Satyam's ill-fated "acquisition" try and its aftermath

Satyam computers, was one of stocks which was in our radar for purchase as we believed that it offered tremendous value when it was quoting at Rs230 per share. One of the primary reasons for looking positively about Satyam was its huge cash reserves it holds in the Balance Sheet and its stable IT Services business, even after discounting the possibility of lack of growth from its IT business. Now it is quoting at Rs160 per share all in a matter of two days.

The question now is, is it still a buy? May not be the case. The reasons are:

Unrelated diversification: We all know that Satyam made an abortive attempt to buy one company by name Maytas Infra to diversify its business and revenue model and the fate it had over the next 12 hours. Satyam shares crashed on Nasdaq by a whopping 55% in a single day of trading. Indian markets followed that on Wednesday by giving Satyam a good 30% cut in its market capitalisation. The intention to buy an unrelated business is a big negative on the stock and it would hang in the wall forever.

Integrity of the management: I dont have any pity for the Satyam as they went into unrelated diversification of buying an infrastructure company. That too, at a very high valuation when the whole infrastructure/real estate industry is in the doldrums. The deal would not have caused such an uproar if not for the promoter and CEO of Maytas Infra is none other than Mr Teja Raju, son of Mr B Ramalinga Raju, Chairman and CEO of Satyam.

Corporate Governance issues: It has won lot of awards for its corporate governance initiatives earlier and they still have a very distinguished board of directors. Now only the directors' names have been irrefutably damaged due to this fiasco. Already vocies are being raised for removing Satyam's Directors and the top management team. I think with active FII investors, it is very much possible that they may be removed.

Lack of confidence of the top management on the core business: Satyam's top management attributed the reason for diversifying into infrastructure business as they were very negative about the business outlook for their core business, IT Services. They have predicted 2009-10 to be very bleak and negative growth for the company is a possibility. Now with the management itself is unsure about the future, no sane person can go and buy the stock.

What may happen with the money lying in Satyams's Balance Sheet?

May continue to hold the cash: Just maintain status quo and see what the shareholders want during the next general meeting. We can expect uproarious scenes during the next shareholders meeting.

Hefty cash dividend: Increasingly the shareholders have started asking for the money back from the company. Satyam management may decide to buy peace with the shareholders by giving some hefty cash bonus.

Look for acquisitions in the IT Space: May go after an IT company in India or outside.

Out of the three possibilities, I see the second one of hefty cash dividend happening in the near future. The management has lost the confidence of the shareholders, so they may buy peace with them with cash. But really doubt whether Ramalinga Raju would be able to survive beyond the next annual general meeting, particularly so as he and his group holds only 8.6% of the Satyam's share capital.

What I am going to do?

I may not buy the share now as the reputation of the management is in tatters. With their own outlook for IT business being gloomy, it is better you avoid Satyam and look for other companies.

Satyam may go on to become one of the first professionally managed IT company in India in the near future.

Time to lock into fixed deposits - Part II

India also started feeling the heat of global slow-down. Inflation ruling well above 12% has now slipped into single digits and it has been reported below 9% for the last week. The rupee continues to trade volatile against the USD and again slipping below the Rs49 mark yesterday. The Prime Minister is making statements to the effect that more pain is in the offing for India. Exports have gone down to a great extent both in manufacturing and service sector (IT) resulting in lesser inflow of foreign currency. FII sales in the stock markets are continuing and the demand for the greenback remains constant.

Coming back to the main question of interest rates in the econcomy, the auto manufacturers and real-estate developers are crying hoarse about the high interest rates which is affecting the demand for their products. Of course, the interest rates alone cant prop up an industry, but it is a definitely a critical factor. With the increasing cost of money, Indian industries have started delaying or jettisoning capacity expansion plans. Many projects could not achieve financial closure due to lack of funds in the market. Now the Government started stepping in through RBI by giving out signals of low interest rate regime. Now there is no threat of demand led inflation, Government is keen on reducing the interest rates in the economy. RBI, under a new head, D Subbarao, started using the monetary tools to bring down the rates to banks and financial institutions. It has aggressively cut the CRR rates by 3.5% over the last 2 months. It has reduced the reverse repo rates and opened up the window for lending to banks and mutual funds.

With the signals becoming clear that Government favouring a lower interest rate regime, the banks has started reducing the lending rates. Of course, the PSU Banks have taken the lead in this instance as they are more amenable to the Government's intervention in the interest rates. The measures taken by the RBI is expected to pump in more than 200,000 crores of Rupees into the system and it should relieve the current pressure on the credit. The interest rates may also start coming down over the next couple of months. Though term deposits are not as tax efficient as FMP's, it is still better to have a good percentage of your fixed income investments in the form of term deposits, as it gives the needed liquidity and the redemption terms are much more easier compared to FMP's. Therefore, I think it is one of the best times to commit funds to Fixed Deposits with banks to take advantage of the high interest rates offered by them.

State Bank of India offers 10.50% for 1000 days deposit and other private banks like Karur Vysya Bank, City Union Bank, Lakshmi Vilas Bank are offering 11.00% on term deposits for 400 days or more. State Bank's deposit scheme was very popular that it garnered more than Rs1000 crores on a daily basis during the first few days of this campaign. Remember, the deposits in the name of Senior Citizens fetches 0.50% more than the normal rates.

Enjoy this small window of high interest rates and commit your term deposits at attractive rates. Make hay while the sun shines!!!

Time to lock into fixed deposits - Part I

Fixed deposits or time deposits were a long last financial instrument hardly used over the last 3-4 years thanks to continuous bull run in the stock markets. Persons who wants to keep money in Fixed deposits were looked down upon as risk-averse, conservative and naive investors. Low interest regime and inefficient tax structure also added to the woes of the investors in fixed deposits. Fixed deposits, as the preferred asset class, vanished from the investors radar.

Coupled with the recent turmoil in the global financial markets and erosion in value of stocks across the board and the high fixed deposit interest rates, fixed or term deposits have slowly gaining prominence again. Currently banks are offering attractive interest rates of 10.50% to 11.50% (for senior citizens) on retail fixed deposits.

If you analyse the reasons behind the high interest rates, you will understand that it is due to the tightening of the domestic money supply by RBI through various monetary policy measures like hiking the CRR rates and repo rates making it costly for banks to borrow and lend. RBI followed the dear money policy till couple of months ago due to the run-away demand led inflation. Suddenly in September, the global financial markets went through a very bad patch where many of the global investment banks disappeared from the scene and it led to sudden realisation of counter-party default risk among the financial community. Banks started hoarding cash instead of lending to customers and financial institutions thereby creating scarcity of deposits.

In that scenario, Indian banks and financial institutions which have lent money to various sectors like real-estate and others started facing defaults or delayed payments. The stock markets worldwide tumbled as the FII's started selling across the board and more particularly in emerging markets. FII's selling the stocks and taking the money out of the country resulted in heavy demand for the US Dollar. The Indian rupee depreciated sharply against the dollar breaching the Rs50 mark against the dollar before recovering to Rs48 against the dollar. The industrial production, exports and consumer demand started to slow-down across the world. Today many countries have seen negative growth in their economy. US, Japan and Europe have slipped into recession. What a change compared what was 6-9 months back. The reaction were swift and painful for most of the market particpants.

Part II would be published tomorrow.

Warren Buffet back in no.1 Slot!!

With all the turmoil going on in the financial world, you dont expect an investor to be richest person in the world, right? But Warren Buffet has proved that wrong as today Forbes unveiled survey results which shows Buffet as the world's richest person overtaking the fellow American, Bill Gates.

Warren Buffet's wealth is estimated at USD58 billion compared to USD55.5 Billion for Bill Gates. Few days back, Warren Buffet did a deal with Goldman Sachs, the investment banking company where he invested USD5 Billion as preference share capital at a guaranteed dividend of 10%. Buffet is known for his hard bargains and I think he has done the same with Goldman Sachs, which was desperately looking for fresh capital as well as an highly influential investor who can bring back the credibility to the Investment Bank. He has also been issued warrants which can be converted in the next 5 years at USD115 per share, again a very attractive price.

Warren Buffet has taken a very bold step in acquring a stake in Goldman Sachs and with subsequent developments in the financial markets globally, we need to wait and watch how Buffet's pick is performing.

NIFTY poll results

There were totally 7 votes with 3 people saying that it would go down to 4000, which actually happened.  3 people said that it would remain stagnant between 4200 and 4600.   One person was very bullish when he said it would touch 4800.  Out of the 3 who have said that it would go down to 4000 levels, did you short the NIFTY?  You could have made a killing as there was more than 10% drop in the index levels. 

The NIFTY has moved to 4000 levels yesterday.  It even touched a intraday low of 3800 before recouping most of the losses thanks of injection of liquidity by few of the Central Banks and some comforting words from the Finance Minister. 

Actually what the Finanace Minister said is very simple that Indian banks are relatively insulated from the global crisis going on currently.  For any market observer it was apparent that Indian banks would not be badly affected due to this but the fear psychosis hit all of us.  Banks were completely sold-off.  ICICI has estimated its loss to around 130 crores whereas it has made a June'08 quarter profit of 730 crores or so.  SBI, PNB, BOI have all exposures to the extent of USD5 to 10 million, but considering the size it is very miniscule.  

Yesterday's intra-day swing was one of the most swift movement I have seen for a long time.  It opened weak around 3830 dipped further to 3800.  In the afternoon, the spurt was very sudden and many of the traders would have been caught off-guard.  It moved from 3830 levels to 4000 levels in a matter of 15 minutes.  Reliance Industries moved up by Rs100, Bharti Airtel moved up by Rs70 resulting in swift upmove.   The NIFTY has closed around 4030 levels.  With the US markets and Asian markets making smart recovery yesterday, we can expect some gap-up opening in the morning today.  SGX NIFTY is already trading at 4270 levels, we may even touch 4300 levels today.  Happy trading!!! 

Andy Mukherjee, a good economic affairs columnist

One of the columnists who has impressed me a lot with the lucid writing and clear-sightedness in his views is Andy Mukherjee of Bloomberg. I have read his articles in Business Line which appears in their Sunday edition. He covers the Asian markets and writes about monetary policy, real estate and economic challenges from a global perspective. It gives a very good idea on how the world sees Asia and particularly India. He is based in Singapore.

His articles are published in www.bloomberg.com and you can access his articles here.
His two recent articles are on India's quarterly monetary policy and recent bombings in Bangalore and Ahmedabad.

I have bookmarked this webpage and I keep visiting it once a while.

High Net Worth Individual - is it me??

Yesterday, I got a promotional call from Kotak Securities, Financial Planning Group about investments in structured products and Private Equity. When the caller introduced himself as XXXX, from Kotak, Financial Planning Group, I had a doubt why this guy is calling me as I knew they deal with HNI's. As he correctly asked for my name, I thought they have come up with some innovative financial product for retail investors as well. The guy from Kotak Sec explained that they are currently offering two products which are open for investments. One is a structured financial product, where he said I may get an annual return of 50% or so based on the NIFTY price movement and the second option is to invest in a Real Estate Private Equity Fund. When he started talking about Private Equity, I got wind of what would be the minimum ticket size. I heard him out and then the time came for him to tell me the minimum investment amount. He said he is looking for an investment of Rs10 lacs and in multiples of that for both the products.

I have to explain to him that I am still not in that league to invest in one go Rs10 lacs, leave alone the fact that I dont Rs10 lacs to invest. I hope, time will come when I will be able to invest Rs10 lacs in a single ticket deal.

Insurance companies investing in Indian Equity Markets in a big way

I have earlier written here about the fact that Insurance companies in India are increasing their exposure to the Indian stock markets. The first quarter of this fical 2008-09 data has come out and it goes on to prove that Insurance companies are the biggest buyers in the market.

As per the statistics disclosed by Business Line, Insurance companies in India has bought shares worth Rs15,000 crores in the first 3 months, April to June 2008. Life Insurance Corporation (LIC) has alone bought shares worth Rs12,000 crores. LIC's investment has increased by 60% in the Qtr 1, 2008-09 compared to Qtr 1 in 2007-08. The increase in the Insurance companies investment in stock markets is due to the increased inflow seen in the ULIP products sold by them. Though the volumes have come down due to market uncertainities over the last 3 months or so, ULIP's are still preferred medium to invest in Indian equities for the average Indian.

Ironically, during the same quarter, Mutual Funds have bought less than what they bought in Qtr 1 2007-08. MF's have bought shares worth Rs3,131 crores compared to Rs4319 crores the previous year.

Wall Street firms' woes continue!!

Lehman Brothers has lost close to USD350million in a loan default on account of fraud by a medical consulting company, LTT Bio-pharma. Lehman Brothers claim that the loans were secured by Japan's trading giant, Marubeni Corp but has been denied by Marubeni Corp.

It is very very sad to see how huge ticket loans are distributed by these popular wall street firms without even knowing who has secured the loans. Probably these are the excesses committed by the Investment Banking firms over the last 3-4 years on the back of secular growth story in the investment banking world.

Not good time for Wall Street firms. Click here to read the story.

Why Saarthi has made his blog available for readers by invitation only?

One of the blogs I regularly visit is http://saarthi.blogspot.com/. He analyzes and comes up with very good reports in a very concise manner. I am a fan of his blog. But unfortunately for the last two days or so, his blog is not accessible for all. It is available for readers only by invitation. I don't know why Saarthi has done it that way but I guess there should be some reason.

There is also no mention about how to get yourself invited to the blog also. I am waiting to know how to get access to http://saarthi.blogspot.com/. If anyone of you have already been invited, please let me know.

Reliance Power IPO and the bonus issue of shares soon after!!

Reliance Power IPO bombed miserably at the share markets when it got listed on Feb 11. As a face saving gesture from Anil Ambani, Reliance Power has proposed issue of bonus shares to all the shareholders within days of the Initial Public Offer!! Ambani's, known for their path-breaking style, has done this bonus issue of shares in the same style as well!!

Where else in this world, an IPO would be launched at a premium of Rs420 per share and within a week of listing the company announces bonus shares due to its poor showing. Anil Ambani, I believe is not that philanthropic in doling out bonus shares but he is slated to hit the capital markets again in the next 2-3 months for the Reliance Infratel IPO. Better luch investors!!

I came across this article by Ms Sucheeta Dalal on Reliance Power IPO and the bonus shares announcement. Sucheeta Dalal is an active investor protection activist whose consistent efforts in 2000-01 brought to light the mis-deeds of Dinesh Dalmia of Square D software.

Reliance Power's Strange and Selective Bonus Proposal
22 Feb, 2008

By Sucheta Dalal

One of the first tasks before Securities and Exchange Board of India's (SEBI) brand new chairman would be to decide on the selective bonus proposed by Reliance Power Limited (RPL) to reduce the price paid by its retail investors. The company claims that it is offering "free shares" to "all the shareholders, excluding promoters who would accept dilution of their stake in the broader interest of over four million investors." That sounds wonderful and the shares shot up 7% after the announcement; but remember, the promoters paid just a fraction of the money coughed up by retail investors and are the biggest beneficiaries of the IPO. More importantly, the rather too-clever bonus proposal stretches the rulebook and probably rips it as well. It ensures a discount to retail investors with a minimal increase in capital and a substantial jump in market capitalisation. We asked a cross section of finance experts for their opinion on whether a bonus can be selectively issued to some shareholders. They included a prominent investment banker associated with the issue. Not one of them was certain it could be done; the best they could say was that RPL must have obtained legal opinion before making the announcement. Well, yes, but then the Reliance group - in fact both factions - is famous for stretching the rulebook or evolving unique interpretations of statute to suit its purpose. A former SEBI executive director is emphatic that such a bonus "vitiates the concept of equity and is like a preferential offer." Let's consider some issues raised by the announcement.

• If SEBI and the Ministry of Corporate Affairs (MCA) permit a selective bonus that excludes the promoters, will it also permit the reverse where the promoters use their majority stake to award themselves a bonus and exclude retail investors or a strategic investor? Once the door is opened to a selective bonus issue for RPL, it will permit various forms of shareholder abuse.
• Can RPL announce a selective bonus without even a board meeting? Is the role of the board limited to rubber-stamping the bonus ratio? More importantly, will SEBI question them?
• Can RPL unilaterally decide to exclude Reliance Energy from the bonus without REL's board discussing the issue or seeking its shareholders' consent? Remember, Reliance Energy investors have already gone to court over the unilateral transfer of power generation licences to Reliance Power and the Mumbai High Court asked SEBI to look into their grievances. However, former SEBI chairman, M Damodaran brushed aside all issues and cleared the IPO.
• The bonus announcement punishes those investors who sold the shares on listing by using their money to pay those who remained invested. So you have a unique situation where a company that over-priced its shares punishes those investors who prudently cut their losses and rewards those who bought the shares at a lower price after they were listed. Who were these smart buyers who got a double benefit? Can a company use the share premium account to issue a bonus within days of listing? Does this not make a mockery of the IPO price discovery process? Normally, a bonus has to be paid out of free reserves; here is a company that has not even achieved financial closure (but was still allowed to raise public money) selectively distributing the money it has collected as share premium.
• The bonus has been announced to compensate investors and make amends for the high offer price and excessive hype; but can a bonus issue be a form of compensation? What are the tax implications of such a payout?
• What exactly does this bonus mean for the promoters of RPL and the shareholders? The promoters invested just Rs2,000 crore, whose post-listing value had jumped to around Rs75,000 crore. On the other hand, public shareholders invested Rs12,000 crore whose value dropped to Rs7,500 crore in a matter of days. Who is being compensated?
• On another note, grey market operators, who had refused to honour their commitments after RPL shares listed at a discount to the offer price, suddenly turned honourable around the time that the bonus was announced. Some say that they received crisp Rs1,000 notes in cash in lieu of the money they had earned by short-selling the shares. With the grey market having restored its credibility, the stage is set for similar operations in future IPOs, unless SEBI, under the new chairman, puts an end to this dubious activity.

As we said earlier, the new SEBI chairman has quite a task in dealing with this issue.

Poor customer service experience - this time with Kotak Securities!!

Sometime back I was lamenting about the very poor service levels of financial services companies and their lack of apathy for customers. You can read that story here.

This is another example of that poor service levels with regard to meeting clients on the appointed time, this time by Kotak Securities. Kotak Securities was behind me for more than 5 days asking for an appointment to explain(!!) about the new "investment" product their group company, Kotak Life has launched. I guess it is nothing more than a new ULIP product. I was very reluctant to meet the financial advisor and I tried my level best to avoid him. He persisted with me for 5 days and I finally relented to meet him on last Saturday at 10.00 AM at my home. The appointment was fixed on Friday morning so I never thought this guy would fail to make it on the next day. But he never turned up on saturday and neither he has called me after that to explain why he didnt turn up. I cant really understand what happened in between Friday morning and Saturday for this guy in not turning up, that too, after pestering me for 5 days!!

The point I dont understand with these financial firms are how they can treat customers with so much disdain? Not able to meet a customer at an appointed time, is a great sin, I would say.
There is usually no clarity or quality in the explanation being made by these so called financial advisors while explaining the products nor they can understand anything beyond what they already know. I believe financial services marketing is a very sensitive area where the customer needs and aspirations are to be kept paramount, but after seeing many Indian companies flouting them with impunity, I can only pity the poor Indian investors, thats us!!

Few facts about Warren Buffet!!

Got the below as a forward in one of the group mail boxes. Before you proceed to read further, there is a word of caution. Many of the things listed below, you would have read it elsewhere but it is nice to keep reading good things again and again. I have added some personal comments to the statements about the great investor within brackets.

1) He bought his first share at age 11 and he now regrets that he started too late! (Mine in mid-20's)
2) He bought a small farm at age 14 with savings from delivering newspapers. (Still saving to pay off the existing housing loan!!)
3) He still lives in the same small 3 bedroom house in mid-town Omaha, that he bought after he got married 50 years ago. He says that he has everything he needs in that house. His house does not have a wall or a fence around it.
4) He drives his own car everywhere and does not have a driver or security people around him. (Really curious to know how he wards of possible kidnappers!!)
5) He never travels by private jet, although he owns the world's largest private jet company.
6) His company, Berkshire Hathaway, owns 63 companies. He writes only one letter each year to the CEOs of these companies, giving them goals for the year. He never holds meetings or calls them on a regular basis. ( I wish my boss is like that!!!)
7) He has given his CEO's only two rules. Rule number 1: do not lose any of your share holder's money. Rule number 2: Do not forget rule number 1. (Fantastic rule - really you need to practice it very sincerely if you want to make big money in the markets!!)
8) He does not socialize with the high society crowd. His past time after he gets home is to make himself some pop corn and watch television. (No cholesterol or what!!??)
9) Bill Gates, the world's richest man met him for the first time only 5 years ago. Bill Gates did not think he had anything in common with Warren Buffet. So he had scheduled his meeting only for half hour. But when Gates met him, the meeting lasted for ten hours and Bill Gates became a devotee of Warren Buffet.
10) Warren Buffet does not carry a cell phone, nor has a computer on his desk.
11) His advice to young people: Stay away from credit cards and invest in yourself.
12) Last but not the least, Warren Buffet has donated USD31 billion for Charity!! ( A back of the envelope calculation converts into INR124000 crores - thats a good amount, isnt?!!)

Tumultuous Indian stock markets!!

The last two days has seen record falls in the major Indian stock indices across the board. The NIFTY which was trading around 6000 levels on Thursday (Jan 17) went down and touched 4455 on Jan 22 (Tuesday), a fall of more than 1600 points on the NIFTY. The NIFTY has fallen around 29% from the record high of 6300 it touched sometime back.

The fall of the markets was justified on account of the poor economic condition in US, continuous fall in other major stock indices across the world, the higher crude oil price and huge write-down by financial institutions on account of sub-prime meltdown. But if you ask me did I expect this steep correction, honestly I have to admit, I didnt. All along whenever the world markets corrected, we were insulated and it was always claimed that Indian markets were de-coupled from the world markets. I was expecting a minor correction of 300-400 points on the NIFTY but the markets corrected four times more than that. A good lesson learnt!

When the markets opened on Tuesday, it was widely expected to fall following the weak Asian markets which opened before the Indian markets. The markets opened and got closed within few minutes following the 10% lower circuit for the index. Markets re-opened after 1 hour after the cooling off period and showed some signs of reversal but not could not sustain the momentum. The real recovery in the indices happened towards the close today more due to the short covering in the market rather than due to fresh buying, I guess. The sector which has got hit badly is Power and Real Estate from the data I collected. DLF, Parsvnath, Omaxe, Patel Engg, Peninsula Land, Ansal Housing are few of the Real Estate stocks which has corrected heavily.

There is absolute liquidity crunch for the retail investors in the market due to two major IPO's of Reliance Power and Future Capital Holdings. Both have collected huge chunks of money from the investing public and they are not due to be returned atleast for the next 15 days. Margin calls were triggered in the morning and investors were forced to sell their long term holdings to meet the margin requirements. Most the brokerage houses could not execute the orders because of the poor margin arrangements for individual broking houses with the exchange. I personally felt that with Geojit and Sharekhan broking houses. I called Geojit Securities to place an order but was turned down by the dealer to place the order citing the reason that there is no margin available. I explained to him that I want to place a cash market order and not in futures and options segment. But I was informed that they are only taking orders for squaring off existing positions and not for initiating fresh positions even in the cash market. Most of the investors would have faced a similar situation. Sorry state of affairs even for people who wanted to pick up shares in the discount sale!!

The volatility during the last two days were phenomenal and the prices moved very violently. The intraday movements were so huge it is highly unimaginable. For instance, the intraday movements in Bajaj Auto was Rs500, Patel Engg Rs100+, M&M Rs100+ just to name a few. The other thing is the difference between the bid and ask price was also very wide. This may be due to lack of volume as most of the investors could not enter because of the severe margin pressure on the brokerages.

I have listed few shares which have corrected by more than 40% in the last one week or so. These shares may correct further and nobody knows what is the real bottom at this stage. If you like a company and convinced about the fundamentals, this crash has really proved a boon for the investors to pick up these stocks at attractive prices compared to what they were 1 week ago.

RPL - 147
M&M - 600
ITC - 183
JK Lakshmi - 109
Microtech - 207
Petronet - 63
GHCL - 97
MTNL - 116
IDBI - 99
Guj Alkali - 152
Bata - 175
Guj NRE - 105
Surya Pharma - 88
Varun ship - 67
Power Grid - 99
Patel Eng - 725
Ind Hotels - 111
Hotel Leela - 41
Bongaigaon - 51

A word of caution, please check the fundamentals before you buy the scrip and be informed that I may already own some of the shares listed above.

Who is going to be the biggest investor in the Indian Stock Markets?

We all immediately come up with the answer saying, it is FII (Foreign Institutional Investors). It is neither FII's or the Domestic Mutual Funds. The answer is: Indian Insurance companies are going to be the biggest investors in the Indian equity markets. It is hard to believe but true. Look at the facts below:

The major Indian Insurance companies like LIC, ICICI Prudential and Bajaj Allianz have sizeable investments in the Indian equity markets. Business Standard reported yesterday that LIC of India has plan to invest close to Rs100,000 crore (USD25 Billion) in 2008. ICICI Prudential manages investments close to Rs28,000 crores (USD7 Billion) and Bajaj Allianz has equity exposure close to Rs7000 crores (USD1.75 Billion). Compare this to the total FII inflows of USD18 Billion in 2007. Insurance companies get bulk of their inflows during the first 3 calendar months in India because tax payers rush to invest in tax saving insurance products. This year they expect to continue in the same way.

It is for real that domestic money is entering the Indian Equity markets in a big way. As more and more people start buying insurance products linked to equities (like ULIP's), the Insurance companies would continue to be the biggest investor in the Indian equities market. Insurance companies typically buy when there are huge falls and this has helped the Indian equity markets to recover from all the lows consistently during the last couple of years. With the Government allowing Trusts and Provident Fund to invest in equity markets, more and more domestic money is entering the Indian Equity markets.

What does it signify for ordinary investors like me?
1. Continued bull run - Till such time the Indian insurance companies are allowed to invest in equities outside India, they would be focussing only on the Indian markets which may lead to continued bull run on the bourses. Sooner than expected, Government may allow Insurance companies to invest in equities outside India to offset the bulging Foreign Exchange reserves, I guess.
2. More FII inflows - With the huge domestic money chasing stocks, more FII's would get attracted to the Indian market and it will accentuate the bull run with further inflows from outside the country.
3. Quality Mid-cap and Small-cap stocks would continue to be in demand.

I think the bull run in the Indian Equity markets would continue for few more years unless there are major issues derailing the Indian economy.

Mini contracts on NIFTY and SENSEX!!

Both NSE and BSE have introduced mini-contracts on their primary index, namely, NIFTY and SENSEX.

What are these mini-contracts?

As I wrote sometime back, Futures and Options contract size was determined with Rs2 lacs as the base amount for determining the contract size. Over a period of time with increase in the prices, the contract sizes of many F&Oable contracts have gone up way beyond Rs2 lacs. NIFTY with a lot size of 50, will have a contract size of Rs3.05 lacs (50 X 6100). The exchanges thought it would be a good idea to introduce a mini-contract so that margin requirements does not become a problem for small retail investors.

The mini-contracts of NSE is 20 shares instead of 50 shares for the regular NIFTY contract. The margin amount for Mini-NIFTY should be arround 13,700/- compared to Rs34,000/- for the regular NIFTY contracts. As mentioned by the exchanges, with the introduction of the mini-contracts, there will be an opportunity for retail investors to hedge their portfolio better.

I dont think people who trade on NIFTY are doing it for any hedging purposes. Atleast, 90% of the retail crowd is buying or selling NIFTY purely as a speculative bet on the market rather than as a hedging tool. With the introduction of the Mini-contracts, it would accentuate the retail participation in the futures market by enticing them with low initial margins. Exchanges and brokers would be highly benefited with the introduction of the mini contracts more than the retail investors!!

What do you say?

Revision of F & O contracts - good news for traders and small investors!!

For serious F&O retail traders, I guess this is a good news. NSE has reduced the lot sizes of F&O contracts on most of the cases and increased it in few. This is a long awaited decision since the share prices of scrips have sky-rocketed in the last few months. The original idea of the F&O contracts is that the value of the lot size should be equivalent to INR200,000 and should provide an easy hedging tool for small and retail investors. Totally, the lot sizes of 92 scrips have been brought down and for 14 stocks it has been scaled up. You can view the contract lot sizes of shares which has been revised here.

The contract value is arrived at by multiplying the lot size (number of shares) into the share price. For example, the lot size of Infosys Technologies is 100 shares. The contract value is 100 x Rs1725, resulting in the contract value of Rs172,500.

With the consistent raise in the stock prices, the contract value of many scrips in F&O has crossed the intended Contract Value of Rs200,000. Take the case of BHEL. The present lot size is 300 shares. At the ongoing market rate of Rs2700, the contract size is close to 810,000.

What is the problem with the increased in the contract value? Futures contracts on individual stocks are taken by paying an initial margin and the exchange does a mark to market on a daily basis. Therefore, when the contract value is way beyond Rs200,000 per contract, the initial margin what you pay is very high. Because of that, there is an higher inital outlay and goes out of the reach of retail traders. The new lot sizes are effective Dec 28, 2007.

There are few other things which comes to my mind immediately, for which I have to search for an answer:
1. As I am aware that F&O contracts are available for a maximum of 3 months forward maturity, what would happen to Jan 2008 month contracts which are currently traded in these scrips which have undergone a change in the lot size? How the reduction or increase in lot sizes would be reflected in those contracts? What mechanism the exchange follows in this regard?

Anybody who has information on how these things happen, please feel free to share it.

With the reduction in lot sizes, I would expect that there is more retail participation in F&O. Happy trading!!!

Indian markets makes a gap up opening!

As expected the Indian markets opened with a huge gap up opening in the morning. At the time of writing this, the top gainers in the NIFTY are Suzlon, Sterlite, ONGC, ICICI Bank and SAIL.
The NIFTY was trading around 4226, up almost 122 points from Friday's close. Sensex was trading around 14500, up almost 356 points.

Brokerage views:
Today morning I saw many brokerage houses have turned bullish again and has come out with buy reports. JM Financial Services commented that the worst is over for the market and doesnt expect the market to go below 13900-14000. The opinions change so fast from these brokerage houses.

Market rumours:
The market rumours say that Anil Ambani is looking to buy out 6 telecom companies across the globe with the help of private equity funding. I am not sure with the existing liquidity crunch in the global markets, if Anil Ambani could pull this out. Reliance Communication has remained muted to this market rumour and trading around Rs510/-.

Lets see how the last hour of trading today pans out.

Turbulence in the Global Markets - Stocks, Currencies and Commodities!

I was witness last week to one of the most turbulent market movements. The turbulence is not only in stock markets across the globe but also in currency and commodity markets.

Currency market operations:
The turbulence in the currency markets (as I am in the business of foreign exchange operations) over the last two days are attributed to the sub-prime crisis in US and the resulting liquidity problems worldwide. The last two days have been tough from the operations perspective. The volumes have multiplied many times across the foreign exchange markets causing a strain on the global settlment systems. Unlike stock and securities markets, which are country specific, foreign exchange trades are mostly settled through the CLS Bank. This helps the counterparties to the trade to reduce the settlement risk to a greater extend. Due to high volumes, we have seen significant delays in getting deals confirmed, status update messages from CLS Bank and other activities. I was told that the volumes were higher by more than 150% in the last 2 days. I know of couple of my colleagues who have worked 24 hours at a stretch to complete the work. Hats off to them. We are keeping our fingers crossed with regard how the coming Monday is going to be.

Stock markets:
Stock markets were volatile from the begining of the week. Thursday turned out to be a big day in the history of Indian stock markets losses. It is one of the steepest falls witnessed in the history of BSE to my memory. On a closer look I find that the "A" Group shares bore the burnt to the maximum. This is nothing but natural because they have gone up the highest in the last 3-4 months. FII's and hedge funds were selling in stock markets and commodity markets to tide over their losses in credit markets. The commodity stocks were completed thrashed on Friday with BSE Metal Index being a net loser of 7.4%. Tata Steel fell by more than 15% in the last two days.

Developments after closing hours:
The Federal Reserve cut the benchmark rate by 50 basis points has helped to stem the losses on the American bourses yesterday. As one analyst remarked, Fed has shown the way where people can borrow money now. I am sure US doesnt want a recession induced by sub-prime crisis with just a year to go for election. They will try to do whatever they could to keep the economy going.

The last time it was yen-carry trade:
I recollect the last time when the world markets went in tizzy during the unwinding of yen-carry trades. Then again it was believed that the bull market of the emerging markets are going to end. After that we have seen the market rise steeply. I am firm believer of Indian stocks and I think we will be able to overcome this sub-prime issue also.

What a normal investor should do?
Normally these type of turbulent markets gives very good opportunity to buy real gems. Warren Buffet has even re-emphasised this fact yesterday in his interview to CNBC stating that credit market chaos may give opportunity to buy stocks.

Try to analyse the fall and find out stocks which has become cheaper with the growth story intact. I will go by the following:

1. Stocks which can grow even if there is recession in the US. ( e.g.,FMCG - higher domestic demand)
2. Stocks which has domestic growth thrust. (e.g.,Power, Infrastructure, Realty )

One stock which has really come down drastically in the last 1 month or so is Gateway Distripaks Ltd., (GTL). I saw it trading around 122 on Friday. I have seen last month it was trading around 190 levels. Needs to be investigated a bit more closely to understand the reasons for the fall.

Lets hope the next week is much better for the markets. Happy weekend to all!!