Friday, July 31, 2009

Recent links on RIL-RNRL fight -
http://online.wsj.com/article/SB124891862250392481.html    In an email exchange with Paul Beckett, The Wall Street Journal's New Delhi bureau chief, Anil Ambani articulates why his company, Reliance Natural Resources Ltd., is battling Reliance Industries Ltd., controlled by his brother Mukesh, in the Supreme Court over a controversial gas deal.  
http://www.business-standard.com/india/storypage.php?autono=69436&tp=on   Anil seeks probe into RIL's 'huge gas scandal'  http://www.thehindubusinessline.com/blnus/14301105.htm The Supreme Court today expressed its inability to commence final hearing of the gas dispute between the Ambani brothers from September 1, but said it would try to give an early date. 

Wednesday, July 29, 2009

Lights Go Out in New Delhi as Billionaire Ambani Brothers Feud

By Abhay Singh 


July 29 (Bloomberg) -- About 50 kilometers (31 miles) east of New Delhi, along a rutted dirt track through fields of corn and barley, lies an empty plot of land where a power plant was supposed to have stood, pumping electricity to alleviate blackouts in India’s capital.

Instead, there are rows of freshly planted saplings, two rusting corrugated metal sheds and a sign on one of them reading, “Reliance Energy Generation Ltd.”

The plant is four years late and a victim of a corporate feud between India’s richest resident billionaires, Mukesh Ambani, 52, and his brother Anil, 50. The two split the Reliance group in 2005 following a fight for control, three years after their father and the company’s founder, Dhirubhai Ambani, died without leaving a will. The conflict has persisted with a legal spat over supply of gas from Mukesh’s company that Anil’s plant needs.

“The loser is not just the brothers, but the whole country,” said Walter Rossini, who manages $283 million in an India fund at Aletti Gestielle in Milan. Power shortages impede development in India as more than 400 million lack electricity and supply falls short of peak demand by 16.6 percent, the World Bank said in June.

In the four years since the split, the feud has led to stalled projects, a court battle and a scuttled merger that may benefit a rival. In the case of the North India power plant, Anil claims his brother is refusing to honor an agreement that fixed the price, quantity and tenure of gas supply needed to start generating electricity.

Mukesh Ambani declined to comment for this story through his spokesman. Anil didn’t respond to questions sent by e-mail.

‘Monopolistic’ Producer

At a shareholder meeting yesterday, Anil directly attacked his brother’s business, Reliance Industries Ltd., India’s biggest company by market value, as a “monopolistic gas producer” that is going back on its word for the sake of greed.

“It is unfortunate that Reliance Industries has tried every trick in the book and apparently several outside the book to back out of its solemn, legal and contractual obligations,” he said.

The differing styles of the brothers -- who live under the same roof with their mother, Kokilaben -- were once seen as complementary. Mukesh was the traditional tycoon who helped build the company’s oil refinery, and Anil the financial wizard who steered the sale of a 100-year bond in the U.S.

Divisions have grown between Mukesh, who owns a cricket team, and Anil, who is funding movies for Steven Spielberg’s DreamWorks SKG and is married to a former Bollywood actress.

‘Bruising Egos’

“Both brothers have big, bruising egos,” said Nigel Nicholson, a professor at London Business School and co-author of “Family Wars: Classic Conflicts in Family Business and How to Deal with Them” (Kogan Page, 288 pages, $24.75). “Mukesh is very much the traditionalist, wanting to build a big industrial empire. Anil is highly political, wanting to go off and do his own thing.”

The clash is spurring investors to take positions in both brothers’ companies to cover themselves. The combined market value of their listed businesses grew fivefold to 5.2 trillion rupees ($108 billion) since they separated.

“Not knowing what will be the legal outcome, I prefer to hedge between the two,” said Aletti Gestielle’s Rossini, explaining his decision to own both Mukesh’s Reliance Industries and Anil’s Reliance Natural Resources Ltd., the parties on either side of the gas dispute.

Father’s Death

The first murmurs of the discord surfaced five months after their father died. In December 2002, Anil didn’t attend the unveiling of a mobile phone venture led by Mukesh. In July 2004, Reliance Industries’ directors approved a proposal to give Mukesh power to overrule Anil’s decisions, bringing the division to a head.

Under the 2005 agreement to split the Reliance group, Mukesh kept the petrochemicals, oil and gas units along with the flagship company, Reliance Industries. Anil got newer businesses such as power, telecommunications, financial services and entertainment. Both retained rights to the Reliance name.

In October 2007, Anil’s side of the business complained to the Indian markets regulator that Reliance Industries was trying to stall the initial public offering of the younger brother’s Reliance Power Ltd.

Merger Blocked

Nine months later, Anil’s mobile phone services company, Reliance Communications Ltd., called off merger talks with South Africa’s MTN Group Ltd. after Mukesh’s Reliance Industries threatened to block the sale if it wasn’t given the option to buy shares in Reliance Communications first. The clause is part of agreements the two brothers signed when they divided the business, said a senior official at Reliance Industries, who declined to be identified because the gas dispute is still in court.

The official also said the company’s move to bar the MTN merger was retaliation for steps it believed Anil’s group took to worsen the gas conflict.

Last year, Mukesh bought the Mumbai Indians cricket team in the Indian Premier League, the country’s biggest sporting franchise, and was seen at stadiums supporting his side. Anil, who is married to former Bollywood film star Tina Munim, announced an $825 million plan July 15 to fund Spielberg’s DreamWorks after its split with Paramount Pictures.

‘Image Management’

“Mukesh is trying to show he’s not a boring technocrat,” said Hamish McDonald, the Sydney-based author of “The Polyester Prince: The Rise of Dhirubhai Ambani” (Allen & Unwin, 296 pages, out of print), an unauthorized biography of their father. “There is a bit of image management going on, on both sides.”

The natural gas at the center of the latest dispute was discovered by Reliance Industries off the eastern coast of India in 2002, before the brothers separated. About a fourth of the power plant’s planned 8,000-megawatt capacity was meant for New Delhi, Anil told the Press Trust of India in August 2006. The city’s residents confront 8-hour-long power cuts that shut down air conditioners and fans in 45 degrees Celsius (113 degrees Fahrenheit) summer heat.

On June 15, Anil’s Reliance Natural won a case in the Bombay High Court, asking Reliance Industries to honor the 2005 family agreement, under which it was to supply 28 million cubic meters of gas a day at $2.34 per million British thermal units for 17 years. Reliance Industries shares fell the most in five months the day of the High Court ruling, while Anil’s company jumped 24 percent.

Court Battle

The dispute over the gas supply contract is scheduled to be heard in the Supreme Court, the country’s highest judicial body, on Sept. 1. Its decision can’t be appealed.

India’s oil ministry has become party to the case in the Supreme Court. Oil Minister Murli Deora said it is “unfortunate” that companies owned by the Ambani brothers sought to divide up the gas, a “national property.”

“It really doesn’t belong to them, but to the people of India,” Deora said by telephone from New Delhi on July 21.

At yesterday’s meeting for Reliance Natural shareholders, Anil criticized the oil ministry for interfering in a commercial dispute.

“This bogey of sovereign ownership is being raised with the sole purpose of attempting to bail out Reliance Industries and help them renege on their contractual commitments,” Anil Ambani said.

If Anil’s Reliance Natural loses the case in the Supreme Court, it will cast doubt over the entire 2005 separation agreement between the two brothers, said a person familiar with Anil’s case who declined to be identified because the matter is yet to be decided by the courts. The 2005 agreement has an indemnity clause, under which Anil can seek compensation if he can prove damages in court, said a person close to Reliance Industries who wouldn’t be identified because he wasn’t authorized to speak publicly on the matter.

‘Disturbs Investors’

“The new developments we hear about disturbs investors,” said Juno Madan, who manages $500 million of Indian stocks at New York-based Brahma Management Ltd., including shares of Reliance Industries and Reliance Communications. “They really should bring the feud to a close or it will affect them negatively.”

The men’s father, Dhirubhai, who was the son of a school teacher, founded Reliance using money earned during a stint in Aden, Yemen, where he worked at a gas station and sold petroleum lubricants. Back in India, Dhirubhai began trading yarn and spices, going on to make textiles, manufacture petrochemicals and refine oil.

Fortunes Shrank

The feud has begun to hurt the brothers’ deals. Anil’s inability to pursue a transaction with South Africa’s MTN proved to be billionaire Sunil Mittal’s gain. Mittal’s company, Bharti Airtel Ltd., Anil’s chief rival in the Indian cell-phone market, resumed talks with MTN when negotiations with Reliance Communications fell through. Mittal had unsuccessfully tried to strike a deal with MTN last year before Reliance Communications.

“If they drag on the fight too long, it might come to haunt them,” Madan said. “In this case it was Bharti that took advantage of it. Tomorrow it will be some other company.”

The global recession saw Mukesh’s fortune shrink to $20.8 billion in 2008 from $49 billion in 2007, according to the Forbes India rich list. Anil’s wealth contracted to $12.5 billion from $45 billion over the same period.

Mukesh, who lives with his family on separate floors to Anil’s family in Sea Wind tower in south Mumbai, is building a new $2 billion, 27-story tower, some 10 kilometers from Sea Wind on Altamount Road.

In February, the brothers were seen together welcoming guests at the 75th-birthday party of their mother, sparking rumors in the Indian media of reconciliation. The mother, who brokered the 2005 agreement, may be the only one keeping the feud in check, McDonald said.

“It’s become quite a heated internecine battle,” he said. “It’s not going to be patched over easily.”
(Source: Bloomberg)

MAHINDRA LIFESPACE 
CMP Rs 300 EPS Rs 11.36 Book Value Rs 217 Debt/Equity 0.3
MAHINDRA LIFESPACE DEVELOPERS LTD (previously known as MAHINDRA GESCO DEVELOPERS LTD) is a subsidiary of M&M LTD and has been in the forefront of urban development in the country. A part of the $6.3billion Mahindra Group, the company has developed premium residential and commercial properties in Mumbai, Pune, Delhi, Chennai and the Mahindra World Cities at Chennai and Jaipur. The Company has completed residential projects of 3 million sq. ft. and another 2.97 million sq. ft. are under various stages of development. Mahindra Lifespaces is also involved in the business of establishing, acquiring, developing and maintaining Industrial Parks, Technology Parks, Software Parks, Special Economic Zones (SEZs), Export Processing Zone, Integrated Townships, Industrial Areas and Industrial Estates. Through a subsidiary, the company has promoted the country's first operational Special Economic Zone (SEZ) and India's first integrated Business City in a public-private partnership model - Mahindra World City, New Chennai. It has recently launched Mahindra World City, Jaipur and is coming up with similar SEZs in Thane and Karla. Mahindra Infrastructure Developers Ltd - the other subsidiary company - is involved in water and sanitation segments.
Q1 Performance:-
MAHLIFE has posted PAT growth of 7% (YoY) to Rs 10.42Cr. It has posted Sales of Rs 47.26 Cr in Q1FY09, which is down 2% YoY but as the company was able to maintain selling prices even in uncertain market, the sales rose 51% on QoQ basis. In this quarter the operating companies in Chennai SEZ stand at 24 and Jaipur SEZ at 16. The total employed personnel in Chennai SEZ is 12,500 and Jaipur SEZ is 1,000. The total leased area in Jaipur SEZ is 1,15,000 sq. ft out of which 61,000 sq ft 
was leased during the quarter to an IT Park.
Jaipur SEZ: As on 3 March 2009, (i) the Light Engineering and the Handicrafts SEZs, spread across 250 acres each, were inaugurated, and (ii) MLL entered into a tie-up with SBI for setting up SBI's North India hub in the DTA part of its Jaipur SEZ. MLL has already received commitments for ~600 acres in the processing area from key tenants such as Infosys, Wipro, Tech Mahindra, Deutsche Bank, Nagarro, Nucleus Software and Talbros.
Chennai SEZ: The management is in advanced stages of acquiring additional ~300 acres of land, which would be an extension of the current processing area at the 1,400- acre Chennai SEZ. In FY09, the workforce at the Chennai SEZ increased by 60% to 12,000 employees. MLL expects to have an total workforce of 0.1m+ by FY14 functioning in the Chennai SEZ. MLL is likely to launch the additional ~300 acres of processing area in FY10- FY11. The management has proposed to launch two new residential projects during FY10.
  • MAHLIFE is the only company in India which is having two operational SEZ’s. 
  • The government will extend tax breaks for industrial park schemes and developers of real estate and road projects to stimulate the economy and lift growth to 8-9 percent by the end of 2010, the finance minister said on Monday, 27Jul2009.
  • MAHLIFE has very low debt levels (as compared to other Realty majors such as DLF, UNITECH) with debt-equity ratio of just 0.3 and so does not face pressures from high interest costs. 
  • SEZs enjoy better margins and once MAHLIFE commences operations at SEZs, it is expected to post even better numbers and low debt will not put pressure on them to lower selling prices which will improve the margins further.
  • MAHLIFE is a value buy at Rs 300 and its EPS is expected to grow to Rs 27-28 in next 1-2 years from current Rs 17 with its low interest costs because of small leverage and existence in SEZs can bring better margins in the future.
Technical View:-
The stock of MAHLIFE got sold off in overall market correction after hitting Rs 1300 in May'06. It hit all time low of Rs 83.40 in March'09 and now looks to have started trending up once again. MAHLIFE should be accumulated near Rs 275-300 and over 12-18 month period the stock can target Rs 520 and more also. Buying in lower levels will provide more value for the investor. 

"Price is what you pay, value is what you get" - Warren Buffet

Saturday, July 25, 2009

Weekly Technical View by Tanmay G Purohit:
Nifty (4568) rose 194 points or 4.43% this week on the back of recovery in Monsoon and strong corporate performance from companies like MARUTI, DR REDDY, UNIPHOS, ACC, ULTRATECH. Nifty trades close to 2009-high level of 4693 but has closed above 4500 this week which has negated the bearish H&S formation. Now it is well-placed inside an up-channel and going past 4693 next technical target at 4790 is possible; which is also a 61.8% retracement of fall from 6357 to 2252. Next week will have RBI Policy Meeting on Tuesday, F&O Expiry on Thursday and the results season will be almost over until weekend to get a clearer picture of corporate scorecard for Apr-June quarter. Markets normally turn volatile near important tops and as we trade close to 2009-high levels with important events next week, traders may experience a lot of volatility. Nifty moving below 4490 will break the rhythm of up channel and below 4380 panic selling is not ruled out. Still caution is advised and investors are advised to remain light for time being. Stocks looking positive - SINTEX, MCDOWELL, UNIPHOS


Support 4480/4420/4375
Resistance 4635/4700/4790






Last Week Recap Of Technical View:
Nifty (4375) rose for 4 days on trot after Monday to close up by 9.27% this week and recouped almost all of the previous week losses. 3900-3930 was minimum target for downmove and Nifty took U-turn from that place. Sustained move past 4500 will negate the bearish H&S formation and we will have to assume that the trend is still up, but for now it is trading in a broadening triangle which indicates large swings on both sides. Nifty breaking 4200 this week will be negative and caution is advised if 4100 is taken out. Because I had a cautious view, we could not catch the 400+ point move on Nifty this week but market is always supreme and we have to obey its orders as no one can dictate terms here. Many ask when Nifty will correct to 3600 so that we can buy - the point is one should not worry much about index movement. When there are opportunities, we should buy. Buying value gives us margin of safety and caution is being advised because a bit of risk management will only improve the total returns of the portfolio.


Contrarian View:-
Nifty has formed an inverse head & shoulders formation in Weekly graph which suggests if Nifty breaks out above 4700, the next target will be in the region of 6500-6600 which will be new AllTimeHigh for the index. A chart is attached here for a better view. But taking into consideration various other factors, I still feel some caution is needed as the risk-reward ratio doesn't favour the buyer in a great way. We have capitalized on a large swing of nearly 2500 Nifty to current levels of 4500 because at that time the risk was minimal and rewards were optimal, current circumstances and valuations don't have such an attractive payout at this juncture. For long term investors, Sensex target of 20000 is maintained by Dec 2011 and 35000 by 2016.




Positives for long-term growth:-

  • India remains in quite safe positions as far as global recession is concerned, we have had only a slowdown effect and India GDP grew 6.7% in 2008-09 which was the most severe year in recent times for global economy.
  • Young population: India has one of the lowest Median-age of population, living a big working class which doesn’t have to serve a lot of ageing population. Many other country nationals will be getting older as Indian youth will blossom in the boom once the recession recedes. Major benefit is that many can speak English easily. English is a world language and China still hasn’t developed well in this aspect but they are coping with it.
  • Global Auto companies have faced a lot of brunt of recession and some have even faced bankruptcy. But Indian Auto sector continues to grow and in future India is likely to be a global auto hub.
  • Indian economy is sustained by one of the highest remittances from Indians living abroad, improving outsourcing and talent-led export growth can make the economy recover quickly
  • Stable government at the center confides about stress on growth and continuation of reforms.
  • Reliance's KG-D6 gas and other capacities from CAIRN, ONGC coming on stream can save India around $19bn through savings in imports and savings for Indian consumers through the approved price. Subsidy burden from fertilizer companies is expected to reduce as import costs will go down.

Negative Factors:-

  • High Fiscal Deficit widened to 6.8% in recent Union Budget, any rise in this deficit can degrade India ratings.
  • High government borrowing can impact interest rates and rising interest rates may disturb the consumption-led growth.
  • Tax collection took a hit last year on the back of stimulus packages and any roll-back in terms of rise in excise duty and other tax rates will contain the fiscal deficit but can hamper demand for the related products as prices will rise after rise in taxes.
  • Failure of Monsoon is still a worry and already food prices are shooting up in the sky. Inflation can be a factor to watch out if food prices sustain their rising trend.



Clustering of important events:-

  • Nifty trades above 20 P/E which makes many positive factors built into the prices.
  • Sensex/Nifty have completed 89 days of rally on Tuesday, 21Jul2009, 21 weeks of up trend will be complete this week - Both are important fibonacci numbers in technical parlance. 
  • Sensex has created 8 up gaps during its journey in the last 5 months of rally, also on weekly graph we are having 3 up gaps open. It is not necessary that we close these gaps always, but closing these gaps can give us a comfortable entry point which is needed for future safety of returns. If Sensex tries to feel even 2 gaps from the 9 open, we may see 13460 levels. If 2 of the 3 weekly gaps are to be closed, we may see even 12250.
  • 61.8% retracement of Sensex fall from 21206 to 7697 will complete at 16045 which can be a place where good supply can be seen.

http://tanmaygopal.blogspot.com/2009/07/clustering-of-important-events.html

Thursday, July 23, 2009


RBI Operationalizes Indian Depository Receipts Rules


(Dow Jones)--India's central bank Wednesday put into operation rules allowing foreign companies to issue depository receipts in the country - a move which, though positive in the long run, analysts said may pressure domestic markets in the near term. Eligible companies resident outside India may issue Indian Depository Receipts through a domestic depository subject to companies rules and guidelines, the Reserve Bank of India said. Issue of IDRs enables foreign companies to raise funds by listing on Indian stock exchanges.
"At a time when we're struggling for capital and liquidity to sustain domestic growth, the flight of money to overseas markets may not help," said J.Moses Harding, head of global markets at IndusInd Bank. Harding said the move could pressure the Indian rupee in the near-term as the demand for dollars would go up. However, when the global economy recovers and investors regain confidence about putting their money in India, this channel could help the growth of the financial market, he said. "These are small, cautious steps toward capital convertibility. Greater foreign participation in Indian markets is definitely going to help us integrate better in the long run," said an economist with a local bank, who did not wish to be named. Standard Chartered PLC is one of the companies looking to raise at least $1 billion by listing in India, a person familiar with the matter told Dow Jones Newswires in April.
The RBI said a financial or a banking company with a presence in India which wants to issue IDRs it will need regulatory approval. Indian shares have been one of the better performers in the region in 2009, with the benchmark Sensex index gaining more than 53% so far this year. According to data from capital markets regulator, foreign institutional investors have been net buyers of over $6 billion of Indian shares. But a lack of confidence in foreign companies amid jittery global sentiment and uncertain economic environment could weigh on investor appetite for shares of these companies in India, analysts said. The RBI said the depository receipts will be rupee-denominated. Foreign institutional investors and non-resident Indians may purchase them, subject to the guidelines on foreign exchange management. The IDRs can't be redeemed into underlying equity shares within one year from the date of issue, it said. The proceeds of the issue must be immediately repatriated outside the country by the issuing company.
Regulator caps Ulip charges

Retail investors to benefit as returns will increase; move effective from October 1

Unit-linked insurance plans (Ulips) are set to become more attractive for retail investors as the regulator today capped the charges levied by insurance companies on such investments. The cap, which comes into effect from October 1, will increase returns from Ulip investments.

The Insurance Regulatory and Development Authority (Irda) has capped the difference between gross and net yield to customers at 3 per cent for 10-year policies and at 2.25 per cent for policies of more than 10 years. At present, the charges vary between 1.8 per cent and 4 per cent depending on the tenure of the investment.

Irda has capped fund management charges at 150 basis points for policies with a period of less than 10 years and 125 basis points for above 10 years.

According to the circular, at the time of sale, the insurer may assume a growth rate of 10 per cent per annum of the investment as a model. This would help customers understand products and charges easily.
“In order to enable customers to have a clear understanding of the product, it is decided that Irda will prescribe one cap on all charges put together. This will ensure flexibility for insurers and encourage product innovation,” Irda said.

Irda said the extra premium from underwriting extraordinary health conditions, cost of all rider benefits, service tax on charges (as applicable) and any explicit cost of investment guarantee would be excluded in the calculation of the net yield.

The regulator said insurers could withdraw all existing policies that did not meet the requirement by December 31, 2009, while all policies filed after October 1, 2009, would be governed by this circular.Bharti Axa Life Insurance CEO Nitin Chopra said the cap on Ulip charges at 2.25 per cent for a gross yield of 10 per cent over the long term would make Ulips more competitive and customer-friendly. Chopra, however, said it would help if mortality charges were removed from the overall ambit of charges as these charges were dependent on individual customer profiles and the amount of cover required. At the time of maturity, the regulatory authority said, the insurer must issue the policyholder a certificate showing year-wise contributions, charges deducted, fund value and final payment made to the policyholder taking into account partial withdrawals, if any. This certificate must also show the actual gross yield and net yield taking into account the actual charges deducted.

Insurers are skeptical about including mortality charges under the overall charges saying it may adversely impact sales, especially to aged customers.

Over 90 per cent policies private insurers sell are Ulips while state-owned Life Insurance Corporation of India (LIC) has collected 85 per cent of the premium from equity linked investment products.
“This will make ULIPs even more transparent and favourable for customers. With a cap on overall charges, customers stand to benefit in the form of higher returns. Moreover, lower charges on products with terms greater than 10 years will provide impetus to long-term policies.” said Aviva India CEO and MD T R Ramachandran.
(Source: Business Standard)

Insurance is not a good investment option - feels N. Muthuraman
Choosing life insurance products such as ULIPs as an investment option may not be a wise thing to do, as complex fee structures may eat into your returns. Insurance products should be chosen only for risk cover; all other features of insurance products are available in mutual funds at a much cheaper cost.

Just sample this set of charges a typical unit-linked insurance policy may levy on you — premium allocation charge, policy administration charge, mortality charge, fund management charge, top-up charge, switching charge, partial withdrawal charge and surrender charge. All these charges could eat into your investment returns substantially, which makes the case for insurance policies as an investment option weak. Add to this the problem of mis-selling by insurance agents.

Avoid policies? Does that mean you should avoid all life insurance policies? No! They serve two basic purposes:
First, the risk of death of the insured and resultant loss of income for the dependents; this risk can be covered with an appropriate ‘term insurance’ plan; and Second, the risk of the insured living longer and, hence, a need for pension for self and family. This can be covered with an appropriate pension plan. Insurance policies should be chosen to address these two basic risks. Beyond these, the policies serve very limited purpose.

The investment part of any insurance product can be adequately addressed by mutual funds, which are much less expensive and also rank much higher in disclosure levels — be it the charges they levy, the periodic disclosure of the portfolio of their investments or the ease of access of net asset values (NAVs). Besides, comparison of charges, past performance and asset composition are much easier in the case of mutual funds than unit-linked policies offered by insurance companies. Conventional insurance products — non-ULIP products — are even worse than ULIPs in disclosure levels, making them much more complex to understand. The insurance regulator can do much more to improve disclosure standards of both conventional and ULIP products, which is beneficial in the long term both for the industry and the investors.

What are these charges?
The typical charges a life insurance policy may entail, and the broad range for each of these charges are given below; a few policies and promotional schemes could fall outside this range.
Premium allocation charge: This is the charge levied by the insurance company to cover its expenses — agent commission, marketing and selling expenses, etc.This is usually the largest charge levied on the insured and can range from 5 per cent up to even 60 per cent of the first year premium, and typically about 5 per cent of the annual premium thereafter. Compare this with the 2.5 per cent entry load typically levied by the mutual funds, and you get the drift.
Policy administration charge: This is the charge levied for the administration of the plan — printing and stationery, postage, maintaining customer call centres, etc., are covered by this charge. Usually this is a small fee — about Rs 20 — levied every month. But beware of some policies which levy policy administration charge as a per cent of sum assured, while charging an apparently low premium allocation charge. A pure marketing innovation to make the policy charges appear low, when in reality they are not.
Mortality charge: This is the charge that is levied to cover the risk of early mortality of the insured, the very purpose why an insurance policy is taken. Ironically, this cost is among the smallest charges levied — typically ranges from 0.2 per cent to 0.5 per cent of the sum assured per annum, depending on your age. Some policies offer a fixed per cent throughout the life of a policy, while others offer a variable per cent, increasing every year till the life of the policy. The variable rates, while starting low, could grow to very high levels, as one reaches advanced ages.
Fund management charge: This is the charge levied for managing your funds by investing in equity markets, debt markets, government securities, etc., as per your choice of funds. Typically, this charge could be 1-2.5 per cent of the funds managed. Insurance companies claim that their fund management charges are lower than those levied by mutual funds. But in the absence of appropriate disclosures, and lack of uniformity even within the same insurance company across products, such claims can neither be confirmed nor denied.

Other charges, such as for top-up, switchin, partial withdrawal and surrender, are levied only when the insured opt for any of these modifications to the original contract. Some of these charges are punitive to ensure continuity of the policy and to deter frequent change requests.
Take, for instance, top-up charge. This provides some avenue for savings. Many policies have high premium allocation charges, but low top-up charge. An investor could choose a low initial premium, and opt for top-up to minimise the expense.

But then, why choose insurance policy as an investment, and then try to optimise your costs, when mutual funds offer much better flexibility on all these fronts?

The mis-selling menace
Having interacted with almost all major insurance companies and a host of agents across the spectrum, I have come across several mis-selling techniques adopted by agents to lure unsuspecting investors. Here are some: 
Selective disclosure of past performance: In the absence of appropriate disclosures and rigorous comparisons of past performance by independent agencies (such as mutual fund awards for the mutual fund industry), comparison of past fund performance becomes a challenge in the insurance industry. This leaves large scope for the insurance agents to selectively quote periods when their fund performance was superior to an index performance and, thereby, hoodwink the investor.
Indicating much higher returns than permitted by regulator: The insurance regulations permit benefit illustrations with returns only between 6 per cent and 10 per cent per annum. However, many agents provide illustrations with much higher returns with impunity — some even as high as 30-40 per cent returns in equity schemes citing performance in 2006 and 2007. Even a small 2 per cent variation in annual return can show widely divergent terminal benefits when compounded over long period of time, luring gullible investors into believing they will be crorepatis in just a matter of time.
Promoting the policies that earn them highest commission: With scant regard for the needs of the insured, some agents promote only policies that can earn them the highest commission. Premium allocation charges are substantially lower in single-premium products (as per regulation) and, hence, commission earned by agents are the lowest in this class of policies.
Suggesting deliberate discontinuity in premium payments: Few unscrupulous agents even suggest discontinuing existing policies and opting for new ones, because that earns them much higher commissions. In fact, one large insurance company had policy forfeitures of up to 30 per cent of new policies in their second year, prompting an investigation and reprimand by the regulator.
Promising kickbacks: The oldest trick in the book, many agents still promise to pay the insured some portion of their commission earned, despite stringent regulations prohibiting this practice. While this will apparently reduce the ‘charges’ borne by the investor, little do they realise it is their own money coming back to them illegally, subverting the good intentions of the regulator.

What can be done?
The regulator can ensure standardisation of some of the charges — for surrender, policy administration, switching, etc., and disclose ceiling on other charges — fund management charges, policy allocation charges, etc. 
The regulator can also engage in more proactive regulation — dialogue with insurers on specific regulatory provisions will yield better results, than making the regulation more and more complex to address every possible mis-selling situation. 
The insurance industry can promote a self-regulatory organisation (SRO) that compiles and discloses NAV and periodic portfolio (like AMFI does for the mutual fund industry). 
Insurance companies can promote ‘risk cover’ as their key offering, and give more thrust for term assurance policies (where none of these charges are pertinent as the entire premium belongs to the insurance company).
Insurance companies can also modify their incentive schemes for agents to maximum the ‘sum assured’ — which is the main purpose of an insurance product, rather than maximising the charges earned by the insurance company. In fact, even shifting to ‘employee’ model rather than ‘sales agent’ model and reducing variable pay could help insurance industry in the long run!

Insurance company angle
The accusations that are being made are not new to the insurance companies. And they do put up a stiff argument to defend these. Some common lines of defence are:
Higher charges in insurance (when compared to mutual funds) are because insurance is a complex product and takes effort in selling. Despite these charges, long-term investors may benefit more from insurance policies than mutual funds because fund management charges in insurance products are lower than mutual fund products. Insurance policies discourage easy redemptions and help investors stay invested for long term in a disciplined manner. Mis-selling is beyond their control in a situation of rapidly expanding base of agents.

While there is merit in some of these arguments, insurance companies, regulators and the intermediaries can do much more for the long-term health of the insurance industry.

(The author is Co-founder of RiverBridge Investment Advisors Pvt. Ltd.) (Source: Business Line)

Tuesday, July 21, 2009



Clustering Of Important Events Indicates Caution Ahead - Tanmay G Purohit

A Bit Of History To Start With:-
Sensex hit its fearsome lows at 7697 and many could not foresee the bull run ahead as markets abounded in predictions about 5000-Sensex which never happened. Since that time only we have been bullish about India and trying to make people aware of the importance of that opportunity through various majors. An upper circuit was predicted right to start with (http://tanmaygopal.blogspot.com/2008/10/now-probability-of-upper-circuit-is-big.html) which happened after 7 months after elections, then we reflected on how SEBI and other regulators were trying to improve the sentiment (http://tanmaygopal.blogspot.com/2008/11/i-have-not-committed-crime.html), the risk-reward was perfect at 9000 sensex also (http://tanmaygopal.blogspot.com/2008/11/why-to-fear-even-if-sensex-does-6000.html), then came Satyam Episode but India still remained investment favourite 

Now Into The Present:-
Sensex hit 8047 which is current rally bottom on 6Mar2009 and rallied nearly 93% to reach 15600 on 12Jun2009. The P/E of Nifty has expanded from below 12 in October'08 to above 20 now and a lot of pessimism has ran away as euphoric phase took over after UPA won the elections. Almost all the sectors have contributed to this rally and many stocks have more than quadrupled also. Some caution is advised at this point as valuations look stretched, markets can run up even with stretched valuations but now the risk-reward is not favourable after indices have nearly doubled themselves. Long term investors need not worry (2-3 years and above) but short-term traders/investors may feel pain if they don't take informed decision at this point of time.
  • Sensex/Nifty will complete 89 days of rally on Tuesday, 21Jul2009, 21 weeks of up trend will be complete this week - Both are important fibonacci numbers in technical parlance. 
  • Sensex has created 9 up gaps during its journey in the last 5 months of rally, also on weekly graph we are having 3 up gaps open. It is not necessary that we close these gaps always, but closing these gaps can give us a comfortable entry point which is needed for future safety of returns. If Sensex tries to feel even 2 gaps from the 9 open, we may see 13460 levels. If 2 of the 3 weekly gaps are to be closed, we may see even 12250.
  • 61.8% retracement of Sensex fall from 21206 to 7697 will complete at 16045 which can be a place where good supply can be seen.
  • RELIANCE results will be out on 24Jul2009 and 80% of the results will be announced over next 8-10 days which can guide further direction to the market. Any disappointment in any of the major results can be a cause of worry as high expectations are built in.
  • Biggest Solar Eclipse of the century and it is one of 3 eclipses in a single month. Now I am not an astrologer to talk about this, but this is one event which needs a close watch as effects can be a bit late also.
All these events cluster together and such rare events encompassing a single week can give way to major turns, it may not be visible immediately and it is difficult to comprehend effects at this point of time but it is better to stay away or stay light as we have taken good profits since markets bottomed out in Oct'08. Technically, Sensex sustaining above 15000 levels can take it to above 16000 and more also very quickly, but it is the risk-reward which is not favourable at this juncture. PCR (Put-Call Ratio) is rising rapidly since last week as there is heavy built-up of shorts and government announcements after budgets regarding various reforms have infused fresh money into stocks. Shorting is not advisable, this is only a caution to investors. The bearish Head & Shoulders formation in Nifty has also failed so more short covering is not ruled out. There is a good chance that we may be wrong as the fall may not materialize soon and we may just become onlookers for higher levels, but if we are right, the correction from current levels can be big which can be 25% or even worse also on index.

Deja Vu 21000 - Similar caution was advised around 20000-Sensex levels in Dec'07 but we did see a rally of 1000 more points from there also. We can never sell at exact top, it is not necessary to wait until last point of rally as when one really wants to sell the market may not oblige. So take profits now, reduce positions and better to watch the events by avoiding over-aggression. In technical analysis, we always talk about probabilities and never certainties but if there is a high probability of turning around, one should have it in mind before investing. If we go up from here and rally doesn't stop, we can again catch it as we will be having cash in hand to do that, we can always take a fresh view later.


Gaps so far:-





About the big Eclipse:-
The world will witness the longest total solar eclipse of the 21st Century on Wednesday, 22Jul2009 as it will lay a carpet of darkness across India and China, from Mumbai to Shanghai. At its maximum, this will last 6 minutes and 39 seconds. Earlier, similar solar eclipse occurred on July 11, 1991 which lasted 6 minutes and 51 seconds. This solar eclipse is the longest total solar eclipse that will occur in the twenty-first century, and will not be surpassed in duration until June 13, 2132. This is second in the series of three eclipses in a month. There was a lunar eclipse on July 7 and now a solar eclipse on July 22 and then a lunar eclipse on August 6.

Sunday, July 19, 2009

Update on EXIDE INDS (CMP Rs 78.45):-
EXIDE is approaching our target of Rs 85-90 This is an update as EXIDE came out with a good results in Q1:-

  • PAT growth of 48.90% to Rs 1224mn from Rs 822mn
  • Income fell marginally to Rs 9043.50mn from Rs 9088.80mn



Further Outlook for EXIDE:-
The demand for batteries in industrial segment is still strong (UPS, Invertors, Telecom etc). Auto battery space is a bit challenging but with improved sales by Indian auto companies and EXIDE being a popular and preferred name; long-term demand will keep coming to it. The distribution network and increasing backward integration (it did acquire Tandon Metals and Leadage Alloys for its lead needs) will help EXIDE sustain tough times as well. As the stock is approaching our given targets, partial profit-taking is advisable here, rest one can hold for even triple-digit targets in a year's time frame.


EXIDE results press release:- http://www.bseindia.com/qresann/news.asp?newsid={FD85246E-6614-4343-859A-BB22C80306BE}&param1=1
Previous Posting on EXIDE http://tanmaygopal.blogspot.com/2009/06/exide-industries-cmp-rs-63.html
UPDATE ON KALINDEE RAIL NIRMAN (CMP Rs 152):-
Previous article:- http://tanmaygopal.blogspot.com/2009/05/kalindee-rail-nirman-cmp-rs-150-buy.html
The stock did reach our target in budget euphoria but now excessive speculation and disappointment has crashed it towards Rs 140 once again. It becomes a value buy once again with a strong catalyst in the form of L&T. Once again the stock can reach near Rs 190-200 levels in 3-4 months period and one can buy for investment around Rs 150-155. The stock hit 9 down freeze after the budget and now has started trading freely last 3 sessions.


Larsen & Toubro holds 14% stake in this company and with management of L&T saying they are going to increase investment in Railway sector, this company may get some attention.


Excerpt from Interview of Y M Deosthalee, CFO, L&T talking to CNBC:-
Q: Just to supplement it, would you be looking at buying Kalindee? L&T Capital already has I think 14%?
A: Yes, we have some stake, about 14%. There are various options. Acquisition is not the only option, one can have strategic alliance. One can look at working together. So, there are all options and we will examine. At this point in time, we have not finalized our thinking on whether we are going to acquire or takeover. I don’t think anybody can make such statements. Read full interview:- http://www.moneycontrol.com/india/news/results-boardroom/beefingcapabilitiespower-railways-lt-/406717/0




A Twist In The Tale :-
All know about the ongoing legal battle between Ambani brothers about the KG Gas dispute and now it has gone to Supreme Court for hearing on 20 July, 2009. We had covered this in our previous post (http://tanmaygopal.blogspot.com/2009/07/update-on-rnrl-reliance-gas-dispute.html), but government has started playing its cards and now the case has become even more interesting. 

The government filed a petition before the Supreme Court seeking a direction to declare as "null and void" the private family agreement of the Ambanis that provides for gas supply by RIL to RNRL. The Special Leave Petition (SLP) was filed by the Petroleum Ministry, a day after it filed an affidavit in response to Mukesh-led RIL's petition in the Supreme Court challenging the High Court order. The points put forward in the SLP by Petroleum Ministry:-
  • The gas under the PSC (Production Sharing Agreement) was "the property of the government of India".
  • "The contractor (in this case RIL) has certain rights and obligations under the PSC. The rights do not include utilising the gas at the discretion of the contractor.
  • The goverment had valued the gas at $4.20 per mmBtu and has stipulated that fertiliser units were to get the gas first followed by power sector. But RIL-RNRL family agreement clauses violate this stipulation.

Why has Government suddenly awaken?
All the blocks provided under NELP (New Exploration Licensing Policy) are on lease basis and private companies use them for a particular time period. In any lease, there is only a transfer of possession and no transfer of ownership. KG basin block is also on the same lines. Government says all the blocks are national property and NELP is on profit-sharing basis. Government share of profits is dependent on selling price so one can not sell below the price set by the Government. The Petroleum Ministry said that the gas produced and expected to be produced from KG basin and other fields under the various PSEs is substantial. "It is expected to nearly double the availability of gas in India in about one year's time. If properly used, it will promote the industrialisation of India. In terms of the MoU, however, all the gas will be owned by the respondents (RIL and RNRL) and utilised at their discretion. Obviously, the pressing needs of the priority sectors cannot be allowed to be held hostage to the benevolence and mercy of these two respondents," the government submitted.

Sub-lease- A lessee can transfer the whole or any part of his interest in the property by sub-lease. However, this right is subject to the contract to the contrary and he can be restrained by the contract from transferring his lease by sub-letting. The lessee can create sub-leases for different parts of the demised premises. The sub-lessee gets the rights, subject to the covenants, terms and conditions in the lease deed. http://www.helplinelaw.com/docs/lease/lease2.shtml

Original NELP clauses (1999 document):- http://www.4shared.com/file/119106623/db2932ed/goi11.html
It is Government who fixes the Gas prices (refer clause 19 in this page):- http://petroleum.nic.in/ng.htm

Saturday, July 18, 2009


Weekly Technical View by Tanmay G Purohit:

Nifty (4375) rose for 4 days on trot after Monday to close up by 9.27% this week and recouped almost all of the previous week losses. 3900-3930 was minimum target for downmove and Nifty took U-turn from that place. Sustained move past 4500 will negate the bearish H&S formation and we will have to assume that the trend is still up, but for now it is trading in a broadening triangle which indicates large swings on both sides. Nifty breaking 4200 this week will be negative and caution is advised if 4100 is taken out. Because I had a cautious view, we could not catch the 400+ point move on Nifty this week but market is always supreme and we have to obey its orders as no one can dictate terms here. Many ask when Nifty will correct to 3600 so that we can buy - the point is one should not worry much about index movement. When there are opportunities, we should buy. Buying value gives us margin of safety and caution is being advised because a bit of risk management will only improve the total returns of the portfolio. 


Support: 4280/4210/4100
Resistance: 4440/4510/4630

Tuesday, July 14, 2009

INFOSYS (Rs 1770):- Buy Rs 1750-1770 for target Rs 2000-2030. Keep stops below Rs 1670. The target can be even Rs 2200 if one can hold for a bit longer term (stop losses can’t be given on longer term targets).



  •  INFOSYS results were not outstanding but in these difficult times results of such large tech companies are not expected to be very magnificent, sustaining profits is more important and when once again growth materializes this stock can outperform. Long-term investors need to accumulate.
  • Market Talks - Infosys bags $10-m outsourcing contract from Intel, which could evolve into up to $100 million.

Sunday, July 12, 2009

More About High Dividend Yield Stocks:-
The previous post (http://tanmaygopal.blogspot.com/2009/07/dividend-yield-stocks-company-name-ex.html) took care of high dividend yield stocks, this will make sure that we know something about those companies before investing. Always know about a company and its business, then only invest in it :-


TATA CHEM :
http://www.tatachemicals.com/
Established in 1939 at Mithapur (in Gujarat, India), Tata Chem (TCL) is a part of the Tata group. The company is a pioneer and market leader in the Indian branded iodised salt segment and India's leading producer of nitrogenous and phosphatic fertilisers. TCL is a global company with interests in chemicals, crop nutrition and consumer products. It is the world's second largest producer of soda ash. With manufacturing facilities in India, UK, the Netherlands, Kenya and USA, TCL is the world’s most geographically diversified soda ash company. It is a leader in the branded salt market in India with above 50% market share. The company recently ventured into the agri-produce wholesale business called Khet-Se and is also running tests for the new bio-fuel business.


Fundamentals:-
CMP Rs 200 EPS Rs 19.22 (TTM) Book Value Rs 171
In correcting markets, an investor needs to find margin of safety in any stock and that comes from fundamental strength. TATA CHEM is paying Rs 9/share as dividend and that makes it 4.5% dividend yield which is very handsome. The stock is a value buy at current levels trading at around 10 P/E on TTM basis. The price has corrected more than 30% from recent peak at Rs 269 made in June'09 and is cheap even from Price/Book Value approach. The dividend record is crystal-clean for Tata Chem as every year it has paid some dividend and never since 2001-02 the dividend payout has gone below Rs 5/share.


In a recent development, Government of India has said that many fertilizer units in India remain underutilized. Tata Chemicals' Haldea-based plant was able to utilize only 57% of total capacity. "Performance of some of the fertiliser units in the country is below par. The main reason for lower production in urea plants is the limitation of availability of natural gas," the Minister of State for Chemicals and Fertilisers, Srikant Kumar Jena, said in a written reply in the Lok Sabha. The government, however, has decided to accord highest priority in gas allocation to the fertiliser sector for expansion and revival of projects. India's gas worries should come to an end soon as RIL, which is currently producing 31-32 mmcmd, is likely to touch 80 mmcmd in next six months from its KG-D6 gas fields and as per Morgan Stanley the peak output is expected to save India $8.3billion annually on import costs.






Fertilizer industry  is seeking an all-cash subsidy payment instead of a mix of cash and bonds, which sell at discounts, resulting in working capital disruptions and losses. Though it is proposed, it is still a pending matter with government and if finalized, will be a catalyst for Tata Chem.



NIIT TECH :
http://www.niit-tech.com/index.aspx
NIIT Technologies became an independent organisation in 2004, after spinning off from NIIT Ltd. Even though the price history is of just 5 years, NIIT Ltd itself has been into software development since last 15 years. NIIT Tech provides solutions for Banking & Fin Services, Insurance, Travel, Transportation & Logistics and Retail & Distribution segments. 


Fundamentals:-
CMP Rs 96 EPS Rs 19.56 (Year-ended Mar'09) Book Value Rs 51.09
NIIT TECH trades at just 4.9 times its FY09 EPS and is paying Rs 6.5/share as dividend yielding 6.78% which takes it very close to even Post-tax Fixed Deposit returns of nationalized banks. One has to understand that stocks are not like Fixed Deposits but if one takes a longer term view, they can be a bit more than that. Good dividend yield makes sure at least some returns as dividends and if it is a growing company (like NIIT TECH also looks), it helps in capital gains too when broader markets do well.


There were other stocks also in that list, I will just give a table of their fundamentals (just for information purpose):-


Financial Snapshot of High Dividend Yield Stocks
Stock Name
Web Site
EPS (Rs) (TTM)
Book Value (Rs)
P/E Ratio
P/B Ratio
Div Yield (%)
KARUR VYSYA BANK
43.71
250.00
6.59
1.15
4.18
GIC HOUSING FIN
10.61
69.35
7.37
1.13
5.13
HYDERABAD IND
59.08
242.46
4.00
0.97
4.24
JK CEM
20.36
129.35
4.95
0.78
3.47
HAWKINS COOKER
36.15
73.95
8.94
4.37
6.19
ORIENT PAPER
10.17
24.75
4.49
1.85
3.26
HEG
26.30
149.21
7.41
1.31
3.33
CHEVIOT
26.55
369.46
5.92
0.43
3.82