US IN GREA GREAT DEPRESSION

The news that frequent CNBC guest Peter Yastrow of Yastrow Origer (and formerly with DT Trading) told CNBC that “We’re on the verge of a great, great depression. The [Federal Reserve] knows it” is going viral today.

But this is not news to anyone who has been paying attention.

I provided details last month:

As I noted in January, the housing slump is worse than during the Great Depression.

As CNN Money points out today:

Wal-Mart’s core shoppers are running out of money much faster than a year ago due to rising gasoline prices, and the retail giant is worried, CEO Mike Duke said Wednesday.

“We’re seeing core consumers under a lot of pressure,” Duke said at an event in New York. “There’s no doubt that rising fuel prices are having an impact.”

Wal-Mart shoppers, many of whom live paycheck to paycheck, typically shop in bulk at the beginning of the month when their paychecks come in.

Lately, they’re “running out of money” at a faster clip, he said.

“Purchases are really dropping off by the end of the month even more than last year,” Duke said. “This end-of-month [purchases] cycle is growing to be a concern.

And – in case you still think that the 29% of Americans who think we’re in a depression are unduly pessimistic – take a look at what I wrote last December:

The following experts have – at some point during the last 2 years – said that the economic crisis could be worse than the Great Depression:

Fed Chairman Ben Bernanke
Former Fed Chairman Alan Greenspan (and see this and this)
Former Fed Chairman Paul Volcker
Economics scholar and former Federal Reserve Governor Frederic Mishkin
The head of the Bank of England Mervyn King
Nobel prize winning economist Joseph Stiglitz
Nobel prize winning economist Paul Krugman
Former Goldman Sachs chairman John Whitehead
Economics professors Barry Eichengreen and and Kevin H. O’Rourke (updated here)
Investment advisor, risk expert and “Black Swan” author Nassim Nicholas Taleb
Well-known PhD economist Marc Faber
Morgan Stanley’s UK equity strategist Graham Secker
Former chief credit officer at Fannie Mae Edward J. Pinto
Billionaire investor George Soros
Senior British minister Ed Balls
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States and Cities In Worst Shape Since the Great Depression

States and cities are in dire financial straits, and many may default in 2011.

California is issuing IOUs for only the second time since the Great Depression.

Things haven’t been this bad for state and local governments since the 30s.

Loan Loss Rate Higher than During the Great Depression

In October 2009, I reported:

In May, analyst Mike Mayo predicted that the bank loan loss rate would be higher than during the Great Depression.

In a new report, Moody’s has just confirmed (as summarized by Zero Hedge):
The most recent rate of bank charge offs, which hit $45 billion in the past quarter, and have now reached a total of $116 billion, is at 3.4%, which is substantially higher than the 2.25% hit in 1932, before peaking at at 3.4% rate by 1934.

Indeed, top economists such as Anna Schwartz, James Galbraith, Nouriel Roubini and others have pointed out that while banks faced a liquidity crisis during the Great Depression, today they are wholly insolvent. See this, this, this and this. Insolvency is much more severe than a shortage of liquidity.

Unemployment at or Near Depression Levels

USA Today reports today:

So many Americans have been jobless for so long that the government is changing how it records long-term unemployment.

Citing what it calls “an unprecedented rise” in long-term unemployment, the federal Bureau of Labor Statistics (BLS), beginning Saturday, will raise from two years to five years the upper limit on how long someone can be listed as having been jobless.

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The change is a sign that bureau officials “are afraid that a cap of two years may be ‘understating the true average duration’ — but they won’t know by how much until they raise the upper limit,” says Linda Barrington, an economist who directs the Institute for Compensation Studies at Cornell University’s School of Industrial and Labor Relations.

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“The BLS doesn’t make such changes lightly,” Barrington says. Stacey Standish, a bureau assistant press officer, says the two-year limit has been used for 33 years.

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Although “this feels like something we’ve not experienced” since the Great Depression, she says, economists need more information to be sure.

It is difficult to compare current unemployment with that during the Great Depression. In the Depression, unemployment numbers weren’t tracked very consistently, and the U-3 and U-6 statistics we use today weren’t used back then. And statistical “adjustments” such as the “birth-death model” are being used today that weren’t used in the 1930s.

But let’s discuss the facts we do know.

The Wall Street Journal noted in July 2009:
The average length of unemployment is higher than it’s been since government began tracking the data in 1948.
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The job losses are also now equal to the net job gains over the previous nine years, making this the only recession since the Great Depression to wipe out all job growth from the previous expansion.

The Christian Science Monitor wrote an article in June entitled, “Length of unemployment reaches Great Depression levels“.

60 Minutes – in a must-watch segment – notes that our current situation tops the Great Depression in one respect: never have we had a recession this deep with a recovery this flat. 60 Minutes points out that unemployment has been at 9.5% or above for 14 months:

Pulitzer Prize-winning historian David M. Kennedy notes in Freedom From Fear: The American People in Depression and War, 1929-1945 (Oxford, 1999) that – during Herbert Hoover’s presidency, more than 13 million Americans lost their jobs. Of those, 62% found themselves out of work for longer than a year; 44% longer than two years; 24% longer than three years; and 11% longer than four years.

Blytic calculates that the current average duration of unemployment is some 32 weeks, the median duration is around 20 weeks, and there are approximately 6 million people unemployed for 27 weeks or longer.

Moreover, employers are discriminating against job applicants who are currently unemployed, which will almost certainly prolong the duration of joblessness.

As I noted in January 2009:

In 1930, there were 123 million Americans.

At the height of the Depression in 1933, 24.9% of the total work force or 11,385,000 people, were unemployed.

Will unemployment reach 25% during this current crisis?

I don’t know. But the number of people unemployed will be higher than during the Depression.

Specifically, there are currently some 300 million Americans, 154.4 million of whom are in the work force.

Unemployment is expected to exceed 10% by many economists, and Obama “has warned that the unemployment rate will explode to at least 10% in 2009″.

10 percent of 154 million is 15 million people out of work – more than during the Great Depression.

Given that the broader U-6 measure of unemployment is currently around 17% (ShadowStats.com puts the figure at 22%, and some put it even higher), the current numbers are that much worse.

But it is important to look at some details.

For example, official Bureau of Labor Statistics numbers put U-6 above 20% in several states:

California: 21.9
Nevada: 21.5
Michigan 21.6
Oregon 20.1
In the past year, unemployment has grown the fastest in the mountain West.

And certain races and age groups have gotten hit hard.

According to Congress’ Joint Economic Committee:

By February 2010, the U-6 rate for African Americans rose to 24.9 percent.

34.5% of young African American men were unemployed in October 2009.

As the Center for Immigration Studies noted last December:

Unemployment rates for less-educated and younger workers:

As of the third quarter of 2009, the overall unemployment rate for native-born Americans is 9.5 percent; the U-6 measure shows it as 15.9 percent.
The unemployment rate for natives with a high school degree or less is 13.1 percent. Their U-6 measure is 21.9 percent.
The unemployment rate for natives with less than a high school education is 20.5 percent. Their U-6 measure is 32.4 percent.
The unemployment rate for young native-born Americans (18-29) who have only a high school education is 19 percent. Their U-6 measure is 31.2 percent.
The unemployment rate for native-born blacks with less than a high school education is 28.8 percent. Their U-6 measure is 42.2 percent.
The unemployment rate for young native-born blacks (18-29) with only a high school education is 27.1 percent. Their U-6 measure is 39.8 percent.
The unemployment rate for native-born Hispanics with less than a high school education is 23.2 percent. Their U-6 measure is 35.6 percent.
The unemployment rate for young native-born Hispanics (18-29) with only a high school degree is 20.9 percent. Their U-6 measure is 33.9 percent.
No wonder Chris Tilly – director of the Institute for Research on Labor and Employment at UCLA – says that African-Americans and high school dropouts are experiencing depression-level unemployment.

And as I have previously noted, unemployment for those who earn $150,000 or more is only 3%, while unemployment for the poor is 31%.

The bottom line is that it is difficult to compare current unemployment with what occurred during the Great Depression. In some ways things seem better now. In other ways, they don’t.

Factors like where you live, race, income and age greatly effect one’s experience of the severity of unemployment in America.

Food Stamps Replace Soup Kitchens

1 out of every 7 Americans now rely on food stamps.

While we don’t see soup kitchens, it may only be because so many Americans are receiving food stamps.

Indeed, despite the dramatic photographs we’ve all seen of the 1930s, the 43 million Americans relying on food stamps to get by may actually be much greater than the number who relied on soup kitchens during the Great Depression.

In addition, according to Chaz Valenza (a small business owner in New Jersey who earned his MBA from New York University’s Stern School of Business) millions of Americans are heading to foodbanks for the first time in their lives.

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The War Isn’t Working

Given the above facts, it would seem that the government hasn’t been doing much. But the scary thing is that the government has done more than during the Great Depression, but the economy is still stuck a pit.

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The amount spent in emergency bailouts, loans and subsidies during this financial crisis arguably dwarfs the amount which the government spent during the New Deal.

For example, Casey Research wrote in 2008:

Paulson and Bernanke have embarked on the largest bailout program ever conceived …. a program which so far will cost taxpayers $8.5 trillion.
[The updated, exact number can be disputed. But as shown below, the exact number of trillions of dollars is not that important.]

So how does $8.5 trillion dollars compare with the cost of some of the major conflicts and programs initiated by the US government since its inception? To try and grasp the enormity of this figure, let’s look at some other financial commitments undertaken by our government in the past:
As illustrated above, one can see that in today’s dollar, we have already committed to spending levels that surpass the cumulative cost of all of the major wars and government initiatives since the American Revolution.

Recently, the Congressional Research Service estimated the cost of all of the major wars our country has fought in 2008 dollars. The chart above shows that the entire cost of WWII over four to five years was less than half the current pledges made by Paulson and Bernanke in the last three months!

In spite of years of conflict, the Vietnam and the Iraq wars have each cost less than the bailout package that was approved by Congress in two weeks. The Civil War that devastated our country had a total price tag (for both the Union and Confederacy) of $60.4 billion, while the Revolutionary War was fought for a mere $1.8 billion.

In its fifty or so years of existence, NASA has only managed to spend $885 billion – a figure which got us to the moon and beyond.

The New Deal had a price tag of only $500 billion. The Marshall Plan that enabled the reconstruction of Europe following WWII for $13 billion, comes out to approximately $125 billion in 2008 dollars. The cost of fixing the S&L crisis was $235 billion.

CNBC confirms that the New Deal cost about $500 billion (and the S&L crisis cost around $256 billion) in inflation adjusted dollars.

So even though the government’s spending on the “war” on the economic crisis dwarfs the amount spent on the New Deal, our economy is still stuck in the mud.

Why Haven’t Things Gotten Better for the Little Guy?

Government leaders make happy talk about how things are improving, but happy talk cannot fix the economy.

Two fundamental causes of the Great Depression, and of our current economic problems, are fraud and inequality:

Fraud was one of the main causes of the Depression, but nothing has been done to rein in fraud today

Inequality was another major cause of downturns – including the Depression – but inequality is currently worse than during the Depression
There are, of course, other reasons the economy is still stuck in a ditch for most Americans, such as encouraging too much leverage, bailing out the big speculators, failing to break up the mammoth banks, and failing to spend wisely, where it will do some good. See this and this. But fraud and inequality were core causes of the Depression, and our failure to address them will only prolong our misery.

RIL hires SBI, other banks to raise over $ 1billion loan

Billionaire industrialist Mukesh Ambani-led Reliance Industries is believed to have hired banking majors SBI , Bank of America and Citigroup among others to raise debt of about $ 1.1 bn (about Rs 5,000 crore).

The energy-to-retail conglomerate plans to utilise the fresh five-year term loan to refinance its existing higher interest rate debts, sources said.

When contacted, a company spokesperson did not comment on the debt raising plans.

The banks hired for raising $ 1.1 bn of loans include SBI, Stanchart, Bank of America, RBS, HSBC, ANZ Bank, Bank of Nova Scotia, Bank of Tokyo Mitsubishi UFJ, Barclays, BNP Paribas, Citigroup, DBS and Sumitomo Mitsui.

Earlier this month, Chairman and MD Mukesh Ambani said at the company's AGM that RIL would become debt-free on net basis in the current financial year ending March 2012.

RIL had an outstanding debt of Rs 67,397 crore ($ 15.1 bn) as of March 31, 2011, as against Rs 62,495 crore ($ 13.9 bn) a year ago.

At the same time, RIL had cash and cash-equivalents of Rs 42,393 crore ($ 9.5 bn) as on March 31 this year, which was nearly double the level seen a year ago.

The company began a process last month to raise fresh loans worth about $ 1.5 bn.

Out of this, loans worth about $ 1.1 bn are for repaying its existing loans maturing in next two years, while the company would also look at further $ 400-500 million of fresh borrowings from abroad.

Last year in October, RIL had raised $ 1.5 bn for the first time through bonds denominated in US dollars.

While it raised $ one bn through 10-year bonds, another $ 500 million were arranged through sale of 30-year bonds. These funds were raised through RIL's wholly-owned subsidiary Reliance Holding USA Inc.

This $ 1.5 bn bond sale was the company's first such bond issue after 13 years. Besides, it was the largest ever public market offshore bond offering by RIL and largest ever corporate bond from India.

This debt raising exercise was followed by plans to raise funds through sale of bonds in global markets by other Indian companies.

These companies included the likes of Anil Ambani group firm Reliance Communications , ICICI Bank , Axis Bank , Essar Energy, JSW Steel and IDBI Bank .

Tatas overtake both Ambani groups together on market wealth

Tatas may not be known for being on the stock-based rich lists, but changing market dynamics have led to the salt-to-software conglomerate overtaking the combined market wealth of the two Ambani groups put together.

The share prices have been tumbling in recent past for both the Reliance groups, led by the billionaire brothers Mukesh and Anil Ambani, and the analysts put the blame on a string of controversies surrounding them for many months now.

On the other hand, a host of Tata group firms have grown stronger, in terms of stock market valuation, while shrugging off an overall bearish sentiments in the broader market and even some controversies related to them.

In the process, the stock market wealth of the entire Tata group has grown to close to Rs 4,40,000 crore -- highest for any corporate house and bigger than the combined figure of the two Ambani groups together at about Rs 3,67,000 crore.

This marks a sharp reversal of the things seen about an year ago, when Tatas were smaller than the Mukesh Ambani group alone. Tatas have about 30 listed companies, while the Mukesh Ambani group has only two.

As per the latest market value of individual groups, Tatas rank on the top, followed by Mukesh-led Reliance group at second position with about Rs 2,85,000 crore.

The Reliance Anil Dhirubhai Ambani Group (R-ADAG), which ranked third after the Mukesh-led RIL group and Tatas a year ago, does not figure even among the top 10 groups now.

In the past one year, R-ADAG's market wealth has plunged by over Rs 60,000 crore to close to Rs 82,000 crore now.

The Mukesh-led group's valuation has also fallen by about Rs 73,000 crore, but that of Tatas has grown by more than Rs 1,00,000 crore in the same period.

The Tata companies that have added significant market wealth in the past one year include TCS , Tata Motors , Tata Steel , Titan, Tata Coffee , Tata Chemicals and Rallis.

On the other hand, all the companies of the two Ambani groups, barring the smallest of them Reliance Broadcast Network , have lost market value since July last year.

In the MDA group, Reliance Industries has lost about Rs 72,000 crore, while the only other listed firm Reliance Industrial Infra Ltd has also lost about Rs 650 crore.

Among ADAG firms, the losses are about Rs 21,000 crore for RCOM, about Rs 20,000 crore for R-Power, Rs 14,000 crore for R-Infra and over Rs 5,000 crore for Reliance Capital .

While the Reliance companies have been traditionally known as very aggressive when it comes to the stock market, Tatas have been mostly known as conservatives on this front.

Investors have historically preferred Reliance stocks for wealth creation, but situation is changing drastically as both Ambani groups are giving below-market returns.

Amid the dwindling investor interest in Reliance stocks, Tatas have not been the only beneficiaries but a whole lot of groups known to be professionally-run have also gained.

These include the likes of the Birla, Mahindra, HDFC, Adani, Bharti, L&T, Jindal and Bajaj groups, experts said.

"Reliance stocks are more controversial at the moment, whereas others like HDFC or Mahindra groups are not," Religare Securities Executive VP (Retail Research) Rajesh Jain said.

"Moreover, a weak stock is more prone to get affected by any negative news. That implies to RIL and ADAG stocks. RIL has underperformed the market in the past one year," he added.

Way2Wealth's Chief Operating Officer Ambareesh Baliga also said that it was negative set of news playing spoilsport for the ADAG stocks.

"For RIL, it was the lower gas production at the KG-D6 basin which has discouraged the investors," Baliga said.

Foreign investors are still 'sold' on India

Contrary to popular perception, overseas investors' love affair with India has hardly soured. Or so says Christopher Wood , the Hong Kong-based CLSA equity strategist with something of a rock star reputation in the Asian investing world for the astute commentary he dispenses in his widely read newsletter, Greed & Fear. If anything, the top-ranked analyst with his trademark shock of curly, shoulderlength, salt-and-pepper hair finds the absence of selling pressure from foreign investors "remarkable", considering the huge disappointment that investing in the Indian market has been for foreigners in 2011.

The numbers tell the story: by June 10 this year, the Sensex had slumped about 11% in US dollar terms from end 2010, securing a place alongside Egypt and Tunisia among the world's 10 worst-performing equity markets (see graphic 1).
Yet, foreign institutional investors (FIIs), who poured $29 billion into Indian equities last year, haven't panicked. Their cumulative net investment in India up to June 9 was $52.5 million.

It's not a number to write home about - not only is it a fraction of the money that the Indonesian and the Taiwanese markets have received, even Pakistan has done better than India (see graphic 2). But although net foreign buying, which subtracts sales from purchases, has been in the negative territory for most of this year, the divestment by foreigners has been relatively benign compared with 2008, a year most investors in the Indian - and indeed global - markets would like to forget.

Wood says he can only attribute the resilience of foreign investors "to the continuing belief in the potential of the Indian growth story, both from a top-down and bottom-up perspectives".

Rational To Bet On India?

Is this a rational belief? On that question, opinion is divided.

Growth in the Indian economy is slowing. Jim Walker of Asianomics in Hong Kong cites the 0.1% dip in gross fixed capital asset formation in the March quarter, the first decline in almost two years in this broad measure of investment demand across the economy, to conclude that "capital expenditure cycle in India has turned decisively for worse".

Even maintaining 8% expansion in gross domestic product this year will prove "challenging", notes Walker.
The deterioration in investment demand is also evident in corporate order books. According to data compiled by Morgan Stanley analysts Akshay Soni and Pratima Swaminathan, order backlogs for engineering and construction companies show that the recovery from the credit crisis that had begun in the December 2009 quarter - after the United Progressive Alliance (UPA) government returned to power in May of that year minus the baggage of the Left parties - began to peter out just a few months later at the onset of the European debt crisis. The slowdown in capital-goods order growth worsened in the final months of 2010 and the first quarter of calendar year 2011 as sordid tales of widespread corruption started surfacing - the 2G spectrum allocation scam; the loans-againstbribes swindle; the Adarsh Housing Society scandal; the Commonwealth Games loot; the list goes on.

Graft and bad governance are only part of the story. Investor sentiment has also been shaken by the rising cost of capital. Aggressive interest-rate increases by the Reserve Bank of India (RBI) have reduced the expected return on equity capital in many infrastructure projects to below the hurdle rate at which investors would like to undertake these risky endeavours.

target tips for equity

Indian share market

Nearly half of US think new recession is coming: Poll

The nation`s gloom over economic conditions poses a serious threat to President Obama's re-election chances, according to a new NBC News/Wall Street Journal poll.
The survey shows that nearly half of all Americans, and two-thirds of Republicans, believe the country is headed back into recession. A 54% majority disapproves of Obama's handling of the economy.
"The public is incredibly pessimistic about the future," said Peter Hart, the Democratic pollster who conducts the NBC/WSJ poll with his Republican counterpart Bill McInturff.
Added McInturff, "The president has substantial advantages, but is still in for a difficult race."
President Obama's overall job approval dipped back to 49% from 52% in May. That signals that the popularity boost he received after the special forces raid that killed Osama bin Laden has faded.
That 49% approval remains higher than some of his predecessors received at similar points when the economy was struggling.
Hart pointed toward the public`s positive feelings for Obama personally, and the fact that 62% of Americans say economic conditions reflect circumstances that he inherited rather that those he caused.
But the challenge facing the president was evident when voters are asked whether they intend to support him or the Republican candidate in 2012. Obama led by a narrow 45 to 40 margin, down from 49% to 30% in May.
His leading Republican challenger, former Gov. Mitt Romney of Massachusetts, is emphasizing the economy almost exclusively in his campaign. Romney leads among prospective GOP primary voters with 30%, compared to 14% for Sarah Palin, 12% for Herman Cain, 7% for Ron Paul, and 6% for Newt Gingrich.
Tim Pawlenty and Rick Santorum both received 4%, Michelle Bachmann 3%, and Jon Huntsman, who plans to enter the race next week, 1%.
Some 45% of Republican voters called themselves dissatisfied with the field of presidential candidates, more than double the proportion who answered that way at a similar point in the 2008 campaign.
That signals an opening for potential contenders who have not yet entered the race, including Palin, Huntsman, and Texas Gov. Rick Perry.
The survey showed continued deep concern about government spending; some 63% said Washington should focus more on reducing the deficit even if it slows economic recovery, and a 45% plurality of Americans believe the 2009 economic stimulus didn`t help the economy.
On raising the federal debt ceiling, Americans are split. A 39% plurality said it should not be raised, while 28% said it should be and 31% said they didn`t know enough.
The telephone survey of 1,000 Americans, conducted June 9-13, carries a margin for error of 3.1% points.

JK Paper raises Rs 225 cr thru FCCB

JK Paper has raised close to Rs 225 crore through the foreign currency convertible bonds (FCCB) route on a private placement basis to three investors — FMO (Netherlands), DEG (Germany) and Proparco (France).

The issue has been priced at Rs 65 a share with a face value of Rs 10 each. FCCBs may be converted into equity anytime after three and a half years from the date of issue. The stock closed at Rs 49.05 on the BSE, a fall of about one per cent.

The instrument would be repaid between the fifth and the seventh year, if the FCCBs are not converted.

The FCCB would part fund JK Paper's Odisha plant that is to be set up at an estimated project cost Rs 1,653.37 crore.

The project entails setting up of a new or augmented fibre line which can produce approximately 2,15,000 tpa of pulp and a paper machine for manufacturing 1,65,000 tpa of wood free copy paper

Alpen Capital India Private Ltd acted as a merchant banker, along with Rabo India to issue these unsecured FCCBs

The Crash that Shook the Nation

he 176-point1 Sensex2 crash on March 1, 2001 came as a major shock for the Government of India, the stock markets and the investors alike. More so, as the Union budget tabled a day earlier had been acclaimed for its growth initiatives and had prompted a 177-point increase in the Sensex. This sudden crash in the stock markets prompted the Securities Exchange Board of India (SEBI) to launch immediate investigations into the volatility of stock markets. SEBI also decided to inspect the books of several brokers who were suspected of triggering the crash.

Meanwhile, the Reserve Bank of India (RBI) ordered some banks to furnish data related to their capital market exposure. This was after media reports appeared regarding a private sector bank3 having exceeded its prudential norms of capital exposure, thereby contributing to the stock market volatility. The panic run on the bourses continued and the Bombay Stock Exchange (BSE) President Anand Rathi's (Rathi) resignation added to the downfall. Rathi had to resign following allegations that he had used some privileged information, which contributed to the crash. The scam shook the investor's confidence in the overall functioning of the stock markets. By the end of March 2001, at least eight people were reported to have committed suicide and hundreds of investors were driven to the brink of bankruptcy.


The scam opened up the debate over banks funding capital market operations and lending funds against collateral security. It also raised questions about the validity of dual control of co-operative banks4. (Analysts pointed out that RBI was inspecting the accounts once in two years, which created ample scope for violation of rules.)

The first arrest in the scam was of the noted bull,5 Ketan Parekh (KP), on March 30, 2001, by the Central Bureau of Investigation (CBI). Soon, reports abounded as to how KP had single handedly caused one of the biggest scams in the history of Indian financial markets. He was charged with defrauding Bank of India (BoI) of about $30 million among other charges. KP's arrest was followed by yet another panic run on the bourses and the Sensex fell by 147 points. By this time, the scam had become the 'talk of the nation,' with intensive media coverage and unprecedented public outcry

The Man Who Trigerred the Crash

KP was a chartered accountant by profession and used to manage a family business, NH Securities started by his father. Known for maintaining a low profile, KP's only dubious claim to fame was in 1992, when he was accused in the stock exchange scam6. He was known as the 'Bombay Bull' and had connections with movie stars, politicians and even leading international entrepreneurs like Australian media tycoon Kerry Packer, who partnered KP in KPV Ventures, a $250 million venture capital fund that invested mainly in new economy companies. Over the years, KP built a network of companies, mainly in Mumbai, involved in stock market operations.

The rise of ICE (Information, Communications, and Entertainment) stocks all over the world in early 1999 led to a rise of the Indian stock markets as well. The dotcom boom7 contributed to the Bull Run8 led by an upward trend in the NASDAQ9.

The companies in which KP held stakes included Amitabh Bachchan Corporation Limited (ABCL), Mukta Arts, Tips and Pritish Nandy Communications. He also had stakes in HFCL, Global Telesystems (Global), Zee Telefilms, Crest Communications, and PentaMedia Graphics KP selected these companies for investment with help from his research team, which listed high growth companies with a small capital base.


According to media reports, KP took advantage of low liquidity in these stocks, which eventually came to be known as the 'K-10' stocks. The shares were held through KP's company, Triumph International. In July 1999, he held around 1.2 million shares in Global. KP controlled around 16% of Global's floating stock, 25% of Aftek Infosys, and 15% each in Zee and HFCL. The buoyant stock markets from January to July 1999 helped the K-10 stocks increase in value substantially (Refer Exhibit I for BSE Index movements). HFCL soared by 57% while Global increased by 200%. As a result, brokers and fund managers started investing heavily in K-10 stocks.

Mutual funds like Alliance Capital, ICICI Prudential Fund and UTI also invested in K-10 stocks, and saw their net asset value soaring. By January 2000, K-10 stocks regularly featured in the top five traded stocks in the exchanges (Refer Exhibit II for the price movements of K-10 stocks). HFCL's traded volumes shot up from 80,000 to 1,047,000 shares. Global's total traded value in the Sensex was Rs 51.8 billion10. As such huge amounts of money were being pumped into the markets, it became tough for KP to control the movements of the scrips. Also, it was reported that the volumes got too big for him to handle. Analysts and regulators wondered how KP had managed to buy such large stakes.

The Factors that Helped the Man

According to market sources, though KP was a successful broker, he did not have the money to buy large stakes. According to a report11, 12 lakh shares of Global in July 1999 would have cost KP around Rs 200 million. The stake in Aftek Infosys would have cost him Rs 50 million, while the Zee and HFCL stakes would have cost Rs 250 million each. Analysts claimed that KP borrowed from various companies and banks for this purpose. His financing methods were fairly simple. He bought shares when they were trading at low prices and saw the prices go up in the bull market while continuously trading. When the price was high enough, he pledged the shares with banks as collateral for funds. He also borrowed from companies like HFCL.

This could not have been possible out without the involvement of banks. A small Ahmedabad-based bank, Madhavapura Mercantile Cooperative Bank (MMCB) was KP's main ally in the scam. KP and his associates started tapping the MMCB for funds in early 2000. In December 2000, when KP faced liquidity problems in settlements he used MMCB in two different ways. First was the pay order12 route, wherein KP issued cheques drawn on BoI to MMCB, against which MMCB issued pay orders. The pay orders were discounted at BoI. It was alleged that MMCB issued funds to KP without proper collateral security and even crossed its capital market exposure limits. As per a RBI inspection report, MMCB's loans to stock markets were around Rs 10 billion of which over Rs 8 billion were lent to KP and his firms.


The second route was borrowing from a MMCB branch at Mandvi (Mumbai), where different companies owned by KP and his associates had accounts. KP used around 16 such accounts, either directly or through other broker firms, to obtain funds. Apart from direct borrowings by KP-owned finance companies, a few brokers were also believed to have taken loans on his behalf. It was alleged that Madhur Capital, a company run by Vinit Parikh, the son of MMCB Chairman Ramesh Parikh, had acted on behalf of KP to borrow funds. KP reportedly used his BoI accounts to discount 248 pay orders worth about Rs 24 billion between January and March 2001. BoI's losses eventually amounted to well above Rs 1.2 billion.

The MMCB pay order issue hit several public sector banks very hard. These included big names such as the State Bank of India, Bank of India and the Punjab National Bank, all of whom lost huge amounts in the scam. It was also alleged that Global Trust Bank (GTB) issued loans to KP and its exposure to the capital markets was above the prescribed limits. According to media reports, KP and his associates held around 4-10% stake in the bank. There were also allegations that KP, with the support of GTB's former CMD Ramesh Gelli, rigged the prices of the GTB scrip for a favorable swap ratio13 before its proposed merger with UTI Bank.

The Factors that Helped the Man Contd...

KP's modus operandi of raising funds by offering shares as collateral security to the banks worked well as long as the share prices were rising, but it reversed when the markets started crashing in March 2000. The crash, which was led by a fall in the NASDAQ, saw the K-10 stocks also declining. KP was asked to either pledge more shares as collateral or return some of the borrowed money. In either case, it put pressure on his financials. By April 2000, mutual funds substantially reduced their exposure in the K-10 stocks. In the next two months, while the Sensex declined by 23% and the NASDAQ by 35.9%, the K-10 stocks declined by an alarming 67%. However, with improvements in the global technology stock markets, the K-10 stocks began picking up again in May 2000. HFCL nearly doubled from Rs 790 to Rs 1,353 by July 2000, while Global shot up to Rs 1,153. Aftek Infosys was also trading at above Rs 1000.

In December 2000, the NASDAQ crashed again and technology stocks took the hardest beating ever in the US. Led by doubts regarding the future of technology stocks, prices started falling across the globe and mutual funds and brokers began selling them. KP began to have liquidity problems and lost a lot of money during that period.


It was alleged that 'bear hammering' of KP's stocks eventually led to payment problems in the markets. The Calcutta Stock Exchange's (CSE) payment crisis was one of the biggest setbacks for KP. The CSE was critical for KP's operation due to three reasons. One, the lack of regulations and surveillance on the bourse allowed a highly illegal and volatile badla business (Refer Exhibit III). Two, the exchange had the third-highest volumes in the country after NSE and BSE. Three, CSE helped KP to cover his operations from his rivals in Mumbai. Brokers at CSE used to buy shares at KP's behest.
Though officially the scrips were in the brokers' names, unofficially KP held them. KP used to cover any losses that occurred due to price shortfall of the scrips and paid a 2.5% weekly interest

to the brokers. By February 2001, the scrips held by KP's brokers at CSE were reduced to an estimated Rs 6-7 billion from their initial worth of Rs 12 billion. The situation worsened as KP's badla payments of Rs 5-6 billion were not honored on time for the settlement and about 70 CSE brokers, including the top three brokers of the CSE (Dinesh Singhania, Sanjay Khemani and Ashok Podar) defaulted on their payments

By mid-March, the value of stocks held by CSE brokers went down further to around Rs 2.5-3 billion. The CSE brokers started pressurizing KP for payments. KP again turned to MMCB to get loans. The outflow of funds from MMCB had increased considerably form January 2001. Also, while the earlier loans to KP were against proper collateral and with adequate documentation, it was alleged that this time KP was allowed to borrow without any security.

By now, SEBI was implementing several measures to control the damage. An additional 10% deposit margin was imposed on outstanding net sales in the stock markets. Also, the limit for application of the additional volatility margins was lowered from 80% to 60%. To revive the markets, SEBI imposed restriction on short sales14 and ordered that the sale of shares had to be followed by deliveries. It suspended all the broker member directors of BSE's governing board. SEBI also banned trading by all stock exchange presidents, vice-presidents and treasurers. A historical decision to ban the badla system in the country was taken, effective from July 2001, and a rolling settlement system for 200 Group A shares15 was introduced on the BSE.


The System that Bred these Factors

The small investors who lost their life's savings felt that all parties in the functioning of the market were responsible for the scams. They opined that the broker-banker-promoter nexus, which was deemed to have the acceptance of the SEBI itself, was the main reason for the scams in the Indian stock markets.

SEBI's measures were widely criticized as being reactive rather than proactive. The market regulator was blamed for being lax in handling the issue of unusual price movement and tremendous volatility in certain shares over an 18-month period prior to February 2001. Analysts also opined that SEBI's market intelligence was very poor. Media reports commented that KP's arrest was also not due to the SEBI's timely action but the result of complaints by BoI.

The System that Bred these Factors Contd...

A market watcher said,16 "When prices moved up, SEBI watched these as 'normal' market movements. It ignored the large positions built up by some operators. Worse, it asked no questions at all. It had to investigate these things, not as a regulatory body, but as deep-probing agency that could coordinate with other agencies. Who will bear the loss its inefficiency has caused?" An equally crucial question was raised by media regarding SEBI's ignorance of the existence of an unofficial market at the CSE.

Interestingly enough, there were reports that the arrest was motivated by the government's efforts to diffuse the Tehelka controversy.17

Many exchanges were not happy with the decision of banning the badla system as they felt it would rig the liquidity in the market. Analysts who opposed the ban argued that the ban on badla without a suitable alternative for all the scrips, which were being moved to rolling settlement, would rig the volatility in the markets. They argued that the lack of finances for all players in the market would enable the few persons who were able to get funds from the banking system - including co-operative banks or promoters - to have an undue influence on the markets.


The People that the System Duped

KP was released on bail in May 2001. The duped investors could do nothing knowing that the legal proceedings would drag on, perhaps for years. Observers opined that in spite of the corrective measures that were implemented, the KP scam had set back the Indian economy by at least a year. Reacting to the scam, all KP had to say was, "I made mistakes." It was widely believed that more than a fraud, KP was an example of the rot that was within the Indian financial and regulatory systems. Analysts commented that if the regulatory authorities had been alert, the huge erosion in values could have been avoided or at least controlled.

After all, Rs 2000 billion is definitely not a small amount – even for a whole nation.

Questions for Discussion

1. Study the developments that led to the Ketan Parekh scam and comment on SEBI's actions after the scam was unearthed.
2. Comment on SEBI's decision to ban badla. What effect would this move have on the stock markets?
3. The Ketan Parekh scam was an example of the inherently weak financial and regulatory set up in India. Discuss the above statement, giving reasons to justify your stand.
Exhibits

Exhibit I: Mumbai Stock Market Index Movements
Exhibit II: Changes in Market Capitalization of K-10 Stocks
Exhibit III: A Note on Badla

1] A change of Re. 1 in the price of a share when one speaks of a share rising or falling by so many points. In stock market indices, however, a point is one unit of the composite weighted average on market capitalisation of rupee values.
2] A stock market index indicating weighted average of 30 scrips, also known as the BSE Sensitive Index. The daily closing figure of this index broadly reflects the performance of the capital markets.
3] It was alleged that Global Trust Bank exceeded its Capital market exposure.
4] Co-operative banks are under the dual control of RBI and the Registrar of Co-operative Societies. The RBI regulates banking functions while the registrar looks after the managerial and administrative functions.
5] An investor who expects share prices to go up and hence buys them.
6] When the interest rates were freed in mid-1989, it made the price of both bonds and money more volatile, and increased the link between the securities and money markets. With price volatility and increased volumes, securities broking became a profitable activity. The rising volumes were funded by banks through bank receipts (BR is a document issued by a bank acknowledging that it has sold certain government securities to a party and received payment). The scam came to light when RBI asked the SBI to show the bank receipts, and it was found that Rs 6.22 billion not been reconciled and was untraceable. The money involved in the scam was eventually ascertained to be well over Rs 30 billion.
7] The e-commerce revolution had led to a massive upsurge in the value of technology stocks across the globe, especially Internet ventures. This came to be known as the dotcom boom.
8] A bull run is an uptrend in the stock markets caused by the rise in the price of shares, sustained by buying pressure of actual investors or news of favorable economic growth, decontrol and political developments.
9] The National Association of Securities Dealers Automated Quotation System (NASDAQ) is a US-based stock exchange, which comprises largely of technology stocks. Started in 1971, NASDAQ is the first screen-based, floor less trading system and the second largest stock market in the US.
10] In September 2002, Rs 48 equalled 1 US $.
11] Businessworld, 16 April, 2001.
12] A bank issues a pay order after it is clear that the customer's account has sufficient funds.
13] The merger was later cancelled.

BUY BUY BUY Manappuram General Finance & Leasing Ltd.

WE strongly recommend MANAPPG to buy rating after showing strong q2 q3 results..we have target for this script above 250 in 6 months
CMP 158
TARGET 250
TIME 6 MONTHS
BUY NOW

Hold reliance next target : 1150

Stock ran from 980 levels to 1100 levels.we recomended buy
after strong result posted this quater we recomend to buy for next 1 year.

buy reliance

After posting good results.we all expected this script may touch new highs,but it went to downward side.we recommend our viewers and followers who are holding this stock to remain in this script.Further downside of this stock is about 1000 to 980 we are taking buy call on this stock target is about 1050 in 2 months for short term

we also recommend to buy reliance call 1100 of aug series

Large-cap index stocks take a beating after results

Large-cap index stocks Reliance Industries (RIL), Hindustan Unilever (HUL) and Larsen & Toubro (L&T) lost between 2 and 3 per cent each over their previous close on Wednesday.

Analysts believe this to be a short-term blip and strongly feel that the long-term story is intact and that the fundamentals are in place.

These stocks were beaten down for a variety of reasons. For instance, RIL had reduced its gas output guidance for FY11 from 80 mmscmd to 60 mmscmd and for FY11 at 80 mmscmd at their Q1 analyst meet, said an equity analyst.

The fact that RIL overstepped on projections and the expectation of this delay in project execution has given people a reason to short the stock. For the RIL stock, Rs 1,045 was an important level and that has been breached. So expect some more pressure coupled with sideways movement,” said Mr Prakash Diwan, Head, Institutional Equity, Net Worth Stock Broking.

Result updates from some of the brokerages have pointed out that the delay in gas ramp-up is a dampener for RIL.

Another set of market players said that this could be an unwinding of long positions a day prior to F&O (futures and options) expiry and that better results expectations was the reason for build up in the stocks of RIL, HUL and L&T.

Ad spends and input costs have hurt HUL, say analysts. “Increase in the ad spend by 30 per cent year on year due to new brand launches and continuous increase in agri-commodities (prices) have taken its toll. Plus the inability to pass on costs to their customer has been their undoing,” added Mr Diwan.

Mr Alok Agarwal, Head of Research, Mata Securities, had another point of view to offer. He said, “HUL is already well owned by institutions. With Q1 numbers not encouraging, don't expect any further buy in.”

The late start to the capex cycle seems to have hurt L&T the most say analysts. “In spite of a good order book, late government disbursals for capex, and a delay in private sector capex resulted in a below expectation Q1 performance. Even a healthy margin could not save the stock from being beaten down; a sure sign of an overreacting street,” said Mr Diwan.

RIL closed at 1,021.25 (down 3.06 per cent), L&T at 1,823.65 (down 2.15 per cent) and HUL at 252.35 (down 3.09 per cent) on the NSE today.

“The more they fall, the better it is for the buyer as these are real blue chip companies to own,” added Mr Agarwal.

Tycoon Online

Tycoon Online

Indian share market

Orchid Chemicals & Pharmaceuticals: Sell

Given the inherent risks associated with first-to-file opportunities and drug application approvals, investors may be better off taking fresh exposure later.



The company has sold its core antibiotic injectables business to Hospira Inc.

Srividhya Sivakumar

Shareholders can consider paring their exposure to the stock of Orchid Chemicals & Pharmaceuticals, which recently sold its antibiotic injectables business to the US-based Hospira Inc for $400 million (about Rs 1,870 crore).

Even though the deal valuations are attractive and would more than address Orchid's debt problems , it threatens to render the company's overall growth prospects unappealing. The generic injectables business enjoyed high-growth and high-margins and was the company's growth driver.

With the growth engine wedged out from its portfolio, Orchid's business would now primarily straddle across its low-margin API and oral dosage formulation businesses only. This is likely to reduce both revenues and margins, even as the company would enjoy significant savings on its interest outgo and depreciation charges.

At the current market price of Rs 184, the stock trades at about 14 times its likely FY-11 per share earnings. While this is at a discount to most peers, much of the premium that the company had earlier commanded was due to its presence in the niche antibiotic injectables area. With that gone, discounted valuations may be here to stay.

Parting with growth engine

As per the deal agreement, Orchid will transfer seven products (including two products in pipeline) in cephalosporins vertical and two products (including one in pipeline) in the penicillins vertical. It will also transfer its carbapenem line with key products such as meropenem and imipenem (with an estimated $1 billion market opportunity per product). In addition to the drugs, Orchid will transfer the manufacturing facilities of cephalosporin, penicillin, carbapenem and a R&D facility too. What's more, the sale also includes Orchid's key business of Tazo-Pip, for which it had acquired six-month exclusivity in September this year. Fortunately for it, the end of exclusivity for Tazo-Pip coincides with the transfer of business to Hospira.

This means by March 2010, when the businesses would effectively be transferred to Hospira, Orchid may have extracted peak sales from the Tazo-Pip opportunity.

On the whole, however, the company appears to have parted with its growth engine, for had it held on, it would have benefitted significantly from the opening up of business opportunities in carbapenem, where a handful of products were expected to go off-patent in the next couple of years.

Given the limited competition in these niche businesses and Orchid's low-risk and low-cost strategy of launching drugs with overseas partners, the divestment is certain to slice away a chunk of its future revenues.

The silver lining, however, comes from the 10-year agreement that Orchid has struck with Hospira.

As per the agreement, Orchid will supply active pharmaceutical ingredients (APIs) or bulk drugs required for producing the injectables. Not only will this help Orchid utilise its manufacturing capacities, export APIs that these would be, it may also help the company realise better margins. In addition to this, though it still may be early days, export API deals could also open up significant custom manufacturing opportunities for Orchid in the long run.

Deal money to help retire debt

On the valuations front, however, the company appears to have made the best of the deal. The antibiotic injectable business, which was expected to make up over $90 million in revenues this year, has been valued roughly at over four times, at $400 million.

For a company that was grappling with a debt of over Rs 2500 crore, including foreign currency convertible bonds worth $150 million redeemable in 2012, the deal money would provide the much-needed breath of fresh air, needed to sustain operations. The company had provided about Rs 109 crore as interest cost in the first half of the current year (about 18 per cent of its revenues) and Rs 76 crore as depreciation.

The influx of the deal money would help the company retire a chunk of its debt and improve cash positions. Orchid plans to retire its entire long-term debt of Rs 1200 crore and part of working-capital loan of Rs 550 crore. By doing this, the management expects to save around $40 million in interest cost alone.

And since the sale also involves transfer of assets (estimated fall in gross block of fixed assets at about Rs 600 crore and net block Rs 450 crore), it will help bring down depreciation charges too. Orchid expects the saving in interest cost and depreciation to help improve it's per share earnings by about Rs 7-8 next year.

Revenue concerns

Even though Orchid is likely to enjoy significant savings on the cost front, these near-term benefits are unlikely to supersede the lack of visibility on its revenue front. Post-deal, the management expects the company's revenues to be lower by $90 million and it's EBITDA to fall by over $30-40 million in FY11.

Operating margin too, as a result, is also likely to come under pressure as the share of the high-margin formulation business expected to go down from the likely 65 per cent level in FY10 to about 45 per cent in FY11. The management, however, is hopeful of improving the share of formulations to 50 per cent by FY-12. It expects the non-antibiotics segment to give it the next growth impetus, having filed 21 ANDAs with the USFDA.

Of those, seven are Para IV FTF (first-to-file) products, including the two FTFs that were recently settled with the US-based Schering-Plough. While the prospects do appear promising in the long run, given the inherent uncertainty and risks associated with FTF opportunities and drug application approvals, investors may be better off taking fresh exposure to the stock when such opportunities present themselves rather than remaining invested and wait them out.

key ratios while buying stocks

LOOKING to buy stocks but you are not sure how to select them? Don't fret. We have, here, eight ratios that would make your life easier, and of course, enable you to make the best possible stock selection.

1. Ploughback or Reserves
Every year, the company divides its net profit (profits in hand after subtracting various expenses including taxes) in two portions: ploughback and dividends.

While dividends are handed out to the shareholders, ploughback is kept by the company for its future use and is included in its reserves. Ploughback is essential because, besides boosting the company’s reserves, it is a source of funds for the company’s expansion plans. Hence, if you are looking for a company with good growth prospects, check its ploughback figures. Reserves are also known as shareholders’ funds, since they belong to the shareholders. If a company’s reserves are twice its equity capital, the company can reward its shareholders with a generous bonus. Also any increase in reserves will push the share price of your share.

2. Book value per share
This ratio shows the worth of each share of a company as per the company's accounting books. It is calculated as:
Shareholders' funds
------------------------------------------------ = Book Value per share
Total quantity of equity shares issued

Shareholders' funds can be computed as such:
Total assets (equity capital to the company's reserves) less total liabilities (money owed to creditors).

Book value is an old record that uses the original purchase prices of the assets.

However, it doesn't show the present market price of the company’s assets. As a result, this ratio has a restricted use when it comes to estimating the market price of the shares, but can give you an estimate of the minimum price of the company’s shares. It will also help you judge if the share price is overpriced or under-priced.

3. Earnings per share (EPS)
One of the most popular investment ratios, it can be computed as:
Profit Post Tax
------------------------------------------------ = EPS
Total quantity of equity shares issued

This ratio computes the company's earnings on a per share basis. Say, you own 100 shares of ABC Co., each having a face value of Rs 10. Assume the earnings per share is Rs 10 and the dividend declared is 30 per cent, or Rs 3 per share. This implies that on every share of ABC Co., you earn Rs 6 each year, but you actually get Rs 3 via dividend. The balance of Rs 4 per share goes into the ploughback (retained earnings). Had you purchased these shares at par, it implies a return of 60 per cent.

This example shows that instead of looking at the dividends received from to company as the base of investment returns, always look at earnings per share, as it is the actual indicator of the returns earned by your shares.

4. Price Earnings Ratio (P/E)
This ratio highlights the connection between the market price of a share and its EPS.
Price of the share
------------------------ = P/E
Earnings per share

It shows the degree to which earnings of a share are protected by its price. Say, the P/E is 40, it means the share price is 40 times its earnings. So if the company's EPS is constant, it will need about 40 years to make up for the purchase price of the share, after taking into account the dividends and the capital appreciation. Hence, low P/E means you will recover your money quickly.

P/E ratio shows what the market thinks about the earnings potential and future business forecast of a company. Companies with high P/E ratios are the darlings of the investors and thus enjoy a higher market rating. In order to use the P/E ratio properly, take into account the future earnings and growth projections of the company. If the current P/E ratio is low, as against the future prospects of a company, then the shares make an attractive investment option. But if the company is saddled with losses and falling sales, stay away from it, despite the low P/E ratio.

5. Dividend and yield
Dividend is the portion of the profit that is distributed amongst shareholders. Companies offering high dividends, normally don’t have much of growth to talk about. This is because the ploughback required to finance future development is insufficient. Similarly, those companies in high growth sector don’t give any dividend. Instead here they give sharp capital appreciation, which ultimately will lead to higher dividends.

So it makes much more sense to invest for capital appreciation instead of dividends. Rather it makes more sense to invest for yield, which is nothing but the association between the dividends and the market price of the shares. Yield (dividend yield) can be calculated as:

Dividend per share
----------------------------- x 100 = Yield
Market price of a share

Yield shows the returns in percentage that you can expect via dividends earned by your investment at the current market price. It is more useful than simply focusing on the dividends.

6. Return of capital employed (ROCE)
ROCE is the ratio that is calculated as:
Operating profit
----------------------------------------
Capital employed (net value + debt)

To get operating profit, add old taxes paid, depreciation, special one-off expenses, and special one-off income and miscellaneous income to get the net profit. The operating profit is a far better indicator of the profits earned by the company instead of the net profit. Hence this ratio is the better indicator of the general performance of the company and the company’s operational efficiency. It is one of the most useful ratio that lets you compare amongst the companies.

7. Return on net worth (RONW)
RONW is calculated as
Net Profit
-----------------
Net Worth

This ratio gives you an idea of the returns generated by investing in the company. While ROCE is an effective measure to get a general overview of the profitability of the company’s business operations, RONW lets you gauge the returns you can earn on your investment. When used along with ROCE, you get an overview of the company’s competence, financial standing and its capacity to generate returns on shareholders’ finances and capital employed.

8. PEG ratio
PEG is an essential and extensively used ratio for calculating the inbuilt worth of a share. It helps you decide whether the share is under-priced, totally priced or overpriced. To derive the ratio, you have to associate the P/E ratio with the expected growth rate of the company. It assumes that higher the growth rate of the company, higher the P/E ratio of the company’s shares. Vice versa also holds true.

P/E
----------------------------------
Expected growth rate of the EPS of the company

In general, a PEG lesser than 0.5 is a lucrative investment opportunity. However if the PEG exceeds 1.5, it is time to sell.

These are some of the most critical ratios that must be considered when purchasing a share. Extensive reading of the financial performance of the company in newspapers and magazines will help you get all the relevant information to arrive at the correct decision.

Few techinical analysis tips

Technical Analysis of Indian Stock Market and Shares

26 mutual funds waiting in the wings

Mumbai, Aug. 10 As many as 26 applications for setting up mutual funds arepending with the Securities and Exchange Board of India (SEBI) at various stages of approval. There are already 36 fund houses actively soliciting investments for over 2,000 schemes.
Room for more

Though retail investors have trouble selecting an MF scheme from among the thousands on offer, industry observers feel that there is headroom for many more to set up shop.

“In India, MF penetration is very low and the coverage in terms of the savings invested in mutual funds is also negligible,” said Mr A.P. Kurian, Chairman, Association of Mutual Funds in India.

With the top five MFs accounting for over 50 per cent of the total asset base, there is scope for more funds, said Mr Dhirendra Kumar, CEO of Value Research. The mutual fund industry manages an asset base of Rs 6,89,946 crore as on July end.

Those awaiting SEBI approval include IndiaBulls, India Infoline, Schroder Investment Management, Axis Bank, Sanlam Investment Management, ASK Investment Holdings Pvte Ltd, Karvy Stock Broking Ltd, Mahindra & Mahindra Financial Services, Union Bank a-KBC Asset Management and IDBI Bank.
Consolidation

With many more players foraying into the mutual fund space, some industry officials see scope for consolidation.

Some would even be coming in with a possible eye on for acquiring existing businesses, said Mr Kurian.

There might be consolidation in the future, with some marginal players wanting to exit and new and existing players taking over those businesses, said Mr Saurabh Nanavati, CEO of Religare Mutual Fund.

NHPCL Resident Form

IPO: Offer price is not the only deciding factor

IT is said that Initial Public Offerings, popularly known as IPOs, can be a safe stepping stone for the first timers, who are entering the equity market. IPOs are supposed to be cheap and provide good upside potential to investors
if they hang around long enough.

For first time investors or those lacking enough experience, the trickiest part is to assess the fair value of the shares on offer in an IPO. This is important as it determines whether you should subscribe to the offer or instead bet your money on a related company already listed on the stock exchanges. But it is easier said than done. Most often prospective investors either get seduced or intimidated by the offer price.

This should not happen in an ideal world. After all an offer price or market price of a share is nothing but a company’s expected or total market value divided by the number of shares. This means that two companies with similar market value may trade at different prices simply due to difference in the number of shares
available for trading. But most of the new investors fail to determine this link between the market value and the share price.

This was clearly visible in the recent IPOs of the power sector companies. The investors have been baffled by the sheer variance in offer price of IPOs and the market price of their listed peers. For instance Adani Power was offered to the investors at Rs 100 per share. In comparison, Tata Power, which in the same line of business (i.e in thermal power) and of similar size (in terms of capacity), is right now trading in the range of Rs 1,200 per share.

On the other side of the spectrum is NHPC, which is being offered to the investors in the price band of Rs 30-36 per share. In comparison, another public sector power utility NTPC is trading at around Rs 210 per share. To a trained eye, there’s nothing unusual in the variation in the market price of various companies in a sector.

But for a retail investor, market price is the most visible and appealing information about the real worth of a company or business that is taken easily without much pondering.

Most retail investors and especially the first time investors in IPOs associate the offer price with the relative cheapness of the stock. To them, NHPC is so much cheaper than NTPC, while Adani Power IPO is a steal compared to Tata Power. They don’t care about the fact that at its lower price band NHPC is asking for around 30 times its earning per share (EPS) in FY09 while NTPC is available at a P/E multiple of just 20.

This brings us to the crux of the issue. How should retail investors with limited resources and experience assess the fair value of an IPO and compare it to related companies already listed on the bourses?

The starting point is to get hold of the company’s red herring prospectus (RHP), which contains all the relevant financial and operational details of the company . RHP as it’s called is freely available on SEBI’s website or the company’s portal.

The first item to look for in the RHP is the face value of the share. Next thing the investor should look for is the company’s capital structure represented by subscribed paid-up capital divided into certain number of shares. These two variables will help us to calculate the total number of shares that will be available for trade. This is important, as it is one of the key determinants of its offer price.

The other factor is earning per share, i.e., total profit divided by the total number of shares. Just to illustrate consider Adani Power IPO. Post IPO, Adani Power’s paid-up equity capital is around Rs 2,180 crore divided into 218 crore shares with face value of Rs 10 each. Now compare it to Tata Power’s capital structure.

At the end of June ’09 quarter, Tata Power’s paid-up equity capital is around Rs 222 crore represented by 22.2 crore equity shares with face value of Rs 10 each. Simply put, Adani Power has nearly ten times more equity shares than Tata Power. This means that for the same market value, Adani Power’s share price will be one-tenth that of Tata Power’s share price.

For instance at Rs 100 per share, Adani Power’s total market capitalisation will be Rs 21,800 crore (Rs 100 multiplied by 218 crore shares). If Tata Power gets the same market capitalisation, its share price would work out to be Rs 982 (Rs 21,800 crore divided by 22.2 crore shares).

But what determines company’s market valuation or market capitalisation? At the most simplest level, market cap is directly depended on company’s earnings or profitability in the preceding 12 months. Higher the net profit, higher will be its market value. Total net profit divided by the number of shares gives us earning per share. Now consider the case of NHPC and compare it to National Thermal Power Corporation (NTPC).

During the year ended March 2009, NHPC earned a net profit of Rs 1244 crore, which translates into a earning per share of Rs 1.01 per share (Rs 1244/1230). Post IPO NHPC paid-up equity capital will rise to Rs 12,300 crore represented by 1,230 crore shares with face value of Rs 10 each. In comparison, NTPC earned a net profit of Rs 8,201 crore during FY09, which works out to be Rs 9.95 per share.

Now divide NHPC offer price with its EPS and its gives you price to earning multiple, commonly known as P/E multiple. In case of NHPC, it works out to be 30 at the lower price band and 36 at the upper price band. In contrast NTPC is trading
at around 21 times its EPS in FY09. Obviously, latter is cheaper than the former.

If we set aside other complex issues involved in valuations such as quality of management, earnings quality and growth prospects, a company with lower P/E is preferable. And in the end, it is always preferable to invest in a company whose business is up & running, rather than a company, which promises to use the proceeds to set-up a business that will generate profits and cash flows in future. As they say, there is many a slip between the cup and the lip!

Buy atlanta limited

TARGET : 300
CMP : 104
PERIOD : 12 MONTHS

FUNDAMENTALS
COMPANY PROFILE

The Company was incorporated under the name of 'Atlanta Construction Company (India) Private Limited' pursuant to a Certificate of Incorporation No. 11-031852 of 1984 dated January 17, 1984 issued by the Additional Registrar of Companies, Maharashtra. The name was changed to 'Atlanta Construction Company (India) Limited' April 5, 1991 on being deemed a public company under Section 43A (1A) of the Companies Act, 1956. The name changed to 'Atlanta Infrastructure Limited' on February 2, 1997 and to 'Atlanta Limited' on December 16, 2004

HISTORY AND MAJOR EVENTS

Year Event

October 17, 1995

Completed widening and strengthening of National Highway No. 45 from Km. 67/0 to Km. 160/2 Package V & VI valued at Rs. 395.56 for National Highways of Authority of India, Chengalpattu Tamil Nadu.

March 28, 1998

Completed construction of Udaipur Bypass Road Phase-II on B.O.T. Basis valued at Rs. 244.50 million for Public Works Department, Udaipur.

December 31, 2001

Completion of improvement of arterial and sub arterial roads in Bangalore valued at Rs. 652.22 million for Bangalore Mahanagar Palike.

2002-03

Completed extraction and transfer of Coal/Coal Measure Strata in deploying "surface miners" on hire basis at Belpahar OCP valued at Rs. 40.91 million for Mahanadi Coal Fields.

April 15, 2004

Completion of periodic renewal of Vapi-Ambethi (link to pient) and Vapi Daman road valued at Rs. 128.38 million for National Highways Authority of India.

February 15, 2006

Letter of recommendation for certification under ISO 9001:2000


NFRASTRUCTURE DEVELOPMENT


From executing India's first greenfield BOT project on National Highways - Udaipur Bypass and successfully participating in toll-based PPP infrastructure development projects to building roads, highways, bridges, runways, docks, ports, canals, water courses, irrigation, embankment, reservoirs and executing several EPC projects, Atlanta is at the forefront of developing India's infrastructure.

The company has serviced some of the biggest players in the industry such as National Highway Authority of India (NHAI), Ministry of Road Transport and Highways, Public Works Department, Municipal Corporation of Greater Mumbai and Airports Authority of India to name a few.

Atlanta has established an enviable reputation in the infrastructure development and EPC space due to its ability to harness technology to match the momentum of tomorrow. The company owns and employs modern, specialised and critical fleet of equipment to successfully execute large and complex projects.

Atlanta's EPC division is the oldest and the largest business division of the company and its key activities comprise the actual execution of theinfrastructure projects. This key in-house EPC capability helps the company deliver quality projects on time, amply demonstrated by the successful completion of the Udaipur Bypass project in less than half of the allocated time.

Projects under execution The company is currently executing two toll-based BOT projects: Mumbra Bypass (which is nearing completion) and Nagpur-Kondhali along with several other EPC projects.

Looking forward Atlanta being a forward thinking company, besides identifying traditional infrastructure development projects plans to foray into two new emerging segments: building and maintaining car parking plazas and airport management.

The company, is confident of success in both these segments due to its inherent construction expertise, flawless execution skills, technological know-how which will be backed by alliances with established foreign players in these field.


MINING


Atlanta is active in the high margin limestone and coal mining business with over a decades experience in contract mining, having gained valuable experience at a time when the captive mining business was not even on the radar of competitors.

Prominent features that make Atlanta the obvious contract mining partner of choice competent and best suited to take on the sector's specific needs and challenges include:

1. SURFACE MINING TECHNOLOGY
Atlanta is the first player in the country to have prudently invested in superior surface mining technology: a technology imported from Wirtgen, Germany and Volvo, Sweden that eliminates conventional operations like drilling, blasting and crushing. Surface mining technology enables controlled excavation, is not labour-intensive nor is it risky like the conventional mining process.

2. CAPACITY
Atlanta has the capacity to extract (limestone / coal) over 25000 tones per day, significantly higher than industry peers.

3. CREDIBLE PRESENCE
Atlanta’s distinguished clients include: Mahanadi Coal Fields Ltd. (a subsidiary of Coal India Ltd), Reliance Petroleum Ltd, The Associated Cement Companies Ltd, Narmada Cement Company Ltd, Tata Chemicals Ltd, amongst others.

REALTY


Having anticipated the market trends in the realty sector, Atlanta increased its preparedness to leverage the opportunities by prudently investing in land sites with clear land titles and concurrently demonstrated success and expertise across diverse formats by executing commercial projects and residential projects in prime and emerging locations in Mumbai.

With a longstanding sectoral presence in constructing and executing large projects, Atlanta is now on its way to build attractive properties in and around Mumbai and plans to develop innovative structures across all realty segments in emerging Tier II and Tier III cities across the country.

RESULTS

Quarterly Results (Rs. in Crores)

June2009
[1 Quarter] March2009
[4 Quarter] June2008
[1 Quarter]