the time <strong>to</strong> research each s<strong>to</strong>ck in<br />
the equity market and yet long <strong>to</strong> invest in the s<strong>to</strong>ck<br />
markets, the best thing <strong>to</strong> do is <strong>to</strong> take the mutual<br />
fund route, and, with online trading of mutual funds<br />
(MFs), it couldn’t have got any easier.<br />
In order <strong>to</strong> encourage and promote equities in India, the<br />
capital market regula<strong>to</strong>r, Securities and Exchange Board<br />
of India (SEBI) abolished entry load on MFs, which in<br />
turn, has given the much-needed shot in the arm <strong>to</strong> online<br />
trading of funds.<br />
A big advantage of investing through online distribu<strong>to</strong>rs<br />
is the availability of mutual funds from all AMCs at the<br />
same location. You can buy and sell funds from across<br />
companies without the hassle of enrolling for each<br />
company separately and viewing holistic portfolio<br />
statements, making it much easier and faster <strong>to</strong> manage<br />
your investments.<br />
THE PREREQUISITES<br />
You now need not get hassled about multiple brokers,<br />
bank accounts or folios, or have <strong>to</strong> engage the services of<br />
an agent. All you need is a demat account that allows<br />
access <strong>to</strong> mutual funds online in complete privacy, in the<br />
comfort of your home, just like equity trading.<br />
You can register and buy mutual funds through any of the<br />
broking companies offering online services. All it takes<br />
is one-time registration through the website of the<br />
broking house (for a small transaction fee) and then at the<br />
click of a but<strong>to</strong>n, you can switch between funds, discontinue<br />
a systematic investment plan (SIP), or even get a<br />
consolidated statement of all your holdings.<br />
You need <strong>to</strong> have a specific bank account that you intend<br />
<strong>to</strong> make investments from. This is <strong>to</strong> confirm the source<br />
of funds and also <strong>to</strong> enable direct credit of funds <strong>to</strong> your<br />
It’s simplified...<br />
35
36<br />
account in the case of sale of units or dividend payout.<br />
It is also worthwhile <strong>to</strong> note that as of now, in India, third<br />
party purchase of mutual fund units (purchasing of<br />
mutual fund units from your account for someone else) is<br />
not allowed.<br />
Inves<strong>to</strong>rs can also trade on the online platform of the<br />
National S<strong>to</strong>ck Exchange (NSE), called Mutual Fund<br />
Service System (MFSS), or the BSE Star platform. This<br />
can be done much the same way as you buy and sell<br />
shares online.<br />
All you need <strong>to</strong> do is register with your existing s<strong>to</strong>ck<br />
broker by filling up the requisite forms. Here again, you<br />
will need a demat account, which entails paying an<br />
annual fee, in the range of `300 <strong>to</strong> `800 per annum. MFs<br />
purchased will be credited <strong>to</strong> your demat account.<br />
PAST PERFECT<br />
If you are fretting about your existing mutual fund units,<br />
do not worry. You can also use your existing demat<br />
account(s) <strong>to</strong> convert your existing mutual fund units <strong>to</strong><br />
demat form.<br />
All you have <strong>to</strong> do is obtain the conversion request form<br />
from your deposi<strong>to</strong>ry participant, fill it, attach your<br />
statement of account and submit it <strong>to</strong> your deposi<strong>to</strong>ry.<br />
After due verification, the deposi<strong>to</strong>ry will have it sent <strong>to</strong><br />
the respective asset management company (AMC) or its<br />
registrar and transfer agent. The AMC will then credit the<br />
mutual fund units <strong>to</strong> your demat account.<br />
If you want <strong>to</strong> redeem your mutual fund units, you can<br />
place an order through the s<strong>to</strong>ck exchange platform or<br />
submit the delivery instruction slip <strong>to</strong> your deposi<strong>to</strong>ry<br />
participant <strong>to</strong> transfer the mutual fund units.<br />
NEW DIRECTIVES<br />
However in a recent regula<strong>to</strong>ry directive, SEBI has made<br />
it manda<strong>to</strong>ry for all mutual fund inves<strong>to</strong>rs (online and<br />
offline) <strong>to</strong> go through Know-Your-Cus<strong>to</strong>mer or KYC<br />
norms, irrespective of the amount you invest.<br />
This is as per SEBI’s anti-money laundering (AML)<br />
procedures. Most mutual fund houses and online<br />
distribu<strong>to</strong>rs assist in fulfilling this requirement. Till now,<br />
retail inves<strong>to</strong>rs who invested less than `50,000 were not<br />
required <strong>to</strong> follow KYC guidelines. They could invest by<br />
merely submitting a copy of their self-attested PAN card.<br />
KYC norms require your identity and residence proofs <strong>to</strong><br />
be verified and recorded with a central authority. Your<br />
residence proof can be verified by any of these<br />
Beyond Market 04th Feb ’11<br />
documents - an utility bill, passport, letter from your<br />
employer or housing society, ration card, voter ID card or<br />
driver’s license.<br />
You will need <strong>to</strong> have the original documents with you as<br />
well as the copies <strong>to</strong> be processed. The originals will be<br />
returned <strong>to</strong> you after they are verified as accurate. If you<br />
send the document through a courier, documents need <strong>to</strong><br />
be attested by a notary, gazetted officer, or manager of a<br />
scheduled commercial bank. As of now, no charges or<br />
fees are levied on the inves<strong>to</strong>r for KYC verification.<br />
DO-IT-YOURSELF<br />
Online trading provides transparency on all the information<br />
from the time of placement of order till the final<br />
settlement. However after having all the prerequisites<br />
in<strong>to</strong> consideration, it is important <strong>to</strong> keep in mind that<br />
investing online really means becoming a ‘do-ityourself’<br />
inves<strong>to</strong>r.<br />
Before taking the plunge in<strong>to</strong> investing and selecting<br />
your funds, do asses your risk profile by consulting a<br />
mutual fund distribu<strong>to</strong>r who will help you select the right<br />
scheme from those on offer by different AMCs. The next<br />
important step is <strong>to</strong> define the goals that you would like<br />
your investments <strong>to</strong> meet. It could be a family vacation<br />
abroad next year, or your child’s education 10 years later.<br />
This clarity is critical in narrowing down an investment<br />
product. For example, equity funds are best invested in<br />
for the long term; the longer, the better as they offer the<br />
best chance of returns over inflation rate and you don’t<br />
get hit by short-term fluctuation. But for short term<br />
investments, fixed income funds are recommended.<br />
Once you have identified the categories of funds that you<br />
would like <strong>to</strong> invest in, start looking at the specific funds<br />
available in each category. The idea here is <strong>to</strong> select<br />
funds that have given consistent returns over at least 2-3<br />
market cycles.<br />
Although past performance of a fund is no guarantee of<br />
its future returns, the consistency of a fund indicates the<br />
ability of the fund management team <strong>to</strong> weather the<br />
market’s ups and downs. Researching funds, keeping<br />
track of your units will all be a regular feature once you<br />
are in the groove. The good news is that with online<br />
investing, managing investments has become a lot faster<br />
and simpler.<br />
Once invested, it is important for you <strong>to</strong> track and<br />
manage your portfolio holdings, profit or loss positions<br />
as well as your transactional records. With technology,<br />
online distribu<strong>to</strong>rs are able <strong>to</strong> offer you website features<br />
and services <strong>to</strong> make this as painless as possiblE.<br />
It’s simplified...
SMS ‘BANG MF’ <strong>to</strong> <strong>54646</strong><br />
e-<strong>mail</strong>: nbmutualfunds@nirmalbang.com<br />
www.nirmalbang.com
38<br />
Beyond Market 04th Feb ’11<br />
A Capital Protection Fund is for an inves<strong>to</strong>r who seeks a high level<br />
of security without risks, yet wishes <strong>to</strong> pro�t from positive s<strong>to</strong>ck<br />
market developments<br />
Capital Protection Funds (CPFs) are back in<br />
vogue. This is clearly evident from the fact that<br />
fund houses like Sundaram Mutual Fund and<br />
Birla Sun Life Mutual Fund launched their<br />
CPFs in the last few months. CPFs propose <strong>to</strong> invest 85%<br />
<strong>to</strong> 90% of the <strong>to</strong>tal corpus of the scheme in debt and the<br />
remaining amount in equities.<br />
CPF first made an entry in 2006, when interest rates<br />
started moving up and were targeted at inves<strong>to</strong>rs with<br />
low risk appetite, looking for a substitute for bank fixed<br />
deposits. Mutual funds target retail as well as high<br />
networth individuals (HNIs) <strong>to</strong>wards these schemes as<br />
they get better returns and tax benefits over bank fixed<br />
deposits (FDs).<br />
CPFs are close-ended products with a lock-in for the<br />
entire product tenure, which varies from three years <strong>to</strong><br />
five years. There is potential for better returns compared<br />
<strong>to</strong> fixed deposits but an inves<strong>to</strong>r needs <strong>to</strong> consider the<br />
lock-in before making investments in close-ended<br />
products like these.<br />
Currently, CPFs are an important investment vehicle for<br />
HNIs as their need <strong>to</strong> protect their capital, yet earn more<br />
than the fixed deposits, is met through this instrument.<br />
These products can give better returns than bank fixed<br />
deposits because of the equity element. These products<br />
also prove beneficial when it comes <strong>to</strong> paying taxes. On<br />
the other hand, returns from fixed deposits are added as a<br />
part of the income and taxed accordingly.<br />
So for HNIs, who are mostly in the higher tax bracket,<br />
the returns get taxed at 30%. But returns from these<br />
schemes get inflation indexation benefits. Compared <strong>to</strong><br />
returns on bank fixed deposits, these funds have done<br />
well over one and two-year return performance.<br />
But the real test of these funds is when they are held till<br />
maturity of three or five years. If you look at the returns<br />
of the fund then, they do not seem <strong>to</strong> be as attractive as<br />
fixed deposits. However, they are more tax-efficient then<br />
bank FDs.<br />
The gains on CPFs, for high networth individuals in the<br />
highest tax bracket, is taxed at 10.3% tax without indexation<br />
or 20.6% with indexation, whichever is lower. In<br />
comparison, the interest on bank fixed deposits attracts<br />
30.9% tax, which most often does not match inflation. In<br />
real terms, when adjusted <strong>to</strong> inflation, bank fixed deposits<br />
eat in<strong>to</strong> the capital.<br />
A capital protection fund is for an inves<strong>to</strong>r who seeks a<br />
high level of security without risks, yet wishes <strong>to</strong> profit<br />
from positive s<strong>to</strong>ck market developments. The focus of<br />
this investment fund is security and guaranteed capital<br />
performance of the investment at the end of the mutual<br />
fund scheme’s tenure.<br />
It’s simplified...
If a CPF is a three-year, close-ended scheme, then<br />
redemption of units before maturity will not be allowed.<br />
Assume that an inves<strong>to</strong>r puts `10,000 in a CPF, 80% <strong>to</strong><br />
85% (`8,000 <strong>to</strong> `8,500) of this amount will be invested in<br />
a debt paper (three-year AAA-rated corporate paper<br />
yielding around 9%). The balance `1,500 - `2,000 will<br />
be invested in equities.<br />
While `8,000 grows <strong>to</strong> around `10,200 in three years,<br />
thereby protecting your capital, the `2,000 equity investment<br />
can grow <strong>to</strong> approximately `3,000, assuming that<br />
returns on equities is at a compounded rate of 15% over a<br />
period of three years. So at the end of three years, the<br />
inves<strong>to</strong>r would receive between `13,000 and `13,500.<br />
A CPF <strong>to</strong>day would, therefore, yield a compounded<br />
return of around 9%, post-tax and expenses (1.5%<br />
assumed) in three years. The 8% NSC locks your money<br />
for six years, while the PPF imposes a 15-year lock-in. A<br />
CPF will be rated by a credit rating agency on its investment<br />
structure and the ability <strong>to</strong> protect capital.<br />
If we take the case of the recently launched Sundaram<br />
Capital Protection Oriented Fund, a three-year closeended<br />
scheme, which invests in AAA-rated high safety<br />
interest bearing bonds and a small portion in equities and<br />
related instruments, we find that this fund seeks <strong>to</strong><br />
maximize returns without losing sight of the main<br />
function - capital protection.<br />
Simple capital protection-oriented funds such as these<br />
ensure capital protection by investing a substantial<br />
portion of the corpus in high-quality debt at all points in<br />
time. The debt component is sized in such a way that its<br />
redemption value at the time of maturity of the scheme<br />
will be equal <strong>to</strong> or greater than the amount invested by<br />
the inves<strong>to</strong>rs.<br />
The scheme would primarily invest in high-quality<br />
fixed-income securities and it intends <strong>to</strong> generate capital<br />
appreciation by investing in equity and equity-related<br />
instruments as a secondary objective.<br />
The CPF satisfies the need for an investment avenue<br />
which allows participation in s<strong>to</strong>ck markets without the<br />
accompanying qualms of capital erosion. The scheme<br />
will enable inves<strong>to</strong>rs <strong>to</strong> benefit from the upside potential<br />
of equity investments without subjecting their capital <strong>to</strong><br />
Beyond Market 04th Feb ’11<br />
a stitch in time saves nine<br />
plan your finances in time<br />
Your financial security is our concern.<br />
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market-related volatility.<br />
CPFs are hybrid structured products and their ability <strong>to</strong><br />
preserve capital is well-suited <strong>to</strong> current market conditions,<br />
where both debt and equity markets have been<br />
displaying intense volatility. The equity portion of these<br />
kind of funds will be managed in a flexible investment<br />
style designed <strong>to</strong> take advantage of the opportunities<br />
across the market capitalization range.<br />
However, one disadvantage of CPFs is that these funds<br />
are not sold much by distribu<strong>to</strong>rs compared <strong>to</strong> equity<br />
linked saving schemes (ELSS) as they do not have any<br />
direct tax benefit like an ELSS.<br />
Also, the liquidity of these schemes is significantly lower<br />
since inves<strong>to</strong>rs cannot exit, even with a load, immediately.<br />
They suggest investing that part of the portfolio,<br />
which inves<strong>to</strong>rs will not require in the next three years.<br />
For example, people wanting <strong>to</strong> buy an asset after threefour<br />
years can look at this scheme.<br />
Capital protection schemes promise that at least the<br />
minimum amount, which has been invested, will be<br />
returned <strong>to</strong> the inves<strong>to</strong>r irrespective of the movements in<br />
the market over the stipulated period. Besides, the inves<strong>to</strong>r<br />
can get a healthy appreciation in case the net asset<br />
value (NAV) of the funds rise by that time.<br />
It is widely known that such mutual funds invest the bulk<br />
of their assets in bonds and debt instruments and the rest<br />
in equities, hoping for some capital appreciation.<br />
Markets regula<strong>to</strong>r, Securities and Exchange Board of<br />
India (SEBI) had said that the mutual fund portfolio,<br />
under the scheme, must be rated by a SEBI-registered<br />
credit rating agency.<br />
However, do not be misled by the name. These are<br />
close-ended products, with a three <strong>to</strong> five year lock-in<br />
and are illiquid compared <strong>to</strong> fixed deposits, which offer<br />
overdraft and loan facility against deposits. And, though<br />
the schemes are listed on the s<strong>to</strong>ck exchange, they tend <strong>to</strong><br />
remain illiquid owing <strong>to</strong> the lack of trade volumes.<br />
Though a good product for first-time mutual fund inves<strong>to</strong>rs,<br />
this fund can be a part of every inves<strong>to</strong>rs’ portfolio<br />
as all of us park some proportion of our savings in<br />
relatively safe investment avenueS.<br />
EQUITIES | DERIVATIVES | COMMODITIES | CURRENCY | MUTUAL FUNDS | IPOs | INSURANCE | PMS | DP<br />
SMS ‘BANG’ <strong>to</strong> <strong>54646</strong> | e-<strong>mail</strong>: contact@nirmalbang.com | www.nirmalbang.com<br />
It’s simplified...<br />
39
40<br />
CHANGE IN PRICE AND OPEN INTEREST<br />
Company Name Price<br />
(Rs)<br />
Nifty Futures<br />
Bank Nifty<br />
ACC Ltd<br />
Ambuja Cements Ltd<br />
Axis Bank Ltd<br />
Bajaj Au<strong>to</strong> Ltd<br />
Bharti Airtel Ltd<br />
Bharat Heavy Electricals Ltd<br />
Bharat Petroleum Corporation Ltd<br />
Cairn India Ltd<br />
Cipla Ltd<br />
DLF Ltd<br />
Dr Reddy's Labora<strong>to</strong>ries Ltd<br />
GAIL (India) Ltd<br />
HCL Technologies Ltd<br />
HDFC Ltd<br />
HDFC Bank Ltd<br />
Hero Honda Mo<strong>to</strong>rs Ltd<br />
Hindalco Industries Ltd<br />
Hindustan Unilever Ltd<br />
ICICI Bank Ltd<br />
IDFC Ltd<br />
Infosys Technologies Ltd<br />
ITC Ltd<br />
Jindal Steel & Power Ltd<br />
Jaiprakash Associates Ltd<br />
Kotak Mahindra Bank Ltd<br />
Larsen & Toubro Ltd<br />
Mahindra & Mahindra Ltd<br />
Maruti Suzuki India Ltd<br />
NTPC Ltd<br />
Oil & Natural Gas Corporation Ltd<br />
Punjab National Bank<br />
Power Grid Corporation of India Ltd<br />
Ranbaxy Labora<strong>to</strong>ries Ltd<br />
Reliance Communications Ltd<br />
Reliance Capital Ltd<br />
Reliance Industries Ltd<br />
Reliance Infrastructure Ltd<br />
Reliance Power Ltd<br />
Steel Authority of India Ltd<br />
State Bank of India<br />
Sesa Goa Ltd<br />
Siemens Ltd<br />
Sterlite Industries (India) Ltd<br />
Sun Pharmaceutical Industries Ltd<br />
Suzlon Energy Ltd<br />
Tata Mo<strong>to</strong>rs Ltd<br />
Tata Power Co Ltd<br />
Tata Steel Ltd<br />
Tata Consultancy Services Ltd<br />
Wipro Ltd<br />
Beyond Market 04th Feb ’11<br />
CHANGE IN PRICE AND OPEN INTEREST OF THE NIFTY 50 COMPANIES<br />
17th Jan'11 28th Jan'11<br />
5657.15<br />
10483.25<br />
1005.55<br />
126.30<br />
1230.10<br />
1270.50<br />
348.55<br />
2184.75<br />
587.65<br />
340.60<br />
346.95<br />
250.60<br />
1639.65<br />
484.05<br />
473.35<br />
663.55<br />
2075.95<br />
1784.35<br />
225.00<br />
301.60<br />
1003.70<br />
155.35<br />
3272.75<br />
172.35<br />
671.50<br />
88.70<br />
404.10<br />
1681.50<br />
738.80<br />
1262.40<br />
187.20<br />
1171.90<br />
1123.55<br />
97.60<br />
565.75<br />
131.95<br />
573.85<br />
1000.50<br />
736.70<br />
137.85<br />
156.30<br />
2518.80<br />
318.20<br />
736.20<br />
170.30<br />
467.15<br />
51.90<br />
1170.10<br />
1342.80<br />
621.85<br />
1137.00<br />
465.55<br />
Open<br />
Interest<br />
24778900<br />
1370625<br />
2275500<br />
11218000<br />
2389500<br />
2209500<br />
8314000<br />
2579250<br />
2595500<br />
12220000<br />
3845000<br />
16352000<br />
1301750<br />
1711500<br />
1821500<br />
7023500<br />
2418125<br />
2543250<br />
14878000<br />
13521000<br />
10646500<br />
19542000<br />
2791625<br />
12834000<br />
2746000<br />
50772000<br />
2522000<br />
5034875<br />
3951500<br />
2118500<br />
17231000<br />
2323000<br />
1335500<br />
30594000<br />
2206000<br />
29228000<br />
7284500<br />
13855250<br />
7305000<br />
24536000<br />
11231000<br />
5332625<br />
11873000<br />
921500<br />
16248000<br />
1751875<br />
85672000<br />
11127500<br />
1313000<br />
21554500<br />
3515750<br />
3369000<br />
Price<br />
(Rs)<br />
5536.55<br />
10635.95<br />
981.10<br />
127.50<br />
1262.80<br />
1263.00<br />
328.30<br />
2159.05<br />
634.55<br />
328.90<br />
337.25<br />
224.15<br />
1572.35<br />
456.30<br />
495.40<br />
649.70<br />
2069.00<br />
1653.90<br />
224.85<br />
273.70<br />
1023.65<br />
149.50<br />
3187.35<br />
169.35<br />
668.90<br />
87.45<br />
382.75<br />
1616.45<br />
702.75<br />
1225.15<br />
190.55<br />
1138.35<br />
1089.45<br />
96.80<br />
539.10<br />
125.75<br />
540.60<br />
920.55<br />
728.20<br />
137.65<br />
159.50<br />
2635.50<br />
330.45<br />
728.35<br />
168.70<br />
453.05<br />
50.05<br />
1138.75<br />
1269.85<br />
628.95<br />
1188.35<br />
439.60<br />
Open<br />
Interest<br />
21309250<br />
1102700<br />
1966000<br />
8370000<br />
1978000<br />
1515750<br />
7657000<br />
2272625<br />
1370000<br />
10330000<br />
3491000<br />
17575000<br />
1066500<br />
2053000<br />
1463500<br />
5846500<br />
2260000<br />
2134875<br />
11164000<br />
14607000<br />
7971500<br />
17610000<br />
2680625<br />
11402000<br />
2395000<br />
39960000<br />
2446000<br />
4008625<br />
3740000<br />
1638500<br />
15356000<br />
2309250<br />
1612500<br />
22226000<br />
1762500<br />
26958000<br />
6546000<br />
16704000<br />
6911750<br />
21992000<br />
8139000<br />
3213250<br />
10654000<br />
862000<br />
14096000<br />
1753750<br />
73952000<br />
8774000<br />
1014000<br />
24824500<br />
2684250<br />
2926000<br />
Change<br />
in Price<br />
(Rs)<br />
-120.60<br />
152.70<br />
-24.45<br />
1.20<br />
32.70<br />
-7.50<br />
-20.25<br />
-25.70<br />
46.90<br />
-11.70<br />
-9.70<br />
-26.45<br />
-67.30<br />
-27.75<br />
22.05<br />
-13.85<br />
-6.95<br />
-130.45<br />
-0.15<br />
-27.90<br />
19.95<br />
-5.85<br />
-85.40<br />
-3.00<br />
-2.60<br />
-1.25<br />
-21.35<br />
-65.05<br />
-36.05<br />
-37.25<br />
3.35<br />
-33.55<br />
-34.10<br />
-0.80<br />
-26.65<br />
-6.20<br />
-33.25<br />
-79.95<br />
-8.50<br />
-0.20<br />
3.20<br />
116.70<br />
12.25<br />
-7.85<br />
-1.60<br />
-14.10<br />
-1.85<br />
-31.35<br />
-72.95<br />
7.10<br />
51.35<br />
-25.95<br />
Change<br />
in Open<br />
Interest<br />
-3469650<br />
-267925<br />
-309500<br />
-2848000<br />
-411500<br />
-693750<br />
-657000<br />
-306625<br />
-1225500<br />
-1890000<br />
-354000<br />
1223000<br />
-235250<br />
341500<br />
-358000<br />
-1177000<br />
-158125<br />
-408375<br />
-3714000<br />
1086000<br />
-2675000<br />
-1932000<br />
-111000<br />
-1432000<br />
-351000<br />
-10812000<br />
-76000<br />
-1026250<br />
-211500<br />
-480000<br />
-1875000<br />
-13750<br />
277000<br />
-8368000<br />
-443500<br />
-2270000<br />
-738500<br />
2848750<br />
-393250<br />
-2544000<br />
-3092000<br />
-2119375<br />
-1219000<br />
-59500<br />
-2152000<br />
1875<br />
-11720000<br />
-2353500<br />
-299000<br />
3270000<br />
-831500<br />
-443000<br />
Change<br />
in Price<br />
(%)<br />
-2.13<br />
1.46<br />
-2.43<br />
0.95<br />
2.66<br />
-0.59<br />
-5.81<br />
-1.18<br />
7.98<br />
-3.44<br />
-2.80<br />
-10.55<br />
-4.10<br />
-5.73<br />
4.66<br />
-2.09<br />
-0.33<br />
-7.31<br />
-0.07<br />
-9.25<br />
1.99<br />
-3.77<br />
-2.61<br />
-1.74<br />
-0.39<br />
-1.41<br />
-5.28<br />
-3.87<br />
-4.88<br />
-2.95<br />
1.79<br />
-2.86<br />
-3.04<br />
-0.82<br />
-4.71<br />
-4.70<br />
-5.79<br />
-7.99<br />
-1.15<br />
-0.15<br />
2.05<br />
4.63<br />
3.85<br />
-1.07<br />
-0.94<br />
-3.02<br />
-3.56<br />
-2.68<br />
-5.43<br />
1.14<br />
4.52<br />
-5.57<br />
It’s simplified...<br />
Change<br />
in Open<br />
Interest<br />
(%)<br />
-14.00<br />
-19.55<br />
-13.60<br />
-25.39<br />
-17.22<br />
-31.40<br />
-7.90<br />
-11.89<br />
-47.22<br />
-15.47<br />
-9.21<br />
7.48<br />
-18.07<br />
19.95<br />
-19.65<br />
-16.76<br />
-6.54<br />
-16.06<br />
-24.96<br />
8.03<br />
-25.13<br />
-9.89<br />
-3.98<br />
-11.16<br />
-12.78<br />
-21.30<br />
-3.01<br />
-20.38<br />
-5.35<br />
-22.66<br />
-10.88<br />
-0.59<br />
20.74<br />
-27.35<br />
-20.10<br />
-7.77<br />
-10.14<br />
20.56<br />
-5.38<br />
-10.37<br />
-27.53<br />
-39.74<br />
-10.27<br />
-6.46<br />
-13.24<br />
0.11<br />
-13.68<br />
-21.15<br />
-22.77<br />
15.17<br />
-23.65<br />
-13.15<br />
Source: NB Research
TECHNICAL OUTLOOK FOR THE FORTNIGHT<br />
KEY HIGHLIGHTS<br />
The Indian markets began the year 2011 on a rough<br />
note and continued <strong>to</strong> drift lower, owing <strong>to</strong> various<br />
concerns. Prominent among them were fears that<br />
money was flowing back <strong>to</strong> the US from emerging<br />
markets, including India. Further, higher inflation and<br />
political uncertainties reflected poorly on the bourses.<br />
In the previous fortnight, huge unwinding was visible<br />
in the January series. The Nifty was down almost 497<br />
points on a month-on-month (m-o-m) basis.<br />
The Indian s<strong>to</strong>ck markets closed below their 200 exponential<br />
day moving average (eDMA), which is a very<br />
big sign of worry. The markets remained trapped in a<br />
trading range.<br />
A severe correction was triggered in the first week of<br />
January this year, after the Nifty made a double <strong>to</strong>p at<br />
6,181 (on 4th Jan ’11), with an earlier <strong>to</strong>p at 6,178 (on<br />
3rd Jan ’11).<br />
After a 14% correction from the recent <strong>to</strong>p of 6,335<br />
(on 8th Nov ’10), the question before us is whether<br />
more consolidation or a slight correction from the<br />
current levels is needed or not.<br />
The trend remains extremely cautious as the markets<br />
are trading below their important 200-eDMA at the<br />
5,647 level.<br />
According <strong>to</strong> the monthly chart, lower prices could be<br />
witnessed in the near term, if the 5,400 level is<br />
breached. On the same lines, the new low made by the<br />
MACD since 25th May ’10 could accelerate further<br />
weakness in the Nifty.<br />
Also, a strong negative outflow of `7,983 crore was<br />
seen in the cash segment, in the previous fortnight.<br />
However, the local domestic players were buyers <strong>to</strong><br />
the tune of `4,229 crore during this period.<br />
STRATEGY<br />
Going forward from the Nifty Futures’ current level of<br />
5,524, it would be very difficult <strong>to</strong> say if we are likely<br />
<strong>to</strong> see any further corrections. As per the technical<br />
chart, if the Nifty starts trading below the 5,400 level,<br />
there is a possibility that the markets may witness a<br />
Beyond Market 04th Feb ’11<br />
fall and that the Nifty may test the 5,250 – 5,210<br />
levels, subsequently.<br />
For the time being, all domestic risks seem <strong>to</strong> be<br />
priced in. However, rising inflation and crude oil<br />
prices remain a cause of worry.<br />
The short-term trade is clearly dependant on the developed<br />
markets and the revival of FII flows. Till then,<br />
the markets are likely <strong>to</strong> remain range-bound around<br />
the 5,200-5,800 levels.<br />
The February series opened at `44,782 crore as<br />
against `48,932 crore last month, where the Nifty<br />
Futures was at `13,036 crore and S<strong>to</strong>ck Futures at<br />
`31,746 crore.<br />
From the Options data, the 5,400 Put has the highest<br />
open interest and the 5,100 and 5,200 Puts have also<br />
shown a good amount of open interest built-up. On the<br />
Call side, fresh additions were seen at the 5,500, 5,600<br />
and 5,700 levels.<br />
The Put Call ratio (PCR) for the Nifty increased <strong>to</strong><br />
1.29 from the previous 0.83, exactly from the oversold<br />
region of 0.80, indicating that a technical pull-back<br />
rally is just round the corner. A major upmove is<br />
possible only if the spot Nifty holds above the 5,590<br />
level, in the near term.<br />
On the Nifty daily chart, the RSI is at 28.60, indicating<br />
that the markets have entered in<strong>to</strong> the oversold area<br />
and a technical bounce is likely in the coming days.<br />
Market participants need <strong>to</strong> wait and watch if the rally<br />
holds above the 5,520-5,590 levels, for a further<br />
upside <strong>to</strong> take place in the near term. On the lower<br />
side, if the 5,400 level is breached, then the 5,250-<br />
5,200 levels are likely <strong>to</strong> be achieved.<br />
The Bank Nifty at the 10,660 level looks scary as the<br />
index continues <strong>to</strong> be under tremendous pressure, as<br />
compared <strong>to</strong> the Nifty.<br />
An important support is placed at the 10,200 level. A<br />
break below this point could lead <strong>to</strong> extreme selling<br />
pressure up <strong>to</strong> the 9,850 level, where the possibility of<br />
a bot<strong>to</strong>m formation exists.<br />
On the higher side, 10,700 – 10,950 will act as strong<br />
It’s simplified...<br />
41
42<br />
resistance levels and stability above the 11,000 level<br />
could only bring back strong momentum in the banking<br />
index. Till then, traders and inves<strong>to</strong>rs are advised <strong>to</strong><br />
wait for a clear signal.<br />
The current downtrend is only a corrective phase.<br />
There is also not much room left for leveraged<br />
positions on the Indian bourses <strong>to</strong> drift lower than<br />
5%-10% from the current levels. There is a lot of pain<br />
on the streets and the best strategy is <strong>to</strong> stay quiet and<br />
Nifty Future Weekly Chart<br />
Beyond Market 04th Feb ’11<br />
see what <strong>to</strong> do next when the s<strong>to</strong>ck markets bot<strong>to</strong>m out.<br />
STOCK IDEAS<br />
S<strong>to</strong>cks like Axis Bank Ltd, ICICI Bank Ltd, Larsen &<br />
Toubro Ltd, Exide Industries Ltd, Orchid Chemicals &<br />
Pharmaceuticals Ltd, Gujarat State Fertilizers &<br />
Chemicals Ltd (GSFC) and Tata Steel Ltd can be<br />
bought during a correction from trading as well as<br />
investment perspectiveS.<br />
The Nifty has broken the key level of 5,550. Going forward, the next important number would be the Fibonacci<br />
61.8% retracement level at 5,405. Unless this point is breached, we do not see any fresh sell-offs happening. A<br />
sustained trade below the 5,400 level can drift the Nifty lower <strong>to</strong> the 5,140 level, in the near term. On the higher<br />
side, the 5,640 level has <strong>to</strong> be sustained for a fresh positive rally <strong>to</strong> occur.<br />
It’s simplified...
BULK DEALS<br />
Bulk deals take place from normal trading windows that brokers provide and can be done<br />
any time during trading hours. In a bulk deal, the <strong>to</strong>tal traded quantity exceeds 0.5%<br />
of the number of equity shares of a company.<br />
Ex Date Company Client<br />
Trade Quantity % of Eq<br />
BSE<br />
BSE<br />
BSE<br />
BSE<br />
BSE<br />
BSE<br />
BSE<br />
BSE<br />
BSE<br />
BSE<br />
BSE<br />
BSE<br />
BSE<br />
BSE<br />
BSE<br />
BSE<br />
BSE<br />
BSE<br />
18 Jan'11<br />
19 Jan'11<br />
19 Jan'11<br />
19 Jan'11<br />
19 Jan'11<br />
24 Jan'11<br />
24 Jan'11<br />
24 Jan'11<br />
24 Jan'11<br />
24 Jan'11<br />
24 Jan'11<br />
25 Jan'11<br />
27 Jan'11<br />
27 Jan'11<br />
27 Jan'11<br />
28 Jan'11<br />
28 Jan'11<br />
28 Jan'11<br />
Source: NSE and BSE<br />
MAJOR BULK DEALS WHERE OVER 1% OF EQUITY WAS TRADED FROM 17th Jan ’11 TO 28th Jan ’11<br />
Ashiana Housing Ltd<br />
Bampsl Securities Ltd<br />
Kirloskar Pneumatic Co Ltd<br />
Asahi Infrastructure & Projects Ltd<br />
Consolidated Const Consortium Ltd<br />
Cable Corporation Of India Ltd<br />
Shree Ashtavinayak Cine Vision Ltd<br />
Gujarat Toolroom Ltd<br />
KSK Energy Ventures Ltd<br />
Shri Lakshmi Cotsyn Ltd<br />
Shri Lakshmi Cotsyn Ltd<br />
Alpha Graphic India Ltd<br />
PM Strips Ltd<br />
Midvalley Entertainment Ltd<br />
Gujarat Toolroom Ltd<br />
Prism Informatics Ltd<br />
Chandni Textiles Ltd<br />
Ashu<strong>to</strong>sh Paper Mills Ltd<br />
Beyond Market 04th Feb ’11<br />
Ashiana Ret Villages Ltd<br />
Bhaijee Overseas Ltd<br />
Relialnce Capital Mutual Fund<br />
Indravarun Trade Impex Pvt Ltd<br />
Ubs Securities Asia Ltd<br />
Rhodes Diversified<br />
Sicom Ltd<br />
Blueberry Trading Company Pvt Ltd<br />
Ksk Energy Company Pvt Ltd<br />
Nav Nirman Mercantiles Ltd<br />
Coastal Fertilisers Ltd<br />
Sonal International Ltd<br />
Comfort Intech Ltd<br />
Real Marketing Pvt Ltd<br />
Blueberry Trading Company Pvt Ltd<br />
Idhasoft Ltd<br />
Nabh Tradelink Pvt Ltd<br />
Tarini Enterprises Pvt Ltd<br />
MUTUAL FUND, FII ACTIVITY AND NIFTY<br />
This graph and data represent the Mutual Fund and FII activity<br />
that <strong>to</strong>ok place in the last fortnight, whether the Fund Houses<br />
were buyers or sellers.<br />
1000<br />
500<br />
0<br />
-500<br />
17 Jan'11<br />
-1000<br />
-1500<br />
MF Net , FII Net & Nifty<br />
20 Jan'11<br />
MF FII NIFTY (RHS)<br />
25 Jan'11<br />
penny saved is a penny earned<br />
money invested is money earned<br />
Your financial growth is our concern.<br />
At Nirmal Bang, it’s a relationship beyond broking...<br />
5800<br />
5750<br />
5700<br />
5650<br />
5600<br />
5550<br />
5500<br />
5450<br />
5400<br />
5350<br />
Source: NB Research<br />
Sell<br />
Buy<br />
Buy<br />
Buy<br />
Sell<br />
Buy<br />
Sell<br />
Sell<br />
Buy<br />
Buy<br />
Sell<br />
Sell<br />
Buy<br />
Buy<br />
Sell<br />
Sell<br />
Buy<br />
Buy<br />
200500<br />
1681000<br />
200000<br />
461066<br />
1998268<br />
3655000<br />
21925000<br />
80000<br />
8000000<br />
266094<br />
249491<br />
88700<br />
66000<br />
500000<br />
44700<br />
500000<br />
200000<br />
78300<br />
Date MF Net*<br />
17 Jan'11<br />
18 Jan'11<br />
19 Jan'11<br />
20 Jan'11<br />
21 Jan'11<br />
24 Jan'11<br />
25 Jan'11<br />
27 Jan'11<br />
28 Jan'11<br />
45.70<br />
-1.50<br />
224.80<br />
27.40<br />
71.30<br />
263.20<br />
-51.50<br />
-307.70<br />
n.a<br />
1.07<br />
1.63<br />
1.56<br />
1.31<br />
1.08<br />
5.83<br />
2.66<br />
2.30<br />
2.15<br />
1.32<br />
1.24<br />
1.80<br />
4.23<br />
1.46<br />
1.29<br />
3.86<br />
1.24<br />
1.20<br />
Traded<br />
140.00<br />
2.79<br />
499.00<br />
11.04<br />
48.50<br />
22.70<br />
7.15<br />
7.87<br />
108.00<br />
110.55<br />
110.55<br />
9.04<br />
53.05<br />
60.25<br />
8.67<br />
46.50<br />
138.00<br />
130.01<br />
It’s simplified...<br />
Price (Rs)<br />
FII Net * Nifty<br />
-694.60 5654.75<br />
-53.70 5724.05<br />
176.40 5691.05<br />
-208.00 5711.60<br />
-834.30 5696.50<br />
37.60 5743.25<br />
194.90 5687.40<br />
428.20 5604.30<br />
-1397.40 5512.15<br />
*Net activity in Equity<br />
Close<br />
142.05<br />
0.00<br />
0.00<br />
0.00<br />
0.00<br />
27.20<br />
7.15<br />
7.87<br />
116.05<br />
110.50<br />
110.50<br />
9.05<br />
0.00<br />
0.00<br />
0.00<br />
0.00<br />
0.00<br />
0.00<br />
EQUITIES | DERIVATIVES | COMMODITIES | CURRENCY | MUTUAL FUNDS | IPOs | INSURANCE | PMS | DP<br />
SMS ‘BANG’ <strong>to</strong> <strong>54646</strong> | e-<strong>mail</strong>: contact@nirmalbang.com | www.nirmalbang.com<br />
43
44<br />
COMPANIES IN AND OUT ( For December ’10)<br />
IN<br />
OUT<br />
ACC Ltd<br />
Ambuja Cements Ltd<br />
Axis Axis Bank Ltd<br />
Bajaj Au<strong>to</strong> Ltd<br />
Bharat Heavy Electricals Electricals Ltd<br />
Bharat Petroleum Corporation Ltd<br />
Cairn India Ltd<br />
HCL Technologies Ltd Ltd<br />
HDFC Bank Ltd<br />
Hero Honda Mo<strong>to</strong>rs Ltd Ltd<br />
Hindalco Industries Ltd<br />
Hindustan Unilever Ltd<br />
IDFC Ltd<br />
Kotak Mahindra Bank Bank Ltd<br />
NTPC Ltd<br />
Power Grid Corporation of India India Ltd<br />
Punjab National Bank<br />
COMPANY QTY AMC<br />
Reliance Infrastructure Ltd<br />
Sesa Goa Ltd<br />
Siemens Ltd<br />
Steel Authority of India India Ltd<br />
Sterlite Industries (India) Ltd<br />
Suzlon Energy Ltd<br />
Tata Consultancy Services Ltd<br />
Tata Steel Ltd<br />
Wipro Ltd<br />
Source: NB Research<br />
Beyond Market 04th Feb ’11<br />
2500<br />
31000<br />
800<br />
64881<br />
65681<br />
445<br />
363<br />
82500<br />
4000<br />
86500<br />
53969<br />
4800<br />
49998<br />
108767<br />
59996<br />
15000<br />
1100<br />
3291<br />
76599<br />
76599<br />
356019<br />
8598<br />
364617<br />
24699<br />
24699<br />
27002<br />
1000000<br />
1027002<br />
679999<br />
679999<br />
55003<br />
9750<br />
333<br />
65086<br />
279<br />
135000<br />
67773<br />
571423<br />
774196<br />
10399<br />
41424<br />
2743<br />
1586991<br />
30018<br />
1213<br />
36900<br />
40259<br />
827196<br />
904355<br />
Mirae Asset<br />
Mirae Asset<br />
Daiwa<br />
JPMorgan<br />
JPMorgan<br />
JPMorgan<br />
HSBC<br />
Mirae Asset<br />
Bharti AXA<br />
Daiwa<br />
L&T<br />
Axis<br />
AIG Global<br />
Bharti AXA<br />
JPMorgan<br />
Bharti AXA<br />
Benchmark<br />
JPMorgan<br />
Bharti AXA<br />
Bharti AXA<br />
Kotak Mahindra<br />
AIG Global<br />
Axis<br />
Bharti AXA<br />
JPMorgan<br />
JPMorgan<br />
Kotak Mahindra<br />
Religare<br />
Sundaram<br />
Bharti AXA<br />
Bharti AXA<br />
JPMorgan<br />
DSP Blackrock<br />
Deutsche<br />
JPMorgan<br />
Bharti AXA<br />
DSP Blackrock<br />
Sundaram<br />
EQUITIES | DERIVATIVES | COMMODITIES* | CURRENCY | MUTUAL FUNDS # | IPOs # | INSURANCE # | PMS | DP<br />
COMPANY QTY AMC<br />
ACC Ltd<br />
4800 BNP Paribas<br />
2259<br />
7059<br />
IDFC<br />
Ambuja Cements Ltd<br />
18286 IDFC<br />
Bharat Bharat Petroleum Corporation Ltd<br />
2891 IDFC<br />
Cairn India Ltd<br />
100024 Deutsche<br />
9633<br />
109657<br />
IDFC<br />
Cipla Ltd<br />
7991 Escorts<br />
DLF Ltd<br />
8111 IDFC<br />
Hero Honda Mo<strong>to</strong>rs Ltd<br />
2120 IDFC<br />
6000 Kotak Mahindra<br />
100 L&T<br />
276516<br />
284736<br />
Sundaram<br />
Hindalco Industries Ltd Ltd<br />
28999 IDFC<br />
Hindustan Unilever Ltd<br />
23417 IDFC<br />
IDFC Ltd<br />
25565 IDFC<br />
JaiPrakash Associates Ltd<br />
25693 IDFC<br />
17057<br />
42750<br />
Religare<br />
Kotak Mahindra Bank Bank Ltd<br />
60004 Axis<br />
8024 IDFC<br />
25001<br />
93029<br />
L&T<br />
Maruti Suzuki Suzuki India Ltd<br />
2960 IDFC<br />
NTPC Ltd<br />
28583 IDFC<br />
Power Grid Corporation Corporation of India Ltd 481766 Axis<br />
363522<br />
845288<br />
HSBC<br />
Punjab National Bank<br />
48358 DSP Blackrock<br />
Ranbaxy Labora<strong>to</strong>ries Ltd<br />
3401 IDFC<br />
Reliance Infrastructure Ltd<br />
163028 Morgan Stanley<br />
Reliance Reliance Power Ltd<br />
8154 IDFC<br />
145483<br />
153637<br />
Sundaram<br />
Sesa Goa Ltd<br />
20998 BNP Paribas<br />
8508 IDFC<br />
20000<br />
49506<br />
L&T<br />
Steel Authority of India Ltd<br />
13099 IDFC<br />
21998<br />
35097<br />
L&T<br />
Suzlon Energy Ltd<br />
17971 IDFC<br />
Tata Mo<strong>to</strong>rs Ltd<br />
1057941 DSP Blackrock<br />
9800<br />
1067741<br />
L&T<br />
Wipro Ltd<br />
11231 IDFC<br />
Note: Data mentioned here has been extracted on 27th Jan ’11<br />
Disclaimer: Insurance is a subject matter of solicitation. Mutual Fund investments are subject <strong>to</strong> 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 o�ering for commodity segment. *Through Nirmal Bang Commodities Pvt. Ltd. # Distribu<strong>to</strong>rs<br />
It’s simplified...
MOVERS AND LAGGARDS IN MUTUAL FUND SCHEMES<br />
Equity Schemes<br />
Beyond Market 04th Feb ’11<br />
Scheme Name<br />
Movers<br />
Birla Sun Life International Equity Fund - Plan A - Gr<br />
Franklin Infotech Fund - Gr<br />
UTI Banking Sec<strong>to</strong>r Fund - Gr<br />
Religare Banking Fund - Reg - Gr<br />
Benchmark Equity And Derivative Opportunities Fund - Gr<br />
Laggards<br />
HSBC Small Cap Fund - Gr<br />
HSBC Midcap Equity Fund - Gr<br />
Principal PNB Long Term Equity Fund - 3 Year - Series I - Gth<br />
JM Basic Fund - Gr<br />
L&T Small Cap Fund - Gr<br />
Debt Schemes<br />
Movers<br />
Peerless Short Term Fund - Gr<br />
BNP Paribas FTF - Series 16 - Plan A - Reg - Gr<br />
Baroda Pioneer Income Fund - Gr<br />
Tata FIP Fund - Series C2 - Ret - Gr<br />
Kotak FMP - 13 Months - Series 6 - Gr<br />
Laggards<br />
Birla Sun Life Equity Linked FMP - Series A - Ret - Gr<br />
Axis Triple Advantage Fund - Gr<br />
Sundaram MIP - Aggressive - Gr<br />
ICICI Prudential SMART Fund - Series G - 36 Months - Ret - Gr<br />
DWS Twin Advantage Fund - Gr<br />
Balance Schemes<br />
Movers<br />
Escorts Opportunities Fund - Gr<br />
HDFC Prudence Fund - Gr<br />
Birla Sun Life 95 - Gr<br />
Escorts Balanced Fund - Gr<br />
FT India Balanced Fund - Gr<br />
Laggards<br />
JM Balanced - Gr<br />
Principal Conservative Gr Fund<br />
HDFC Balanced Fund - Gr<br />
ING Balanced Fund - Gr<br />
UTI Balanced Fund - Gr<br />
*(27 Jan’11) Source: NB Research<br />
NAV<br />
(28th Jan'11)<br />
9.7451<br />
68.5768<br />
41.0000<br />
19.1900<br />
12.0499<br />
11.8414<br />
20.8726<br />
10.5200<br />
14.0670<br />
4.9500<br />
10.6187<br />
10.7337<br />
15.2471<br />
11.4921<br />
10.5871<br />
13.4829*<br />
9.9714<br />
10.1680<br />
19.1617 *<br />
16.0228<br />
27.5429<br />
206.4920<br />
303.0100<br />
60.6299<br />
47.2289<br />
22.0598<br />
85.6900<br />
52.6670<br />
24.6500<br />
78.9600<br />
Absolute %<br />
(Point <strong>to</strong> Point)<br />
2 Weeks<br />
1.4290<br />
0.6323<br />
0.5148<br />
0.4712<br />
0.3506<br />
-7.1306<br />
-6.5179<br />
-6.3224<br />
-6.1818<br />
-6.0721<br />
3.2947<br />
0.7859<br />
0.6442<br />
0.6225<br />
0.5232<br />
-1.6730<br />
-1.6714<br />
-1.4690<br />
-1.2925<br />
-1.2529<br />
-0.8692<br />
-1.2940<br />
-1.4666<br />
-1.6779<br />
-1.6988<br />
-3.9893<br />
-2.9668<br />
-2.8302<br />
-2.7613<br />
-2.3739<br />
Disclaimer<br />
The information provided here has been obtained from<br />
various sources and is considered <strong>to</strong> be authentic and<br />
reliable. However, Nirmal Bang Securities Private<br />
Limited is not responsible for any error or inaccuracy<br />
in the same.<br />
It’s simplified...<br />
45
SMS ‘BANG’ <strong>to</strong> <strong>54646</strong>,<br />
<strong>Contact</strong> <strong>Person</strong>: <strong>Sagar</strong> <strong>Karvat</strong> - <strong>077383</strong> <strong>80033</strong>; e-<strong>mail</strong>: contact@nirmalbang.com<br />
For job openings at Nirmal Bang, visit http://www.nirmalbang.com/careers.aspx<br />
BSE SEBI REGN No. INB011072759, INF011072759 & INE011072759, NSE SEBI REGN No. INB230939139, INF230939139 & INE230939139 DP SEBI REGN. No NSDL: IN-DP-NSDL-136-2000, CDS(I)l: IN-DP-CDSL-37-99, AMFI REGN. No. arn-49454 NCDEX REGN. NO. 00362, FMC Code-0075, MCX REGN. No. 16590, FMC Code-MCX/TCM/CORP/0490, MCX SX-INE260939139, PMS-INP000002981<br />
Disclaimer: Insurance is a subject matter of solicitation. Mutual Fund investments are subject <strong>to</strong> 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 o�ering for commodity segment. *Through Nirmal Bang Commodities Pvt. Ltd. # Distribu<strong>to</strong>rs
UK Sinha, the successor <strong>to</strong> SEBI chief CB<br />
Bhave, will assume the post of the security<br />
market regula<strong>to</strong>r in February this year. He is<br />
scheduled <strong>to</strong> take over when Bhave’s term ends<br />
next month. Sinha is the chairman and managing direc<strong>to</strong>r<br />
of Unit Trust of India Asset Management Company (UTI<br />
AMC), also known as UTI Mutual Fund, since 2005. He<br />
is also the chairman of the Association of Mutual Funds<br />
in India (AMFI).<br />
Born in the year 1952, Sinha is an IAS officer of the 1976<br />
batch of Bihar cadre. He is a post-graduate in mathematics<br />
and statistics and has a degree in law as well. He has<br />
held important positions with the Indian government and<br />
has also been the Additional Secretary <strong>to</strong> the government<br />
of India.<br />
He has been on the board of direc<strong>to</strong>rs of SIDBI, IFCI,<br />
Bank of Baroda, Central Bank of India and the Pension<br />
Funds Regula<strong>to</strong>ry & Development Authority (PFRDA).<br />
Beyond Market 04th Feb ’11<br />
UK Sinha:<br />
The Rightful Heir<br />
Thanks <strong>to</strong> his vast experience,<br />
fifty-nine-year-old IAS officer,<br />
UK Sinha, seems <strong>to</strong> be the suitable<br />
successor <strong>to</strong> CB Bhave as the SEBI chief<br />
He was on several committees set up by the government<br />
of India like the Wheat Procurement Committee, an<br />
Advisory Committee working on the guidelines for<br />
mutual fund investments in the infrastructure sec<strong>to</strong>r and<br />
one that focuses on reworking the framework governing<br />
foreign investments.<br />
Sinha began his career as a probationary officer for three<br />
years with the State Bank of India. He has also been the<br />
direc<strong>to</strong>r of the State Credit and Investment Corporation<br />
at Patna. He has been the Joint Secretary in the banking<br />
division of the Ministry of Finance and dealt with financial<br />
institutions. Here, Sinha helped banks with recovering<br />
bad loans and restructuring corporate debt plans.<br />
Sinha’s portfolio then included the capital market,<br />
currency and coins, external commercial borrowings,<br />
foreign exchange management and pension reforms. He<br />
was in charge of the drafting of the SEBI (Amendment)<br />
Act, 2002, the Securities Law Amendment Act, 2004 and<br />
It’s simplified...<br />
47
48<br />
the PFRDA Bill, 2005. He was also the Joint Secretary in<br />
the Department of Economic Affairs.<br />
UTI TURNAROUND<br />
Sinha <strong>to</strong>ok up the reins of UTI in 2005, at the time when<br />
the organization was reeling in the aftermath of its<br />
‘assured returns’ scheme that went under due <strong>to</strong> a deluge<br />
of redemptions. This left the company <strong>to</strong> grapple with the<br />
consequences of a government bailout and also a split in<br />
the company.<br />
UTI was losing its esteemed cus<strong>to</strong>mers by the week and<br />
Sinha was brought on board <strong>to</strong> give the company a<br />
radical makeover. In a span of five years, UTI has<br />
regained most of its past glory and boasts of an `80,000<br />
crore AUM and nearly 10 million cus<strong>to</strong>mers.<br />
Sinha decided <strong>to</strong> cut back UTI’s dependence on the four<br />
shareholders - Punjab National Bank, State Bank of<br />
India, Bank of Baroda and Life Insurance Corporation.<br />
He devised a strategy where T Rowe Price, a global<br />
investment management firm, with assets of over $350<br />
billion, acquired a 26% stake in UTI. He also managed <strong>to</strong><br />
attract considerable foreign investment particularly from<br />
Europe, Middle East and Japan.<br />
Thinking of the transformation days, Sinha said that five<br />
years ago, when he came in<strong>to</strong> UTI, he was shocked <strong>to</strong><br />
notice that the organization did not even have a human<br />
resource (HR) head. He recalled the low employee<br />
morale and the time when 40 of the <strong>to</strong>p talented professionals<br />
left UTI <strong>to</strong> look for greener pastures. So, he<br />
decided <strong>to</strong> revamp the setup of the human resource<br />
department first.<br />
Some of his remarkable achievements include reworking<br />
the public sec<strong>to</strong>r pay scales of the UTI employees <strong>to</strong><br />
match the market-level salaries. He also hired the best<br />
talent in the industry.<br />
UTI was the first company <strong>to</strong> publicly list its mutual fund<br />
scheme. The market valuation of UTI MF rose more than<br />
ten times in a span of around two years. Sinha has<br />
introduced some extremely successful schemes that have<br />
raised the assets under management at UTI MF by<br />
approximately 100%.<br />
He launched a micro-pension scheme <strong>to</strong>o that was<br />
targeted at low-income groups. This scheme provided<br />
them with financial protection on the lines of a<br />
post-retirement pension scheme. It is run with the help of<br />
a few co-operative societies and government agencies<br />
and has attracted over two lakh inves<strong>to</strong>rs.<br />
Sinha has arranged for tie-ups with agencies such as<br />
Beyond Market 04th Feb ’11<br />
SEWA, the dairy farmers’ co-operative in Bihar and the<br />
Union of Railway Porters. This mutual fund scheme has<br />
laid the path for quite a few others, who are now coming<br />
up with similar minimum-payment models. Thus over<br />
the years, Sinha has built a reputation for himself with his<br />
knack for turning a crisis around.<br />
CHALLENGES AT SEBI<br />
The current SEBI chief, CB Bhave’s three-year term was<br />
not devoid of turbulent times. He had <strong>to</strong> deal with the<br />
global financial crisis, scams and changes in regulations<br />
in the primary and secondary markets. A number of<br />
concerns will be carried forward <strong>to</strong> Sinha after Bhave’s<br />
term ends.<br />
On assuming the post of SEBI chairman, Sinha will<br />
decide the fate of two important policy papers that were<br />
pioneered during Bhave’s tenure.<br />
A panel headed by C Achuthan has modified the rules<br />
governing corporate takeovers and a different panel,<br />
headed by former Reserve Bank of India governor Bimal<br />
Jalan, has recommended a framework governing market<br />
infrastructure institutions such as s<strong>to</strong>ck exchanges,<br />
deposi<strong>to</strong>ries and clearing corporations. Both these<br />
reports have some controversial proposals, especially the<br />
takeover code, since the SEBI board has already begun<br />
discussions on the draft.<br />
He also has <strong>to</strong> deal with the Multi-Commodity Exchange<br />
(MCX) issue, where SEBI has so far rejected their<br />
application <strong>to</strong> run bourses trading various products,<br />
including s<strong>to</strong>cks and equity derivatives, on the grounds<br />
that the promoters of MCX cannot hold more than 5%<br />
stake in the commodity exchange.<br />
SEBI has also warned inves<strong>to</strong>rs of the Sahara Group<br />
companies that it will not be liable <strong>to</strong> address inves<strong>to</strong>r<br />
complaints since Sahara India Real Estate Corporation<br />
Ltd (SIRECL) and Sahara Housing Investment Corporation<br />
Ltd (SHICL) have been raising funds without the<br />
regula<strong>to</strong>r’s approval.<br />
And the largest of all, the SEBI investigations in<strong>to</strong> the<br />
country’s biggest scam, Satyam Computers. It remains <strong>to</strong><br />
be seen if UK Sinha will be able <strong>to</strong> overcome the impediments<br />
and forge a path of innovation for the Indian<br />
securities market.<br />
UK Sinha is a self-confessed music lover and a connoisseur<br />
of Urdu poetry. He listens <strong>to</strong> music while on his<br />
morning walks and on his way <strong>to</strong> and from work. Sinha<br />
says that this is indeed very relaxing. He also loves<br />
analyzing numbers so an indoor game of bridge wipes<br />
out the day’s stresS.<br />
It’s simplified...
A<br />
Wake-up<br />
Call<br />
Beyond Market 04th Feb ’11<br />
If you are an inves<strong>to</strong>r, it is advisable<br />
<strong>to</strong> learn from other people’s<br />
mistakes instead of staying<br />
oblivious <strong>to</strong> scams and frauds<br />
The he usage of the words scam/fraud has increased<br />
manifold these days with the unearthing of<br />
several unethical practices across the board, be<br />
it sports (Commonwealth Games) or even<br />
industries (telecom sec<strong>to</strong>r - 2G scam, housing finance<br />
loans scam).<br />
The investment world is not new <strong>to</strong> frauds and scams.<br />
But time and again people fall prey <strong>to</strong> scams because<br />
they only talk about it when it hits the headlines.<br />
However, as time passes, it gets erased from public<br />
memory. They do not exercise caution. Instead, they only<br />
tend <strong>to</strong> take the return element in<strong>to</strong> consideration.<br />
In the past <strong>to</strong>o several people have been duped by scams<br />
such as the plantation scam, which lured thousands of<br />
small inves<strong>to</strong>rs and other such scams. Yet, they fall prey<br />
<strong>to</strong> such schemes since they are marketed in a very attractive<br />
manner.<br />
The Indian market recently witnessed a big fraud <strong>to</strong> the<br />
tune of `400 crore, committed by the relationship<br />
manager of Citibank. It is noteworthy <strong>to</strong> mention that the<br />
clients duped by this relationship manager were actually<br />
wealthy individuals and corporates.<br />
It’s simplified...<br />
49
50<br />
���� ����������� ����� �������� ������� ����� ���� ����� ������<br />
inves<strong>to</strong>rs but also wealthy ones are susceptible <strong>to</strong> tall<br />
claims and promises.<br />
OVERVIEW OF THE CITIBANK FRAUD<br />
Shivraj Puri, the relationship manager at Citibank’s<br />
Gurgoan branch allegedly lured rich clients in investing<br />
in<strong>to</strong> fraudulent schemes by promising attractive returns<br />
supposedly backed by the bank.<br />
By virtue of being a relationship manager, he garnered<br />
trust of his clients and used that <strong>to</strong> his advantage. He<br />
made his clients sign blank documents, which were later<br />
used <strong>to</strong> transfer money.<br />
He forged a letter from the capital markets regula<strong>to</strong>r,<br />
�������������������������������������������������������<br />
credence <strong>to</strong> the products he was offering and was<br />
successful in tapping wealthy inves<strong>to</strong>rs. He siphoned off<br />
the funds garnered <strong>to</strong> the accounts of his family members<br />
and then routed the funds <strong>to</strong> the s<strong>to</strong>ck market through<br />
brokerage houses.<br />
The Citibank fraud got a lot of publicity due <strong>to</strong> its magnitude.<br />
But several small frauds that occur around us go<br />
unnoticed simply because the quantum of frauds are not<br />
huge nor are the affected inves<strong>to</strong>rs powerful.<br />
Some time back, the wealth management arm of Kotak<br />
Mahindra Bank, another big private sec<strong>to</strong>r bank, was<br />
accused of misleading a cus<strong>to</strong>mer in<strong>to</strong> investing in<strong>to</strong> a<br />
fund at a steep premium based on bogus claims. These<br />
���������������������������������������������������������<br />
is time <strong>to</strong> pause and think of how you can avoid falling<br />
in<strong>to</strong> such a trap.<br />
POINTERS WORTH CONSIDERING<br />
�� � � ��� ���� ����������� ��������� ����� ����� ������������<br />
because you have a relationship manager looking after<br />
them. Moni<strong>to</strong>r them on a timely basis as it is your money<br />
and you will be the one affected by the loss or gain<br />
���������������������������������������������������������<br />
you. Weigh the pros and cons and then decide on the<br />
investment opportunity<br />
���������������������������������������������������������<br />
a product that makes a lot of money with minimum risk<br />
and guaranteed returns<br />
��������������������������������������������������������<br />
promised looks unbelievable and is more than what the<br />
������� �������� ���� ������� ��� ����������� ��� ���� ��������<br />
accept what is being <strong>to</strong>ld <strong>to</strong> you because achieving<br />
Beyond Market 04th Feb ’11<br />
spectacular returns, that is, returns much above the<br />
markets is not an easy task<br />
Make sure you get as many details as possible. Talk <strong>to</strong> a<br />
few people and see if they are aware of such a product<br />
and what their view on that particular product is. Make<br />
an attempt <strong>to</strong> understand the product. Understanding the<br />
product offered is important because it will help you<br />
understand the risk element<br />
�� � � ��� ���� ������ ���� ����������� ������� ����� �������<br />
spectacular returns blindly even if it is being offered by<br />
big and reputed business houses. The alleged fraudster<br />
from Citibank, Shivraj Puri, was able <strong>to</strong> fool inves<strong>to</strong>rs as<br />
��� ����� ����� ��� ���� ������� ��� ���� ������ ��� ���� ���� ���<br />
offering from a big business house cloud your judgement<br />
������������������������������������������������������������<br />
details of your investment. Regular moni<strong>to</strong>ring will help<br />
you figure out abnormalities, if any. Take corrective<br />
actions on an immediate basis instead of learning about<br />
the same after it is <strong>to</strong>o late<br />
�� � � ���� �������� ���� ��� ����� ��� ��������� ��� ��� ���������<br />
pressure tactics. You may be <strong>to</strong>ld that you have <strong>to</strong> invest<br />
in a day or two else the opportunity is lost. Take time <strong>to</strong><br />
understand the product if you have the background, or<br />
else talk <strong>to</strong> people who have an understanding of the<br />
����������������������������������������������������������<br />
instead of falling prey <strong>to</strong> it because of urgency<br />
���������������������������������������������������������<br />
look after your financial needs. This will allow you <strong>to</strong><br />
take a second opinion when needed and ensure that your<br />
risk is diversified<br />
�� � � ��� ��� ����������� �������� ��� ������ ��������� ���� ����<br />
brochures, flyers and similar such things. Looking at<br />
them, you should be able <strong>to</strong> gauge the authenticity of the<br />
investment product<br />
����������������������������������������������������������<br />
may involve talking <strong>to</strong> your relationship manager,<br />
seeking details, asking for updates in the form of<br />
documents, among other things.<br />
While it may be easy <strong>to</strong> blame the fraudster, the responsibility<br />
of the investment made lies with you <strong>to</strong>o. Hence,<br />
‘inves<strong>to</strong>rs beware’. Falling prey <strong>to</strong> claims that are unusually<br />
attractive is easy.<br />
Try <strong>to</strong> be prudent while making your investment<br />
decisions and do not decide in haste. Take time out <strong>to</strong><br />
understand and talk <strong>to</strong> people about the product being<br />
��������������������������������������������������������������<br />
have the better of your judgemenT.<br />
It’s simplified...
EQUITIES | DERIVATIVES | COMMODITIES* | CURRENCY | MUTUAL FUNDS # | IPOs # | INSURANCE # | PMS | DP<br />
SMS ‘BANG’ <strong>to</strong> <strong>54646</strong><br />
<strong>Contact</strong> <strong>Person</strong>: <strong>Sagar</strong> <strong>Karvat</strong> - <strong>077383</strong> <strong>80033</strong>, e-<strong>mail</strong>: contact@nirmalbang.com<br />
For job openings at Nirmal Bang, visit http://www.nirmalbang.com/careers.aspx<br />
BSE SEBI REGN No. INB011072759, INF011072759 & INE011072759, NSE SEBI REGN No. INB230939139, INF230939139 & INE230939139 DP SEBI REGN. No NSDL: IN-DP-NSDL-136-2000, CDS(I)l: IN-DP-CDSL-37-99, AMFI REGN. No. arn-49454 NCDEX REGN. NO. 00362, FMC Code-0075, MCX REGN. No. 16590, FMC Code-MCX/TCM/CORP/0490, MCX SX-INE260939139, PMS-INP000002981<br />
Disclaimer: Insurance is a subject matter of solicitation. Mutual Fund investments are subject <strong>to</strong> 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 o�ering for commodity segment. *Through Nirmal Bang Commodities Pvt. Ltd. # Distribu<strong>to</strong>rs
52<br />
WHO<br />
DARES<br />
can battle rough<br />
seas or volatility in the markets<br />
following events like the budget<br />
WINSBravehearts<br />
with straddles and strangles<br />
Beyond Market 04th Feb ’11<br />
It’s simplified...
Come February and all eyes shift focus <strong>to</strong> the one<br />
big event of the month – the budget. This is<br />
because it is that singular event, which affects<br />
the financial world like nothing else.<br />
While the salaried class, professionals and even<br />
businessmen look at the budget with a long-term macro<br />
perspective, there is another niche group of people who<br />
view budget as an extremely short-term money-making<br />
event. This group is the ever-so-important trader community<br />
of the s<strong>to</strong>ck market.<br />
The budget is important <strong>to</strong> the traders because of the<br />
s<strong>to</strong>ck markets on the whole, and more importantly<br />
individual s<strong>to</strong>cks fluctuate violently, either up or down<br />
depending on the event, which is perceived as favourable<br />
or unfavourable for respective sec<strong>to</strong>rs or industries.<br />
Thus, no active trader can afford <strong>to</strong> miss out on such huge<br />
fluctuations in the markets.<br />
The best piece of advice for newcomers and the<br />
risk-averse traders is <strong>to</strong> stay away from such volatile<br />
markets since they can burn their fingers if their trades go<br />
against them.<br />
But those who have been around for a while now can<br />
enter the markets during such an important event and<br />
take advantage of the wild swings. These individuals can<br />
make use of certain tried and tested strategies for such<br />
volatile markets.<br />
These strategies are designed <strong>to</strong> help market participants<br />
profit if the markets rise or fall drastically. People will<br />
lose money if the market or the s<strong>to</strong>ck remains rangebound<br />
with very little change. And the best part about<br />
these strategies is that they have limited risk, but can give<br />
unlimited profit.<br />
The key instrument employed for these strategies is<br />
known as Options. Options is a part of the derivatives<br />
market, also commonly known as the Futures and<br />
Options (F&O) market.<br />
While the buyer of an Option has limited loss potential<br />
with the possibility of unlimited profit potential, the<br />
seller of an Option has limited profit, but with a possibility<br />
of incurring unlimited loss. So it is advisable <strong>to</strong> buy<br />
Options rather than sell them until such time that an<br />
individual is well-versed in Options trading.<br />
OPTION STRATEGIES<br />
LONG STRADDLE: A long Straddle is a strategy for<br />
volatile markets and involves simultaneous buying of a<br />
Call Option and also a Put Option of the same<br />
s<strong>to</strong>ck/index with the same strike price and expiry date.<br />
Beyond Market 04th Feb ’11<br />
Illustration: Say s<strong>to</strong>ck XYZ is trading at a price of `200<br />
in the cash market and you feel that certain announcements<br />
in the budget can have a significant impact on the<br />
s<strong>to</strong>ck price and hence, you buy a 200-strike price Call at<br />
a premium of `6. The lot size of the s<strong>to</strong>ck XYZ is 1,000<br />
per contract. Thus, the <strong>to</strong>tal premium for the Call Option<br />
is `6 x 1,000 = `6,000<br />
Simultaneously, you also buy a 200-strike Put at a<br />
premium of `5. Thus, the <strong>to</strong>tal premium for the Put is `5<br />
x 1,000 = `5,000.<br />
The <strong>to</strong>tal premium paid for the entire straddle is `6,000 +<br />
`5,000 = `11,000. This is the <strong>to</strong>tal loss that you can incur<br />
on this transaction and, hence, your risk is limited <strong>to</strong> only<br />
`11,000.<br />
Now as the <strong>to</strong>tal premium paid is 6+5 = 11. This straddle<br />
will be profitable for the inves<strong>to</strong>r only if the s<strong>to</strong>ck trades<br />
above 200 + 11 = 211 on the upside or below 200 - 11 =<br />
189 on the downside.<br />
Payoff Illustration: After the budget, if the s<strong>to</strong>ck zooms<br />
<strong>to</strong> `250, your profit would be `250 - `211 = `39 x 1,000<br />
= `39,000. Conversely, if the s<strong>to</strong>ck crashes <strong>to</strong> `160 after<br />
the budget, you would still make a profit of `189-`160 =<br />
`29 x 1,000 = `29,000.<br />
Thus, the profit potential is virtually unlimited if the<br />
s<strong>to</strong>ck moves drastically on either side. But, if the s<strong>to</strong>ck<br />
remains in a sideways movement, that is, between the<br />
211 and 189-range, then it would result in a loss for the<br />
inves<strong>to</strong>r. And even though inves<strong>to</strong>rs can square off both<br />
the Puts and Calls at lower premiums and minimize their<br />
losses – if held till expiry and the s<strong>to</strong>ck does not move,<br />
the inves<strong>to</strong>r stands <strong>to</strong> lose the entire premium and the<br />
maximum loss that can be incurred is `11,000.<br />
LONG STRANGLE: A long Strangle is almost similar<br />
<strong>to</strong> the long Straddle, except for the fact that here you buy<br />
an Out-of-the-Money (OTM) Call and an Out-of-the-<br />
Money (OTM) Put with the same expiry date. In other<br />
words, the strike prices of the Call and Put are different.<br />
Take the same s<strong>to</strong>ck XYZ as example. XYZ is trading at<br />
a price of `200 in the cash market and you buy one OTM<br />
Call of 230 at a premium of `3. You also buy one OTM<br />
Put of 170 at a premium of `2. Since both the Options are<br />
OTM, their premium is relatively low. Hence, the <strong>to</strong>tal<br />
premium paid for the Strangle is `3 +2 = `5 x 1,000 (lot<br />
size) = `5,000. This `5,000 is the maximum loss you can<br />
incur on this transaction.<br />
This Strangle will be profitable for the inves<strong>to</strong>r only if<br />
the s<strong>to</strong>ck trades above `230 + 5 = `235 on the upside and<br />
below `170 – 5 = `165 on the downside.<br />
It’s simplified...<br />
53
54<br />
Payoff Illustration: After the budget, if the s<strong>to</strong>ck rises <strong>to</strong><br />
`250, your profit would be `250-`235 = 15 x 1,000 = `<br />
15,000. Alternatively, if the s<strong>to</strong>ck crashes <strong>to</strong> `155, your<br />
profit would be `165-155 = 10 x 1000 = `10,000. But, if<br />
the s<strong>to</strong>ck remains range-bound between 235 and 165, it<br />
will result in a loss for the inves<strong>to</strong>r. The one advantage<br />
that a long strangle offers over a long straddle is that the<br />
premium outgo is much lower in the former since both<br />
the Options are out-of-the-money.<br />
The two main fac<strong>to</strong>rs <strong>to</strong> keep in mind when trading<br />
Options are<br />
a. Time Decay Or The Time To Expiry: The longer the<br />
time left for expiry of an Option, the higher will be the<br />
premium. As the time <strong>to</strong> expiry comes nearer, the Option<br />
premium loses its value and at expiry, the premium<br />
becomes zero. This erosion of the premium is known as<br />
time decay.<br />
b. Volatility: The probability of the underlying asset<br />
moving up and down in price is called volatility. The<br />
higher the volatility, the higher is the premium. It is more<br />
IMPORTANT TERMS<br />
Option: An Option is a contract that gives the buyer the right but not the obligation <strong>to</strong> buy or sell an underlying asset<br />
(index or an individual s<strong>to</strong>ck) at a specific price, on or before a certain date.<br />
Beyond Market 04th Feb ’11<br />
commonly known as Implied Volatility (IV), which is<br />
the estimated volatility of the price of an underlying.<br />
Generally the IVs are very high before important events<br />
such as budget, elections, quarterly results, etc. Hence,<br />
the premium of Options is also very high.<br />
And it is often seen that once the event is out, the IVs<br />
drop drastically and the premium also drops considerably<br />
even if the trade is in your favour. So, watch out for such<br />
sharp falls in IVs and exit at the first sign of trouble by<br />
either booking your profits or minimizing your losses.<br />
The main reason why employing Options strategies<br />
makes sense is because they offer a low-risk, high-return<br />
proposition without having <strong>to</strong> guess the direction of the<br />
markets, which is much better when compared <strong>to</strong> a pure<br />
speculative one-sided trade based on mere gut feeling.<br />
Remember, it is always better <strong>to</strong> wear a life jacket when<br />
jumping in<strong>to</strong> the rough seas even though you may know<br />
how <strong>to</strong> swim. After all, the only thing you stand <strong>to</strong> lose<br />
is the money spent on buying the life jackeT.<br />
There are two types of Options - Call Option and Put Option.<br />
Call Option: It gives the buyer the right <strong>to</strong> buy the underlying asset at a fixed, predetermined price within a fixed<br />
period of time.<br />
Put Option: It gives the buyer the right <strong>to</strong> sell the underlying asset at a fixed, pre-determined price within a fixed<br />
period of time<br />
Strike Price Or Exercise Price: Strike price or the exercise price is the specified price of an Option at which the<br />
contract may be exercised<br />
Lot/Contract Size: It is the number of underlying assets in a contract. For example, the lot size of Nifty is 50<br />
Underlying: It is a particular asset on which the Option contract is issued. While index is the underlying asset in<br />
Index Options, individual s<strong>to</strong>cks are the underlying assets in S<strong>to</strong>ck Options<br />
Option Premium: It is the price paid by the buyer of an Option <strong>to</strong> the seller of an Option<br />
Expiry: It is the date on which the Option expires and ceases <strong>to</strong> exist<br />
In-the-money: It is when the Option strike price is less than the market price of the underlying asset<br />
At-the-money: It is when the Option strike price is equal <strong>to</strong> the market price of the underlying<br />
Out-of-the-money: It is when the Option strike price is greater than the market price of the underlying<br />
How To Read An Options Table<br />
OPT-Nifty-27-Jan-2011-5900-CE at 50. This is how an Options contract typically appears on a screen or in newspapers.<br />
It simply means that a Nifty Call Option with strike price of 5,900 and an expiry date of 27th Jan ’11 is available<br />
at a premium of `50.<br />
It’s simplified...
LEARN THE ART OF<br />
COMMODITY INVESTING<br />
Beyond Market 04th Feb ’11<br />
&<br />
Beyond<br />
Present<br />
Date: 14th January, 2011<br />
Venue: The Pride Hotel,<br />
Pune.<br />
Exchange Partner<br />
It’s simplified...<br />
55
Educating Inves<strong>to</strong>rs<br />
In The Oxford<br />
Of The East<br />
The fourth in the series of commodity camps called Beyond Mandi, organized by Nirmal Bang,<br />
one of the leading broking houses in India, in association with Zee Business, was held in Pune.<br />
A good crowd of people comprising traders and inves<strong>to</strong>rs alike turned up at the Pride Hotel, Pune<br />
<strong>to</strong> hear market mavens like Anjani Sinha, MD & CEO at NSEL; Kunal Shah, Head of Commodity<br />
Research at Nirmal Bang and Manish Rangari, CEO of the Indian Bullion Association discuss<br />
the opportunities offered by the commodities market and the future of this asset class with Amish<br />
Devgan, Commodity Edi<strong>to</strong>r and Anchor at Zee Business.<br />
Amish Devgan kick-started the camp by introducing the panelists. He stated that the discussion<br />
would mainly focus on the advantages of investing in the spot and futures market. He <strong>to</strong>ld the<br />
audience that the speakers would be guiding them in getting favourable returns from commodity<br />
trading and speak about the future of the commodity markets <strong>to</strong>o.<br />
56<br />
Anjani Sinha,<br />
MD & CEO of NSEL<br />
Anjani Sinha is the MD & CEO of National Spot<br />
Exchange Ltd (NSEL). He has over two decades of<br />
experience and deep knowledge of commodity derivatives<br />
and spot markets. His previous stint was with the Ahmedabad<br />
S<strong>to</strong>ck Exchange. Prior <strong>to</strong> that, he was associated with<br />
the Bombay Commodity Exchange Ltd, Interconnected<br />
S<strong>to</strong>ck Exchange of India Ltd (ISEI) and Magadh S<strong>to</strong>ck<br />
Exchange.<br />
Beyond Market 04th Feb ’11<br />
With right advice from experts,<br />
individuals can make the most<br />
of the ongoing rally in the<br />
commodities market<br />
Amish Devgan,<br />
Commodity Edi<strong>to</strong>r and<br />
Anchor at Zee Business<br />
Anjani Sinha commenced the discussion and spoke about how each and<br />
every inves<strong>to</strong>r could take advantage of the commodity markets, thanks <strong>to</strong><br />
the development of new investment products. He went on <strong>to</strong> speak about<br />
the ‘E-series’ instruments introduced by NSEL in March last year. Sinha<br />
also mentioned that up till now four such instruments have been developed<br />
for inves<strong>to</strong>rs by NSEL.<br />
He said that all the ‘E-series’ products have been giving good returns and<br />
explained the process of investing in them <strong>to</strong> the audience. He expects<br />
the commodity markets <strong>to</strong> grow manifold and advised inves<strong>to</strong>rs <strong>to</strong> make<br />
small investments from time <strong>to</strong> time. Sinha suggested that inves<strong>to</strong>rs<br />
could also convert their commodity investments in<strong>to</strong> the physical form<br />
and reap profits on a regular basis.<br />
It’s simplified...
Kunal Shah<br />
Head of Commodity<br />
Research at Nirmal Bang<br />
Kunal Shah serves as the Head of Commodity<br />
Research at Nirmal Bang. He closely tracks<br />
precious metals, base metals, energy and<br />
agricultural commodities. He addresses<br />
seminars on the outlook of commodities across<br />
the country. He appears regularly on business<br />
channels. He is also sought by the print media<br />
and wire services <strong>to</strong>o, on a regular basis. Prior<br />
<strong>to</strong> Nirmal Bang, he was associated with<br />
Motilal Oswal Commodities Pvt Ltd, where he<br />
managed the research desk.<br />
Beyond Market 04th Feb ’11<br />
The next speaker in line was Kunal Shah, who chose <strong>to</strong> delve on commodities as an asset<br />
class, its value, the opportunities and outlook in the coming times as well as the potential<br />
risks involved in commodity trading.<br />
Where opportunities are concerned, Shah said that the volumes have grown by leaps and<br />
bounds even though most have not got the permission <strong>to</strong> enter the commodity markets.<br />
He moved on <strong>to</strong> the do’s and don’ts <strong>to</strong> be followed by market participants while trading<br />
in the commodity markets. According <strong>to</strong> him, all those entering the commodity markets<br />
should have adequate knowledge and must only trade as per individual capacity and keep<br />
a futuristic view while trading in commodities.<br />
He attributed the rise in commodity prices <strong>to</strong> a number of reasons, including liquidity. He<br />
<strong>to</strong>ld the audience that where fundamentals are strong, there will be liquidity. Shah also<br />
mentioned that commodities have outperformed other asset classes globally because<br />
currently commodity fundamentals are quite strong.<br />
Shah said that in the coming times, the population is bound <strong>to</strong> rise and the demand will<br />
maintain an upward pressure on commodity prices. He spoke about commodity index<br />
funds and said that he sees a liquidity-driven run up in the markets since the value of<br />
commodities is rising.<br />
Talking about the outlook of the commodities market, Shah said that inflation is on a rise<br />
due <strong>to</strong> a gap in the demand and supply of agro commodities. He is bullish on agro<br />
commodities till no substantial rise is visible in their supply. He also listed out various<br />
reasons supporting his bullish outlook on agricultural commodities.<br />
Shah said that there has been no major correction in commodities but inflation is rising<br />
due <strong>to</strong> global uncertainties like the European sovereign debt crisis and excess liquidity.<br />
Rising commodity prices will affect the profitability of companies.<br />
The slackening growth in China, weak housing market data in the US and high frequency<br />
trading that has been adopted globally are all posing a problem presently and could do so<br />
in the future <strong>to</strong>o. Shah feels that rising rates could affect growth prospects of economies<br />
and, in turn, affect commodity prices.<br />
In agro commodities, Shah feels guar seed could test `2,900 level and guar gum could<br />
<strong>to</strong>uch the `7,200 level in a month’s time. Shah expects soya bean prices <strong>to</strong> drop and<br />
advised inves<strong>to</strong>rs <strong>to</strong> accumulate it on declines as he sees soya bean giving good returns in<br />
the coming year. He is bullish on coriander seeds and thinks the price will <strong>to</strong>uch<br />
`6,000/quintal – `7,000/quintal in the next four months or so. Long positions in cumin<br />
seeds are <strong>to</strong> be avoided in the near future.<br />
As far as base metals are concerned, Shah feels that only nickel is strong and one could<br />
enter around the level of `1,130/kg – `1,135/kg and see the level of `1,200/kg –<br />
`1,230/kg. Copper can be shorted around the level of `450/<strong>to</strong>nne – `455/<strong>to</strong>nne with a<br />
s<strong>to</strong>p loss of `460/<strong>to</strong>nne - `465/<strong>to</strong>nne. He feels that zinc, as a base metal, is fundamentally<br />
weak. Shah warns inves<strong>to</strong>rs of the ongoing rally in other base metals and thinks that the<br />
short-term outlook is not very positive but he is bullish on base metals with a long-term<br />
investment perspective.<br />
Shah does not see much of an upside fundamentally in crude oil and believes it will go up<br />
<strong>to</strong> a maximum price of $95/barrel - $96/barrel. In the near term, a correction in precious<br />
metals is likely but the long-term outlook is bullish.<br />
It’s simplified...<br />
57
Manish Rangari,<br />
CEO, Indian Bullion Association<br />
58<br />
Beyond Market 04th Feb ’11<br />
The last speaker for the day, Manish Rangari, CEO of the Indian Bullion Association<br />
feels that the commodities market will correct in 2011. He spoke on the outlook for 2011<br />
and the advantages of bullion as an asset class. Rangari said that gold is a very good asset<br />
class and that as much as 30% of the <strong>to</strong>tal world consumption is by India. He also feels<br />
that in the coming years, India will hold the maximum amount of gold. Rangari says that<br />
gold production is limited and is always connected <strong>to</strong> a country’s economy.<br />
Gold is an asset which hedges us against inflation. Even though the rally in the shortterm<br />
may not last long, Rangari feels that it will be a sideways movement. Though in the<br />
coming days, the maximum returns could be from gold investments.<br />
He urged the audience <strong>to</strong> invest in gold since even countries are buying gold. He says<br />
that if gold investment is done with a systematic approach, an inves<strong>to</strong>r will not only beat<br />
inflation but also build a strong portfolio as well as take advantage of easy liquidity. To<br />
sum it up, Rangari threw light on the different avenues through which people can invest<br />
in gold.<br />
This was followed by a discussion among panelists and a round of questions and answers. The camp was a<br />
huge success if the number of attendees is anything <strong>to</strong> go by and this encourages Nirmal Bang <strong>to</strong> hold similar<br />
such camps in the future as it will educate many more inves<strong>to</strong>rs who will be able <strong>to</strong> take guidance from the<br />
experts and profit from them.<br />
The next camp will he held on 18th February at LudhianA.<br />
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It’s simplified...
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