The Week That Was:- 8th Nov - 14th Nov  

Posted by Team Niveshak in ,

Market Watch

After a sudden collapse on the stock exchange, last week saw Sensex rise by 690.55 points, or 4.27 per cent, at 16,848.83 compared to the previous week, while the Nifty closed at 4,998.95, up 202.80 points, or 4.23 per cent. Nifty could not touch the 5000 mark. This rise could be attributed to the increase in global markets and government’s reform initiatives. Also, the robust growth data lifted the spirits of steel and auto sectors. This increase was the best weekly gain in 11 weeks.

States speak about GST

The much awaited discussion paper on GST was released on November 10 communicating the proposed framework in India. The paper also discusses about administrative and threshold aspects. It was a broad consensus among the various states on GST. The final law would be passed by the central government. The two-tier structure was proposed to enjoy concessional rates for some goods by states, though it would raise the GST rate.

L&T strengthens Power sector, reduces stake in Satyam

The last two weeks has seen two major acquisitions by L&T driving company’s growth in thermal and nuclear power sector. Immediately after bagging the Rs 6897 crore order from Mahgenco- Maharashtra for 3 supercritical Boiler – Steam Turbine Generator Package of 660 MW capacity, L&T entered into yet another deal with Madhya Pradesh Power Generation Co. Ltd. (MPPGCL) on turnkey basis. This Rs 1635.30 crore Balance of Plant (BoP) contract was signed for two Coal fired plants of 600 MW each. L&T faced a tough competition from domestic BoP bidders for this project.

On the other hand, L&T plans to sell one-third of its 6.9% stake in Mahindra Satyam fetching them around Rs 304 crores. It is accounted as a strategic move to book profits as the markets recover.

Inflation surges to 1.34% in October

The new monthly index launched on 14th November, declared a 0.50% increase in the WPI-based inflation to 1.34% in October. Though the fruits and vegetables became cheaper by 11%, still the heightened prices of a few commodities including wheat and rice in the previous month highly affected the inflation. The fuel and power category also rose by 0.1 per cent during October, mainly due to higher prices of furnace oil (3 per cent) and bitumin (1 per cent).

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Value Investing: An Inside Perspective  

Posted by Team Niveshak

Neha Katyal
IMT Nagpur

Value Investing relates to selecting stocks which are under-valued in the stock markets. This under-valuation necessarily means stocks which are selling at less than their estimated fair price and not just any stocks selling at low price.

History

Benjamin Graham is regarded by many to be the father of value investing. The concept of value investing was given by Benjamin Graham and David Dodd in 1934.

Analysis Done for Value Investing

The indicators used for value investing, as given in “Security Analysis” by Benjamin Graham and David Dodd, 1934, are:

1. Price to Earnings ratio (P-E Ratio) should be at least double the AAA bond yield

2. PE ratio of the stock should be less than 40 percent of the average PE ratio for all stocks over the past five years

3. Dividend Yield > Two-thirds of the AAA Corporate Bond Yield

4. Price is less than Two-thirds of Tangible Book Value, where tangible book value is calculated as difference between total book value and value of intangible assets such as goodwill

5. Price is less than Two-thirds of Net Current Asset Value (NCAV), where net current asset value is defined as liquid current assets including cash minus current liabilities

6. Debt-Equity Ratio (Book Value) has to be less than one

7. Current Assets > Twice Current Liabilities

8. Debt is less than Twice Net Current Assets

9. Historical Growth in EPS (over last 10 years) > 7%

10. No more than two years of declining earnings over the previous 10 years

Other investors may indulge in estimation of future growth and cash flows. All these indicators help to identify the under-valued stocks which may be used for value investing. These are the stocks defying the efficient market hypothesis, that is, their market prices do not reflect all the information, existing or new, about the stocks in their market price.

En-cashing Upon the Opportunity

People using the value investing technique make money by buying the stocks of these specific companies when the market price is deflated and selling in the better times. As the intrinsic value of these stocks is higher than the price at which there are trading, these are available at a discount, the discount which later translates into the profit.

People without much experience in investing in the stock markets can use the value investing technique to their advantage by observing the P-E ratios and other indicators. As the stocks are available at less than their fair value, the novice investors can use the value investing technique to their advantage as in this they are able to keep a higher margin of safety, for probable errors. This defensive investment in stocks trading below the fair value acts as a safeguard to adverse future developments common in the stock market.

Precautions while using Value Investing

The investor may wrongly consider an under priced stock as undervalued as well leading to loss of investment. In a bear market, the price of all stocks are low, but that does not have to mean that all of them are undervalued as well and have high earnings potential over the investment horizon.

Value Investing in Current Scenario

The financial sector crisis in the US has seen stocks around the world tumble to levels, which were unthinkable less than a couple of years ago. In a market when most people would agree that the best strategy to play the stock market right now is to stay away from it, value investors, have a different view. The value investing philosophy suggests that the current condition provides an excellent opportunity to pick up shares at very cheap prices. Talking in Graham’s language, this could be one of the times when the market is unjustifiably pessimistic on a large number of stocks. This however, does not imply that all stocks should be bought just because they are trading at way below the bull-run highs. In every bear run, although there are stocks which fall due to genuine falls in their values, there are many which decline simply because of the widespread pessimism among investors. Obviously, the intrinsic value of the company does not swing with the mood of the investors. A large number of stocks consequently end up taking a huge beating without any rational reason and hence trading at huge discounts to their intrinsic value. Thus, every bearish phase brings about some excellent opportunities for the value investor to capitalize upon. In the later part of this article, we will evaluate the performance of some such opportunities provided at the end of the dot-com bust, over the subsequent boom in the Indian stock markets.

Conclusion

In practice, value investing is similar to deriving gains through arbitrage pricing theory, in that, it involves finding stocks which are under priced in a certain market. Using the value investing technique for creating a portfolio of stocks is a better option than buying only a few stocks. The creation of a portfolio may be done by a novice investor as well to reap the benefit of having a higher margin of safety and the obvious benefit of diversification of risk.

For using the value investing technique, the investor must ensure that proper valuation techniques have been used and no extra optimism has been shown. The evaluation may be done using simple fundamental analysis techniques such as Economy-Industry-Company analysis (EIC), estimating future discounted cash flows or may be studied in relation to the market using techniques such as Capital Asset Pricing Model (CAPM).

An assumption made while using the value investing technique is of the marketability of the security. It is assumed that the stock would be easy to sell at the end of the desired investment holding period as the prices of the stock would have risen, making it easy to book profits.


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Niveshak October Issue  

Posted by Team Niveshak in , ,

Dear Niveshaks,
As the Stock markets rallied in the later part of Samvat 2065 to kiss the 17000 mark on Sensex, the new financial year Samvat 2066 opened on a high note pushing both our benchmark indices BSE Sensex and NSE Nifty to 12 month highs. Hope this jubilation is a sign of things to come. With this hope and celebration in mind, we welcome you to Samvat 2066 and wish that we have a great year of Bull Run.
I still remember 6 months back, newspapers were full of negative economic and financial data from across the globe. Almost all the companies went into the negative income zone and had their shares trading at 12 months low. Countries were pushed to the recession and the brink of depression. Multinational Banks were writing off billions of dollars of bad debts quarter after quarter. We used to celebrate on even the slightest of any good news like any company coming out with positive quarterly earnings, but markets dint react much to such reports. Then we got reports on the whole of sectors recovering like positive IIP, then reports on recovery of whole of economies started to come. Most of these were intentionally created with forward statements to boost the morale of markets. Markets let some of these pass by and reacted heavily to others. We used to celebrate to all these.
But all of a sudden, today I feel that we are no longer searching for positive financial data on news sites. Market indices touching new highs every day has just become a part of the story. The same Banks and companies are making profits. M&A deals, which were either absent at that time or were forced by banks to help some companies survive, are returning with a bang. Have we matured or has this just been a part of life. We are now among reports that within the next two quarters, our financial markets will reach the levels that were prevalent just before the Sub Prime doom. We just hope that this current Bull Run prevails for at the least two more quarters’ so that we get the cheer & jubilation that once made the Wall Street and dalal street the most happening places of the world.
In the current edition we have a cover story on one of the most potent derivative instrument that was recently introduced in India- Currency Futures. Apart from this we have articles on Asset Management and allocation strategies, articles on the Bharti-MTN deal and the current state of Private Equity Industry of India. Hope this issue would prove to be an interesting read for you.

Stay Invested for the good times ahead.
Biswadeep Parida
(Editor-Niveshak)

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Niveshak September Issue  

Posted by Team Niveshak in , ,

The global financial system is reminiscing the fall of Lehman Brothers, the event of September 15, 2008, that shook the world economy and sparked the worst financial crisis in generations. A year after, world is slowly but surely coming out of its tremor. The markets across the globe are continuously scaling new heights every week, backed with strong fundamentals from all the sectors. Hence with some level of confidence we can say the financial systems around the world have stabilized and the economy recovery is on its way. Whether this has been possible due to the resilience of economies and financial markets or the prudence of policymakers who responded to the crisis with massive macroeconomic stimulus and other measures to prop up their domestic financial system is already a burning topic of discussion.

The Asian and European market is on upward trend which has been termed as “Cautiously Bullish”, is now waiting for the second quarter results of the corporate. The market sentiments and expectation across the globe has been positive for last three months, with almost all markets giving positive returns. The revival of US market and numerous signs recovery like positive home sales for the first time since 2007 and the growing of order book of manufacturing sectors have brought some cheers to the Wall Street. But the glaring fact which needs to be pointed is that the world is still looking up to US to pull the global economy from the crisis. China on the other hand is showing signs of recovering from the present crisis with the funding from government and bank lending. Today, China is one of the fastest growing economy of the world. We have covered this question whether China is the next economic superpower of the world and will overtake US is highlighted in this issue.

India’s GDP growth for the first quarter of 2009 stood at 6.1%. This exceeds the consensus estimates and an improvement from the last quarter growth which was 5.8%. Hence given the global downturn these figures have brought some cheers to the investors in the Dalal Street and also to the policymakers of the country. But the fiscal deficit at 6.8% of GDP is hot topic of discussion among policymakers and economist. It’s not that only India is facing its worst fiscal deficit in past decade, most of the countries across the globe are facing the problem of huge fiscal deficit. US fiscal deficit stood 12.3% of its GDP. Our cover story is in line with these issues and gives a perspective whether to worry about fiscal deficit and what implication it will have on the recovery from the current crisis.

We have also covered the topic of rising prices and falling inflation which have been making news every week. The basic of inflation calculation in India and the comparison of CPI and WPI method have been outlined. This issue also features the prospects of credit default swaps in India. An inside look into the Build America bonds have also been covered in this issue.

I am glad to mention that this is the beginning of second year of Niveshak journey and would thank all our well wishers for their support for making the Anniversary issue a huge success. We will constantly try to scale new heights. Now in the outset of the recovery of the world economy it’s even more important to track the global cues and be informed. Economists and experts across the global have already stated that it may be ‘V’ or ‘W’ or even square root shape recovery. So it’s the time to keep a watch on the Bull and Bear fight in the global market and support the Bull to win the race.

Stay Invested for the good times ahead.

Biswadeep Parida
(Editor-Niveshak)

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