Ceat India

Ceat has brought in cost efficiencies in operations and its investment arm demerger and land sale will bring in a cash pile.

After reeling under rising cost of raw materials and attendant competitive cost pressures which had whittled margins, tyre majors are reaping benefits of cost optimisation and dipping natural rubber prices.

One such tyre company that has seen its operating margins move from under 4 per cent five quarters ago to a healthy 9.2 per cent in the current quarter is Ceat. With short-term triggers coming from non-core areas such as sale of land and demerger of its investment arm, the stock could see a rerating.

Unlocking value

Ceat wants to shift its 31-acre manufacturing facility located in Bhandup, Mumbai to a new location and sell the land to real estate developers. As a first step, the company has identified 6.5 acres which will be sold by the third quarter of the current fiscal. At Rs 14 crore an acre, the land is expected to fetch Rs 91 crore.

By FY09 when the entire facility will be shifted out to Patalganga and the entire land is sold, the company is expected to pocket nearly Rs 400 crore. The company is also demerging its investment arm, CHI Investments into a separate listed entity and this too is expected to boost the stock price.

Investment gains

CHI Investments has exposure to stocks of RPG group companies and has an investment value of Rs 127 crore. The current market value of these investments is put at nearly Rs 400 crore. According to the financial restructuring, existing shareholders will get one share in CHI Investments and three shares in the new Ceat for every four shares held in Ceat holding in the new entity.

In addition to these, the company is also expected to make an octroi saving of Rs 28 crore (in the event octroi is abolished), and has received refunds from income tax and Sicom to the tune of Rs 15 crore and Rs 8 crore respectively.

These are all windfall gains, and are mostly of a one-time nature. But besides these, the company has put in place plans to move into higher value-added products and improve realisations.

Value-added portfolio

To tackle increasing cost pressures and cut-throat competition, Ceat adopted a three-pronged strategy to improve margins. Ceat’s vice president Amit Kumar says that the company changed its product mix, went up the product value chain and outsourced low-end manufacturing activities.

Of Ceat’s three segments, OEM, replacement and exports, realisations from supplies to auto manufacturers historically were 15-20 per cent lower than Ceat’s largest revenue earning segment - the replacement market which accounts for 62 per cent of sales. High demand and lack of supply has put Ceat at an advantage and the difference is now only 5-10 per cent, which has boosted margins in the past quarter.

The company is aggressively scouting for more opportunities in the export markets which account for 20 per cent of sales and come with higher realisations of Rs 18 per kg. The company’s focus on exports and replacement could not have come at a better time, according to Kumar as Ceat’s OEM sales are expected to dip by 20 per cent because of the slowdown.

The company is also trying to shake off the tag that it caters primarily to the economy segment by including high-end products in its portfolio. Says Kumar, “Ceat is looking at speciality tyres -- be it radials which have realisations of Rs 100 per kg or off-the-road tyres where it has doubled its capacity with a investment of Rs 47 crore in the last fiscal and saved on costs with in-house mixing.”

In line with its aim of moving up the value chain, the company is outsourcing low-end tyre manufacturing activity for scooter, motorcycle, auto rickshaw and agricultural application tyres. This has freed up capacity to focus on high margin products and at the same time reduce costs.

The company is planning to relocate its 240-tonne Bhandup plant to Patalganga which will have an enhanced capacity of 300 tonne of which 100 tonne would be for manufacturing specialty tyres. The capacity at its Nashik facility has been enhanced to 180 tonne from 140 tonne.

The cost of the Patalganga facility is expected to be Rs 300 crore which is to be funded by internal accruals and debt in a 1:1 ratio. To make deeper in-roads in the radials business, the company plans to set up a greenfield facility to manufacture passenger car radial facility along with truck and bus radials. The production facility, the location for which has not been finalised, is expected to come on stream by FY11.

Efficiency gains

The company’s focus on cost cutting is paying off. Interest, depreciation and manpower costs are down from nearly 20 per cent of sales to half that number over the last seven years even though the top line has nearly doubled during this period.

Says Kumar, “Costs are down thanks to value engineering which involved the use of low weight tyres and material substitution based on natural and synthetic rubber prices.”

The key raw material for the company is natural rubber which accounts for 46 per cent of its raw material cost while crude oil by-products synthetic rubber (8-12 per cent), carbon black (20 per cent) and nylon cord fabric (15 per cent) account for the rest.

The company changes this mixture and uses arbitrage opportunities between domestic and international prices to bring down its raw material costs. This helps balance the cost differential as natural rubber is seeing a declining trend while crude prices are going up.

Valuations

Since most holding companies trade at a 50-70 per cent discount to their investment value, Ceat’s holding arm, which has investments of Rs 400 crore, would work out to Rs 26 per share. After deducting Rs 12 per share of the land value as well, Ceat’s core business trades at a P/E of about 9.8 times estimated FY08 earnings.

With a 40 per cent net profit growth, analysts say the P/E of the core business could get re-rated up to 12 times, thus valuing the share at Rs 170. If its invested companies like KEC International, CESC and Phillips Carbon Black rise further or if the holding company discount is not as low as 70 per cent, there could be further upsides.

Analysts corner

Firstsource Solutions Reco price: Rs 79 Market price: Rs 74.60 Target price: Rs 97 Broking firm: Man Financial

Man Financial put a “buy” on Firstsource Solutions, a pure play business process outsourcing (BPO) vendor. The company has delivered strong performance in the past and has a focused approach in key business verticals balanced across geographies. Due to the blended offshore-onsite mix, Firstsource enjoys a natural hedge which its competitors with an India-based delivery model may lack.

The company boasts of an attractive clientele, and has a privileged access to its stakeholder Metavante’s business. Further, the company is eyeing acquisitions in overseas markets. Man Financial expects Firstsource’s revenues, EBITDA and net profit to grow at a compounded rate of 39, 41 and 46 per cent over FY07-09E. At the target price of Rs 97, Firstsource is valued at 21.6 times estimated FY09 earnings.

Hero Honda Reco price: Rs 660 Market price: Rs 630 Broking firm: Prabhudas Lilladher

Rated “outperformer”, Hero Honda’s results were a dampener as its profits declined y-o-y over FY07. Rising commodity prices, mounting competition and cost hikes to usher in new-engine-technology products created margin pressures for the company. Prabhudas Lilladher believes that slowed down sales will gain momentum in the coming festival season again to a double-digit growth.

Further, in spite of major upheavals in the industry, the company has been able to maintain its market leadership with a 41.4 per cent share in the last three years. At Rs 660, the stock traded at 13.8 times and 10 times estimated FY08 and FY09 earnings per share of Rs 47.8 and Rs 66.2, respectively.

Jindal Drilling Industries Reco price: Rs 754 Target price: Rs 1,056 Market price: Rs 755 Broking firm: Religare

Jindal Drilling Industries offers good prospects as new rigs are being acquired and its pricing environment changes for better. The company offers varied services to oil exploration and production majors including offshore drilling, directional drilling and mud logging and derives 85 per cent of revenues from offshore drilling.

The company has plans to acquire new-build jack-up rigs through its Singapore-based subsidiaries for $35 million. These new rigs will start operation from the fourth quarter of FY09, and the company has already entered into a contract with ONGC for one rig at $148,000 a day for five years.

Due to strong crude prices which fuel higher price realisations in rigs and adding to the number of rigs, Religare expects Jindal Drilling’s net sales increase at a 56 per cent CAGR over the next two years. At Rs 754, the stock is valued at 46.3 and 29.7 times estimated FY08 and FY09 earnings, respectively.

Bharat Forge Reco price: Rs 275 Target price: Rs 416 Market price: Rs 263.60 Broking firm: Emkay Shares

Bharat Forge delivered a strong export growth in the quarter ended June 2007 at about 32 per cent y-o-y despite the rising rupee. Further, even though the domestic commercial vehicle industry, which is the key growth driver for Bharat Forge-- remained subdued during the quarter, the company’s domestic revenue grew 9 per cent y-o-y.

Exports to European Union markets almost doubled to Rs 93.3 crore compared to Rs 46.9 crore in the corresponding quarter previous year. On the other hand, US exports grew by 4.3 per cent y-o-y to Rs 122.3 crore, and Asia Pacific market witnessed growth of 37 per cent y-o-y to Rs 8.1 crore. Following a slowdown in the US business, the management expects a recovery in early 2008.

Going forward, Bharat Forge also expects a revival in its Chinese operations with further inventory corrections. The stock currently trades at 17 times and 12 times estimated FY08 and FY09 earnings respectively.

Ranbaxy Laboratories Reco price: Rs 368 Market price: Rs 352.20 Broking firm: Edelweiss

Edelweiss upgraded its rating on Ranbaxy from “accumulate” to “buy” as it foresees the branded generics segment’s contribution to the company’s revenues increasing significantly. Being a high margin business, branded generics business is a lucrative area.

Further, with the announcement of settlement of patent litigation for Valtrex, Edelweiss believes there is a higher possibility of similar announcements for monetising another Para IV opportunity in CY08. The stock has underperformed the healthcare index by more than 12 per cent over the last one year.

This was primarily driven by the issues in approval of facilities at Paonta Sahib and the USFDA raid on the company’s offices in the US. Due to these, Edelweiss believes that all the adverse news are already factored in the price and there is limited downside to the stock going forward. At Rs 368, the stock traded at 17.6 times estimated FY08 earnings.

Warren Buffet - Investment Wisdom

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Warren Buffett, Chairman of Berkshire Hathaway, is arguably the world's greatest investor and the third richest man with a net worth exceeding $52 billion. He is also a great philanthropist: last year he declared plans to give away over $37 billion in charity, to the Bill & Melinda Gates Foundation.

But he is not just a man with a large heart and a matching wallet. Also known as The Sage of Omaha, he is also full of wisdom and wit.

Here are some of his gems of advice for investors who look at the stock market to make a fortune, culled from various publications, his speeches and writings:

• 'Never invest in a business you cannot understand.'

• 'Always invest for the long term.'

• 'Remember that the stock market is manic-depressive.'

• 'Buy a business, don't rent stocks.'

• 'Price is what you pay. Value is what you get.'

• 'Stop trying to predict the direction of the stock market, the economy, interest rates, or elections.'

• 'I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years.'

• 'Wall Street is the only place that people ride to in a Rolls-Royce to get advice from those who take the subway.'

• 'Buy companies with strong histories of profitability and with a dominant business franchise.'

• 'It is optimism that is the enemy of the rational buyer.'

• 'As far as you are concerned, the stock market does not exist. Ignore it.'

• 'The ability to say 'no' is a tremendous advantage for an investor.'

• 'If you're doing something you love, you're more likely to put your all into it, and that generally equates to making money.'

• 'My idea of a group decision is to look in the mirror.'

• 'Most people get interested in stocks when everyone else is. The time to get interested is when no one else is. You can't buy what is popular and do well.'

• 'The smarter the journalists are, the better off society is.'

• 'Success in investing doesn't correlate with IQ once you're above the level of 25. Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing.'

• 'Diversification is a protection against ignorance. It makes very little sense for those who know what they're doing.'

• 'You're neither right nor wrong because other people agree with you. You're right because your facts are right and your reasoning is right - that's the only thing that makes you right. And if your facts and reasoning are right, you don't have to worry about anybody else.'

• 'There seems to be some perverse human characteristic that likes to make easy things difficult.'

• 'In the short run, the market is a voting machine but in the long run it is a weighing machine.'

• 'It's only when the tide goes out that you learn who's been swimming naked.'

• 'Somebody once said that in looking for people to hire, you look for three qualities: integrity, intelligence, and energy. And if they don't have the first, the other two will kill you. You think about it; it's true. If you hire somebody without the first, you really want them to be dumb and lazy.'

• 'There are three kinds of people in the world: those who can count, and those who can't.'

• 'It takes 20 years to build a reputation and five minutes to lose it.'

• 'The first rule is not to lose. The second rule is not to forget the first rule.'

• 'Wide diversification is only required when investors do not understand what they are doing.'

• 'Only buy something that you'd be perfectly happy to hold if the market shut down for 10 years.'

• 'We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.'

• 'Our favourite holding period is forever.'

• 'If past history was all there was to the game, the richest people would be librarians.'

• 'Why not invest your assets in the companies you really like? As Mae West said, 'Too much of a good thing can be wonderful.''

• 'Your premium brand had better be delivering something special, or it's not going to get the business.'

• 'You are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right.'

• 'We do not view the company itself as the ultimate owner of our business assets but instead view the company as a conduit through which our shareholders own assets.'

• 'Accounting consequences do not influence our operating or capital-allocation decisions. When acquisition costs are similar, we much prefer to purchase $2 of earnings that is not reportable by us under standard accounting principles than to purchase $1 of earnings that is reportable.'

• 'Unless you can watch your stock holding decline by 50% without becoming panic-stricken, you should not be in the stock market.'

• 'The critical investment factor is determining the intrinsic value of a business and paying a fair or bargain price.'

• 'Risk can be greatly reduced by concentrating on only a few holdings.'

• 'Much success can be attributed to inactivity. Most investors cannot resist the temptation to constantly buy and sell.'

• 'Lethargy, bordering on sloth should remain the cornerstone of an investment style.'

• 'An investor should act as though he had a lifetime decision card with just twenty punches on it.'

• 'An investor needs to do very few things right as long as he or she avoids big mistakes.'

• 'Turnarounds' seldom turn.'

• 'The advice 'you never go broke taking a profit' is foolish.'

• 'It is more important to say 'no' to an opportunity, than to say 'yes.'

• 'It is not necessary to do extraordinary things to get extraordinary results.'

• 'An investor should ordinarily hold a small piece of an outstanding business with the same tenacity that an owner would exhibit if he owned all of that business.'

• 'It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you'll do things differently.'

• 'In the business world, the rearview mirror is always clearer than the windshield.'

• 'A public-opinion poll is no substitute for thought.'

• 'It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price.'

• 'The business schools reward difficult complex behavior more than simple behavior, but simple behavior is more effective.'

• 'Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it.'

• 'The investor of today does not profit from yesterday's growth.'

• 'Of the billionaires I have known, money just brings out the basic traits in them. If they were jerks before they had money, they are simply jerks with a billion dollars.'

• 'I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years.'

• 'I don't look to jump over 7-foot bars: I look around for 1-foot bars that I can step over.'

• 'I always knew I was going to be rich. I don't think I ever doubted it for a minute.'

• 'We enjoy the process far more than the proceeds.'

• 'You do things when the opportunities come along. I've had periods in my life when I've had a bundle of ideas come along, and I've had long dry spells. If I get an idea next week, I'll do something. If not, I won't do a damn thing.'

• 'I buy expensive suits. They just look cheap on me.'

• 'Let blockheads read what blockheads wrote.'

• 'I do not like debt and do not like to invest in companies that have too much debt, particularly long-term debt. With long-term debt, increases in interest rates can drastically affect company profits and make future cash flows less predictable.'

• 'My grandfather would sell me Wrigley's chewing gum and I would go door to door around my neighbourhood selling it. He also sold me a Coca-Cola for a quarter and I would sell it for a nickel each in the neighbourhood, so I made a small profit. I was always trying to do something like this.'

• 'A public-opinion poll is no substitute for thought.'

Unknown Source

No Celebration for Market

Monday started on a positive note as central banks moved to ease a credit crunch. The European Central Bank pumped in billions of dollars to the monetary system. The Bank of Japan also did so. The Fed too injected billions in reserves to the nation's banking system. Subsequently, European shares posted a substantial gain as investors took heart from central banks' moves to calm money markets. In India too, the market closed in positive territory.

But since that day, the market fell all through the week. Not only was that evident in the main indices but even in the BSE sectoral indices. Tuesday the market closed flat but there was blood on the street on Thursday. The US sub-prime mortgage worry continued to haunt global markets after reports that the biggest mortgage lender in the US was on the brink of bankruptcy. The next day the slump continued. Of course, we also had to contend with relations between the Left parties and the Congress-led government going sour.

Nevertheless, though the situation will remain volatile and even negative in the short-run, the long-term outlook is fairly positive with inflation under control, the general perception of interest rates peaking and fairly robust quarterly results. In the short-term, global liquidity supply will affect the market. Brokers went on record saying that they don't think the Sensex will fall to below 13000 to 14000.

Cipla

Cipla

ICICI Bank Ltd

ICICI Bank Ltd

Jaiprakash Associates, Ranbaxy

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Jaiprakash Associates, Ranbaxy

Gujarat - the top investment destination

Gujarat has edged out Maharashtra to become India's top state in terms of investment commitments during 2006-07, cornering over 25 per cent of the total spending proposed by corporates across the country.

Gujarat received investment proposals to the tune of Rs.74,988 crore in 86 projects, while Andhra Pradesh was at a distant second with investment intentions worth Rs.25,173 crore, Maharashtra Rs.24,330 crore and Tamil Nadu Rs.24,229 crore, the Reserve Banks said in an analysis of 'Corporate Investment: Growth in 2006-07 and prospects for 2007-08.'

ICICI Bank ADR zooms 13%

The surprise US Fed move to cut discount rate by 50bps spurred a strong rally on Wall Street yesterday.

While the Dow jumped 233 points to 13,079, the Nasdaq Composite zoomed 54 points to 2,505.

Indian ADRs, too, logged sharp gains on Friday. ICICI Bank zoomed 13% to $42,92. HDFC Bank gained over 8% to $83.95. Infosys, Wipro and Satyam also rallied.

WNS, which had reported a subprime crisis, slumped over 16% to $20.45. Genpact also declined 2% to $14.

Recovery on the way...

Having lost close to USD 100 bn in last 15 sessions on sub prime mortgage concerns, Dalal Street may hope for happier times ahead with improving global cues after US Federal Reserve cut the rate at which it lends to banks, even as some feel more steps were needed to tackle the crisis.

Indian bourses lost close to Rs 4,00,000 crore -- nearly 10 per cent in overall market capitalisation -- in just a fortnight of trading since July 27 after the credit crunch in the us economy spread across the globe.

While the Fed's decision to cut the primary credit rate by 50 basis points to 5.75 per cent came as a reprieve for us and European markets on Friday, domestic bourses, which were declared closed before the rate-cut was announced, will react only tomorrow.

Multiple crashes since July 27 have wiped off nearly all gains made by BSE in the past six months, while taking the benchmark Sensex back to January-February level. Analysts at global brokerage giant Merrill Lynch said the rate cut would not necessarily bring a sustained stability in the markets.

"Prior two asset and credit bubbles that unwound from 1990-92 and again from 2001-03 show that Fed cut interest rates 100 basis points, the central bank believed that it acted in time to prevent a recession or bear market," Merrill Lynch's North American Economist David A Rosenberg wrote in a research note after Friday's rate cut.

"But, recessions did follow the initial Fed rate cuts back then, and so did a cyclical bear market in equities. Not even the Fed could stand in the way of nature taking its course and expunging the bad credits out of the system," Rosenberg said.

On market turbulence and its genesis

What is the genesis of the ongoing turbulence linked to the US markets?

The easy liquidity policy — with US Fed rates touching 40-plus year lows about four years ago has led to a steep rise in property prices in the US markets. In several regions, prices were reckoned to be akin to bubble-like territory even early this year. The low-interest rate policy led to a boom in mortgage financing. As lenders exhausted high-quality clients, they gradually started moving down the credit curve of borrowers. This gave rise to sizeable loans to borrowers who figured low on credit quality. The boom in these loans — has been on an unprecedented scale.

What led to a change in the US housing market and its financiers?

The home buying spurred by low interest rates led to prices going way of out of line with realistic levels. The sharp price rise had an in-built trigger to snowball into a problem at some stage unless the period of extraordinarily low interest rates sustained. This was never going to be the case.

As the US Federal Reserve moved to raise rates — there were 17 successive hikes of 25 basis points each, from June 2004 to June 2006 leading to the Fed Rate moving from a low of 1 per cent to 5.25 per cent — the impending crisis in US property markets got fast tracked.

What has happened in the sub-prime segment?

As interest rates rose, so did payment obligations (EMIs or their equivalent in the US) linked to variable rates and this started account for a larger proportion of income, leaving borrowers vulnerable. As US consumers are also highly leveraged, the rising payment obligations make things more difficult. This has triggered defaults on a rising scale, especially at the lower end of the credit curve. What is the linkage to movements in the financial markets?

Lenders who provided sub-prime loans packaged them together and sold it to investors as securitised assets. As such loans and risk appetite to buy securitised assets based on such loan pools increased, more exotic versions were added. Investors in such assets also included hedge finds that are usually leveraged significantly. (They also borrow and invest that money, too, over and above the capital to enhance returns).

It is this structure that gained critical mass that has become the root of the problems in the financial markets. Hedge finds that have taken a hit in sub-prime need to unwind exposures in other asset classes to compensate and ensure that they stay in tune with the fund mandate.

What has happened in the market for these assets?

There has been a significant decline in liquidity. Trading levels for some asset-backed bonds have declined dramatically and these include bonds with AA or AAA ratings (high investment grade). There are few buyers even for such assets. The lack of liquidity has ensured that valuation and ratings have been left at uncertain levels and without any meaningful linkage. It is even harder to trade risky high-yield bonds, junk bonds and loans for borrowers with high debt. As this is also the vacation season, liquidity has been further affected in these markets.

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Folks, its the best buying opportunity !

A report on the website of Fool says the P/E - the price of stocks divided by their last 12 months of earnings - in the S&P 500 are cheaper as a group today than they have been for 12 years.

Year Q2-Ending S&P 500 P/E
Today 16.62
June 30, 2007 17.34
June 30, 2006 17.05
June 30, 2005 18.80
June 30, 2004 20.32
June 30, 2003 28.21
June 30, 2002 37.02
June 30, 2001 33.28
June 30, 2000 28.02
June 30, 1999 33.46
June 30, 1998 29.10
June 30, 1997 21.83
June 30, 1996 19.21
June 30, 1995 15.82

"Mid-2003, when the large caps in the S&P 500 had a trailing P/E of 28, was actually a pretty good time to be making investments because the earnings in the denominator were so depressed that the ratio was misleading without taking normalised earnings levels into account.

"So, today's low prices for a dollar of the past year's earnings could be an indicator that it is an especially good time to invest new funds in the market,"the report said.

As the table shows, net profit margins can move dramatically on a company-by-company basis. Also, buying and selling established businesses on the basis of a temporary spike or decline in profit margins can be worth your while. Getting out of Yahoo! in 2005 would have worked out pretty well. The same goes for folks who picked up shares of General Motors after its disastrous 2005.

Today's S&P 500 profit margins are probably not indefinitely sustainable -- even given the significant productivity improvements across the economy. At the very least, investors cannot expect further improvements in profit margins to mirror the improvements over the past five years.

2. Contribution from energy and financials.
A second argument frequently voiced against putting too much reliance in today's S&P 500 P/E level is that if you subtract the financial and energy companies from the totals -- two sectors that show particularly low P/Es, coupled with high earnings -- the P/E for the rest of the companies in the S&P 500 moves up significantly.

It is true that an energy company such as ExxonMobil (NYSE: XOM) has a P/E of 12, and Citigroup (NYSE: C) trades for 11 times its earnings. And with the ongoing and justified concerns about subprime lending and the effects on earnings that have yet to be revealed, we could see earnings for financials moving down instead of up over the next few quarters.

Anybody who wishes to forecast the profits of energy companies over the short term is welcome to try, but such profits are cyclical, and at peaks shouldn't be accorded high P/Es.

Still, excluding the best performers from a group and declaring that the rest of the group isn't priced quite as cheap is always going to be true. I don't put that much faith into this attack on today's lower P/E levels.

Shift your focus
It's well worth noting that today's large-cap P/E levels are more attractive than they have been for years, and that there are reasons why the simple bottom line doesn't tell the whole story.

It's also worth noting that Wharton professor, best-selling author, and leading market historian Jeremy Siegel has said that given the low trading costs and ease of diversification today, P/E levels of around 20 are probably justified for the future. If that turns out to be the case, today's levels are certainly one of the better buying opportunities you'll find.

But at The Motley Fool, we've always been far more focused on individual companies than the stock market as a whole. That's helped our leading newsletter, Stock Advisor, turn in stock recommendations that have produced 66% returns over its five-year history vs. 28% returns for the S&P 500.

Rakesh Jhunjhunwala - Believe in India..

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The biggest bull of them all Rakesh Jhunjhunwala, says that India is likely to benefit from its strong fundamentals in the long term but only after a tough intermittent transition period.

He feels that high degree of complacency has set in as too much easy money has been made too quickly and world equity markets are bound to get shaken in the near future.

Mr Jhunjhunwala was speaking at the convocation ceremony of IIT Mumbai last week. In what should be called a rare glimpse of bearishness - he bet that the US economy is bound to slow down sometime after a 25 year bull market.

Corporate profits as the engine

But this has not changed his faith in the Indian economy. “India has got all ingredients that markets value,” he quipped. In a presentation made to students, he said that corporate earnings will grow at over 18% (faster than unorganized sector) the sustained earnings expansion driven by growth and productivity.

India has a favourable framework for equity investing with high standards of corporate governance, transparency, effective regulation, electronic trading, dematerialisation and tax paradise for equity investing under the STT regime. “Good balance between domestic consumption and global outsourcing opportunities coupled with rising savings, yet low equity ownership offer a significant potential,” said the legendary investor.

Mr Jhunjhunwala also sang an ode to India’s economic resilience by proving that its being a country with least volatile economic growth. He calculates that the difference between the maximum and minimum GDP growth is least as compared to other Asian countries like Taiwan, South Korea, Singapore, Hong Kong and Malaysia.

Indians everywhere?

Mr Jhunjhunwala says that its people are the country’s biggest assets. One of his slides said that 38% of doctors in America are Indians, 12% of Scientists in America are Indians and similar numbers for Nasa, Microsoft and IBM employees are 36%, 34% and 28% respectively.

He sums up by saying that Indian skills and Indian enterprise have now got a global level playing field and a much superior platform than India Inc has ever had before.

A tough period for equities

He, however, also spoke of scenarios under which the Indian economy could lose way temporarily. Slowdown in US economic growth, tanking of global economy, politicians messing up figure prominently this list.

Turmoil in debt markets, rising oil prices, rising interest rates, China slowdown and global currency realignment are some of the other factors. But the impact on India could be lesser as here interest rates may soften and India’s domestic consumption could see it through. Having said that he warns that the next few months will be tough for stocks.

Conclusion

India has now changed from a deficit to surplus economy with emergence of first generation entrepreneurs. The growth in the airlines industry, mobile phone, increases in tax to GDP ratio and changing attitudes where wealth/profit no longer a dirty word, is a tribute to India’s growing prowess.

Grey Market - Take Solutions, Motilal Oswal, Indowin Energy

Grey Market Premiums are coming down, think twice before applying in substandard IPOS

Take Solutions 730 310 to 320

Motilal Oswal 725 to 825 240 to 250

Magnum Venture 27 to 30 3 to 4

Indowind Energy 55 to 65 5 to 7

Puravankara Projects 400 Discount

KPR Mills 225 Discount

Refex 65 5 to 7

Central Bank 102 32 to 33

SEL Manufacture Ltd. 80 to 90 2 to 3

Asian Granito 97 5 to 7