Simple sounds make for sound investments

Easily pronounced stocks do better on the market.

For those of you struggling to pick a winner in the complex world of stocks and shares, help is at hand. A psychology study has found that, at least in the short-term, stocks with names that are easier to pronounce consistently outperform those with more confusing monikers.

According to Adam Alter and Daniel Oppenheimer, psychologists at Princeton University, New Jersey, it's all about fluency. When people try to understand complicated information, they tend to focus on the simplest parts. This means that people naturally favour things that are more fluent, and easier to think about.

To test whether this behaviour influences what people buy on the stock market, the duo asked a group of ten undergraduates to rate the fluency of 60 fictional stock names, according to how difficult they were to pronounce. Companies such as 'Hillard' or 'Barning' were judged fluent, whereas 'Xagibdan' and 'Creaumy' were classed as complex names.

A second group were then asked how they thought each of the stocks would perform. Perhaps unsurprisingly, they tipped the nicely named stocks for success.

Taking stock

So far, so what, you might say; these were fictional stocks picked by undergraduates with no stake in the matter and nothing much to judge the companies by. But the scientists argue that this roughly simulates the launch of completely new shares on to the market, when investors are unlikely to have much information about the company beyond its name, which could consequently become an influential factor.

To check, Alter and Oppenheimer did a second study looking at 89 real stocks that were traded on the New York exchange between 1990 and 2004. They asked 16 undergraduates to grade the fluency of the stock names on a sliding scale. Then they checked on the stocks' performance.

As anticipated, the more complex a share's name, the poorer it performed on the first day of trading. The effect appeared to wane as time went on; after 6 months, when more information about the stock was presumably available, the name alone couldn't be used to predict a single stock's performance.

But the overall impact on a portfolio of stocks was, in this case at least, substantial. Alter and Oppenheimer calculated how much a US$1,000 investment would have fared if it were invested in either the ten most fluent, or ten least fluent, shares. After just one day, the fluent portfolio was $118 ahead of the tongue-twisters; and after a year, it was US$333 up.

"It's a very large effect," says Oppenheimer, who reports the work in the Proceedings of the National Academy of Sciences ¹. But so far the researchers have only trialled one bunch of stocks, so it is unclear how robust this trend really is. "I'd caution people not to change their portfolio on this basis."

Shares pronounced up

One explanation might be that bigger companies simply have more marketing people to dream up a catchy title, or certain business sectors may naturally tend towards simpler, more pronounceable names. But after a thorough statistical analysis, the psychologists concluded that there was no link between a company's type or size and its stock performance.

To prove the point, the pair finally analysed how well companies performed on the basis of their three-letter stock ticker code, which a company doesn't determine itself. Amazingly, pronounceable codes such as KAR still tended to do much better than unpronounceable ones such as RDO. Once again, the pair invested their fictitious $1,000, and found that the fluent codes were $85 up on the first day, although the portfolio was just $20 ahead after a year.

Oppenheimer says that considering psychological factors such as name choices could help to improve economic models. Because shares are traded by human beings, he reasons, behavioural foibles will undoubtedly influence how the market works.

It sounds like a winning formula, but are Alter and Oppenheimer ready to bet the farm on snappy-sounding stocks? "No," says Oppenheimer. "I don't have the money to invest."

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Investing: The mirror says it all!

In making an investment decision, apart from returns, there is one more very important factor that weighs heavy on investors' minds - risk. Simply defined, it is the uncertainty of happening/non-happening of a certain event(s) that is likely to affect future returns.

A risk is generally attributed to external factors that create disturbance in the existing scheme of things. Some of these external factors are geo-political uncertainties (elections, terrorist attacks and wars), financial crisis and economic downturn. However, what stockbuyers generally fail to understand is that, apart from these external factors, there is one very big 'risk-factor' that is very inherent (or internal) to them. This internal risk is that of 'indiscipline'.

By indiscipline, we mean that stockbuyers tend to forget the basic scruples of safe and sound investing, as they are then lured by the high probability of earning 'a big bang for their buck'. In times when everything around seems promising and stock markets rise incessantly, discipline generally gives way to chaos. And this leads to even the best of investors putting their money into the worst of stocks believing that their invested company is the 'next big thing'. Ironically, as just these very times when stockbuyers need to stick to the fundamentals of sound investing, they seem to forget these (the fundamentals).

This is where the 'behavioral' aspect of investing gains importance. And this is the time when a stockbuyer, before making the next investment (say investment 'X') should look into a mirror, and ask certain strict questions to himself. First, he needs to ask whether he understands his investment 'X' as well as he thinks he does. This would include:

• asking whether the investor has enough experience of similar kind in the past. This is like, when an investor is thinking of investing in say, Tisco, he should ascertain what has been his previous experience with the company;

• asking what has been other people's track record in the past in making a similar kind of investment;

• ascertaining how much returns should his investment 'X' generate for him to break-even after his taxes and cost of making the investment. This would make clear the price that he would be ready to pay for the value of the investment 'X'.

Secondly, the stockbuyer needs to ask himself as to what would be his reaction in case his 'correct' analysis about investment 'X' goes wrong. This would then involve:

• asking whether he has adequately allocated his assets (into equity, debt, insurance) to tide over losses from his investment 'X';

• asking whether he has a track record of controlled behaviour (i.e. acknowledging that he made a mistake) or else he would be a part of the overall chaos when things go wrong;

• asking whether he is relying on a well-calculated approach and what is his tolerance level of risk. He could find out his tolerance level by studying his past losses.

Now, while the answer to the first question (i.e. whether the stockbuyer understands his investment 'X' as well as he thinks he does) would be indicative of the 'confidence' level of the stockbuyer, the answer to the second (i.e. what would be his reaction in case his 'correct' analysis about investment 'X' goes wrong) would speak about the 'consequences' in times his investment decision goes wrong. If the stock buyer has clear answers for all the abovementioned questions, he would only make his larger task (of making investment 'X') easier. Thus, before you (as an investor with a long-term horizon of 2 to 3 years) invest, make sure that you have pragmatically ascertained your probability of being right and as to how would you react to the consequences of being wrong. Always, look at the downside before the upside. And always, look into the mirror before investing! Investing: The mirror says it all!

In making an investment decision, apart from returns, there is one more very important factor that weighs heavy on investors' minds - risk. Simply defined, it is the uncertainty of happening/non-happening of a certain event(s) that is likely to affect future returns.

A risk is generally attributed to external factors that create disturbance in the existing scheme of things. Some of these external factors are geo-political uncertainties (elections, terrorist attacks and wars), financial crisis and economic downturn. However, what stockbuyers generally fail to understand is that, apart from these external factors, there is one very big 'risk-factor' that is very inherent (or internal) to them. This internal risk is that of 'indiscipline'.

By indiscipline, we mean that stockbuyers tend to forget the basic scruples of safe and sound investing, as they are then lured by the high probability of earning 'a big bang for their buck'. In times when everything around seems promising and stock markets rise incessantly, discipline generally gives way to chaos. And this leads to even the best of investors putting their money into the worst of stocks believing that their invested company is the 'next big thing'. Ironically, as just these very times when stockbuyers need to stick to the fundamentals of sound investing, they seem to forget these (the fundamentals).

This is where the 'behavioral' aspect of investing gains importance. And this is the time when a stockbuyer, before making the next investment (say investment 'X') should look into a mirror, and ask certain strict questions to himself. First, he needs to ask whether he understands his investment 'X' as well as he thinks he does. This would include:

• asking whether the investor has enough experience of similar kind in the past. This is like, when an investor is thinking of investing in say, Tisco, he should ascertain what has been his previous experience with the company;

• asking what has been other people's track record in the past in making a similar kind of investment;

• ascertaining how much returns should his investment 'X' generate for him to break-even after his taxes and cost of making the investment. This would make clear the price that he would be ready to pay for the value of the investment 'X'.

Secondly, the stockbuyer needs to ask himself as to what would be his reaction in case his 'correct' analysis about investment 'X' goes wrong. This would then involve:

• asking whether he has adequately allocated his assets (into equity, debt, insurance) to tide over losses from his investment 'X';

• asking whether he has a track record of controlled behaviour (i.e. acknowledging that he made a mistake) or else he would be a part of the overall chaos when things go wrong;

• asking whether he is relying on a well-calculated approach and what is his tolerance level of risk. He could find out his tolerance level by studying his past losses.

Now, while the answer to the first question (i.e. whether the stockbuyer understands his investment 'X' as well as he thinks he does) would be indicative of the 'confidence' level of the stockbuyer, the answer to the second (i.e. what would be his reaction in case his 'correct' analysis about investment 'X' goes wrong) would speak about the 'consequences' in times his investment decision goes wrong. If the stock buyer has clear answers for all the abovementioned questions, he would only make his larger task (of making investment 'X') easier. Thus, before you (as an investor with a long-term horizon of 2 to 3 years) invest, make sure that you have pragmatically ascertained your probability of being right and as to how would you react to the consequences of being wrong. Always, look at the downside before the upside. And always, look into the mirror before investing! Investing: The mirror says it all!

In making an investment decision, apart from returns, there is one more very important factor that weighs heavy on investors' minds - risk. Simply defined, it is the uncertainty of happening/non-happening of a certain event(s) that is likely to affect future returns.

A risk is generally attributed to external factors that create disturbance in the existing scheme of things. Some of these external factors are geo-political uncertainties (elections, terrorist attacks and wars), financial crisis and economic downturn. However, what stockbuyers generally fail to understand is that, apart from these external factors, there is one very big 'risk-factor' that is very inherent (or internal) to them. This internal risk is that of 'indiscipline'.

By indiscipline, we mean that stockbuyers tend to forget the basic scruples of safe and sound investing, as they are then lured by the high probability of earning 'a big bang for their buck'. In times when everything around seems promising and stock markets rise incessantly, discipline generally gives way to chaos. And this leads to even the best of investors putting their money into the worst of stocks believing that their invested company is the 'next big thing'. Ironically, as just these very times when stockbuyers need to stick to the fundamentals of sound investing, they seem to forget these (the fundamentals).

This is where the 'behavioral' aspect of investing gains importance. And this is the time when a stockbuyer, before making the next investment (say investment 'X') should look into a mirror, and ask certain strict questions to himself. First, he needs to ask whether he understands his investment 'X' as well as he thinks he does. This would include:

• asking whether the investor has enough experience of similar kind in the past. This is like, when an investor is thinking of investing in say, Tisco, he should ascertain what has been his previous experience with the company;

• asking what has been other people's track record in the past in making a similar kind of investment;

• ascertaining how much returns should his investment 'X' generate for him to break-even after his taxes and cost of making the investment. This would make clear the price that he would be ready to pay for the value of the investment 'X'.

Secondly, the stockbuyer needs to ask himself as to what would be his reaction in case his 'correct' analysis about investment 'X' goes wrong. This would then involve:

• asking whether he has adequately allocated his assets (into equity, debt, insurance) to tide over losses from his investment 'X';

• asking whether he has a track record of controlled behaviour (i.e. acknowledging that he made a mistake) or else he would be a part of the overall chaos when things go wrong;

• asking whether he is relying on a well-calculated approach and what is his tolerance level of risk. He could find out his tolerance level by studying his past losses.

Now, while the answer to the first question (i.e. whether the stockbuyer understands his investment 'X' as well as he thinks he does) would be indicative of the 'confidence' level of the stockbuyer, the answer to the second (i.e. what would be his reaction in case his 'correct' analysis about investment 'X' goes wrong) would speak about the 'consequences' in times his investment decision goes wrong. If the stock buyer has clear answers for all the abovementioned questions, he would only make his larger task (of making investment 'X') easier. Thus, before you (as an investor with a long-term horizon of 2 to 3 years) invest, make sure that you have pragmatically ascertained your probability of being right and as to how would you react to the consequences of being wrong. Always, look at the downside before the upside. And always, look into the mirror before investing

Movers & Shakers

• Larsen & Toubro inched up on bagging a consortium project worth Rs2,600 crore from IOC.
• Garware Offshore Services moved up on reports that the company has placed an order for the construction of one platform supply vessel with Norway-based Havyard Leirvik.
• Rajesh Exports gained on reports that the company has entered the elite billion-dollar club with revenues of Rs5,483.66 crore for the year ended March 31, 2006.
• Punjab Chemicals & Crop Protection, which got the board�s nod for the merger of IA&IC Chem and Pauraj Chemicals with itself, ended at higher levels.
• NIIT inched lower despite announcing the formation of an alliance with Sun Microsystems to introduce specialised education and training programmes.
• Tata Coffee ended marginally lower despite signing a marketing and selling agreement with Beeyu Overseas

Grapevine

FUND buying was seen in EIH, Mahindra & Mahindra, IOC, Infosys, TCS and HCL Tech while Nalco, Hero Honda, VSNL, ABB, Maruti and ACC witnessed fund selling.

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Infrastructure firms to triple investors' wealth

Fuelled by investments to the tune of US$ 308 billion in the infrastructure sector over the next 6 years, shares of companies in the sector could offer returns of 300 per cent by 2010 to investors, a report by financial services firm Edelweiss said.

The next wave of revolution in the country, 'grey revolution' would see an investment of Rs 14 lakh crore and companies in the sector would see a 2.7-fold growth in profits. Also, the combined market capitalisation of these companies would triple to $190 billion from the current $64 billion, the Edelweiss Infrastructure Report said.

"The need for infrastructure is more than an opportunity than a risk for the growing economy of our country. Infrastructure is now a national priority. The blueprints are in place and it is ready to take off. This is going to be a long story," Rashesh Shah, MD and CEO, Edelweiss said.

Edelweiss expects 87% of the investments to come from household and corporate savings and the balance from foreign direct investments. The infrastruture report is aimed at bringing out companies beyond the obvious beneficieries of this infrastructure boom.

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Hot Picks

Infosys Technologies
Research: UBS Investment
Recommendation: Buy
CMP: Rs 2,927 (Face Value Rs 5)
12-Month Price Target: Rs 3,700

UBS Investment Research recommended `buy' on Infosys Technologies with a target price Rs 3,700. Based on ramp-ups expected, Infosys could have 2-3 clients with engagement size of US$100m p.a. in FY07.

Ramp-ups could be led by financial services and telecom vertical. Problem clients that dented growth in FY06 have stabilised and are back in gradual growth phase. The management views scaling-up of large relationships favourably compared to price-sensitive large contracts.

While investors had questions on cost-side issues, UBS sensed that Infosys is comfortable with stable margins in FY07 as: (a) Salary increase to be nullified by G&A leverage, (b) HR issues are blown out-of-proportion, (c) Improving profitability of subsidiaries is one of the key EBITDA margin levers in FY07.

Overall, UBS found management confidence to be strong about growth and margins in FY07. Based on the analysis, UBS expect June quarter results to be stronger than expected.

Also, consensus EPS upgrades in coming quarters from current levels of Rs119/share of FY07 (compared to FY07 guidance of Rs116). UBS came back incrementally more positive on the back of this trip. The price target is based on a DCF analysis, using a medium-term growth of 22%, terminal growth of 3% and a WACC of 13%.

Crompton Greaves
Research: CLSA
Recommendation: Buy
CMP: Rs 1,003 (Face Value Rs 10)

CLSA put `buy' on Crompton Greaves as the net profit of the company Rs 163 crore for FY06 is in line with their estimates. All three business segments reported 20% revenue growth led by the power segment which grew by 38%.

Given the pick up in the pace of new generation capacity addition, the growth momentum will sustain and expect 30% earnings CAGR over the next two years. With the successful turnaround of Pauwels, Crompton may look to pursue new inorganic growth opportunities.

Crompton's power segment PBIT was up 63% in FY06 on the back of a strong 38% revenue growth and 137 bps improvement in PBIT margins. Industry division revenues and PBIT were up around 20%. The consumer segment, which has historically grown at 8-10%, too reported a 20% revenue growth on the back of construction boom and expansion in the product range.

Strong growth is to continue, though copper prices may hurt a bit. CLSA expects around 30% revenue growth in the power segment to continue for the next two years with the pick up in generation capacity addition and rural electrification drive (40,000 villages to be covered in FY07 versus 10,000 last year).

Industry division sales, too, are expected to grow at around 25% on the back of a pick-up in industrial capex.. However, the sharp rise in copper prices may hold back EBITDA margin expansion in FY07.

Given the good demand environment, Crompton should be able to pass on a large part of the price increase to customers but it may have to absorb some of the impact.

The company's management had earlier indicated that it would look at other acquisition opportunities, especially in the industry space, once Pauwels' turnaround is complete. The increase in the company's authorised share capital could be a precursor to that, since Crompton's normal capex can be met by internal cash generation.

Federal Bank
Research: Enam Securities
Recommendation: Outperformer
CMP: Rs 190 (Face Value Rs 10)
12-Month Price Target: Rs 260

Enam Securities rated Federal Bank as `outperformer' with a twelve month price target of Rs 260. The bank achieved an excellent all round performance in Q4. Credit growth remained robust at 33%. Deposit growth at 18% was also commendable and NIM was sustained at 3.2%.

NII growth of 54% resulted in 70% YoY growth in net profit in Q4. Yield on credit at 9.88% was almost same as the previous quarter and previous year. Even the yield on investments at 7.45% was down only 10 bps YoY and was flat QoQ. Cost of deposits at 5.1% was also almost flat both QoQ and YoY.

Operating expenses grew 31%, led by higher staff cost which rose almost 60% YoY in Q4. Higher provisioning for pension liabilities and some one-time expenses like higher ex-gratia contributed to the rise. The bank's provisioning for standard assets is now 0.7%, which is already in compliance with new RBI guidelines for standard assets (most banks will be complying by Q1FY07).

Also post-GDR, Tier-I capital is at 9.3%. The bank has still not taken IFR (investment fluctuation reserve) in the Tier-I capital but has already followed the Basel-II norm for the market risk. Including IFR, Tier-I capital would go up to 11.3%.

The bank has also effected a 50 bps rise in its PLR effective April '06. With almost the entire portion of the loan book linked to PLR, the bank is set to gain on the yield side. With a deliverable ROE of 20%+ for the next two years, valuation at 1.1 times FY07E is very attractive.

Karnataka Bank
Research: India Infoline
Recommendation: Buy
CMP: Rs 99 (Face Value Rs 10)
12-Month Price Target: Rs 134

India Infoline recommended a `buy' for Karnataka Bank with a year's target price of Rs 134. The bank's 27% growth in net profit for the forth quarter of FY06 was above the expectation of 20% and the upside was a result of lower operating expenses. Credit growth was in line with an expectation of 24%.

The bank is well placed in a rising rate scenario as it has ample liquidity to fund its credit growth, without having to strain deposit cost. At current valuations of a mere 0.9 times and FY07E adjusted book value, the bank is grossly undervalued.

India Infoline maintains the `buy' rating on the stock with a price target of Rs 134 implying a target price/adjusted book value of mere 1.3 times, an upside of 49%. 20.8% of net interest income growth drove home net interest margin of 2.75%, down by 7 bps. However, this was on expected lines. India Infoline expects margins to expand rapidly in FY07 and FY08 driven by stable liquidity and growing advances yield.

Employee cost was down by 47% in Q4 FY06 as the bank made lower provisions for employee benefits. As a result, operating costs reported a drop of 20.3%.

This helped the bank improve its profitability from the above-expectation of 20.1% to 26.7% Despite many of its peers reporting profit growth volatility, KTK Bank has managed to report a steady profit CAGR of 31.1% over the past five years without any dip.

The bank is expected to report an ROE of 17.5% in FY07 and 17.9% in FY08; stacking it amongst the better ROE banks in the sector. India Infoline have revised their profit estimates by 6% and 5.5% in FY07 and FY08 respectively.

Prime Focus: Invest at cut-off

Investors with a long-term horizon and an appetite for risk can consider the initial public offer of Prime Focus, a leading player in post-production and visual effects.

New genre of films that require a higher degree of technical expertise, the launch of TV channels and programmes, the increase in advertising spending across sectors, and the outsourcing of post-production work by international film houses are the sub-plots of a script that spells opportunities for players in this segment.

Prime Focus, in expanding its presence both at the national and international levels, appears well-placed to garner a greater share of this business.

Valuation and risks

The Rs 450-500 price band values the offer at 38-42 times its annualised per-share FY-06 earnings, on an expanded equity base. Our recommendation is based on a long-term outlook and is not linked to gains upon listing. We believe that, given the bright prospects, Prime Focus is likely to trace a high growth trajectory over the next three-four years.

While the company is expanding its reach, revenues from newer markets are likely to trickle in gradually, as it will take time to build its reputation, especially at the international level. In the medium term, higher depreciation expenses, which now account for 10-12 per cent of sales, could also temper earnings growth.

Prime Focus derives about 50 per cent of its revenues from films. It may, however, be among the safer plays in the entertainment space, relative to production houses or multiplexes, as its fortunes are not linked to the success or failure of films.

Bigger role for films

Prime Focus offers a range of post-production services, including visual effects, high-resolution film scanning and recording, offline and online editing and Telecine (the process of transferring motion pictures into the electronic form, enabling it to be viewed on television, video or on computers).

The company boasts of a state-of-the-art technological infrastructure, which makes it one of the preferred players for post-production, be it for films, TV commercials or television programmes. It also rents equipment which, given the current boom in the industry, is likely to remain a highly lucrative business.

Changes in Indian cinema are likely to benefit the company; the contribution of films to its revenues has been steadily increasing.

The multiplex age has, more often than not, rewarded movies are a visual treat. Indian film-makers are also on experimenting mode, with the traditional love stories giving way to murder mysteries, action films, horrors and grand dramas

The role played by post-production in the making of a successful Indian film has never been stronger. Prime Focus has been associated with films such as Gayab, Black, Sarkar, The Rising, Darna Zaroori Hai and Fanaa.

It now hopes to gain a share of the South Indian film industry as well. Prime Focus has set up a studio in Chennai; operations are to commence shortly. The proceeds of the offer will partly be used to set up another visual effects and animation facility in Mumbai and a studio in Hyderabad.

A big name in Mumbai's entertainment industry, it is sure to make its presence felt in the South as well.

Shooting for outsourcing

Prime Focus has its eye on international markets as well. Overseas production houses and special effects studios are beginning to outsource work to cut costs.

India has been attracting attention on this front, especially in the field of animation; post-production outsourcing, however, is still at its infancy.

The cost-savings from such outsourcing is put at a high 60-70 per cent. Prime Focus hopes to capture a share of the outsourcing opportunity by setting up studios in hubs such as London, Los Angeles and Dubai.

It recently acquired for about Rs 35 crore a 55 per cent stake in VTR Plc, a London-based studio with revenues of £20 million. This will provide the company access to some British clientele in the immediate future.

Prime Focus will also be able to cut costs substantially by outsourcing most of the post-production work.

This can help turnaround VTR, which is now making losses. Prime Focus is also at an advanced stage of acquiring a studio in Los Angeles.

Studios in these hubs are likely to commence operation in the first half of FY-08. It may be a while, however, before these ventures begin to pay off in a big way.

Investors would have to hold on to the stock for a longer period, before it unlocks value.

Financials: Prime Focus has a revenue base of Rs 35 crore. Revenues and profits have grown at a compound annual growth rate of 30 per cent and 50 per cent respectively. The operating margins are at about 55 per cent; they tend to fluctuate due to last-minute discounts, rebates and bad debt write offs.

Offer details: About 22 lakh shares are on offer. Prime Focus would raise between Rs 88 crore and Rs 110 crore from the offer. The promoter's stake, post-offer, will be about 55 per cent.

Adlabs and Reliance Capital hold 4.67 per cent and 14.5 per cent respectively. The offer closes on May 31. The lead managers are Centrum Capital and ICICI Securities.

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Strong earnings growth may provide downside protection

A major correction was always round the corner on the domestic bourses after a solid run up in share prices that was witnessed over the past few months. Excessive leveraging by traders and retail investors provided the trigger for correction when FIIs pressed heavy sales as global emerging markets witnessed a sell-off. As the weakness in the market triggered off a series of margin calls, brokers and banks were forced to liquidate positions of retail investors that could not meet margin payments.

Analysts feel that the fundamentals of the Indian corporate sector remain strong and strong corporate earnings growth would limit downside on the domestic bourses. The macro growth outlook for India remains strong, supported by structural factors like robust domestic consumption to a healthy take-off in the capital expenditure cycle. Favorable demographics with large young population will drive consumer demand.

In fact, Indian companies are better place than their Asian counterpart to weather global upheavals given that they don't rely excessively on external demand as a source of growth.

However, some more correction in near term may not be ruled out given that the rally has been quite steep over the past few months

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Banks: After an eventful FY06...

Better economic growth, relatively lower interest rates, capacity expansion by corporates, retail credit penetration and technological upgradation are factors that have facilitated the banking sector's 'dream run' so far. In the initial years of this decade, with the spiraling bond prices, banks could afford 'lazy banking'. Later on (2004 onwards), the highest credit growth in two decades, net interest margins and asset quality comparable to global standards and extended reach, more than made up for the treasury losses.

• Exponential growth: A consistent year on year growth in incremental credit disbursals of more than 30% persuaded banks to lighten their treasury portfolios and concentrate on the higher yielding advance book.
  
  

• Not just retail...The growth was not just in the retail segment (especially mortgage loans) but also in the corporate book (primarily SMEs). The corporates who initially borrowed only for working capital purposes, gradually sourced capital for capex also, as overseas borrowing became expensive.
  
  

• Margins at the zenith: Higher demand for credit coupled with low cost of deposits enabled banks to extract a very attractive spread (interest income less interest expended). The average NIMs of above 3% in FY06 are almost comparable to that of the banking sector in the developed countries.
  
  

• Marked improvement in quality: The asset quality of Indian banks has shown a remarkable improvement over the last 5 years, wherein average gross NPA levels have shrunk from the highs of 11% in FY02 to 3% in FY06. Also, banks that enjoyed high treasury gains, utilized the same to write off the stressed assets from their books. Of late, the secondary market for stressed assets has further facilitated banks to offload the bad assets.

Nevertheless, we reckon, that the route forward is not as rosy for the players in this sector.

Here on...
Going forward, we perceive certain encumbrances that may handicap the ability of the players in this sector to enhance their profitability.

• High base effect: With the larger banks in the sector now having attained a sizeable asset book, the growth hereon with be at a lower clip due to the high base effect. While we are not trying to negate the possibility of future credit growth being robust, the YoY growth in percentage terms (as against absolute terms) is expected to be lower. Also, the fact that interest rates charged across asset classes have seen an upward revision over the last couple of months, may discourage potential borrowers.
  
  

• Margin pressures inevitable: With interest rates headed northwards (impact of rising global interest rates weighing heavily), banks have been compelled to raise funds at higher interest rates to meet the incremental credit demand. However, the time lag for passing on the rate hike to the customers is typically 6 to 9 months. This has started squeezing the net interest margins for players across the sector and we see the margin pressure continuing, going forward.

Investors should look for...

• Attractive valuations: The valuation parameter typically used for banks is price to adjusted book value. Unlike other sectors, a bank's asset is cash and the ability to grow the topline (interest income) is therefore, largely dependent on the capital base (net worth in a broader sense). Therefore, rather than price to earnings ratio, the price to adjusted book value (book value less net NPA per share) is more relevant while valuing a banking stock.
  
  

  Besides this, investors could also look at some of the unconventional parameters such as net interest income per share and net NPA per share. While the former is to banking what sales per share is to manufacturing, net NPA per share could be considered as erosion from the book value per share. Similarly, the price to pre-provisioning profit (PPP) per share multiple would be similar to the price to EBIDTA valuation used for manufacturing companies.
  

  FY06	P*/ ABV (x)	P*/ PPP (x)	NII/ share (Rs)	Net NPA/share (Rs)
  HDFC Bank	4.8	12.0	81.3	4.9
  ICICI Bank	2.3	10.4	47.8	11.7
  UTI Bank	3.1	8.3	38.7	5.6
  SBI	2.1	4.1	297.1	89.5
  OBC **	1.1	5.9	64.1	5.7
  Corp Bank	1.3	3.9	85.5	10.0

  * Considering prices as on 25th May 2006
  ** For OBC the pre-provisioning profits are net of the extraordinary write-offs.

• Dividend yield: Investors must also look out for a regular dividend history and an attractive dividend yield that can provide them with a regular income stream at times when capital appreciation is not commensurate with expectations.

Not undermining the banking sector's ability to capitalise on the superior growth prospects of the Indian economy, what we would like to point out to investors, is the fact that the historic growth levels seen so far are not sustainable. Also, the future growth prospects will be subjective and dependent on a bank's scalability, operating efficiency and competitive edge, more so once the sector opens to foreign players in 2009. Investors, must therefore, take their decisions based on critical evaluation of the parameters as mentioned above.

Sharekhan Commodities Buzz

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Jain Irrigation & Bharat Bijlee

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SSKI - Biocon

SSKI - Biocon - Outperformer - CMP >  405 Target > 558

SSKI - Sasken

Outperformer - Target - Rs. 426

SSKI - Vaibhav Gems

Outperformer - Target - Rs 585

Motilal Oswal - Titan Industries

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Prime Focus Ltd

Solid growth prospects, but aggressive pricing

Prime Focus (PF) is one of India's techno-creative leading end-to-end post-production and visual effects services house. The company offers a comprehensive spectrum of services ranging from visual effects, digital film lab (digital intermediate, high-resolution film scanning and film recording), telecine, editing, and motion control to High Definition (HD) production. Currently, it holds 85% of all films undergoing process. PF caters to the commercials, features film and television segments.

Adlabs Films is a Strategic Partner, holding 482,000 shares (3.8% to 3.9% of the post equity capital) of Rs 10 each of PF. Incidentally the effective cost of acquisition for Adlabs Films was Rs 96.80 per share. Their relationship extends into business alliance agreement wherein the terms give PF a non-transferable, non-exclusive right and license to use the Name/Brand of Adlabs Films in consideration of royalty of Rs 12,80,000/- per annum.

PF operates at Santacruz, Mumbai, Royal Palms, Goregaon and Raghuvanshi Mills, Lower Parel, Adlabs premises at Goregaon, Mumbai & Vijaya Labs, Chennai. Most of the premises are owned by the company, some by its directors and couple of them by Adlabs. The company employs 273 personnel with 141 creative staff & 132 non-creative staff.

PF has acquired 55% of the share capital of VTR Plc, listed on the London Stock Exchange, totaling to 13,491,561 ordinary shares of 5 pence @ 35 pence per ordinary shares, amounting to a purchase price of GBP 4.7 million with GBP 4.2 million in cash & GBP 0.50 million in equipment. Currently, its shares are trading at 28.5 pence in London Stock Exchange, which is at about 19% discount to the PF's purchase price. VTR Plc provides services to the media industry with 20 years of post-production experience and is involved in post-production and graphic design for broadcast, commercials and promos sectors. The main focus on the acquisition is to enter in the UK market, London a key advertising market.

The Issue proceeds are to be utilized to finance the following: -

1. domestic expansion (service commencement April 2007)
2. acquire existing studio in Los Angeles, the main business center for film-based production (service commencement April 2007)
3. London studio (service commencement April 2007)
4. set up studio in Hyderabad to tap south market (service commencement September 2006)
5. fund long term working capital
6. set up studio in Dubai (service commencement July 2007)
7. issue expenses.

Strengths

• PF is the market leader in the post-production visual effects, especially for films, except in the Southern Region. Now the company also plans to enter the Southern region market as well, by setting up a studio in Hyderabad.

• The Indian Entertainment Industry stands at Rs 20,000 crore currently and is expected to grow at the rate of 18% per annum. The average budget for postproduction and visual effects is expected to be 15-25%. PF which provides a wide range of post production and visual effect services under one roof will be able to secure a sizeable piece of the pie with only 2-3 players offering such services under one roof.

• Setting up shop in Los Angeles, London & Dubai will enable the company to explore the international markets as also to explore the possibilities of outsourcing of services.

Weakness

• The collection period for PF is 90 days that gets stretched to 120 days that in turn leads to high receivables. Bad debt write off accounted for Rs 1.13 crore (5.61% of sales) as on March 31, 2004, Rs 0.89 crore (2.85% of sales) as on March 31, 2005 and Rs 0.84 crore (2.87% of sales) as on December 31, 2005. However, bad debts totaling to Rs 0.63 crore were recovered during the period ended December 31, 2005.

• On a consolidated basis, VTR Plc (subsidiary of PF), reported 18% fall in turnover to GBP 9.59 million in the six months ended February 2006. During this period, the performance deteriorated and the company reported loss after tax of GBP 0.52 million compared to a profit to GBP 0.30 million in corresponding previous period. The consolidated net worth of the company stood at GBP 4.66 million (GBP 6.15 million corresponding previous period).

• PF has to report consolidated numbers from the current fiscal. The losses of VTR Plc will eat into the profits of the stand-alone entity. The net profit for the nine months ended Dec'05 of PF is Rs 11.04 crore, while the net loss of VTR Plc for the six months ended Feb'06 is Rs 4.03 crore! Hence, much depends on the ability of PF to quickly turnaround VTR Plc and benefit from synergy in operations, which it believes to be immense.

• The mega expansion plans slated by the company will start realizing gains only in 2007-08 since the time frame for commencement of services in all location except the Hyderabad studio is proposed to be April 2007.

Valuation

The nine months annualized EPS of (stand alone) PF is Rs 10.43 / 10.22, which discounts the offer price by 48 times at the higher end and by 44 times at lower end. There is no other listed player for comparison, the biggest unlisted player being Prasad Studio. However, the Entertainment Industry PE taken as a basket is 54.3, but this again is not comparable taking into account the services rendered and the size of the company, which is at the moment mid-sized. Also, ballooning losses of VTR Plc will bring down the consolidated EPS.

The year end for both VTR and PF are different, and they have disclosed unaudited results for different periods, with the former having disclosed results for the six months ended February 2006 while the latter has disclosed the results for the nine months ended December 2005. Assuming steady stream of revenues and profits, based on the latest available financials of both the companies, we find that the consolidated P/E to be in the range of 65 to 74 times (depending on the offer price) the annualised consolidated earnings, which appears to be on a higher side.

On the positive side, the company has a basket of services covering the entire range of post-production and visual effects, and claims to be a market leader in India, except in South. With entertainment sector set to witness accelerated pace of growth, by virtue of its leadership and expansions, PF is ideally placed to optimally capitalise on the growth. But it is equally critical for the company to quickly turnaround VTR Plc and derive operational and business synergies therefrom, lest it's consolidated profits will not reveal its operational prowess. In this context, the offer price in the range of Rs 450 to 500 per share, appears stiff

Bangalore Maha Rally

Maha Rally on 28th May (Sunday)

Time: 9:30 AM
Venue: starts at Chiklalbagh (near Majestic), concludes at Banappa Park

This will be the BIGGEST rally so far in Bangalore with five to ten thousand protestors. We will make it peaceful and conclusive.

Contact persons:
Kumar Gaurav (IITK alumnus; 9341018993, kgaurav.iitk@gmail.com)
Subodh Kumar (IITKGP alumnus; 9342104597; subodh.kgp@gmail.com)
Anurag Arora (Bangalore Medical; 9844140125)

Prime Focus - IPO

Background:

• Prime Focus Ltd. (PFL) was incorporated in 1997 as a Private Limited Company by the merger of proprietary concerns of its directors viz. Video Works' of Mr. Naresh Malhotra and 'Video Workshop' of Mr. Namit Malhotra. The company was converted into a Public Ltd. in April 2000.
• PFL is an integrated company providing end-to-end post-production and visual effects and digital intermediate services.
• The company has a studio in Mumbai and a facility in Chennai has been commissioned to cater to South Indian film market.
• Adlabs Films Ltd. is a strategic partner in the company with 4.67% of shareholding while Reliance Capital Ltd. holds 14.53% shares.
• PFL derives revenue from Films, Ad Films and Television & Music Videos. Revenue contribution from Films is maximum and has increased year on year. The same has grown at a CAGR of 74.34% from FY2001 to FY2005. CAGR for revenue from Ad Films and Television & Music Videos i15.33% and 9.9% respectively for the said period.

Object Of The Issue

PFL intends to raise Rs.100 crore from this issue. There shall be a green shoe option (GSO) of Rs.15 crore, aggregating the amount to Rs.115 crore. The objects are:

• Finance Domestic expansion.
• Setting up high and digital studios at Los Angeles, London and Dubai.
• Setting up a studio at Hyderabad.
• 
  
General Corporate purposes, meet working capital requirements and expenses of issue.

Strengths

• PFL is geographically expanding its business. It has drawn up plans to setup the latest technology kit, to service the local markets in London, Los Angeles and Dubai, and to take advantage of its backend visual effects and animation facility in India. This would create a unique position for the company at a global level.
• This move is aimed at building up outsourcing business from these markets. London and Los Angeles are the key markets in the field of post-production and visual effects. Los Angeles is the main business centre for film based productions whereas London provides access to key advertising markets. The UK government is also offering tax incentives. PFL has identified Dubai as a potential market. The Dubai government has laid down plans for setting up of Dubai Studio city. The Dubai Studio city would provide several incentives such as good infrastructure, tax free zone, availability of cheap power to studios and production houses. PFL foresees great potential to be reaped from outsourcing & having a presence in the respective local markets. The company would have the early mover advantage to tap a fair market share and would also benefit from cost savings.
• PFL has recently acquired a 55 % stake in VTR Group, a 20 million pound, UK-based media services company with over 20 years of post-production and visual effects experience. The stake has been acquired at an estimated cost of 4.7 million pounds (approximately Rs.39 crore) where 4.2 million would be paid through cash and balance would be for buying out equipment. PFL has taken a bridge loan of Rs.35 crore from Reliance Capital Ltd. against the Issue proceeds, for a period of 30 days at an interest @ 9% p.a. The acquisition will lead to Namit Malhotra, Managing Director of PFL, to join the VTR board as chairman, while PFL's chairman Naresh Malhotra, and director Rivkaran Chadha would be appointed as non-executive directors on the VTR board.
• PFL is also focusing on expansion in the domestic market. It is setting up a studio at Hyderabad, one of the fastest growing film markets in the South India. With studios at Hyderabad, Chennai and Mumbai, the company will be diversifying its risk across different geographical markets, each of which goes through its own cyclical phase of up and down, thus ensuring that PFL will not be subjected to the swings of a single geographical market.
• The Indian entertainment industry, largely comprising films, television, music, radio and live shows stands at over Rs.20,000 crore today. It is expected to grow at a CAGR of 18% per annum over the next five years to reach over Rs.45,000 crore.

Weaknesses:

• PFL has long collection period. Average Collection period from FY2002 to FY2005 has increased from 88 days to 126 days. Besides, the company faces the risks of incurring bad debts. Bad debts written off during FY2004 and FY2005 are Rs.113 lakhs and Rs. 89 lakhs respectively. The same being 5.53% and 2.77% of income for the said period. Bad debts written off for nine months ending 31 st December 2005 are Rs.83.5 lakhs being 2.49% of income.
• VTR Plc., in which PFL has acquired 55% stake has posted losses amounting to Rs.5.26 crore and Rs.3.77 crore for the previous two financial years ending on August 31, 2005 and August 31, 2004 respectively.

Valuation:

• PFL's income and profits have grown at a CAGR of 29.95% and 49.22% from FY2001 to FY2005 respectively.
• Return on Networth for PFL as in FY2005 is 26.58%. Book value for the same period is Rs.35.15 per share.
• EPS for FY2005 is Rs.9.34. Post issue EPS if the GSO is exercised will be in the range Rs.11.4 to Rs.11.6, else it would be in the range of Rs.11.7 to Rs.12 for a price band of Rs.450 to Rs.500. Post issue PE will be in the range of 39 – 43 if GSO is exercised, else it would be in the range of 38 – 42 for the price band.

Citigroup - Ashok Leyland

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Youth 4 Equality - Bangalore

Please visit http://www.savebrandindia.org

Maha Rally on 28th May 2006 (Sunday) in Sync with protests ALL over India Time and Venue to be declared soon

Nomura View (Brief)

Market consensus has acknowledged that the Indian equity market was in need of a "healthy correction". While the macro problems of running both a deteriorating current account deficit and a fiscal deficit have yet to be adequately addressed, private sector credit has become increasingly dependent on fund flows. With a negative basic balance of payments, the credit system appears much more susceptible to an external shock. At the same time and apparently unbeknown to investors, the degree of financial leverage (open interest of derivatives) relative to equity market capitalisation has risen from five times to 20 times over the past 20 months, creating considerable systemic risk for investors in an economy with an open capital account. We feel investors are being betrayed by high earnings growth projections and macro risks are being ignored. Equally, the large issuance of equity by companies looks set to dampen ROE — normally a good indicator of a peaking in equity markets. We believe Indian equities have far further to correct compared to regional peers, and thus remain Bearish, with a lean towards Taiwan as an alternative.

DILLI AAO, DESH BACHAO 28th May

Sunday, May 28, 2006 : This appeal is made to all Indians who feel betrayed by the Union Govt's decision to enforce reservations for OBCs.

DELHI AAO, DESH BACHAO - Lets show our might to this autocratic regime by collecting at Delhi on 28th May 2006. This government has to be shown a taste of our strength. Please come in numbers that are as large as possible. We want to raise such a voice in Delhi, that even our senile, deaf leaders can hear.
This protest will be completely peaceful. JOSH MEIN HOSH MAT KHO BHETHO. Remember, we are NON-VIOLENT - NON-POLITICAL - UNITED
JAI HIND!

For details please keep visiting this site

Youth 4 Equality

Site has Changed

http://www.youth4equality.org

Suzlon - Equal Weight - MS

Morgan Stanley - Suzlon

CMP - 1227
Target - 865

Valuations: At Rs 1,228, SEL trades at P/E of 26.6 and 21.2 times our F2007 and F2008 estimates. We retain our earnings estimates over F2006-08. While the growth momentum is strong, we believe that that's captured in the current valuations and hence retain our Equal-weight
rating. For F2006, SEL would be paying dividend of Rs 5 per share to its equity shareholders and Rs10 per share to  its preference shareholders

Bajaj Auto

ENAM - CMP: 2873 Target: 3300

PLIndia - Market Outperformer

SSKI - CMP: 2873 - Outperformer - Target: 3451

Is there a `foreign angle'?

The Morgan Stanley Emerging Market Index has been declining since May 10, when the US Fed raised the interest rate and signalled further rise.

---

The current market crisis could be handled better if it is viewed against developments in global markets. First, the world commodity and bond markets were impacted and then the bourses.

---

What has happened since May 18 is nothing short of butchery at the bourses. In three trading sessions — on May 18, 19 and 22 — the Sensex dropped by 1300 points. It was galling that the Sensex, which dazzled market analysts when it hit the peak of 12,612 on May 10, has been winding down since. When it hit the peak, they assumed that the market was defying gravity and there would be no roll back. They also seemed unaware of the developments in other markets of the world.

Fear of inflation and anxiety over the policies of the US Federal Reserve (Fed) began to stalk the markets. Though the Fed chief, Prof Ben S. Bernanke, raised the rate to 5 per cent on May 10, financial markets remained sceptical about his commitment to fighting inflation even as the dollar was depreciating. As Buttonwood (The Economist, May 16) analysed: "The fear rippling through Asia... was that the Federal Reserve might find itself with a classic inflation scare: faced with a tumbling dollar and rising bond yields, it might have to raise rates higher than it would otherwise have done."

Worm in the apple

Higher rates would exacerbate the global financial imbalances by reversing flows, driving Asian surpluses away from dollar assets, upsetting balance-sheets, pricking the housing bubble, lowering US consumption levels and slowing its growth, hurting Asian exports. To many, these concerns may appear irrational, but the worm had entered the apple.

Indeed, faith in the value of the dollar was critical to the current global financial balance. Asian surpluses could finance the US' twin deficits and, as some economists describe, sustain a new Bretton Woods II.

Many others wondered whether faith in the dollar would endure long. Unfortunately, at some point, especially since April, that faith has been shaken.

On May 12, the dollar slumped to its lowest level since October 1997 against the euro, the pound sterling, the Swiss franc and the Japanese yen, losing 6-8 per cent since April. In turn, they brought down the value of the currencies of Brazil, South Africa, Turkey and Hungary. Iceland and Australia were wrecked too. As reported by financial papers, carry trade investors such as hedge funds began to cut their exposures to "emerging markets amid rising volatility in the leading currencies in which they borrow and mounting risk aversion as concerns over inflation increase" (Financial Times, May 13).

Carry trade contagion

Carry traders borrow at, or near, the 1 per cent overnight rate set by the Fed and invest in multi-year notes and bonds that yield high profits. The former Fed chief, Mr Alan Greenspan, lowered the Fed rate 13 times since 2001 to mid-2003 from 6.75 per cent to 1 per cent.

In 2002, it was negative when adjusted against the inflation rate. The carry traders were awash with liquidity provided by the Fed at historically low rates. Carry trade spread to all markets such as currency, commodity, equity and bonds.

Much of the equity to emerging markets was through carry trade. In India, the equity was provided through the portfolio route operated by foreign institutional investors (FIIs) and Participatory Notes (PNs). It was no coincidence that capital flows surged after 2002-03. Apart from the interest differential, the tax exemption given to investors attracted further inflows.

FII flows reached $10.70 billion in 2005 and were expected to scale higher levels in 2006. In tandem, the Sensex rose from 6,000 points in January 2004 to 12,612 on May 10, 2006. Financial prudence should have suggested circumspection and concern whether the trend would hold. Sadly, it was taken as a badge of honour or testimony to India rising as an emerging giant.

To get back to the fears of other markets. On May 15, Bloomberg reported that the Morgan Stanley Capital International Emerging Market Index, which tracks shares in 26 developing markets, plunged to 759.26 on Monday. The index, in fact, had started declining since May 10, when the Fed raised the interest rate and signalled further rise. This gave rise to fears that if the Fed kept hiking the rate, money would start flowing back to Treasuries.

The Latin America index also fell by 2.8 per cent on top of an earlier drop of 3.6 per cent. The commodity market began to tumble. There were also jitters in the bond market. Running through all these were the withdrawal symptoms of the carry traders.

Impact across markets

If the Fed has raised the rate to 5 per cent and threatened to hike it further, it took the bottom out of the carry trade. In the Greenspan years of cheap money, they had over-reached themselves and taken excessive or indiscriminate risks.

In the changed context, they would have to unwind and rebalance their positions. The reverberations of such unwinding were felt across all the markets and segments, beginning with currency and extending to commodities and equity. It was just a question of days before it hit Indian shores.

Their honeymoon with emerging markets is over as developments there are now seen to be volatile and unpredictable. As Landon Thomas Jr. explains, though the earlier crises in Mexico, Asia and Russia might have been due to faulty government policies, "the pandemic nature of these blow-ups was deepened by the panicked selling of unsophisticated investors" (The New York Times, May 18).

Perhaps, what was witnessed in the Indian bourses was an extension of this frenzy. Referring specifically to India, he adds that "... a market that has shot up 141 per cent over the last two years... some of the largest shareholders of top Indian companies are American mutual fund companies like Janus, known more for its momentum style of investing than for its emerging markets expertise... " The current crisis in our bourses may be handled better if it is viewed in the context of developments taking place in other global markets.

Tax implication

Though the Finance Minister blamed `rumour-mongers' and explained how the draft circular of the Central Board of Direct Taxes (CBDT) did not envisage any change in the status of the FIIs or propose additional taxes, all investors are aware of the tax implications of their operations and have safeguarded against them through suitable tax shelters.

Indeed, a lot was said about the global factors but not wholly convincingly. Recent developments must not be seen through the narrow prism of the stock market requiring correction.

It is a major economic issue with implications for sustaining the rupee rate, management of foreign exchange reserves, etc. In particular, the government needs to clarify whether it will continue to keep faith in the FIIs, a la Lahiri Committee, or if there will be a rethink to bring about financial stability in the coming years.

(The author, a former Finance Ministry official, has experience in international, financial and trade issues.)

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Kotak - GVK Power

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Ashok Leyland - Stock Idea

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One more :-)

Vivek :)

Bush to Manmohan Singh: So do all of them go through the regular high fitness training programme for selection ? Singh: We have relaxed the standards for the reserved category. Just walking for 5 steps on a potholed road in Bangalore is sufficient.

Why the Left is right, but sort of wrong...

Red was the dominant colour and theme across India for much of last week. The reality of the election results in four states in which the "reds" gained more power slowly began feeding its way into policy statements on how not to raise oil prices and to continue to subsidise a range of Indian oil consumers in a bizarre way.

But red was also the colour of the victory flag as the Tata group announced that their revolutionary project for introducing a car that costs less than Rs 200,000 (USD 4,600) will be manufactured in a factory in West Bengal – probably one of the longest communist-ruled areas in the world after China, Cuba, and North Korea.

Red was the colour of blood on Dalal Street as bulls, fabled to charge towards red, and seemed to run away from it in haste. And red were the comments made by the Communist Party when they challenged conventional perception and made some very intelligent comments on why India's capital markets needed a strategic re-think.

While a myriad of experts and commentators were looking for the usual suspects of vague tax circulars, vaguer hints of some ominous syndicate that was acting in concert to bring share prices down and impoverish the country for personal profit, littered with some panic-stricken statements on how the heavens were falling. (Did anyone ask for an investigation when the market was galloping ahead? Human nature, I guess – everyone loves wealth creation irrespective of how and why.) But while the witch-hunting and shadow-boxing was gamely on display, the Communist Party of India (Marxist) broadly said that the recent rout in the stock markets in India was due to global factors. Spot on!

The CPI (M) then went on to say that India should start taxing capital gains and suggested that this Double Taxation Agreement treaty with Mauritius should be revamped. Capital gains taxes, said the CPI (M), are charged by other countries and capital still flows in, so why should India not have this tax on capital gains? The capital gains tax was recently reduced to zero from 10% on long-term gains (securities held for more than one year) and to 10% from 30% for short-term capital gains.

Well, the left is sort of right but wrong on this one. India must have a tax regime that suits its objectives. On the assumption that the CPI (M) wants a better life for its comrades, India will need to build more power plants, more roads, more schools, and more hospitals for our growing population over the next few decades. And that will cost hundreds of billions of dollars which cannot be financed from domestic savings. So, whether we like it or not, we need to use external capital for this massive build-out to make every comrade's life a lot better.

Now the key question: what kind of money should we attract? The answer: patient, long-term money to build long-term infrastructure and businesses. And this is where there has been, in my humble opinion, a policy disconnect.

The fact is that there is over US$ 16 trillion (some 20x India's annual GDP) with the pension funds of the developed world and India needs probably 5% of that over the next decade. But that money takes time to come to India and it needs to see regulations that seem steady and sensible for attracting their money. There is another pool of money often referred to as "hedge fund" money but, basically, in common parlance it means anyone looking for a quick buck in the quickest period of time before they make a quick turnaround to their next destination for another quick buck. Most policymakers in India do not seem to recognise the whimsical nature of the money that comes in from hedge funds and shorter-term pools of money via the P-Notes versus the longer-term nature of money that could come in from the pensions and endowments. On visits overseas they meet hundreds of fund managers many of whom have an investment time-span of weeks and tend to rarely interact with the real source of money: the pension funds and endowments.

The pension funds are owned, the CPI (M) will be happy to note, not by any individual but by the workers of companies, many of whom belong to unions - comrades from different nationalities, but union workers nonetheless. And these pools of pension money are given a tax-free status in their home countries – just like our PPF that is tax free for our comrades in India.

Keeping in mind the steadier nature of the pension fund money and the more fickle nature of the hedge fund money, our policy makers should come up with a tax structure that rewards long-term risk-taking and punishes short-term fickleness. A simple way to do this would be to make all capital gains from investment in shares free of tax but to tax the investors a high, say 2%, transaction levy on the value of any stock sold within a year. There was an attempt to move to a two-tiered structure via a dual Securities Transaction Tax in July 2004 but the powerful influence of brokers who were nervous that their clients would trade less (the higher the volume, the higher the commissions the brokers make) forced the government to roll back its "discrimination" against short-term traders.

Purists and theoreticians, reading this will be bristling at the hindrance to "price discovery" – establishing a price on as high a volume as possible. But, hey, we have just seen some pretty good "price discovery" last week. Massive mood-swings of short-term capital leads to these sort of boom-bust cycles that actually scares away the long term pension money. There is a risk that they will brand the Indian stock markets as too volatile for their objective of trying to seek steady, safer, long-term returns. Whether we like it or not: we need the foreign comrades to help our own comrades in India. The Reserve Bank of India had given a dissenting note on the recently submitted report led by Mr. Ashok Lahiri on the framework for capital market flows into India. The RBI was rightly concerned about the longevity of the source of money being used to buy Participatory Notes (as an aside, these are also very profitable for the brokers) and the potential for havoc – like the little tremors we just felt last week.

The CPI (M) is right: India fell as much as many global markets last week probably due to the jumpiness of the shorter-term pools of capital from within India and from overseas. If we had more long-term money in India, the fall would probably have been less than global markets – but neither would we have had that spectacular increase since May 2005. Doing away with the Mauritius route or increasing capital gains tax is not the prescription for the stock markets recent pain. Preventing shorter-capital flows by tweaking their transaction rates and setting policy for accepting longer-term money is a better solution. The comrades in India will get the money they need from their comrades in the developed world. That would, indeed, be a red-letter day for the development of India.

This article is authored by Ajit Dayal is the founder of Quantum Advisors, an investment advisory firm that focuses on long-term investing for long-term investors. The views expressed here are his own and not necessarily that of the organisation. Quantum Advisors is also the sponsor of Quantum Asset Management Company Private Limited. You can visit their web site at www.quantumamc.com