After remaining tumultuous in the last few quarters, the Indian ...beyondmarket.nirmalbang.com/issue76/Download/magazine.pdfAfter remaining tumultuous in the last few quarters, the

After remaining tumultuous in the last few quarters, the Indian rupee perhaps is in for an autumn ahead

For Pr ivate Circulat ion Volume 1 Issue 76 04th Jan ’13

It’s simplified...Beyond Market 04th Jan ’13 3

DB Corner – Page 5

Too Good To Be TrueInvestors must always read the fine print while investing in the markets, especially in IPOs since what is being portrayed may not always be true – Page 6

Incentivizing SavingsThe RGESS aims to encourage the flow of savings and improve the depth of domestic capital markets, while promoting an equity culture in India – Page 9

Trick Or TreatAlthough the government has set up the Cabinet Committee on Investments, it is not without its set of riders, which could still be an impediment to growth – Page 12

Simplifying Tough ChoicesInvestors can learn a lot about the markets and companies in particular when the going gets tough as it may not be as bad as it seems – Page 16

Bond With The BestInvestors can consider bonds for the purpose of investment in volatile market condi-tions – Page 20

Striving For SupremacyThe Indian aviation sector needs to improve its infrastructure to improve performance and achieve global recognition before flying high on its laurels – Page 22

Riding On HopeShort-term blips notwithstanding, the commercial vehicles segment is poised for tremendous growth in the future – Page 25

Keeping It RealCurbing of counterfeiting of drugs through the adoption of a unique code verification technology and mobile SMS authentication for all domestic medicines produced in India is caught in a war with industry and the concerned ministry - Page 28

Lakshmi Machine Works Ltd: Spinning A Success StoryDistinctive leadership position, strong balance sheet and customer-centric approach, coupled with improving business environment have led to attractive valuations for the global textile machinery manufacturer – Page 32

On A New NoteAfter remaining tumultuous in the last few quarters, the Indian rupee perhaps is in for an autumn ahead – Page 36

A Better AlternativeIndex funds can be considered by cost conscious investors with a long-term perspec-tive – Page 40

Important Statistics For The Fortnight Gone By – Page 44

A Measure Of Performance IIP numbers are important as they help gauge the general level of industrial activity in an economy for a specific time period – Page 46

Geometry At WorkInvestors can take lessons from geometric shapes as they teach us a thing or two about the markets – Page 50

Volume 1 Issue: 76, 04th Jan ’13

Editor-in-Chief & Publisher: Rakesh BhandariEditor: Tushita NigamSenior Sub-Editor: Kiran V Uchil

Art Director: Sachin KambleJunior Designer: Sagar Padwal

Marketing & Operations:Divya Bhurat, Shreelatha Gollavathini

We, at Beyond Market welcome your views, comments and feedback. Do help us to grow better as per your liking. This is our attempt to reach you better while crossing horizons...

Web: www.nirmalbang.com [email protected] No: 022 - 3926 8047

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Research Team: Sunil Jain, Vikash Bairoliya, Kavita Vempalli, Dipesh Mehta, Anand Shendge, Manav Chopra, Vikas Salunkhe

It’s simplified...Beyond Market 04th Jan ’134

The Indian stock markets fared better than its global peers in the year 2012 although economic uncertainty around the world, political deadlock in Europe and fiscal cliff debate in the US kept markets volatile in India. However, experts believe that the coming year could bring cheer to the markets as the government may announce a slew of populist measures in view of the general elections in 2014. Comments from industry veterans on the markets and their outlook for the year 2013 are interspersed in this issue.

The Indian currency is on the same page as the markets since the rupee too witnessed tumultuous times in the past few quarters. However, the rupee is likely to enjoy a smooth ride in 2013. Factors like relative economic outperformance in emerging markets and improved risk appetite will lend support to the Indian currency in the coming year. Our cover story explains this issue in detail.

Apart from this, we have covered a range of topics in the current issue of the magazine. The topics include the importance of studying IPOs thoroughly before investing in them so as to avoid any pitfalls in the future, the aim of the recently introduced Rajiv Gandhi Equity Savings Scheme (RGESS) in relation with the stock markets, the setting up of the Cabinet Committee on Investments to boost physical infrastructure in the country, the need for better infrastructure in the aviation sector, the lack of consensus between the pharmaceutical industry and the Ministry of Commerce over the adoption of a unique code verification technol-ogy and mobile SMS authentication for all domestic medicines produced in India and how market participants can look for positives in the markets despite the overwhelming dampeners, among other topics.

The Beyond Learning section explains the importance of IIP numbers in an article. There is also a piece on the different geometric patterns that are formed by price movements of stocks and how they help in understanding the direction a stock is likely to take.

As we bid adieu to the year 2012, here’s wishing you all a prosperous and Happy New Year. Let us hope that our association with you grows from strength to strength in the coming year too. Happy ReadinG!

Tushita NigamEditor

A NOTE FOR THE FUTURE


Disclaimer It is safe to assume that my clients and I may have an investment interest in the stocks/sectors discussed. Investors are required to take an independent decision before investing. Investment in equity is subject to market risk. Our research should not be considered as an advertisement or advice, professional or otherwise. The investor is requested to take into consideration all the risk factors including their financial condition, suitability to risk return profile and the like and take professional advice before investing.

he past fortnight was dominated by news on fiscal cliff in the US. As the year drew to a close,

the US reached a deal at the eleventh hour to avert huge New Year tax hikes and spending cuts, known as fiscal cliff, which would have otherwise sent the US economy into recession.

The deal between the White House and Congressional Republicans would raise taxes on the richest Americans but exempt everyone else. This extension will allow the US to put off the $109 billion in budget cuts across the government for two months. The Chinese economy too is witnessing a revival.

There was some cheer on the Indian front too. FIIs continue to be on a buying mode. And inflation for the month of November too showed signs of improvement. It decreased month-on-month despite expectations of a rise in inflation by the RBI.

Also, the Index of Industrial Production (IIP) grew 8.2% in October, compared to a negative 0.4%

T in September, beating estimates by analysts. However, since core sector growth has not been good, IIP numbers for November may not be as good as in the past.

Further, the RBI kept key rates unchanged in its mid-quarter monetary policy. While the repo rate stands at 8%, the reverse repo at 7%, the cash reserve ratio is now at 4.25% as before. Similarly, if the declining trend in inflation sustains, then the RBI may consider rate cuts in the upcoming monetary policy review.

The Indian stock markets look good at current levels as well as on declines, around the 5,850 level on the Nifty. Market participants can look at stocks like Indiabulls Real Estate Ltd (LTP: `77.75), Sun TV Network Ltd (LTP: `430), IndusInd Bank Ltd (LTP: `424.15), Yes Bank Ltd (LTP: `477.20), NMDC Ltd (LTP: `168.50), Cera Sanitaryware Ltd (LTP: `405.55), Vaibhav Global Ltd (LTP: `121.90), Mahindra & Mahindra Financial Services Ltd (LTP: `1,123.10) and Zee Entertainment Enterprises Ltd (LTP:

`223.35) look good from investment and trading perspectives.

Earnings results will start pouring in from the coming fortnight. To begin with, IT results are not expected to be good as it was a weak quarter and IT majors were impacted due to Hurricane Sandy in the US. However, India Inc’s results may see improvement in the coming quarter.

Lastly, expectations for the budget are building up as the government’s focus is on growth. This will support industries and thus be a positive for the marketS.

The Indian stock marketslook good at current levels

as well as on declines, aroundthe 5,850 level on the Nifty.

Sensex: 19,580.81Nifty: 5,950.85(As on 1st Jan ’13)


and was subscribed 6.58 times. Though retail investors participated to a large extent in these two issuances, market experts said that this comeback was cautious and is deemed to pick up pace as some more issuances go through successfully.

Alongside the success of these three IPOs, the huge offer for sale of NMDC also received good response. The NMDC issuance was once again marked with the active participation of institutional investors - both domestic and foreign.

This offer for sale raised a total of `5,900 crore for the government and was oversubscribed 1.73 times. The tax-free bonds of REC and PFC are other issuances that received a good response from investors.

TOO SOON TO REJOICE?

While the success of these issuances may be considered a good sign for the primary market, it is still too early to call it a revival. Come 2013 and there is expected to be a flood of offerings from the PSU sector as the government has to meet its disinvestment target of `30,000 crore by the end of this fiscal year. Though disinvestment issuances may get through, the IPO market is still being frowned upon. The capital market regulator, Securities and Exchange Board of India (SEBI), recently pointed out that investment bankers were not putting in enough effort as far as mechanism for price discovery is concerned.

Addressing a summit for merchant bankers recently, SEBI chairman UK Sinha said that credibility of bourses were at stake as more often than not retail investors remain clueless about the returns on their stocks.

Retail investors participate in IPOs in

the hope of good returns but a few bad decisions about investing in IPOs may bring down the value of their overall portfolio.

A closer look at some of the IPO issuances made in the last year show that while stocks are giving stellar returns, there are quite a few that have had gullible investors losing quite a lot of money.

THE WINNERS AND LOSERS

While the stocks of Thribhovandas Bhimji Zaveri, Aanjaneya Lifecare, VKS Projects and Tree House Education have seen their stocks appreciating in the range of 70% to 230%, there are also the ones like Bharatiya Global Infomedia, Tijaria Polypipes, Vaswani Industries, Taksheel Solutions and Inventure Growth and Securities that have disappointed investors majorly as they have lost 80% to 90% in their stock value as compared to their listing price.

The problem with most of these above mentioned stocks was that they rode the hype while the stock markets were doing reasonably well in mid-2011.

But it is not fair to blame merchant bankers and companies who are making offerings alone. The onus is as much on the retail investor who tends to get carried away where an IPO is concerned.

In fact it would serve well for investors to remember that the rules of investing in an IPO do not differ vastly from the rules of investing in a stock in the secondary market.

While considering any issuances the ground rules of investing in companies that offer a good profitability pattern, high rate of growth as well as good management

ith a spate of positive news flow from the North Block since September onwards,

the sentiment seems to have improved on the bourses. Much awaited reforms such as foreign direct investment (FDI) in multi brand retail, diesel price hike and “overweight” recommendation by Goldman Sachs spread some Christmas cheer in the markets.

Buoyed by this positive sentiment in the secondary market, the primary market too is abuzz with activity after a lull of almost three years with a slew of offers including initial public offerings (IPOs), qualified institutional placements (QIPs) and offers for sales; some of which evoked a good response in the month of December, while others hold a lot of promise for the days to come.

THE EARLY ACHIEVERS

Already three IPOs including the largest offering of Bharti Infratel’s `4,500 crore IPO has seen a strong appetite. Despite the fact that its success was largely due to the participation of institutional investors, Bharti Infratel’s IPO is a significant landmark because it is the first issue to get full subscription in the last two years.

The issue was bid 1.3 times as institutional investors such as Goldman Sachs, Temasek, Nomura and Anadale stepped in the band of `210 to `240.

While retail investors stayed away from Bharti Infratel’s offering, issuances from rating agency CARE got an overwhelming response as it got subscribed 41 times, collecting a little more than `17,000 crore.

The IPO of PC Jewellers on the other hand raised more than `1,100 crore

W


should be considered worthy of investment by market participants.

A lot of investors get carried away with the spate of advertisements, positive news flow and analysis that float around the launch of an IPO.

Even valuations are so cleverly portrayed at times that investors fail to realize that they have been drummed up for no reason at all. An investor must bear in mind that investing in an IPO is a good idea only when one gets to be a part and parcel of the growth of the company.

However, it may not be true in all cases as there may be some companies that are making an offer when they have some major projects lined up.

THE DANGER SIGNS

It is, however, important for investors

to watch out for some tell-tale signs that spell out danger. For instance, one must watch out whether or not an offering in the primary market is just an exit strategy for a promoter or other investors such as private equity investors or venture capitalists.

The key in the case is how much of the stake in the company is being offloaded through the issuance. If this stake is too high, one should obviously stay away from it.

Also, keep away from those companies that are just turning up in the primary market riding on the trend. Point in case was the dotcom boom which saw a host of rogue companies that added “infotech” to their company names to ride the dotcom wave.

Another key mistake that investors make is that they rush to sell the stock right after it is listed, because they

have the fixed notion that they can make a killing on the profits on the day of the listing.

While it may have been true in some cases, it is not a strategy that should be followed every time. Investors should bear in mind that the listing price may often be manipulated and the stock is fraught with volatility on its listing day.

Sometimes even good companies have a start that has been a little shaky, like that of Thribovandas Bhimji Zaveri.

Last but not the least, investors should remember that while there is enough appetite in the market to absorb the spate of upcoming issuances, the key will always be the quality as well as the pricing of the issuance. If you are planning to invest in forthcoming issuances, the offer document should indeed be your BiblE!

LOOKINGFORWARD

Deepak Parekh, Chairman, HDFC

Despite the fact that we have fundamental problems in the economy such as a high �scal de�cit, infrastructure bottlenecks and current account de�cit, the government has been able to carry out some key reforms in 2013.

Important initiatives such as raising of diesel prices and opening up of sectors such as retail and aviation have been strong reforms. This makes me positive that 2013 will be a better year than 2012 for India Inc. The Indian economy has bottomed out and the GDP growth is likely to improve to 6% to 6.5% in the next �scal. In�ation, interest rates and oil prices will also come down in 2013. However, global sentiments are weak and emerging currencies like ours are likely to remain weak in the coming year.

The RGESS aims to encourage

the �ow of savings and improve

the depth of domestic capital

markets, while promoting an

equity culture in India

ndia has a rich stock market history. Our primary bourses BSE and NSE have a combined existence of over

150 years. However, retail participation in the stock markets is anything but broad based. While stock exchanges and regulators were busy all the while putting technology and systems in place, a lackadaisical response to a few of the primary issuances and an enormous requirement of equity capital of corporates in the future, have forced authorities to take note of the shallow equity culture in India. To this effect, the government in its Union Budget announced a scheme to lure first-time investors to stock markets by giving tax benefits. The scheme is called as Rajiv Gandhi

I Equity Savings Scheme (RGESS). While it took time to fix up the nitty-gritty, the scheme is finally available for first-time investors from 23rd November of this fiscal year.

The article attempts to explain the scheme in detail: the eligibility criteria, securities available to invest, the lock-in period and the tax benefits. However, before we understand the salient features of the scheme, it becomes imperative to understand why a robust equity-culture is essential for a developing nation like India and what the thinking was behind the launch of this scheme. WHY THE SCHEME

The term equity capital is also

INCENTIVIZINGSAVINGS



the proportion of the overall savings of an individual that go into the stock markets. India has a healthy savings rate, above 30% of the GDP. Of the overall domestic savings, 50% go into physical assets like gold and real estate, with the remaining 50% in financial assets. A majority of savings go into bank fixed deposits and postal savings while direct and indirect equity part stands at a little less than 4% of the total household savings.

Further, according to a SEBI sponsored survey only 11% of domestic households (24.5 million of 227 million) invest in equity, debt, mutual funds, derivatives and other instruments in the capital markets, which is abysmally low. Also, participation is highly polarized in top cities of the country.

With this as background, the government in the Union Budget for this year announced a scheme that would encourage first-time retail investors to come and try the stock markets and get tax benefits. The scheme intends to increase retail participation in the stock markets and channelize domestic savings into capital markets. Other implied reasons for announcement of the scheme was diverting retail investor’s attention from gold, thus helping countries’ current account deficit (CAD) and garnering investor participation in government’s divestment programme. WHAT IS THE SCHEME

Who Is A New Investor?

The Rajiv Gandhi Equity Savings Scheme is for a new retail investor, who has an income of less than `10 lakh per year and who does not have a demat account. He is also eligible if he has opened a demat account in the past but has not made any transaction in the equity segment or the

derivative segment of the market.

Eligible Securities

Eligible securities for RGESS are companies that are listed with BSE 100 and CNX 100, public sector companies that are categorized as Maharatna, Navratna or Miniratna and ETFs and mutual funds that are listed on a stock exchange and invest in “eligible securities”. The first-time investor can also invest in follow-on-public offerings (FPOs) of the above mentioned securities.

In case of mutual funds, the investors can also participate in new fund offerings (NFOs) of eligible mutual funds. Also, in order to facilitate government’s divestment programme, IPO of a public sector undertaking where the government has at least 51% shareholding and has an annual turnover of at least `4,000 crore over the past three years are made available for investing under the RGESS.

Lock-In Period Of Investment And Other Holding Requirements

The holding period of eligible securities is three years. All eligible securities are required to be held for a period called ‘fixed lock-in period’ and ‘flexible lock-in period’. The ‘fixed lock-in period’ is for one year, during which no churning of securities is allowed. The ‘flexible lock-in period’ is for the next two years, during which restricted churning is allowed. The demat account created under the scheme will be converted into an ordinary demat account on the expiry of the holding.

Amount Of Investment And Tax Benefits

If you fulfil the above conditions, you can invest a maximum of `50,000 in the scheme, which will give you a tax

referred to as risk capital. Not every expansion of a corporate can be done with debt capital as it has got its implications on the balance sheet. A bank always checks the amount of ‘skin in the game’ that the corporate has in the business before lending. Banks check whether corporates can sell equity to risk takers in the business. Thus, equity capital becomes imperative for corporates and so does the role of the stock markets, which facilitate funding needs of businesses. Thus, a strong financial market with a broad market participation is quite essential.

According to a McKinsey report, going forward India will require `145 trillion over the next five years to ensure GDP growth of 7.5%, of which `26 trillion would be required from capital markets, which is a tall order by any standard.

While the last decade has seen a wide network of brokers, sub-brokers and terminals reaching out to far fledged places in India leading to a decent amount of stock market participation by retail investors, yet their involvement remains volatile.

To put things in perspective, the number of demat accounts in India has grown from 6.7 million accounts in 2004 to 20.3 million accounts today. However, a number of these accounts (approx 30% to 35%) are dormant, while a good amount of new accounts are opened to trade in currency, bullions or commodities. Even indirect investments through mutual funds are low.

A quick global comparison indicated that in 2011 retail investor participation as a percentage of the total population in India was just 1.3%, where as in the US and China it was 27.7% and 10.5%, respectively. Another barometer of participation is


deduction of `25,000, this adds up as total tax savings of `5,000 a year as explained here. Also, dividend from the investments is tax free.

To illustrate, let us take the following example in which a person has a gross income of `10 lakh and decides to invest `50,000 as per the RGESS and receives tax deductions. Tax deduction means if you spend your income on certain activities, you will not have to pay income tax on that much amount of your income. Hence, the taxable income is:

= `10 lakh - 50% of `50,000 = `10 lakh – `25,000= `9,75,000So, the person has to pay tax on `9,75,000 as against `10,000,00.

Since the applicable tax slab is 20%, the person saves: `2,00,000 - `1,95,000 = `5,000.

Note:

saving = `2,500 (for investment of `50,000)

saving = `5,000 (for investment of `50,000)

An investor who has claimed a deduction in any assessment year,

will not be allowed any deduction under the scheme for any subsequent assessment year. Hence, you can avail of the benefit only once. Also, deductions claimed will be withdrawn if the lock-in period requirements of the investment are not complied with or any other condition of this scheme is violated.

Indian investors have ample capacity to take risks but many investors have stayed away after burning their fingers in the bear market of 2008-2011. No doubt if RGESS clicks, it can help spread the equity culture in India, which has been hit due to negativity from the West and unsuccessful IPOs in the recent past.

Just to illustrate, India has an estimated 15 million individuals out of the 25 million tax payers whose annual income is less than ̀ 10 lakh. If half of these individuals were to invest the full limit of `50,000 in the equity markets, the Indian stock markets can receive just around US $12 billion in investments, which is equivalent to nearly one year of

The success of RGESS can lead to transfer of assets from traditional non-capital forming savings instruments such as bank deposits and

diversification in the already existing retail investor portfoliO.

Quick Facts

Who Can Invest In RGESS? New retail investors with an annual income of less than `10 lakh

The maximum amount eligible for claiming benefit under RGESS is `50,000

invested. The benefit is in addition to deduction available under section

lock-in for subsequent two years.

Source: BSE &NSE

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Although the government

has set up the Cabinet

Committee on Investments,

it is not without its set of

riders, which could still be

an impediment to growth

magine this: you are a real estate developer and contemplating a project. Do you have any idea how many

approvals or clearances you need from authorities to kick start the project? An astounding 55 approvals from over a dozen departments are required for the same.

As many as 50 approvals are needed to set up a petroleum project. Did the numbers astound you? Industrialists have been encountering red tape while facing the onslaught high costs to keep the files moving from one department to the other.

Industrialists cite the need to obtain multiple approvals from a plethora of departments and ministries as the main factor behind delay in projects,

I along with other factors like land acquisition and funding for the project. It may take several months or even years to start a project.

To put things into perspective over `2 lakh crore worth of projects are stuck in different ministries due to want of statuary and regulatory clearances.

The delay in project approvals has come as a byproduct of a democratic nation like India. The government knows the implications of stalled or delayed projects on the economy.

In fact its 12th Five-Year Plan has got ambitious targets and cannot be achieved without contribution from private players.

Hence, amidst a slew of reforms in



REACH AND FUNCTIONING OF THE CCI

CCI has been created to fast-track clearances for infra projects requiring an investment in excess of `1,000 crore. It will function under the leadership of the Prime Minister. The committee will comprise of the finance minister, the law minister as well as the ministers of key infrastructure ministries.

The committee will identify projects in notified sectors and prescribe time limits for approvals from individual ministries from which approvals are needed for the project.

If a ministry has to grant its approval, there will be a 30-day window and if the ministry does not give some sort of a response by that time, then the project will be taken over by the Cabinet Committee on Investment to take it forward.

However, if an individual ministry gives a negative feedback on a project proposal, the matter ends at that level and the CCI does not come into the picture. By this, the CCI does not encroach into other ministries’s turf.

Further, the CCI will also do project monitoring in notified sectors and review implementation of the delayed projects. This is likely to bring in some degree of predictability to big ticket infrastructure projects. Individual companies will not be allowed to go to CCI. The CCI will help with inter-ministerial difference to expedite big infra projects and also simplify the rules followed by various ministries in the government.

WHY THE NEED FOR CCI

The Indian economy is in a slowdown mode. Capital expenditure (capex) which translates into GDP growth with a lag is not picking up.

According to Centre for Monitoring Indian Economy (CMIE) database, new project announcements continued to decline in the quarter ended September ’12. New investment proposals dropped for the sixth consecutive quarter for the quarter ending September ’12. As many as 293 new investment proposals worth `574 billion were captured during the quarter ended September ’12 as compared to 735 projects worth `2,375 billion that were captured in June ’12 and 931 projects worth `2,328 billion in September ’11.

New investments recorded during the September ’12 quarter at `574 billion were the lowest since September ’04. So, in a way we are back to FY03-04 levels in terms of new capex activity. The number of stalled projects continues to inch up and a future decline in the capital expenditure is on the horizon. According to data available, projects worth `2 lakh crore are stuck for want of statutory and regulatory clearances. Industrialists are in no hurry to set up capacities.

Few years back when private investments, both Indian and foreign, were on a rise, the government had promised them land, ore, fuel and clearances and asked them to start the project. In a number of cases, promises have not been kept and numerous projects stand stalled. Industrialists are surprised and feel cheated by the policy logjam.

According to the Ministry of Statistics and Programme Implementation (MOSPI), as of end June ’12, of the 195 mega public infra projects, three were ahead of schedule, 70 projects were on schedule, 91 delayed, 20 have no fixed date of commissioning and 11

the past few weeks, the government has constituted a committee called the Cabinet Committee on Investments (CCI) to boost physical infrastructure in the country.

CCI intends to expedite the approval process for projects and clear bottlenecks for large projects. It was called the National Investment Board (NIB) when such a plan was actually discussed by the government few months back. However, the new CCI seems to be a watered down version of NIB.

NIB was actually mooted to have more teeth in the form of single window project clearance and its decision over a project binding on other ministries.

However, the mellowed down version (CCI) was done primarily to address the Environment Ministry’s objections to National Investment Board (NIB), which was thought to assume some of its authority. It was thought to be anti-democracy.

The formation of the CCI was condemned for circumventing the democratic process in favour of big industrial and investment lobbies.

In the new version, CCI’s primary role will be to urge nodal ministries to fast-track clearances and de-bottleneck stalled projects.

CCI or NIB or some committee by other name, is welcomed by the industry, which is anyways living under the cloud of uncertainty, both on policy and business fronts.

However, to understand the reach of the committee one will have to wait till it is printed in black and white. Given the prominence infrastructure sector holds in India, this article tries to explain the need and functioning of such a committee.


projects sanctioned without commissioning schedules. The CCI is likely to focus on these 91 delayed projects, a majority of which belong to the beleaguered power sector.

With this as background, it was high time for the government to come up with some reform for the infra space.

Further investment in infrastructure is envisaged to be doubled to US $1 trillion during the 12th Five-Year Plan (2012-2017) and about half of this is targeted to be achieved through private sector investment. By announcing CCI, the government has

acknowledged the gap in the existing framework and now they want to fill that gap.

VIEWS ON CCI

While CCI is seen as a step in the right direction, the fact that they can’t overturn other ministries’s negative decisions leaves them helpless. The CCI will also not be able to help if any delays occur at the state level. The CCI will also not be able to solve the burning issue of land acquisition, which is a much bigger cause of concern and is monitored by individual states.

Thus, it is widely felt by experts that the role of CCI gets limited to the delayed projects. However, even if the CCI takes up the case of the delayed projects, a majority of which are from the power sector, it will prevent significant capex decline and will support GDP growth.

The other silver lining is that in the short term, PSUs could undertake new projects as they are cash rich. This, along with interest rate cuts by the apex bank of India in the near future could rub off on private companies and give the much needed push to the country’s infrastructurE.

LOOKINGFORWARD

Vijai Mantri, MD & CEO, Pramerica Mutual Fund

We are bullish on India in 2013 as valuations are not looking as high as its peers. Driven by government reforms, we think that the markets will be able to deliver between 8% to 10% returns. The Sensex and the Nifty are likely to escalate around 15% from the current levels. Banking, pharma, infrastructure, capital goods and FMCG are sectors that are going to have a major in�uence on the markets in 2013.

Though there is some traction on the reforms front, elections in major states and the announcement of general elections will have some impact on the markets in 2013. We cannot expect monetary authorities to push the markets higher and the cost of capital is not likely to come down dramatically for corporate India.

With in�ation hovering around 7% to 8%, interest rates could fall marginally in the �rst half of 2013. As for GDP growth, we think there will be around 5.5% growth in 2013.

QUAL

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MID AND SMALL CAP STOCKS

It is a well-known fact that in situations where both the markets as well as the economy are doing badly, smaller and mid-sized companies suffer the most in terms of prices and fundamentals of companies. There could be some exceptions, though.

Small and mid-sized companies have lower liquidity or number of outstanding shares floating in the markets, which is the main reason why these companies tend to fall more during a downturn or a correction in the markets.

When there is less liquidity in a particular counter or stock, it is obvious that desperate selling takes place at lower prices as there are not many price matching trades and quantities. And if an investor wants to exit with large quantities of the company’s shares, it may cause mayhem for that particular company.

However, the same thing could also work wonderfully to create higher returns when the entire process reverses and there is a revival in the markets and industries. During an upturn in the economy, mid-cap and small-cap companies bounce back faster and their fundamentals improve significantly. But the icing on the cake is the share price.

In a poor market and economic condition, a small- or a mid-cap company might trade say at a price to earnings multiple of about 1-3 times, but if the situation improves huge returns could be generated by way of re-rating of valuations. Similarly, on the same set of earnings if the company is giving a price to earnings multiple of say 2 - 6, the returns will be higher.

And if re-rating happens along with improved earnings, share price

returns could be even higher. This is possible as on most occasions the perception of the same company in the minds of investors changes quite drastically in good market conditions, which leads to re-rating and higher-than-expected returns. This could be vouched from the fact that today mid-cap and small companies are trading significantly at lower valuations as compared to their large-cap peers in the industry.

HIGH DIVIDEND YIELD

Investors do not give much attention to dividends. However, companies with huge dividend yields could make a big difference in the long run.

Even if one assumes a portfolio return of say 15% over the next 30 years, an additional dividend income of say about 3% can allow a person to retire in the 26th year instead of the 30th year in the earlier case. Besides, dividends are not static unlike interest on a bank deposit. If one chooses the right candidate, dividends could grow at a much higher rate in the future as the company grows.

The best time to buy high dividend yield stocks is during a blood bath in the markets and when there is widespread pessimism in prices.

Higher dividend yield is the indication of both protection of the invested capital and appreciation. However, this cannot be generalized because investors need to choose them with care after in-depth understanding of the fundamentals of the company.

If the markets are witnessing a correction, then the company with a high dividend yield will allow share prices to fall less. Similarly if the markets are recovering, high yield stocks are first to catch investors’ eye and thus the re-rating or the bounce

ed by higher inflows, particularly foreign fund flows and major improvement in investor

sentiments, largely influenced by government policy action on various issues, the Indian equity markets have recovered quite significantly in the last couple of months.

One school of thought believes that this rally could continue because as of now the re-rating of markets is based on liquidity and hope. However, a lot more could happen if the government continues to take policy action and is followed by RBI’s rate cuts.

The Indian economy has taken a beating in the last few months and a further deterioration could cause a serious setback to the government’s tax collection and lead to a negative impact on fiscal deficit.

At this point in time there is a feeling that the government cannot afford this given its own divestment programmes, elections in 2014 and the looming threat of downgrading of India’s sovereign rating by rating agencies. On top of this the rupee has already caused a lot of nuisance. And anything more is going to hit corporates badly and, subsequently, the overall economy.

Besides, market pundits feel that retail money is yet to come into the market, which could be self-sufficient to fuel the rally because retail investors do not give much attention to valuations as they simply jump in to participate in the rising market.

If these things indeed hold true, the year 2013 is likely to be better for market participants after a long period of disappointment.

Listed here are five themes or strategies that could help in riding the market rally to achieve better returns.

L


back in the share prices occurs at a much faster pace.

Not just that, investors who buy high yield stocks and hold on to them when they witness a recovery in the fundamentals of a particular company, the dividend they earn itself could create huge wealth for them.

This is possible because if a company is paying `10 as dividend on every share when the environment is poor, it could raise the dividend to say `15 or `20 in normal and good conditions. Over the last two years many Indian companies have cut their dividends due to industrial and economic slowdown, apart from the individual issues that the companies are facing at the moment.

However, if we take that as the base, then the dividend yield will be lower because there are chances that in the event of a revival in many cases dividend rates get restored, which will lead to higher returns and boost investor interest, including institutional buyers.

UNDERVALUED STOCKS

If one can research and spend some time screening a group of stocks like BSE 500 companies or BSE 100 companies, one would definitely find some real bargain stocks or stocks that are trading at lower valuations.

The most prevalent criteria such as price to earnings multiple, price to book value and enterprise value to earnings before interest depreciation and tax (EBIDTA) could be used to filter out the stocks.

There are many good quality stocks which are trading at lower valuations compared to their historical valuations. Most of the time, investors do not have long-term views and the markets generally discount

next year’s earnings at the most.

But if one can look at the valuations beyond one or two years and take the call on earnings, real gains can be made. There are reasons for them to command lower valuations, but in many cases those reasons could be temporary and unwarranted.

Also, there could be cases where most of the negatives that could happen to the company are already in the price, which means whatever good things that could happen to the company will be accompanied by the price reaction. Contrarian investors at this point can benefit the most and generate higher returns for themselves.

HIGH BETA STOCKS

Beta represents stock volatility compared to broader indices. Comparing a stocks’ return with market returns can give a fair idea about the behaviour of a stock compared to the broader market. So, a high beta counter fluctuates higher than the broader indices.

Considering their nature they tend to rise and fall at a higher pace when compared with the movement in leading indices like the Sensex or the Nifty index. Typically, companies with a cyclical nature of business or businesses which have high sensitivity with interest rates, commodity prices, etc tend to be in this category.

However, some of the stocks become high beta as a result of traders’ interest due to news flow which leads to higher volatility in share prices of that particular company.

In a rising market if one has high beta stocks, the returns of the overall portfolio could be higher given the fact that they tend to go higher compared to the markets.

The Indian markets have already moved from the lower levels and so have high beta stocks. However, if one believes that the current rally in the Indian equity markets is going to stay longer there are many companies in rate-sensitive sectors and in the commodities space, which have a better chance of outperformance.

High beta also means higher risk, which not only comes from the behaviour of the share price but also due to the nature of the business.

In bad market conditions investors tend to allocate their capital towards stable and sustainable businesses, which are not very susceptible to poor economic environments.

But in good or improving market conditions, risk-taking appetite of investors increases. They like to move their investments from defensive sectors or stocks to high-risk companies and stocks as the overall perception about the risk changes.

In this background if the appetite for risk returns, which is typically the case in a rising market, a high beta stock tends to give better returns.

On top of that a broader economic recovery is largely good for high beta stocks because key business drivers like interest rates, commodity prices, liquidity and industry environment improve, which leads to a change in fundamentals and perception about these companies.

TURNAROUND CANDIDATES

Poor economic conditions, which could be explained in terms of demand slowdown, higher interest rates, scarcity of funds, policy paralysis and many more reasons were responsible for several companies going through a severe downturn in the recent past.


We have already seen companies from the construction space suffering due to lack of funds. There are companies from the power sector too, which have witnessed a severe downturn due to policy issues and non-availability of coal.

There are yet others who have filed for corporate debt restructuring (CDR) as a result of high interest costs and non-availability of funds.

There is a large list of companies that are stuck in the FCCB issue and others due to excessive pledging of shares by promoters. Slowdown in the exports market and currency issue demands in the domestic market are among the various reasons that have led to many of the Indian companies suffering severe financial setbacks and their share prices trading at multi-year lows.

It is a well known fact that industries and the economy go through the boom and bust cycle and that leads to volatility in the financials of companies. However, if economic conditions are going to improve and the markets are going to support, there could be some hidden games in some of these sectors which are about to rebound.

Identifying few such candidates where the fundamentals are improving and are expected to improve, there could be significant re-rating of such stocks.

If a company that is facing high debts is able to lower its interest cost as a result of lower interest cost in the economy and also manages to solve liquidity issues, the share prices of such a company could rebound as earnings rebound when liquidity in

the system improves. There will be a huge re-rating of stocks if these issues are resolved when there is a pick-up in demand.

Several companies from capital goods, construction, real estate and power sector are awaiting a turnaround in the industry and hope to return to normal conditions. During a downturn, valuations of businesses are generally stressed.

Once a turnaround takes place in a business, the perception about valuations change and investors start visualizing earnings over the next one or two years, which leads to higher valuations and higher returns.

So, if investors choose some of the turnaround candidates intelligently, it could make a huge difference to the returns on the portfolioS.

LOOKINGFORWARD

Nilesh Shetty, Associate Fund Manager (Equity), Quantum Asset Management Pvt Ltd

The perception in the Indian markets is that the government’s policy reforms will continue to be fuelled in 2013. However, it would serve us well to remember that in 2013 we shall be moving a year closer to the general elections in the country. Hence, populist policies and economic movements may be the order of the day.

Corporate earnings have gained some momentum in 2012 as we have already seen and this is likely to continue in 2013. A simple Bloomberg consensus earnings projections for Sensex companies and the long-term average PE multiple for the index shows that the Sensex could be at the level of 24,620 by the end of March ’13. However, it must be remembered that this is just a derived value and the actual levels of the Indian indices may be in large variance to this.

The WPI in�ation should range between 6% and 6.5% and we expect around 50 bps cut in the repo rate by March or April. The GDP growth is likely to move towards the long-term sustainable level of 6.5%, approximately.

WITH THE BESTBOND

Investors can consider bonds for the purpose of investment in volatile market conditions

nvesting in equities always means treading an uncertain path. It could either be a smooth ride or a painful one

that leads you downhill. This is why the participation of investors in bonds is low at less than nearly 5% of India’s population.

For such investors, there are fixed income securities. Bonds, as these securities are termed in the Indian investing context, are a relatively less explored investment avenue as opposed to equities and other simple avenues such as fixed deposits. One of the chief reasons for this is the low

I awareness regarding the bond or the fixed income securities markets.

Let us now look into the bond markets, its functioning and the various investment avenues available to investors.

THE BASICS

In simple words, bonds mean an investor lends capital to the issuer of a bond. It can be a company, an institution or the government. Given the low volatility in returns of bonds, investing in bonds is considered less risky than investing in equities.

It has been largely observed that bonds issued by the government, public sector companies and large corporations are relatively safer than those issued by private sector companies. This is because of the low possibility of default.

It has been observed that government bonds give returns that are proportionate to the returns given by savings deposits when held till maturity. Experts are of the opinion that bonds usually give returns in the range of 5% to 11% per annum. However, it depends mostly on the pattern of interest rate movements.



prevailing in the markets.

It also takes into account various factors such as credit worthiness of the issuer of the bond and the period of the bond. It is observed that a bond with high credit rating offers lower interest rate in comparison with bonds with a lower credit rating. Some experts suggest that bonds with lower credit ratings, offer higher interest rates to compensate for the lower rating and attract investors. This also holds true in case of the period of the maturity of a bond. A bond with a short period of maturity would offer less interest rate than a bond with a longer maturity. In sum, in the long run, on most occasions investors gain much more than they gain in the short-term.

Lastly, one should understand the concept of liquidity very well to gauge the performance of one’s investments in bonds. For instance, the prevailing interest rate in the market is 10% and the bond in which you have invested offers an interest rate of 11.5%, then this would naturally attract more number of investors to the bond.

Bonds are also on stock exchanges after allotment. There are some bonds which have a fixed lock in period after which they are listed on the stock exchange. Listing of a bond on the exchange provides clear details of liquidity in a bond and this helps investors to take informed and lucrative decisions regarding their investments in bonds. There is a possibility that a bond might be below its fair value. In such a case, investors need to have patience to cash in on any change in the sentiments prevailing in the markets.

TYPES OF BONDS

Bonds based on their issuers can be divided mainly into two types:

corporate and government bonds. Many corporations avail of the route of raising capital through bonds also. Experts believe that it is one of the safest routes of raising capital. A large section of experts believe that raising capital through bonds is safer than raising it through equities.

Broadly, corporate bonds can be of two types: convertible and non-convertible bonds. In convertible bonds, investors know beforehand that bonds can be converted into shares as and when needed. A non-convertible bond is a plain vanilla bond with no option of conversion of equity available.

In both types of bonds, the issuer of the bond maintains a payment schedule and the amount remains the same. There is another bond type termed as callable bonds, which means that a company can buy it back from investors by paying a premium price for it. Government bonds on the other hand are safer to a large extent. They are issued by governments to finance their developmental activities. Quite naturally, the size of a government bond is larger than a corporate bond.

Government bonds are also termed as government securities (G-Sec). It is estimated that government bonds generally offer returns in the range of 7% to 10% and their maturity can range from a period of three months to 30 years.

The government has taken steps to increase investments in their bonds. A case in point is providing tax benefits on infrastructure bonds - bonds issued to step up investments in the infrastructure sector. The government offers tax benefit on bonds up to `20,000 a year. This is one of the steps that the government has taken to build a strong bond market in IndiA.

In India, the bond market is in a very early stage. In the beginning of the establishment of bond markets, only institutions and large corporations were big players. Subsequently, small investors were allowed to trade in bonds and today, these investors have a very important role to play in the fixed income markets.

THE FUNCTIONING

Before investing in the bond market one should understand the inverse co-relation of interest rates with the prices of bonds. As interest rates go up, bond prices go down and vice versa. Basically, this inverse co-relation is the result of demand and supply in the markets for a particular bond. To have a clear understanding of the bond market one has to take into account some basic criteria like credit rating of the bond, interest rate and liquidity in the bond. By paying heed to these criteria, an investor can take lucrative decisions in the bond market.

Typically, the issuer is required to get its issue rated through a known credit rating agency. In India, the notable credit rating agencies are CRISIL, ICRA, Fitch and CARE. Considering the credit worthiness - the ability of the issue to repay principal and interest on time, such credit rating agencies award a credit rating. A bond that carries a rating of ‘AAA’ is considered as the safest investment option, while a bond having a rating of ‘A’ is considered relatively safer.

Besides, when investing in bonds, one should be aware of the interest rate factor. There are options by which investors can collect their yields on the bonds. Investors can collect their interest rates every year at the end of a year or cumulatively at the end of the maturity of the bond. Typically, an interest rate that is offered on a bond issue is based on interest rates

STRIVINGFOR SUPREMACY



aviation market will see an addition of 1,000 aircraft to its existing fleet of 400 aircraft. This increased traffic requires investments in airport infrastructure at large.

Airport infrastructure investments include building of new airports wherever necessary. It also includes upgrading existing airports. To manage increasing traffic and boost efficient handling of air traffic there is a need to invest in ground handling facilities, maintenance, repair and overhaul (MRO) facilities.

New airports are equally essential. The ministry of civil aviation has mandated building and restructuring of airports that would last for the next 50 to 100 years. The government has already approved an airport at Navi Mumbai to address air traffic woes in Mumbai. This airport, however, is still stuck at the plan stage and the work is yet to commence.

Environmental clearances took some time and after almost two years the airport is expected to materialise. Another such example is the airport at Chipi in Sindhudurg district of Maharashtra. The airport was approved in principle four years ago, but the construction of this airport has been stalled due to one reason or the other. That makes it all the more imperative to consider upgradation and modernization of the already existing airports in the country.

The government has plans to upgrade 35 non-metro airports and modernize five non-metro airports by FY17. The upgradation of airports includes night flying facilities and improved facilities at airports for both passengers and aircraft. Quick movement of passengers and cargo in and out of the airport is a priority.

With the growing threat of terrorist activities, a number of security

systems and checks are in place. Though it serves the purpose of ensuring safety on board, it also consumes time at the airport. Technology can come handy while ensuring quicker screening of passengers and cargo. It can also help to improve procedures such as check in of passengers, collection and submission of luggage.

Though metro-airports and some airlines have systems to support such use of technology, non-metro airports need not necessarily have such systems in place. There are also issues with integration of various systems run by airlines.

MRO is another component of airport infrastructure where a lot of improvement is required. In India, the MRO business is worth US $800 million and is expected to grow to US $1.5 billion by 2020. The sheer growth in traffic needs investments in MRO to ensure safe civil aviation operations in the country.

There are two reasons why there is a need to invest in MRO. First is the rising number of aircraft and second is the arrival of more sophisticated aircraft, such as the Dreamliner in India. As airlines invest in more number of aircraft, they aim at optimization of their returns.

For efficient use of aircraft, there is a need for state-of-the-art maintenance facilities across airports, which will bring down downtime and increase yield per asset. Also, more sophisticated aircraft require advanced MRO facilities to ensure best performance.

All these investments need large fund raising. Looking at government deficits and increasing non-plan expenditures such as subsidies, private participation is inevitable. Out of the estimated investment of

irport infrastructure remains a weak link in India’s growth story. Despite central planning

in the last six decades, India awfully runs short of airport infrastructure required to facilitate the growth it envisages. The demand-supply gap is rather visible after the explosive growth in the last decade.

India, the second fastest growing economy after China in the last five years, is the ninth largest civil aviation market in the world. Passenger traffic has grown at a CAGR of 13% - from 4.6 crore in FY02 to 16.2 crore in FY12. Cargo traffic has grown from 9.2 lakh tonnes to 22.8 lakh tonnes - a CAGR of 10% over the same period. Air Traffic Forecast by the Working Group under the National Transport Development Policy Committee has concluded that Domestic Air Traffic by scheduled carriers in India in 2020-21 is set to cross 159 million passengers as against 54 million in 2010-11, suggesting a growth of approximately three times the present traffic in 10 years.

The growth is more likely due to the success of the low-cost carrier model, which at the end of FY12 garnered a 70% market share against a negligible market share in 2003-04 when it was launched in India.

If one goes by various estimates, then the traffic is expected to increase by low double digit growth over the next five years. By FY17 the Indian

A

The Indian aviation sector needs to improve its infrastructure to improve performance and achieve global recognition before �ying high on its laurels


`67,500 crore during the 12th Five-Year Plan in the sector as much as `50,000 crores would come from the private sector. Further, there is a proposal to launch Essential Air Services Fund (EASF) on the lines of the Central Road Fund.

The proposal came first from the Naresh Chandra Committee in 2003, much before low-cost carriers started their operations in India. The rationale behind this was to cross subsidize unprofitable routes through this fund. Airlines were supposed to contribute a part of their ticket revenues to this fund and the same fund would be used to compensate airlines to operate on low profit or loss-making routes.

For example, Mumbai-Delhi sees maximum air traffic and accounts for 45% of the total traffic. This is the most profitable route. However, there are routes such as Kolkata-Bhubaneshwar where one may not see that much demand. The heavy-traffic routes are supposed to pay for low-profit routes.

But this may not be the best solution in today’s era of low-cost carriers. Instead, industry experts are recommending direct investments in airport infrastructure. EASF may be a short-term solution to encourage air traffic in far flung locations, but it may not sustain in the long term. In the long term, investments in aviation infrastructure should help boost civil aviation in India. Public-private participation is the way to go ahead with these investments.

Mumbai and Delhi airports have been modernized by taking the public-private participation route. GVK Infrastructure operates Mumbai and Bengaluru airports whereas GMR Infrastructure operates Delhi and Hyderabad airports.

We need more such private participation to provide a boost to airport infrastructure. Also, bringing in private players would bring in best business practices and accountability in the running of airports. Delhi airport is the world’s first airport to get ISO 50001:2011 certification for

energy management. Mumbai airport handled traffic of 29.07 million passengers and more than 6,50,000 tonnes of cargo in 2011.

As new integrated terminal and the cargo complex are integrated, it will be capable of handling 40 million passengers and 1 million metric tonnes of cargo annually. These certifications and numbers of increased capacity aim at higher volumes at efficient operations. This should translate into better bottomline for airport operators.

India’s aviation engineering abilities have been recognized world over and consortiums led by Indian players have been successful in bagging important contracts world over. However, the recent cancellation of Male Airport mandate given to GMR has led to a question mark regarding India’s abilities in this space. The best way to sail through this phase is to improve the Indian airport infrastructure so as to make it a specimen of the best airport infrastructure available in the worlD.

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Short-term blips notwithstanding,

the commercial vehicles segment is

poised for tremendous growth in

the future

he automobile sector of India is one of the key drivers of economic growth in the country.

While India has predominantly been a two-wheeler market, there has been a moderation in growth in this particular segment because of high inflation and rising fuel prices. What is however keeping up the optimism in the automobile sector is the commercial vehicle segment.

The Indian Commercial Vehicle (CV) market is one of the fastest-growing markets in the world, since the global economic meltdown of 2008-09. India has become the fifth largest commercial vehicle manufacturer in the world, with an overall commercial sales growth of 18.20% in 2011-12 at 8,09,532 units against 6,84,905 units in 2010-11.

The entry of major international players such as Daimler AG, Volvo

T according to plan. The CV segment has seen a decline in sales in the past few months, so much so that a few companies reported a decline of more than 30%. It is the largest decline since the recession of 2008-09, hurting mostly sales of heavy and medium commercial vehicles, with the exception of light commercial vehicles. Sales of medium and heavy-duty buses and trucks dropped from 2,13,937 units in 2011 to 1,78,974 units this year.

Tata Motors Ltd, India’s largest CV manufacturer, reported a 40% dip in its sales. Formerly known as Telco (TATA Engineering and Locomotive Company), Tata Motors has over 50% market share in the CV segment and is the fourth largest truck and bus manufacturer in the world.

In November ’12, Tata Motors’s global sale was 1,02,337 vehicles of which 49,248 were commercial

RIDINGON

HOPEand Beiqi Foton has made it a market to reckon with. According to a report by consultancy firm, Ernst & Young, sales of commercial vehicles in India is expected to grow at a CAGR of 15% over the next five years - from 0.8 million in 2011-12 to 1.6 million units by 2016–17.

The sad part is not all has gone


Commercial Vehicles Ltd, an equal joint venture between Eicher Motors Ltd, the flagship company of the Eicher group and Volvo Group, which has recorded a growth of 9.8% in November this year, with 3,565 units sold as compared to 3,248 units sold in November ’11. The company has a strong presence in the light and medium duty segment.

While most commercial vehicle companies have shown a dip in growth this year, experts believe that the segment’s future looks good. Ernst & Young’s report states that the demand is likely to be driven by the country’s economic progress, as has been amply substantiated by the rapid pace of urbanization in the country, with the likely emergence of more than six cities (each with a total population of over 10 million) and 63 cities with a projected population of more than one million by 2025.

The growth of the commercial vehicle industry is heavily dependent on infrastructure, especially the road transportation segment. According to the National Highways Authority of India, 85% of the passenger traffic and 70% of freight traffic in India is carried by roads.

The Government of India’s budget for 2010-11, shows large-scale investment in infrastructure. This should have some positive impact on the CV segment. For instance, the transition to the hub and spoke model of transporting goods is expected to work wonders for the CV segment.

The hub and spoke model is divided into two categories, that is, ‘hub’, which consists of heavy trucks transporting on highways and small commercial vehicles working as spokes inside cities where heavy vehicles are not allowed. Once this model is implemented, there will be an overall growth of the commercial

vehicle segment, because then the transportation of goods would not be solely dependent on HCVs but MCVs and LCVs would also be necessary, helping the manufacturers of those kinds of vehicles.

Improved connectivity thanks to the construction of roads under the National Highways Development Programme will further increase the demand for commercial vehicles with a significant rise in goods and passenger transport by road. Road transport and highways ministry expects to meet the target of 20 km highway construction per day during the first half of 2014-15.

Interestingly, with an improvement in infrastructure, experts believe that there could be a shift in segment sales in CVs. Industry experts believe that the growth in the CV segment will be driven by LCVs because of the rapidly expanding usage of smaller vehicles for inter-city transportation.

Apart from infrastructure, experts also believe that the CV industry needs an efficient, single tax system for the movement of goods across the nation. Currently there are multiple taxes and quotas at state entry points. The Goods and Services Tax (GST) is likely to be implemented in the near future in the country.

Apart from reduction in the number of taxes, there will be a cut in effective tax rate for many goods and reduction of transaction costs for taxpayers through simplified tax compliance. Also, exports under GST will be zero-rated. With GST, state economies will be integrated, boosting the overall growth. Also, CV owners can look for various options such as warehousing on transportation routes.

Furthermore, the government has mandated the use of CNG for the

vehicles. A bulk of this must have come from outside India, because in the domestic market, Tata Motors saw sales declining to 9,495 units in November ’12 compared to 16,000 units in November ’11. This decline is the largest ever since 2009, when the company reported a decrease of 48% in sales revenue.

The story continues with Ashok Leyland which, combined with Tata Motors Ltd, accounts for three-fourth of the overall CV market share. Sales figures show a massive de-growth of 36.45% in November ’12, with sales of 4,487 units of CV in November ’12 as against 7,061 units sold in November ’11.

An exception to this trend is Dost which is a small (1.25 ton) commercial vehicle that was launched in July ’11 by the company. Exhibiting an upward trend, Dost showed sales of 2,883 units in November ’12 as against 814 units in the same month in the previous year with a total of 21,829 units sold during the first eight months of FY13. The point however is that overall CV sales of Ashok Leyland decreased by around 6% during November this year, even though Dost’s sales are included in this figure.

Poor demand in the last few quarters, resulted in a loss of `310 crore for Mahindra Navistar Automotives Ltd, a joint venture between Mahindra and Mahindra Ltd (M&M) and Navistar International Corp. As a means to counter slowing sales, M&M has announced that it would buy Navistar’s stake. Industry experts believe the move would be positive for M&M, as they would get commercial business assets worth `700 crore to `800 crore from an investment of `675 crore.

An exception to the trend of slowing sales in the CV segment is VE


registration of CVs in metro cities. The step has been taken keeping in mind various green initiatives. According to analysts, the move will encourage manufacturers to bring in advanced technology, which would help in fuel efficiency and slow down environmental degradation. The subsidies given for components used in green and fuel-efficient vehicles

are working as catalysts in improving green technologies. This green initiative will also help in keeping fuel prices under check, thereby reducing operating costs, which in turn will boost the segment.

The commercial vehicle industry is also witnessing changes in product technology with the entry of foreign

CV makers. Subsequently, domestic manufacturers have been forced to continuously upgrade their products, which is a boon for both the industry and the consumers. Considering the initiatives being taken by the government and commercial vehicle manufacturers, analysts could be proven right when they say that this segment has a promising futurE!

LOOKINGFORWARD

Navneet Munot,CIO, SBI Mutual Fund

Some policy initiatives by the government and rate cuts by the RBI are likely to spark some positive trends in macro data as well as corporate pro�tability in 2013. On the global front, sovereign debt issues across the developed world, growth dynamics and continuance of easy liquidity by central banks could spur the markets.

One of the important developments in 2013 could be the return of domestic investors to the equities market as they have been net sellers for the past couple of years. We think that both domestic and global political developments will in�uence market sentiments in the days ahead. Hopefully, the Union govern-ment should be able to continue with the reform momentum and work on improving the execution side.

Globally, there are new regimes in several places and their approach towards managing the debt-growth dynamics would be important events to watch out for. We should also keep a watch on the Middle East as events there could have a signi�cant impact on crude oil.

Looking at the corporate earnings trajectory and a slight improvement in P/E, we believe that the Indian markets could deliver 15% returns next year. As for sectoral in�uences, consumption and pharma themes are likely to maintain their dominance over the markets.

We also expect rate-sensitive and investment-related themes to do well next year. However, one needs to keep a watch on valuations. For example, some of the stocks in the consumer staples space are looking stretched in terms of valuation.

On the macro economic front, we think that GDP growth is likely to bottom out soon and growth is nudging towards 6% in 2013. Also, given the lagged e�ect of tight monetary policy, incremental �scal tightening, output gap, soft commodity prices and expectation of more stability in the rupee, we believe in�ation and interest rates could head down. We expect overnight rates to fall by 75 bps to 100 bps in the year 2013.

0123456789KeepingIt RealCurbing of counterfeiting of

drugs through the adoption of

a unique code verification

technology and mobile SMS

authentication for all domestic

medicines produced in India is

caught in a war with industry

and the concerned ministry

ackaging is a key element in the branding of products. It affects consumer’s perception of the product’s

usability, efficiency and practicality, among other factors. Indian manufacturers’ view on packaging as simply a container with visual representation of the product it contains has certainly changed.

Packaging is not only used to secure the products it holds and give insight into its contents, but also its origin and journey along the supply chain. Pharmaceutical packaging, which consists of various types of packaging like glass, pet bottles, strip and blister packs, ampoules, injectibles, etc, is growing slowly but steadily in India. Although the United States has been the world leader in pharmaceutical packaging, India too is emerging as an extremely strong contender.

The Indian pharmaceutical packaging industry is growing at more than 11% per annum and is expected to cross a turnover of $21.59 billion by 2015 and is making its presence felt in the

P



of pharmaceutical products.

As per the issued notification, exporters of pharmaceutical products need to adopt a trace and track system and incorporate its features for exported medicines using barcode technology as per GS-1 global standards at all levels of packaging, namely: primary, secondary and tertiary packaging levels.

A primary pack is defined as the first level of packaging and is in direct contact with the product and marked with an AIDC (Automatic Identification and Data Capture) data carrier either on the packaging or on a label affixed to the packaging. The primary pack may consist of a single item or a group of items for a single therapy such as a kit.

A secondary pack is defined as a level of packaging that may contain one or more primary packages or a group of primary packages, which contains a single item.

A tertiary pack comprises of multiple secondary packs or secondary pack levels. Tertiary packs are normally the ones which are dispatched as logistic units/shipments.

The DGFT notification mandates that primary packaging should have 2D barcodes on blister strips, vials and bottles, encoding a unique product identification code, batch number, expiry date and serial number; secondary packaging should be encoded with the same information using either 2D or 1D barcodes and tertiary packaging should use 1D barcodes to encode data that is the same as secondary packaging.

The earlier deadline of 1st Jul ’12 for primary level packaging has been extended till January ’13. This is the same deadline for secondary level packaging too, which was meant to be

implemented from January ’12 but was further postponed to the month of September in 2012.

While the DGFT notification was welcome by the industry initially since it is an attempt to standardize security mechanisms across the industry, the implementation of the 2D bar-coding technology at primary and secondary packaging levels for export consignments got delayed because of its concern over the cost involved in the same.

The mandated implementation was delayed because the industry was not ready. As a major chunk of pharmaceutical exporters from India are small and medium enterprises (SMEs), the capital expenditure required for implementation is large and, therefore, possibly prohibitive for them.

Also, companies may have to compromise on the packaging line speed after implementation. Many small scale players have faced problems with other service providers where the solution that was proposed to them by these providers was leading to a significant loss of efficiency on the packaging line and was, therefore, unacceptable.

Thus, the industry is still ambivalent about what is the best way forward to implement these changes cost effectively without compromising on the packaging line efficiency.

The stakeholders and associations recently held a closed-door meeting with the Ministry of Commerce and discussed the issues concerning the implementation of the packaging norms for drugs. Though the Ministry presented the primary report prepared by Wipro and opined firmly on the set deadline, the Ministry seemed firm on its decision and mentioned that there are many small players who are ready

international market. India ranks 11th in the $550 billion world packaging industry and may soon climb to the fourth position as the country is expected to grow at 18% to 20% from the current 15% owing to a rise in consumer demand as well as new technologies.

But India has an enormous economic, topographic and social diversity that provides a major challenge to provide pharmaceuticals safely with the necessary security in place, while being cost effective at the same time.

Moreover, globalization and consumer demand have vitalized the need for constant improvement and innovation to meet the growing demand for product protection. Packaging can also contribute to another key emerging area of patient adherence, namely in ensuring timely intake of medication as well as refill of prescription.

This can result in reduction of healthcare costs and improve patient health. The packaging industry needs to innovate and produce cost-effective packaging solutions where more and more information can be made available to a patient at the same cost or less!

Recently, the task force set up by the Union Health Ministry recommended the adoption of a unique code verification technology and mobile SMS authentication for all domestic medicines produced in India with the aim to curb counterfeiting of drugs. This step will boost the pharma packaging industry in the country.

To maintain the quality of pharma exports, the Directorate General of Foreign Trade India (DGFT) issued a notification on 10th Jan ’11 prescribing the procedure for tracing and tracking of export consignments


to give technology at a much lesser price than mentioned.

Also, to consider the financial condition of small-scale players, the Ministry has already made a provision to give 50% subsidy on cost involved to these companies. The announcement by the ministry of commerce to provide 50% subsidy on the cost involved in implementing it could offer some relief to them.

Software developers feel that implementing 2D barcode on primary or secondary packaging will not solve the problem completely as such a barcode can be easily copied by counterfeiters. And it is equally difficult to print 2D barcode on pharmaceutical goods especially on ampoules, which already have less space for printing necessary content on them.

Besides, it requires employment of multiple levels of security. Other security features such as tamper-evident solutions should be in place to identify attempts of stealing or compromising goods and track and trace programmes must be robust enough to provide supply chain agents with proper information to identify suspicious activities in a very short period of time. Once serialization of all

pharmaceutical products happens successfully and a more robust track and trace and product validation system is instituted, possibly allowing anyone with a mobile phone to verify products worldwide, Brand India can be better protected from counterfeiting of drugs.

A hardened track and trace system is imperative to maintaining Brand India’s global reputation as a high-quality right-price drug manufacturing giant.

A watchdog of the pharma industry maintains, “A robust track and trace system alone cannot be the only defense against counterfeit drugs in the market. In order to close the loop on the supply chain down to its end user, a solution must be employed at the consumer level.

“The track and trace system is beneficial for the manufacturer throughout the distribution network, but consumer verification is necessary to ensure that no products can be compromised at the retail/pharmacy level.

“Coupled with strong enforcement action, consumer-level verification can make it hard for counterfeiters to successfully sell their products, especially when consumers can reject the fakes.”

This will not only improve the reputation of the Indian pharma industry in the international market but also curb illegal channels of trade. For instance, spurious drugs found in Nigeria in the year 2009 were labelled ‘Made in India’ but were finally traced to China.

It is specified that 2D bar coding technology has been very successful in helping pharma companies to detect fakes depends and is aimed at safeguarding the product.

In future, even more advanced technology can replace 2D bar coding. However, at present this is the best technology that is being used vastly by the pharmaceutical industry.

The government is pressurizing the pharmaceutical industry to implement 2D in secondary packaging line whereas the industry is suggesting that the ministry first implement D and later considering its pros and cons work towards implementing 2D technology in the secondary level of packaging line.

It is difficult to give the trend beyond track and trace now as the secondary packaging level has not been implemented till now. And what is important is to achieve consensus between the ministry and the industry before implementing the changeS.

Registered O�ce: Nirmal Bang Securities Private Limited. 38-B, Khatau Building, 2nd Floor, Alkesh Dinesh Mody Marg, Fort, Mumbai - 400001. Tel: 3926 8600 / 01; Fax: 3926 8610Disclaimer: Insurance is a subject matter of solicitation. Mutual Fund investments are subject to market risk. Please read the scheme related document carefully before investing. Please read the Do’s and Don’ts prescribed by Commodity Exchange before trading. Through Nirmal Bang Securities Pvt. Ltd. *Through Nirmal Bang Commodities Pvt. Ltd. #Distributors investment in securities is subject to market risk. investment in securities is subject to market risk

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Distinctive leadership position, strong

balance sheet and customer-centric

approach, coupled with improving

business environment have led to

attractive valuations for the global

textile machinery manufacturer

akshmi Machine Works Ltd (LMW) is the third largest textile machinery manufacturer in the world. It produces an entire range of spinning machinery and holds around 70% of the market

share in the domestic textile spinning machinery industry. This has been possible mainly because of its strong after sales service and economical product portfolio.

LMW has also diversified into the manufacture of CNC machine tools, heavy castings and parts and components for the aerospace industry.

High volatility in cotton prices last year, combined with high inflation, high interest rates, power shortage in southern India and global economic stress took a toll on the textile industry, including the performance of the textile machinery manufacturing unit of LMW.

However, the situation has revived in the past few months and the second half of FY13 is expected to be better, aided by the extension of the Technology Upgradation Fund Scheme (TUFS) by the Government of India for the textile

L

SpinningA SuccessStory

LAKSHMI MACHINE WORKS LIMITED



industry in the country.

LMW has two wholly-owned subsidiaries – LMW Textile Machinery (Suzhou) in China and LMW Machinery Ltd (Coimbatore). LMW’s textile machinery division’s plants are all located at Coimbatore. It also has its foundry division’s machine shop and advance technology centre at Coimbatore. Apart from this, its windmill is located at Tirupur in Tamil Nadu.

In FY12, exports contributed 14% of the total revenues.

Source: Company And Nirmal Bang Research


systems and help them attain optimum performance outputs. While adhering to its mission of continuous after sales support to customers, LMW has formulated a dynamic technical support centre to handle technical queries of customers.

LMW has a debt-free balance sheet and holds approximately `680 crore cash in its books. Out of this, `400 crore is advances from its customers. With a minimum capex lined up in the medium term, we expect the cash balance in the balance sheet to improve going forward with improving profitability. We feel a strong balance sheet will help it to command a premium in the improved business scenario.

The government has extended TUFS to the textile industry in the 12th Five-Year Plan. This would give a big boost to investment-related decisions in the textile industry at large. Meanwhile, order inflows of LMW have shown some improvement in the past few quarters. In Q2FY13, the company’s total order book position stood at around `3,980 crore, with order inflows of `390 crore during the particular quarter.

LMW’ R v u m

The performance of spinning companies in India was impacted in FY12 by volatility in cotton prices. Spinning mills had to incur substantial losses on account of a sharp decline in cotton prices and companies had to take inventory write off in the books. However in FY13, the textile machinery manufacturer’s performance has again returned to normal levels.

Spinning mills that were holding back their expansion plans are likely to implement it now. This will reduce the

84.7%

15.3%

0.1%

Tex le Machinery

Machinery Tool & Foundary

Advanced Technology Centre

4700

4000 3900 3980

0500

100015002000250030003500400045005000

FY11 FY12 Q1FY13 Q2FY13

(`

LMW is a leader in the domestic textile machinery market, commanding a market share of around 70%. Further, LMW would be able to cash in on any growth in the domestic textile industry owing to its widespread network of customers comprising 1,300 out of the total 1,600 spinners in the country.

LMW is priced around 10% cheaper than its closest competitor. LMW’s foreign competitors include players like Rieter, a global leader in textile machinery and Chinese players like Pacific Mechatronic Group and China Textile Machinery Group, among others.

Also, LMW goes beyond providing machinery for the textile industry. Its comprehensive range of spinning systems is accompanied by various value-added services. These services are meant to familiarize customers with the



Source: Technopak


133836

1374

76219

120256

1157217

021711854

1544610

107

86.5

84319

150

1217165

07

1374

10640

113733

1169

6620

117194973196

01969650

150600

-14104

84.6

92117

150

1000174

05

1169

97160

177330

1804

1110-38167301

1540264

126210480

2387200

166

135.0

80922

300

1565261

07

1818

164210

207241

2113

13056

174371

1856258

525311485

2238600

137

121.6

88320

500

1818327

111

2135

16128

-13

88320

903

574-3085

160789114

01145632892800

62

54.7

960130

776127

12

902

6210

-11

` in Crore Mar’09 Mar’10 Mar’11 Mar’12 H1FY13

inactive order book for LMW, which has reached around 70%. LMW’s order book is likely to improve in the coming period on the back of the TUF scheme and revival in spinning mills.

RISKS

o Competition from other players would eat into the market share of LMW

o Volatility in textile players’ earnings due to fluctuating cotton prices could pose a threat to the financial performance of the company.

FINANCIALS

187

10

-63 -36

358

24

74

-49

382

59

152

60

-100

-50

0

50

100

150

200

250

300

350

400

450

Vardhaman Tex les

Bannari Amman Spinning

Nahar Spinning Mills

Spentex Industries

EBIDTA (` in Crore)

H1FY12

H2FY12

H1FY13

30 47 5289

140

1623 26

45

80

0

50

100

150

200

250

2005 2009 2010 2015E 2020E

Textile Industry Size (US $ bn)

Exports

Domes c

o The company has a land bank of 25 acres in two plots in Coimbatore. It plans to develop these two properties into a residential space.

It has already obtained an approval from the government to build 236 flats (both 2 BHK and 3 BHK) in 5 acres of land. It is now looking for a builder to develop this property. The company management expects cash flows from this property in FY14.

o The company added 8.85 MW of wind power in FY12, totaling its wind mill capacity to 36.85 MW, which can satisfy 75% of the power requirement of the company.

INDUSTRY

Although the textile machinery industry is quite fragmented, organized players have a greater share of the market in terms of value as they focus on larger machineries such as spinning machines. Unorganized players on the other hand, mainly deal in low-end machines and accessories.

The Indian textile industry is expected to grow at 10.4% over the next decade, reaching US $220 billion by 2020. Textile machinery players face competition from other manufacturers as well as imports which account for 55% to 60% of the demand.

Net SalesOther Operating Income

Raw Material ConsumedStock AdjustmentEmployee ExpensesOther ExpensesTotalPBIDT

InterestPBDTDepreciationOther IncomePBTTaxFringe Benefit TaxDeferred TaxPAT

EPS `

Book Value `ROE %Dividend %

Segment RevenuesTextile Machinery Machinery Tool & Foundary Advanced Technology Centre (-) inter segmentTotal

EBIT SegmentsTextile Machinery Machinery Tool & Foundary Advanced Technology Centre



IN A NUTSHELL

LMW’s spectacular growth in financials during FY11 and FY12 came to a halt from Q1FY13 on the back of sluggish growth in the textile industry, resulting in a flattish order book position. With interest rates and inflation cycles expected to take a reversal and extension of TUFS in the 12th Five-Year Plan, the textile industry is headed for better times, going forward. The order book position of LMW has shown signs of a revival in the latest Q2FY13 quarter and the management hopes that H2FY13 will be better that the first half.

Distinctive leadership position with nearly 70% market share in the textile machinery industry, a strong balance sheet, consistent dividend-paying record and customer-centric approach are all LMW’s strengths. These fundamentals in an improving business environment puts the company in a sweet spot.

At the current market price (CMP) of `2,242, the stock is trading at 17.9x and 14.6 x its FY13E and FY14E expected earnings (based on Bloomberg consensus estimates) looks quite attractivE.

12.4830.9843.3

0.0

843.3

1344.4825.8518.610.5

103.8

82.551.8

627.099.5

860.7578.325.0

603.3257.5

0.21.3

48.5-47.1

0.0

843.329.4

12.4908.1920.5

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1370.6921.7448.9

3.5103.8

118.658.2

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639.5397.4

0.01.8

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1145.7

1439.91008.4431.510.576.8

290.784.1

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675.2602.8

0.00.9

28.5-27.651.7

1145.787.2

11.3872.6883.8266.4

1150.3

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262.2154.4713.1150.4

1280.1707.771.2

778.9501.3

0.00.7

25.4-24.747.0

1150.369.6

` in Crore Mar’09 Mar’10 Mar’11 Mar’12

SOURCES OF FUNDS :Share CapitalReserves TotalTotal Shareholders FundsOther Liabilities

Total Liabilities

APPLICATION OF FUNDS :Gross BlockLess: Accumulated DepreciationNet BlockCapital Work In ProgressInvestmentsCurrent Assets, Loans & AdvancesInventoriesSundry DebtorsCash and BankLoans and AdvancesTotal Current AssetsCurrent LiabilitiesProvisionsTotal Current LiabilitiesNet Current AssetsMisc Expenses Not Written OffDeferred Tax AssetsDeferred Tax LiabilityNet Deferred TaxOther Assets

Total AssetsContingent Liabilities

Balance Sheet

After remaining tumultuous in the last few quarters, the Indian rupee perhaps is in for an autumn ahead

deficit (current account deficit and fiscal deficit) concerns came to the fore as we approached mid-year.

Then came the thrust of policy reforms by the Indian government towards the end of the third quarter with unprecedented rhetoric to do everything possible to contain the fiscal deficit at 5.3% of the GDP for the current fiscal year. First in the line of policy reforms was raising diesel prices to address the ever-soaring fuel subsidy. It also announced fast-paced disinvestments along with the 2G spectrum sale.

The government also opened up the Foreign Direct Investment (FDI)

he year gone by was no different for the rupee from the one before that as it was yet another

roller-coaster ride for the Indian currency. It opened the year on a solid note and catapulted to the ranks of the best performing Asian currency in Q1 2012 after being declared as the worst performer in 2011.

A host of measures taken by the Reserve Bank of India (RBI) to minimize speculation in the form of banning rollover of forward contracts and limiting net overnight open positions, coupled with healthy capital inflows led to a sharp appreciation of the rupee. However, the gains tapered off when the twin

T route in key sectors such as retail and aviation in the country with an unambiguous intention of attracting more capital inflows to finance the widening current account deficit.

At the same time, western central banks came to the rescue of emerging market currencies by pumping even more liquidity into their respective economies during this period.

The US Federal Reserve announced the third round of unlimited quantitative easing in September. As a knee-jerk reaction to these events, the rupee appreciated by over 5% in a short span.

However, this move seemed clearly



Moreover, moderation in inflation is likely to stabilize the Nominal Effective Exchange Rate (NEER), which saw a trend depreciation led by higher-than-expected inflation rate.

PICK UP IN INVESTMENT SENTIMENT AS WELL AS AGGREGATE DEMAND

On the domestic front, there are some incipient signs of pick-up in economic activities though growth remains significantly below its recent trend. GDP growth is evolving along the baseline projection of 5.8% for 2012-13 set out by the RBI. GDP growth in Q2 of 2012-13 at 5.3% was marginally lower than 5.5% in Q1. However, there are some indications of a modest firming up of activity in the third quarter.

Industrial activity rose sharply in October. But this is, in large part, due to a low base and festival-related demand, which propelled the growth of both consumer durables and non-durables into double digits.

Significantly, capital goods production recorded a growth of 7.5% after 13 successive months of decline. The manufacturing PMI rose moderately in November as order book volumes expanded.

While the services PMI fell from a month ago, expansion in new business and order book volumes show positive sentiment about rising activity in the months ahead.

Moreover, the recent policy initiatives by the government and further reforms should help to boost business sentiments and improve the investment climate in the country. CHANGE IN GUARD: RBI’S STANCE

The RBI was reluctant to cut policy

rates in the latter half of 2012 as headline inflation was above the central bank’s comfort levels in the past few months.

However, the emerging downtrend in headline inflation, coupled with the decline in core inflation has been comforting of late. These emerging patterns reinforce the likelihood of steady moderation in inflation, going into 2013.

In view of ebbing inflation pressures, the monetary policy has to increasingly shift focus and respond to the threats to growth from this point onwards.

Liquidity conditions will also be managed with a view to supporting growth, thereby preparing the ground for further shifting in the RBI’s policy stance to support growth.

Overall, recent inflation patterns and projections provide a basis for reinforcing our view of policy easing in Q1 of calender year 2013. EQUITY-RELATED INFLOWS

Capital inflows, both in equity and debt, remained robust in 2012, surpassing the $24 billion-mark.

We expect to see a continuation in this trend with even greater capital inflows, in part due to the recent reform efforts by the government, as well as global easing of liquidity.

Though prospects of a rate cut may deter inflows into the Indian debt markets, equity-related inflows are likely to surge in the coming year.

EXTERNAL SECTOR

In line with weak external demand, we have seen a widening current account deficit of late. Falling revenues from the services sector and

overdone as a lot of questions remained unanswered as to how the government will adhere to a deficit target of 5.3% for FY 2012-13, when the finance minister laid out a fiscal consolidation roadmap late in the year. Evidently, this roadmap failed to impress the markets at large and the rupee eroded most of the gains accumulated in Q3 2012.

As we move into 2013, we believe the rupee’s journey will not be as patchy as witnessed in the last two years. In this article, we have tried to collate the factors which substantiate our view of a gradual and smooth recovery of the Indian currency.

Source: Bloomberg

44

46

48

50

52

54

56

58

USD

/IN

R

JANUARY PERFORMANCE

January has generally been a good month for the rupee in the last few years as most emerging markets tend to receive healthy inflows, backed by reallocation of funds by the developed markets. With the passage of policy reforms and ample global liquidity, expect inflows to kick off robustly into India.

SUSTAINED DISINFLATION

If the rupee has to see sustained appreciation, there is a need for sustained disinflation. Though consumer price inflation moderated slightly, the pace of moderation in wholesale price inflation has been faster than anticipated.

With food and manufacturing prices expected to edge down further, inflationary pressures may ease somewhat in the coming months.


a dip in exports due to global slowdown have resulted in a higher current account deficit in the current fiscal. Though the merchandise trade deficit in the first half of 2012-13 has remained at the same level as in the first half of 2011-12, as slowdown in exports was matched by import contraction, the falling surplus in services trade over the period has left the current account deficit - the net of imports and exports of goods and services - too wide for comfort.

Going forward, the trend in various components of services exports, which has been a crucial cushion for financing the current account deficit, would largely depend on economic activities in trading partner countries. Current indications are that CAD (current account deficit) could remain under pressure throughout 2012-13.

However, we see some silver lining with the recent downtrend in gold prices, which could eventually lower gold import bills. Furthermore, robust portfolio and retail FDI inflows will ease financing pressure on CAD.

2012-13 compared to Q2, there were downward pressures on the rupee, reflecting large trade and current account deficits.

Current account deficit financing pressures can re-emerge in the face of event risk. India’s external sector clearly faces certain sustainability issues that rise from huge current account imbalances. Although reserves coverage and manageable external debt offer some comfort, macro-financial policies aimed at lowering inflation, improving trade competitiveness through structural and other policies and the direct use of trade policy measures are the need of the hour for medium-term sustainability of the external sector.

Fiscal deficit remains another area of concern for sustained appreciation of the rupee.

Though the government has laid out a fiscal consolidation plan and taken some significant steps to contain fiscal deficit, it needs to be seen how far it goes in reducing the non-planned expenditure and garnering higher tax revenues by boosting growth-orientated policies.

Implementation risks and further political obstacles could still emerge. But for now, the government looks serious about its business.

GLOBAL SCENARIO

Hopeful Of A Fiscal Resolution Without Any Significant Fiscal Drag On The US Economy

Assuming that the fiscal cliff in the US is resolved, with a limited fiscal drag on the economy, a relatively positive growth trajectory for the US can bring some cheer to Indian IT exports to the US.

Lead indicators also point to a modest

firming up in the momentum of global growth over the rest of 2012 and in 2013 too, if there is firm policy action in the Euro area and the US.

Uncertainty From Euro Zone: A Drag On World Economy

The biggest risk to the global growth outlook stems from the spillovers of depressed outlook for the Euro zone growth, which can deter global trade and capital flows to emerging markets. The slow resolution of the Euro zone crisis means that many issues will remain unresolved including closer fiscal integration, banking union, Spanish bailout and subsequent OMT (Outright Monetary Transactions) activation.

While the presence of OMT will continue to provide an important backstop for re-emergence of any debt crisis in the Euro zone, the political uncertainty from Italy has the potential to temper the market mood once they go for elections in the first quarter of 2013.

Influences on the currency markets have tended to shift over the past year, with risk, yield differentials, relative growth and other factors alternating in terms of their influence.

One interesting development has been the reduced ability of the dollar index to influence other currencies, especially Asian currencies. This is set to continue, allowing relative yield and growth differentials to gain greater prominence as FX drivers.

In view of calming risks world over, we anticipate high-yield carry trade to come in full swing in 2013. In terms of best performers over 2013, relative economic outperformance in emerging markets and improved risk appetite may allow emerging market currencies to outperform, with rupee emerging as one of the winnerS.

Source: Bloomberg

0.0

5.0

10.0

15.0

20.0

25.0

Trad

e de

cit (

in b

illio

n $)

IMPEDIMENTS

CAD And Fiscal Deficit Still Remain Larger Concerns

With the persistent step up in oil and gold import despite the moderation in crude and gold prices, the cumulative trade deficit for April-November grew from its level a year ago showing greater risks to the BoP from adverse external environment. Even as capital inflows improved in Q3 FY

lobal investment legends like Warren Buffet and Benjamin Graham have always maintained that index funds are one of the best investment vehicles for small investors.

However in India, index funds have not picked up as they have in the global markets. But with many equity funds languishing in the last one year, investors can certainly look at investing in index funds with a long-term perspective.

In India it is always believed that ‘active’ funds are better than ‘passive’ funds, which are also known as index funds. Unlike ‘active’ funds where fund managers actively buy and sell securities, in index funds the managers merely try to replicate the overall market’s performance.

G

A Better

Alternative

Index funds can be

considered by cost

conscious investors

with a long-term

perspective



management charges. Most index funds charge anywhere between 0.50% and 1.5% compared to an active fund, which charges up to 2.5% per annum.

As said earlier, fund managers in index funds do not need to put time and effort in analyzing the company before investing as they invest as per the benchmark allocation, which helps in directly saving the cost for the fund house.

The main discount for index funds is the brokerage and other trading costs, which active managers incur on their active trading.

So, as far as index funds are concerned, lower expenses and index-linked returns are the biggest draws for the investor.

WHY PICK INDEX SCHEMES

We must have read hundreds of times of how to pick up a mutual fund. Passive investing is a gift for those who want a fair slice of their wealth in the stock market and are willing to settle for index returns over time - for very low fees.

Selecting a mutual fund scheme to invest from a universe of hundreds of open-ended equity schemes can be quite confusing.

Since the equity markets can be a puzzling place for a new investor, the best way to start investing is through an index mutual fund.

The best thing about an index fund is that since it invests in companies that make up the index and often in the same proportion, the returns tend to be similar to that of the index.

The slightly lower return than the index is due to the expenses involved in managing the fund.

IMPORTANT ASPECTS TO LOOK BEFORE INVESTING IN INDEX FUNDS

Before investing in index funds, investors should look at two key features, one is cost and the other is tracking error.

As discussed, index funds are most cost-effective as they have very minimal operative expenses against active funds.

Though there is a small difference of cost in index funds and active funds, if calculated over the longer term, it can make a huge difference.

The other important aspect is of tracking error for index funds, which is a measure of the return based on the fund’s net asset value (NAV), relative to the return of the index over time.

Tracking error is the difference between the returns delivered by the fund and that of the benchmark index.

Tracking error is defined as the annualized standard deviation of the difference in returns between the Index fund and its benchmark Index. In simple terms, it is the difference between returns from the index fund and the index.

An index fund manager needs to calculate his tracking error on a daily basis especially if the fund is open-ended in nature.

Lower the tracking error, closer are the returns of the fund to that of the target index. Tracking error is always calculated against the Total Returns Index which shows the returns on the index portfolio, which is inclusive of the dividend.

For example, if an index gained 15% over a year, while a fund that tracks it gained 14.7%, the tracking error is

But many investors are still unaware of the concept of index funds. First we will try and understand what index funds are and then we will know how they function.

Index funds invest in a basket of stocks of an index (like Sensex, Nifty, Junior Nifty or even sectoral index such as Bankex and Infrastructure) in a similar manner that reflects the allocation of a benchmark index.

Index funds invest in stocks that form an index and are in the same proportion as that of the stocks within the index.

For example, a Nifty Index fund will only invest in the 50 companies that constitute the index and the weightage of a company in the fund portfolio is same as that of the weight of the company in the index.

Active funds also invest in shares that are under their specified benchmarks and try to outperform the index, but an index fund reflects similar returns of a benchmark.

This is the key difference between passive funds and active funds; one is content giving index-linked returns, while the other knowingly tries to outperform it.

In active funds, the fund manager actively manages equity funds, while in index funds, the fund manager buys and holds only those stocks that are present in their chosen benchmark.

Their main intention is to replicate returns given by the index, whether the market goes up or down. Typically, a manager sells shares only when he witnesses that redemption pressure or any stock is moved away from that particular index.

The major difference between active and passive funds is fund


0.3% points for that period. Calculations of tracking error are straightforward for conventional mutual funds, which are traded once a day based on NAV, the end-of-day calculation of the per-share value of the fund’s holdings.

WHICH INDEX FUND SHOULD INVESTORS PICK?

This concept has still not picked up in India and we have hardly over a dozen index schemes present in the market. Before investing, investors should look at the cost and the tracking error, which can have an overall impact on returns.

So, investors can look at investing in say schemes such as HDFC Index Sensex Plus, which aims to invest 80% to 90% of its assets in companies that form the Sensex and between

10% and 20% of the assets in companies, which are not included in the Sensex.

This is not a 100% index scheme but manages a minimal part of the corpus to boost the overall returns, which also shows in its performance.

So, say in the last one year the Sensex has given return of 22.34%, while this fund has managed to give returns of around 25.22%.

This is the fund which has outperformed the benchmark index on one-year, three-year and five-year time frame. If investors want to choose index schemes, they can opt for Quantum Index, which has also given returns of 25.64% in the last one year and 5.02% in the last three years outperforming the Nifty on both these occasions.

If investors want to have thematic index in their portfolio they can definitely look at schemes such as Dividend Opportunity Index, which was launched by India Infoline Mutual Fund.

This scheme aims to generate returns which closely corresponds to the returns generated by securities as represented by CNX Dividend Opportunities Index.

IN A NUTSHELL

Globally, most fresh inflows come usually into index schemes as they are cost effective. However in India, investors still go to active fund management with higher cost. But long-term investors can look at investing in index funds which can replicate the benchmark returns with lower costS.

LOOKINGFORWARD

Harsha Upadhyaya, Head of Equities, Kotak Mutual Fund

We think that the Indian government will do its best to continue the pace of reforms in the year 2013. We are also looking forward to some progress on �scal consolidation and believe that the investment cycle will respond to monetary policy actions. The markets are responding to the reforms that have been initiated by the government and political in�uences are not likely to de-track the pace of reforms at least in the �rst half of 2013.

However, in the second half of the year as we move closer to the general elections, there might be some ripple e�ects in the markets. Overall, we believe there has been some momentum in corporate earnings in the past year and we are expecting the markets to deliver double digit returns in 2013.

Consumer discretionary, automobiles and banking and �nancials are themes that are likely to dominate the Indian markets in 2013. We also think that there might be some mergers and acquisitions in some select sectors that could be triggered by events such as regulatory changes, multinational interest in India and growth challenges.

On the macroeconomic side, we think that in�ation will average around 6% and interest rates will decline by around 100 bps. On the growth front, we expect GDP growth to be around 6.2%.


he markets in India managed to maintain a long-term positive momentum in the

December expiry. The Nifty Futures gained 0.77% in December expiry.

The December Nifty Futures touched a psychological level of 6,000 on 11th Dec ’12 but failed to sustain that level as developments in the winter session of the Parliament and widening trade deficit weighed on the markets.

The Index of Industrial Production (IIP) for the month of October beat street estimates significantly. It rose by 8.2% for the month of October, which was a 16-month high, against expectations of 5.1%.

In its mid-quarter monetary policy review the RBI left the short-term lending (repo) rate and the cash reserve ratio (CRR) unchanged at 8% and 4.25%, respectively but hinted at possible easing of rates in January.

Foreign Institutional Investors purchased stocks worth about `6.5 lakh crore in 2012 and sold equities to the tune of `5.3 lakh crore, which has resulted in a net inflow of `1,21,652 crore (US $23 billion).

The Put Call Ratio-Open Interest (PCR-OI) for Nifty Options at the start of the January ’13 expiry was seen between 0.85-0.90, indicating an increase in the Call option activity compared to Put options.

The current PCR-OI stands at 1 (as on 31st December) and going forward we see the PCR again coming down to lower levels of 0.85-0.85, maintaining a neutral view ahead of the fiscal cliff outcome in the US scheduled on 2nd January.

TTECHNICAL OUTLOOK FOR THE FORTNIGHT

On the Nifty Options front, for the December series, again a narrow range between 5,800 and 6,000 is being predicted by Nifty traders and a consolidation is seen between this range before the US fiscal outcome.

Highest OI build up is seen at 5800PE and 6000CE to the tune of over 5 mn each as on 31st Dec ’12. Hence, a breach of this narrow range will take the markets to its second resistance and support levels, which is directly seen at 6,100 and 5,680, respectively. India VIX, which measures the immediate 30-day volatility in the markets, has been choppy since the past few days ahead of the US fiscal cliff announcement (currently at 14.90) (as on 31st December). Going forward, we believe that it has already formed a strong base of 13 and we may see an upward breakout and levels of 17 and 19 may be seen on India VIX in the days to come.

TECHNICALLY

The Nifty index rallied from the November ’12 lows of 5,550 and the advance halted at the 5,950 level. The Nifty did correct from the resistance and found support at the 5,820 level and has turned sideways since then.

Currently, the range for the index is at 5,800-5,950 and any move on either side would call for a trending action. Recently there were multiple Doji and Spinning pattern formations on weekly charts and closing above this is essential for a positive bias, which has to be triggered by strong buying across sectors.

Until the index trades below the 5,950 level, one should maintain a cautious approach in the near term. Any move

beyond that may trigger a further upside till 6,080 and 6,150, which is a possibility over the next few weeks. However, for the uptrend to remain intact, the Nifty should sustain above the level of 5,750 in case of further correction in the next few days.

BANK NIFTY 12,482

After taking support from its November ’12 lows, the Bank Nifty has managed to sustain above the 12,200 level, which is a bullish signal. The Bank Nifty faces strong resistance around the 12,550 level on the upside where selling pressure is expected; one should maintain a positive bias only on close above this level for an upside potential to 13,750-13,900. There is an immediate support at 12,220-12,180 levels on the downside.

As the market struggles with the trend, seemingly undecided whether to move up or down, we find that the evidence for some continuation of the ranging action has built up yet again. Traders should maintain a bullish bias in the Bank Nifty only on a decisive close above the 12,550 level.

OPTIONS STRATEGY: LONG STRANGLE ON NIFTY

It can be initiated by ‘Buying 6100CE and 5800PE of the January series’. The net combined premium outflow comes around `65-70 (as on 31st Dec ’12), which is also the maximum loss (that is, if the Nifty January series expires between 5,800-6,100). The breakeven stands at 6,170-5,730. There is unlimited profit beyond the breakeven range. Traders can square off their strategy when combined rate of Strangle comes below 50 or goes above 100/120, whichever is earlieR.


Source: Capital Line

Company Name Current Market Price11th Nov'10

Book Value Price /Book Value

147.66218.98156.16135.29253.28144.58

64.03202.62152.84

86.01399.94200.50239.54215.22141.73161.34221.27114.50218.36521.60254.57123.76178.96405.62193.52

80.76133.66

35.67128.16

77.7973.0731.64

169.5693.98

115.1973.89

135.34311.73

50.2659.3840.27

218.93319.86157.84121.41114.65126.76

9.47199.46773.23

0.30.30.40.40.40.40.40.40.40.40.40.40.50.50.50.50.50.50.50.50.50.50.50.50.60.60.60.60.60.60.60.60.60.60.60.60.60.60.70.70.70.70.70.70.70.70.70.70.70.7

Source: Capital Line

PRICE TO BOOK VALUE

Gammon India LtdReliance Communications LtdA2Z Maintenance & Engineering Services LtdPrakash Industries LtdGOL Offshore LtdShipping Corporation Of India LtdBajaj Hindusthan LtdPatel Engineering LtdRolta India LtdHCL Infosystems LtdJindal Poly Films LtdAmtek Auto LtdHousing Development & Infrastructure LtdShiv- Vani Oil & Gas Exploration Services ltdPunjab & Sind BankGujarat Narmada Valley Fertilizers Company LtdUnited Breweries (Holdings) LtdPunj Lloyd LtdShree Ganesh Jewellery House LtdBEML LtdChennai Petroleum Corporation LtdJai Corp LtdUflex LtdBilcare LtdStandard Chartered PLCJyoti Structures LtdIndiabulls Real Estate LtdMercator LtdEscorts LtdVikas Wsp LtdOnmobile Global LtdSuzlon Energy LtdOrchid Chemicals & Pharmaceuticals LtdNCC LtdJindal Stainless LtdIVRCL LtdIndian Overseas BankSRF Ltd.Usha Martin LtdParsvnath Developers LtdMahanagar Telephone Nigam LtdGujarat Alkalies & Chemicals LtdVideocon Industries LtdWelspun Corp LtdCentral Bank Of IndiaUnited Bank Of IndiaAnant Raj Industries LtdAnant Raj Industries LtdKesoram Industries LtdState Bank Of Travancore

Company Name Current Market Price(As on 31st Dec'12)

Book Value Price /Book Value

38.0073.8056.0549.0593.2554.3525.1080.3061.7037.85

176.0088.30

111.45107.10

71.9083.20

115.8560.10

115.90279.65138.00

67.3097.35

221.00106.85

44.8574.8020.2573.9044.9042.7518.55

100.6557.6571.0045.6085.65

200.7032.7538.7526.40

146.25214.90106.70

83.7080.3589.80

6.78146.80574.70

The table represents companies listed on the BSE that are low on Price to Book Value


focuses on mining, electricity and manufacturing sectors to measure industrial production in the economy.

The base year for the construction of IIP was recently revised to 2004-05. The Central Statistics Office releases this data for the reference month with the time lag of six weeks.

IIP is basically an indicator which measures short-term changes in the volume of production of a basket of industrial products during a given period with respect to those in the chosen base period.

In India, the first attempt to compute IIP was made with 1937 as the base year. At that time, 15 different industries accounting for more than 90% of the production in the economy were incorporated in the product basket. Since 1950, IIP data is released monthly.

Over a period of time with changes in economic activities and different trends, the baskets were changed and so have the base periods.

At present, IIP has 2004-05 as the base year. The industries comprising the basket too have changed. One of the chief reasons for this change is to capture the strong and pronounced economic activity going on within the Indian economy.

For example, 1993-94 was the base year before the recent changes. In that case, the production basket included products such as typewriters as well as tape recorders.

These are technological products and in years to come, these have become obsolete and there is little production of these items nowadays.

However, there are a lot many products available now which were not available in 1993-94. A case in

point is smart phones, laptops, DTH set top boxes.

These products are nowadays in demand and form a large chunk of industrial production and need some representation in IIP.

Recent changes in the product basket have accommodated these new age products. In 1993-94, there were 543 items in the product basket as against 682 items in 2004-05.

A point to note here is that though IIP focuses on the mining, electricity and manufacturing sectors, items in this product basket are further divided into subheads based on the end use of it. These are basic goods, capital goods, intermediate goods, consumer durables and consumer non-durables.

To put it simply, in the previous year in a particular month, if the industrial production stood at 100 and in the same month for this year if the value stands at 106, the IIP is meant to grow by 6%.

Analysts’ community track these numbers and financial markets too react to these data releases. THE SIGNIFICANCE

A weak IIP data connotes bad times for economic growth. If the index value is lower than the previous year, then it is a clear sign of contraction in the economy.

A rise in the index number implies growth in the various sectors that are part of the IIP data. More so, it sends a positive message among investors across various categories - HNI, retail and institutional.

However, analysts prefer to keep track of sequential movement in IIP. For example, if January records a growth of 5% and February records a

conomic data have a unique charm. They can conceal a lot of information and present very little of it.

Whatever the case, those wise men who understand the significance and the components that form a part of an economic data, make better and lucrative investment decisions in the financial markets.

One of the data frequently released in the financial markets is the Index of Industrial Production (IIP).

For many IIP is a barometer of the performance of corporate India, while for others it is one of the skewed economic parameters which shows only a particular side of the story instead of a comprehensive picture.

Since the awareness related to economic data is very low, chances are less that many understand what constitutes the IIP.

More so, there is a trait of complacency, which forces many investors to just stick to basic, relatable and understandable economic data such as inflation, savings and deposit rates.

But as the Indian markets evolve, opportunities also grow. To take advantage of these opportunities, the investor must also look at IIP.

So, what exactly is IIP data and why should one pay heed to the data when there are many other financial parameters and economic data to look at and interpret?

WHAT IS IIP? The Index of Industrial Production (IIP) is an index that connotes industrial activity in an economy for a specific time period. In India, IIP numbers are released each month. IIP

E


growth of 6%, it is a clear indication of better times.

But if there is a fall in growth in sequential months, then it is a clear indication that the economy is slowing down, though numbers are positive and conveying growth in the economy. There was a similar situation in CY12, when we saw India’s IIP falling.

The Indian economy grew at 5.5% in the current financial year’s first quarter, which was almost at a 10-year low.

No wonder we have seen no significant movements in the equity markets. In short, low economic activity means low topline for companies, which further translates into lower profits and also lower stock prices.

A consistently weak IIP necessitates that all stakeholders in the economic activity to take steps.

The government is one such stakeholder. In recent months, after no improvement in the economy, the government announced a slew of reform measures to facilitate corporate decision-making,

investments and create conducive environment for businesses.

INDICATORS

An IIP data can also speak volumes about the measures and steps needed to be undertaken to provide a boost to the sector or industry that is not performing well.

A look at specific products or specific product categories can also help to form or alter government policies. For example, in the previous year capital goods were facing competition from cheap imports and that resulted in lower production.

The government could come out with increased import duties on select capital goods to ensure that the production catches up.

The RBI can also consider cutting interest rates. In a gloomy period, a cut in interest rates typically makes credit easily accessible.

Low interest rates make many products viable. Entrepreneurs too are more willing to take risks. This restarts the capital expenditure cycle in the economy, which in turn pushes industrial production.

Also, low interest rates can encourage leveraged consumption from individuals and thereby increase the IIP numbers.

No wonder we have seen many industrialists demanding a rate cut from the Reserve Bank of India in the last couple of quarters. On the other hand, a rising IIP number connotes a strong economy.

A jump in IIP numbers both up and down needs to be seen with an eye for detail. For example, festive season elements can skew the data.

For instance, in the previous year Diwali was in October and this year it was in November. In that case the October numbers may not be as good this year.

But November numbers may show a big jump. Analysts have to account for such “base effect” while interpreting IIP numbers.

And for investors, it is very important to draw a comparison with the situations in the same month a year ago and in the preceding month. This would provide strong insights into the overall health of various sectors of India’s economY.

Contact - Daisee Boga: +91-22-39268244, 7738068289

Investors can take lessons from geometric shapes as they teach us a thing or two about the markets

geometryat work



Accordingly, they will help predict the short and long-term moves. The main component of a chart pattern is Trendlines. A trendline is a straight line connecting either the tops or the bottoms of a stock price movement. For a trendline, one requires at least two tops or two bottoms, but it can have more.

a. Symmetrical Trianglesb. Ascending Trianglesc. Descending Triangles a. Symmetrical Triangles

Symmetrical triangle patterns are generally considered as neutral patterns. Every stock goes through a consolidation phase during a trend, either uptrend or downtrend.

During this period, the volumes become extremely thin and the stock starts forming lower tops and higher bottoms, that is, the difference or the gap between the highs and the lows become progressively less and less.

Basically, the forces of demand and supply start to weaken until suddenly there is a breakout, which is accompanied by a spurt in volumes, signalling that either the bulls or the bears have taken control according to the direction of the breakout.

In symmetrical triangles, this breakout is typically seen in the direction of the prior trend, that is, if the pattern is preceded by an uptrend, the breakout is generally seen on the upside (resistance line) and if the pattern is preceded by a downtrend, the breakout is generally seen on the downside (support line).

However, this is not a rule of thumb and there can be breakouts in the opposite direction of the prior trend as well and so this signifies a change in the trend.

ost of us may have shuddered at the mere mention of the word ‘geometry’ in school.

It meant drawings, theorems, shapes and figures - basically the toughest parts of mathematics for most. But little did we know that there would come a day when these same shapes and diagrams would guide us in becoming informed and successful traders in the stock market. We are talking about chart patterns. There are numerous chart patterns in technical analysis such as flags, pennants, cup and handle, gaps, wedges, double and triple tops and bottoms, among other chart patterns.

This article will help you learn about a few basic geometrical patterns, namely triangle, rectangle and circle. Basically, a chart pattern helps a trader to identify the direction in which a stock or the market is likely to take by identifying the buying and selling forces, their magnitude and most importantly who has the upper hand in this push and pull.

To understand chart patterns, we must first understand what these different patterns indicate.

There are two main types of chart patterns. They are:

Reversal pattern indicates a change in the “direction of the trend”, that is, they are chart patterns, which indicate a reversal of an earlier trend.

As the name suggests, they indicate a continuation of the earlier trend, that is, they indicate that the stock will resume its movement in the direction of the original trend after a brief period of time.

Charts can either be intraday, daily, weekly, monthly, or yearly.

M

Connecting The Consecutive Tops

Connecting The Consecutive Bottoms

Support Line

Resistance Line

Connecting The Consecutive TopsConnecting The Consecutive Bottoms Support Line

Resistance Line

Resistance Line

Support Line

Breakout OnThe Upside

This is a type of continuation pattern, which is formed predominantly during sideways markets, that is, when there is not much volatility or volume in the stock.

Just as the name suggests a triangle is formed when two trendlines converge where the upper trendline (Resistance Line) is formed by connecting the consecutive significant tops and the lower trendline is formed by connecting the consecutive significant bottoms (Support Line). There should be at least two tops and two bottoms to form a triangle pattern but there can be more.

There are basically three types of Triangle chart patterns:


Note: In this pattern, the breakout should ideally be accompanied by an increase in volumes.

A market participant can initiate a trade in the direction of the breakout only after making sure that the level (support or resistance) that it has broken is not penetrated again, that is, the level holds.

Trade: Initiate long positions if breakout is on the upside and initiate short positions if breakout is on the downside

b. Ascending Triangles

Ascending triangles are generally bullish continuation patterns that form during an uptrend, suggesting that the uptrend will resume upon completion of the pattern.

This pattern is characterised by an upper trendline, which is almost horizontal, formed by connecting the tops and an upward sloping lower trendline connecting the higher (rising) bottoms.

Basically, the price faces a resistance (Top) on the upside at a certain level. So, every time buyers take the price to that upper level, it faces a resistance and there is a sell-off and the stock falls, forming a bottom.

From there it again resumes its upmove and as it reaches the resistance, it falls again but not to the same extent of the previous fall. Hence, it forms a higher bottom than the one before.

This will continue until the price can effectively break above the resistance level. This usually happens when sellers start becoming weak and the bulls in the markets get an upper hand and they take the price of the stock above the resistance with a huge spurt in volumes.

Note: Ascending triangles will typically be preceded by an uptrend. And although it is a bullish pattern, it can sometimes be formed during a downtrend in the market.

Also, do not initiate trade before the breakout just because the bottoms are trending higher. The price can still fall below the support line. So, wait for the actual breakout.

Trade: One can initiate long positions on break above resistance.

c. Descending Triangles

These are generally bearish patterns, which suggest that the initial downtrend will resume upon completion of the pattern. This pattern is characterized by an almost horizontal lower support line formed by connecting the bottoms and a downward sloping upper trendline connecting the lower (falling) tops.

The price reaches a support level, and unable to break it, bounces up from there forming a high where again selling pressure sends the stock downwards towards the support level and unable to breach the support again, the stock goes up once more.

But this time, it forms a lower high than before due to the decrease in volume. This is repeated until the buyers start giving up and the sellers gain the upper hand and the support

level is broken with a breakout on the lower side accompanied by huge volumes, clearly suggesting a resumption of the downtrend.

Although a continuation pattern is formed during a downtrend, the pattern can also sometimes be formed during an uptrend.

Resistance Line

Support Line

Breakout OnThe Upside

Ascending Triangle Denoted ByFormation Of Almost HorizontalTops And Rising Bottoms

Trade: Can initiate short positions upon breakout below the support level.

Measurement Of Triangles

Measure the height of the triangle, that is, the height of the widest part of the triangle (if the highest high of the pattern is at `100 and the lowest low of the pattern is at ̀ 70, then the height of the pattern is `100 – `70 = `30. Now, if the price has made a breakout on the upside at the `120 level, then the target price of the stock could be `120 + `30 = `150.

RECTANGLES

Rectangles are nothing but a tug of war between the bull and the bear where both forces are of almost equal strength and neither of them is willing to give up.

The eventual direction of the trend is defined by who wins the battle. Rectangles are typically continuation patterns formed by a sideways movement of the price between two horizontal trendlines.

Resistance Line

Support LineBreakout OnThe Downside

Descending Triangle Denoted By The Formation Of Lower Tops And Almost Horizontal Bottoms


The formation is very simple to understand. As the prices reach the support level, buyers rush in and take the stock up. Now as the stock goes up and reaches the resistance level, sellers become active and push the prices down. This process continues until one of these forces become weak and relents.

It usually takes around two to three months for a rectangle pattern to be formed completely.

Until the pattern is complete, rectangles have no real predictive power, in the sense that, the rectangle does not really help forecast as to which way the eventual breakout would occur.

But once the pattern is complete, it can give a fairly accurate picture as to which way the prices are headed. Rectangle patterns are also a boon to swing traders, because they can trade both ways. They can buy at the support and sell at the resistance and again sell at the resistance and buy at the support levels.

Trades: If the breakout is on the upside, one can initiate a buy trade keeping the upper resistance line as a stop loss. If the breakout is on the downside, one can initiate a sell trade keeping the lower support line as a stop loss.

After a breakout, the price move is expected to be at least equal to the height of the rectangle (The difference between the top price and the bottom price).

So, if the height of the rectangle is 20, and an upward breakout happens at a price of `100, then one can buy the stock with a target price of at least `120 in mind.

ROUND BOTTOM

This pattern is a long-term reversal pattern taking weeks or even months to form. It signals a gradual change of trend from a downtrend to an uptrend. It is also called as a saucer-type pattern due to its saucer-like shape.

This initial declining slope of the round bottom formation suggests excess supply, which forces the stock down. Buying emerges when the stock is quite low and value buyers start accumulating the stock, which propels the stock upwards. Slowly more and more investors spot this upmove in the stock and investor interest in the stock rises and the stock starts moving up with reasonable volumes and finally there is a mad rush by investors to get a piece of the action and the stock simply flies and makes a breakout on the upside

accompanied by huge volumes, signalling a new uptrend.

Note: Volume is high at the initial high or peak of the pattern. It then starts declining as the stock starts going down as selling pressure eases.

Near the bottom, the volume almost diminishes. And as the uptrend starts, volumes start increasing with the eventual upside breakout happening with a great spurt in volumes.

Trade: Round bottom pattern requires great patience since often it takes weeks or even months to form and, hence, it is not recommended for intraday or swing traders. This pattern is more suited to the palate of the long-term investor. A buy trade can be initiated once the price breaks above the initial peak (the high at the start of the pattern).

Usually the time taken (in days or weeks or months) from the initial high to the extreme low is considered as half the distance of the pattern. So, if one finds that this time frame was six months, then one can easily say that the next high would take at least six months to forM.

Round Bottom Pattern

Breakout

Rectangle Formations

Resumption OfPrior Uptrend

Resumption Of The Prior Downtrend

PrecedingDowntrend

PrecedingUptrend

Bullish Rectangle

Bullish Rectangle

Note: Unlike Triangles, the volumes do not dip drastically in a Rectangle.

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INTERNATIONAL STOCK EXCHANGE HOLIDAYS IN 2013

Month Date China India Japan Singapore UK USA Hong KongJanuary

February

March

April

May

June

July

August

September

October

November

December

01st Jan'1302nd Jan'1303rd Jan'1314th Jan'1321st Jan'1311th Feb'1312th Feb'1313th Feb'1314th Feb'1315th Feb'1318th Feb'1320th Mar'1327th Mar'1329th Mar'1301st Apr '1304th Apr'1305th Apr'1319th Apr'1324th Apr'1329th Apr'1330th Apr'1301st May'1303rd May'1306th May'1317th May'1324th May'1327th May'1310th Jun'1311th Jun'1312th Jun'1301st Jul '1304th Jul '1315th Jul '13

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