05 July 2013

Balance sheet and valuations remain key in an uncertain demand environment for real estate co:: Credit Suisse

 The demand environment remains uncertain: Residential
absorption remains muted along with high inventory levels. On the
commercial side, although absolute inventory has dropped
significantly in the past two-and-a-half years, the inventory levels
as a proportion to absorption remain very high. Full report.
 The balance sheet becomes important in this environment: We
prefer stocks that have low leverage, which will enable them to
manage a poor demand environment better and buy land parcels, if
attractive.
 This, coupled with relative valuations, makes Oberoi our preferred
pick: Among the Indian property names, Oberoi has the strongest
balance sheet (it has net cash), attractive relative valuations (FY14
P/E of 8x, EV/EBITDA of 5x) and reasonable ROE (15% in FY14).
 We assume coverage on Oberoi with OUTPERFORM and on DLF
with NEUTRAL: Our target price for Oberoi of Rs275, implying
43% upside, is based on 15% discount to NAV. Our DLF TP of
Rs190 presents 8% upside and is based on a DCF model.

Shaky foundation ups risk :: Business Line


When the Dust Settles on the INR :: Morgan Stanley Research

When the Dust Settles on
the INR
Quick Comment – Impact on our views: The sharp
INR move has multiple implications for India. In
summary, earnings move higher net of the USD
positions and macro impact.
From a macro perspective, the inflation rate potentially
rises, yields go higher, and growth becomes more
uncertain. The RBI estimates that a 10% INR fall could
add approximately 60bps to WPI in the short run (in the
same quarter) and up to 120bps in long run. However,
the rupee move will also hasten the adjustment on the
external deficit. The rupee is arguably at fair value
(Exhibit 1) and, combined with the government’s effort
on fiscal consolidation, it will bring down the current
deficit in the next few months. A declining twin deficit is
good for equities. The sharp rupee depreciation could
also hasten reforms. Indeed, one of the reasons for the
shift in the government’s actions in September last year
was the prospects of a sharp rupee depreciation (if the
credit rating was downgraded) and its impact on inflation
in an election year. The downside risk is that the rupee
move tests the RBI’s patience and forces it to lift rates.
From an earnings perspective, corporate India runs a
net long USD position of around US$20 (simplistically
speaking, the current account net of oil, gold and
remittances – Exhibit 2) and earnings rise 1.5% for every
5% move on the currency. The negative macro impact of
the INR move will moderate the earnings gains. The
biggest potential beneficiaries and losers are outlined in
Exhibit 5. However, this could be different from the way
the equities react – Staples outperforms in all episodes
of rupee depreciation (Exhibit 4).
Corporate balance sheets, however, take a hit. This hit
is concentrated among a smaller group of companies.
We estimate forex liabilities at around US$200 billion. A
5% move increases liabilities by US$10 billion. From our
coverage universe, the worst-affected include Bharti,
RCom, Tata Power, Ranbaxy, United Spirits, United
Phosphorous, GESCO, Reliance Industries and
Bhushan Steel (not in that order).

Bharti AXA Flexi Save: Needs more glitter :: Business Line


Reliance Equity Opportunities: Invest :: Business Line


Fund Talk: Don’t spread thin across schemes :: Business Line

I am 28 and have been investing in mutual funds through SIP mode for the past four years. I am currently investing through SIPs in the following funds: Franklin India Bluechip – Rs 2,000; DSP Blackrock Top 100 – Rs 1,000; IDFC Premier Equity – Rs 2,000; BSL Dynamic Bond Fund – Rs 2,500; L&T Equity Fund – Rs 1,000; Templeton India Pension Plan – Rs 2,000; Quantum Equity Fund – Rs 1,000 and Canara Robeco Equity Diversified – Rs 1,000.
Out of the above, L&T Equity fund, Franklin India Bluechip and DSPBR Top 100 are not performing well for the past one year. Should I continue investing in them? Please suggest suitable alternatives, if necessary. 
Rajaram R.
It is nice to note that you are investing a reasonable amount of money in mutual funds, that too so early into your career. But you must have specific financial goals and a definite time horizon so that the appropriate investment avenues can be chosen to realise your targets.
Coming to your portfolio, there are a few flaws in the way you have chosen to allocate amounts across schemes. You have spread your investment of Rs 12,500 across as many as eight schemes, which is much too high. For this amount, a maximum of 4-5 schemes would suffice.
Then, there is considerable overlap in the mandates of the funds you have chosen. It is important to choose funds with differing portfolios, but which fall within your risk appetite, so that meaningful capital appreciation can be achieved.
All the three funds that you have mentioned, especially Franklin India Bluechip, have a good long-term track record. Since you would be investing for the long-term, mild underperformance can be tolerated in the short-term, provided the scheme returns as much as the category’s average.
Spread your investment as follows: Invest Rs 4,000 each in Franklin India Bluechip and Quantum Long-Term Equity. These funds with a large-cap and multi-cap mandate are known to deliver top quartile returns over a 5-7 year timeframe. If you want a debt fund, invest Rs 2,000 in Birla Sun Life Dynamic Bond. Invest the balance Rs 2,500 in IDFC Premier Equity, a quality mid-cap fund.
DSPBR Top 100 and Canara Robeco Equity Diversified are quality funds. But you already have strong performers in Franklin India Bluechip and Quantum Long Term Equity, so you can exit these schemes. L&T Equity too can be exited.
Investing in diversified equity funds itself is a good way towards saving for your retirement. Templeton India Pension Plan is not the ideal vehicle where you should be putting money for your retirement kitty.
Instead opt for the national pension system (NPS) and invest there till you retire. It is a low-cost product, simple, and has delivered well over the past four years.
***I am 25 and single. I have no plans to get married for the next two years. I work in a private sector firm and earn a net salary of Rs 28,000. I have an LIC policy where I invest Rs 5,000 every month. I am not in a position to exit this plan as I stand to lose substantially. I also have an IDBI Federal Wealthsurance Premier where Rs 25,000 is invested annually from 2012. I have another term insurance policy for Rs10 lakh from IDBI itself.
I have recurring deposits to the tune of Rs 6,500 per month and a fixed deposit of Rs 50,000.
As far as SIPs in mutual funds are concerned, I have been investing Rs 1,000 monthly in DSP BR Top 100 from 2011. Around Rs 3,000 from my salary is also invested in NPS (by my employer).
As you can see, I am pretty confused here. I wish to invest more in mutual funds (SIPs). Hence suggest a good way to manage my money. I have a fairly high risk appetite and can remain invested for long periods (10-25 years).
Remya M.G.Don’t worry about being confused! Most youngsters do puzzle over investments. But the good thing is that you have realised the mistake of combining investments and insurance quite early.
Traditional policies and unit linked plans are high-cost products and do not offer a high sum assured commensurate with your risk profile. Since you already have a term cover, enhance its value to Rs 50 lakh. Exit the traditional plan and ULIP once the minimum lock-in period is completed and required premiums are paid. This will enable you to have some surplus a few years hence.
Your savings plan seems quite good given that you are investing Rs 6,500 in a recurring deposit and also have some amount in an FD. If you can reduce your RD instalment to, say, Rs 3,500, you will have an immediate surplus of Rs 3,000. So, you will have Rs 4,000 for investment in monthly SIPs. Invest Rs 2,000 each in Franklin India Bluechip, instead of DSPBR Top 100, as the former is a stronger performer over the long term. Park the balance Rs 2,000 in ICICI Pru Discovery, a mid-cap fund that has delivered well.
When your salary increases over the years and when your surplus rises, you can consider more schemes.

Are we entering an era of lower technology spending intensity? ... Not quite so for IT services :: JPMorgan

IT intensity or IT spending as a % of GDP/corporate profits is a key indicator of
the technology spending intensity of an economy. Plotting IT intensity for the US
since 1995, we see several outcomes at play that have implications for IT services
(IT services is one sub-segment besides hardware, software and telecom services).
 IT spending as a % of corporate profits for the US has been moderating
since CY08 and has reached a 6-year low. This raises questions as to whether
the US economy is entering an era of lower technology spending intensity.
We think that there are both cyclical (temporary) & structural factors at
play here. Corporate profits/balance sheets are robust in the US; thus capacity to
spend on IT is not in question. It is a matter of confidence & timing (hence,
cyclical). Today, we think corporations are getting over this cyclical hump.
 In addition to cyclical effects, some segments of IT spending are seeing some
adverse structural impact, particularly on the pure hardware side thanks to
technologies such as cloud and supporting virtualization which compresses
hardware/data-centre growth. Gartner points out infra-as-a-service business
models are forcing disruption on the infrastructure/hardware players (e.g.
Dell/HP). Revenue cannibalization resulting from industrialized, cloud-based
services risks muting growth for the IT outsourcing providers that are heavily
focused on asset-heavy traditional infrastructure outsourcing (e.g. CSC).
 Also, the ongoing tide towards smartphones/tablets is structurally impacting the
PC industry (hardware). Though this results in smart secular growth for spending
on devices (as per Gartner, devices are among the fastest-growing sub-segments
within IT spending – it is the entrenched PC-dependent players who do not seem
to be able to cope adequately with this trend). Likewise, on the software side, what
we see happening is different players emerging that commercialize newer business
models (e.g. Salesforce) – a phenomenon needing established, players (e.g.
Oracle) to keep up. This does not necessarily dim the outlook on top-down
software spending; it’s the incremental shift that needs watching. In fact, Gartner
sees software as the fastest growing sub-segment.
 On the other hand, the picture on asset-light IT services is better, in our
view, despite oft-expressed reservations about the lowered intensity of IT
services spending in the US. One common view of pessimists is that
investments that had to be made in spreading diffusion of technology in the
economy have substantially been done and IT services is already ingrained in
business activities within the US. What tends to get missed is the capacity and
room for business innovation, change and productivity brought about by
technologies which demands increasing IT services consumption.
 The consumption of technology is still rapidly rising thanks to new waves
such as SMAC (social mobility, mobility, analytics and cloud) – much faster
than corporate IT budgets can accommodate them. Therefore, as the units of
consumption go up pushing the technology mainstream, price per unit may show
a downward trend. Alternatively, keeping the unit pricing competitive for newer
business models promotes usage and helps cast the net wider attracting newer &
different client segments. It’s the pricing trend that needs watching in the pricevolume
equation – will newer business models impact pricing is the key issue.
 The SMAC wave buffeting IT services has the potential to change the
assimilation & growth landscape for IT services. We estimate that SMAC-led
opportunities alone should raise the 3-5 year revenue CAGR profile of offshore
IT services industry by at least 1% (net of cannibalization). Thus, we think a
reversion to mean of IT services to profits ratio in the US is possible.

Do you plan to retire early? :: Business Line

An early retirement goal may appear difficult at the start, but when in sight will make you work harder to achieve it.
Here is food for thought: Should you retire at 60 or aim for an early retirement? It turns out that retiring at 55 (or even early, if possible) is behaviourally good for you.
Achieving financial freedom is everyone’s dream. It is the state where you have enough passive income to pay for your living expenses. And all of us prefer to achieve it sooner than later. But why aim to retire by 55? If you do so and achieve your goal, you will no doubt be delighted, also you get additional 5 years to pursue your travel and other retirement goals.
But suppose you fail to achieve your objective of retiring early. Now, which would make you unhappy: not making an effort at all to retire by 55 or failing to retire by 55 despite making the effort? The former is referred to as the error of omission and the latter, the error of commission. It turns out that you will be more unhappy when you do not make an effort. That is also the reason why you feel miserable when a stock that you did not buy goes up, but not so unhappy when the one that you bought declines in value.

FORECASTING

This behaviour can perhaps be attributed to affective forecasting. It refers to forecasting our feelings about an event that could happen in the future. Today, you may believe that an adverse event that could happen in the future may have an intense effect on you, losing your job, for instance.
But what you do not consider when you simulate the feeling is that you may also experience positive events in the future at the same time the negative event happens.
Such positive events could well offset the pain of the negative event. That is one reason why you typically tend to suffer less pain when an adverse event actually happens.
Your experience may be no different if you fail to achieve your early-retirement objective.
Then, there is the goal-gradient hypothesis. You may have exhibited this behaviour with any of your store cards. Suppose you have accumulated 49,000 reward points on one of your store cards and require only 1,000 more points to enjoy a free trip to the Walt Disney World in Florida.
You will most likely frequent the store and purchase products to quickly accumulate the last 1,000 points. A goal in sight typically drives you to work harder. An early retirement goal is no different; it may appear difficult to achieve when you start, but could well become a reality as you near the retirement date.