Good Growth Visibility for Cos making Watches, Shoes, pizza, Movies etc but valuation looks stretched

At a time when both bulls and bears are struggling to make money, Dalal Street is betting big on companies which make shoes, watches, pizzas, kitchen appliances and movies.

Shares of companies such as Bata India, Titan, Jubilant FoodWorks and TTK Prestige all hit life-time highs in June. UTV Software shares touched a two-year high the same month (see chart).

Sample this. Shares of footwear maker Bata India gained 58 per cent in the past three months compared, while there was a two per cent decline in the Bombay Stock Exchange’s benchmark, the Sensex, during the period.

Shares of Jubilant FoodWorks, which sells Domino’s Pizza in India, have gained about 75 per cent in three months.

. Since their listing in February 2010, these shares have gained 555 per cent from the issue price of Rs 145.

Others like footwear maker Bata India, jewellery & watch retailer Titan Industries, kitchen appliances maker TTK Prestige and media & entertainment firm UTV Software have all delivered great returns to investors.

“It indicates that the purchasing power in a populous country such as India is increasing. Most of these companies are expanding in tier-II and tier-III cities, from where growth is going to come," said Anita Gandhi, director at Arihant Capital Markets.

The numbers tell the story. For the financial year ended March 31, Jubilant reported sales growth of 60 per cent and TTK Prestige of 50 per cent. Titan and UTV Software had sales growth of 39 per cent each. In profit growth, Jubilant saw a jump of 117.6 per cent for 2010-11, while UTV Software registered a rise of 154 per cent (see chart).

“Investors are buying shares of companies where they see consumption is growing. They are looking for business models which have higher sustainability," said Deven Choksey, managing director at Mumbai-based KR Choksey Shares & Securities.

“However, personally, I don’t want to chase stocks which are expensive. I will prefer to wait on the sidelines till valuations become comfortable."

Global Agriculture Supply Worsening May Spur Food Shortages, Rogers Says

The global agriculture supply situation has worsened and a failure to boost food production fast enough to meet demand may lead to shortages, said investor Jim Rogers, chairman of Rogers Holdings.

“We’ve got to do something or we’re going to have no food at any price at times in the next few years,” Rogers said in a Bloomberg Television interview with Rishaad Salamat today in Singapore. “I still own agriculture. If I found something to buy, I would buy it.”

Rogers joins former United Nations Secretary General Kofi Annan, the UN Food & Agriculture Organization and the World Bank, in highlighting the need to boost global food production and address issues pushing prices higher. Group of 20 farm ministers agreed last week to increase agriculture output, set up a crop database and limit export bans to tackle what French President Nicolas Sarkozy calls the “plague” of rising food prices.

Monthly food prices tracked by the FAO have surged nine times in the past 11 months and last month stayed near a record reached in February, as global demand for corn and wheat outstripped production and drought and flooding ravaged harvests. The World Bank estimates higher food prices have pushed 44 million more people into poverty.

Food Inflation

China, the world’s largest consumer of grains, energy and metals, has raised interest rates four times since October and increased bank reserve requirements nine times to tame above- target inflation. The nation’s food-price inflation was at 11.7 percent in May, matching levels in March and November when they were at the highest since July 2008, the year of the global food-price crisis.

Global stockpiles of corn, the most-consumed grain, are forecast to drop to 47 days of use, the fewest since 1974, data from the U.S. Department of Agriculture show. Inventories are declining as demand continues to outstrip production that’s forecast to rise to a fifth consecutive year of record.

The proportion of the U.S. corn harvest going to ethanol has almost quadrupled since 2002 and will reach 40 percent in the current marketing year, according to USDA data. Ethanol output has increased more than six-fold since 2002, boosted by federal renewable fuel standards and subsidies now being scrutinized by Congress.

Farm Prices

The Standard & Poor’s GSCI Agriculture Index fell 9.6 percent this quarter, the first loss since the first three months of 2010. While corn has lost 4.7 percent this quarter, the grain is still 92 percent costlier than it was a year ago, making it the best performer in the index. Corn traded at $6.685 a bushel in Chicago today.

Inventories of wheat, used in making pasta, noodles, bread and feed for hogs and poultry, will drop to a three-year low of 184.26 million metric tons before next year’s Northern Hemisphere harvest, as output misses demand for a second year, the USDA said.

“Production just hasn’t been able to respond to new demand,” Michael Creed, an agribusiness economist at National Australia Bank Ltd., said in a phone interview from Melbourne today. Demand continues to outstrip global harvests because of rising ethanol production in the U.S. and China’s surging demand for meat, Creed said.

Kellogg View

“Grain is a solid input into all those food sectors and so there’s really no way to go to avoid grain-based inflation,” John Bryant, chief executive officer of Battle Creek, Michigan- based Kellogg Co., the largest U.S. maker of breakfast cereal, said in a June 2 conference.

Unless governments come together to successfully address the issue of food security, “hopes for wider international cooperation looked doomed,” Annan, who served as UN Secretary General from 1996 to 2007, said last week.

“We have serious problems in inventories” of farm products, Rogers said.

Coming next from China : Cheaper Loans!

After cheap toys, consumer goods and other manufactured products, cheaper loans could be the next major Chinese import into India, and the credit may go to a potential FCCB crisis looming large over Indian corporates.

In the next one and half years, close to 100 Indian companies need to repay an estimated Rs 33,000 crore (over $7 billion) of loans they had raised by issuing FCCBs (Foreign Currency Convertible Bonds) and they are scurrying around for cheaper resources to meet these repayment obligations.

The Chinese banks may emerge as the big winners as a host of Indian companies have begun exploring possibility of getting cheaper loans from China to meet their other costlier foreign borrowing obligations and ward off a red mark on their creditworthiness, a senior banker said.

The FCCBs have been a widely preferred loan instrument for Indian companies borrowing money from overseas markets, especially during 2006 and 2008 when the stock markets were on a high and allowed the companies to easily tie-up loans which were low-cost, but had equity as a convertible.

As the name suggests, the lenders can convert these bonds into equity if the debt is not repaid upon maturity, which is generally five years or more.

The companies which issued FCCBs in 2007-2008 include 3i Infotech, Subex, Sterling Biotech, Country Club, JSW Steel, Tata Motors, Rolta, Educomp, Jaiprakash Associates, Tata Steel, Great Offshore, Suzlon, Firstsource, Pidilite, GTL Infra, Bartronics, Kinetic Engineering, Aban Offshore, Moser Baer and Hotel Leelaventure.

However, share prices have fallen sharply since 2008 for many of the companies that had issued FCCBs to raise loans and their stocks are currently trading way below the conversion price fixed at that time.

This has put the borrowers and also the lenders in a spot, as the companies cannot risk defaulting on the FCCB redemption payment and the bondholders would not convert the bonds into shares at a price way above the current levels.

There is another option that allows the companies to reset the conversion price, but this generally leads to a decline in the company's share price as it is seen as an inability on the part of the borrower to meet its payment obligations.

Still, a lot of companies have recently reset their FCCB conversion prices at the cost of their share prices and these include Suzlon, Spicejet and Gitanjali Gems.

A vast majority of the companies are, however, looking for other resources to redeem their FCCBs.

With loans having become expensive in India and most of the Western markets already having been tapped, the companies are approaching investment banks to explore the possibility of tying up funds from Chinese banks, another banker said.

Companies from power and other infrastructure related sectors are especially interested in Chinese loans, as they may get concessional rates if they agree to other import-related relationships with China's manufacturing companies.

Indian companies can get very low-cost loans from Chinese banks if they also agree to source other products from that country, banking sources said. However, they declined to name the companies citing client confidentiality clauses.

The Chinese loans are also catching the fancy of those corporates who do not face any FCCB redemption risk, but are looking to retire their existing costlier loans.

Some of the Indian firms having taken cheaper Chinese loans previously include two Anil Ambani group firms, RCom and Reliance Power, who together tied up about $3 billion worth loans from China.

Reliance Power is said to have saved about Rs 6,500 crore (Rs 65 billion) in interest costs when it tied up $1.1 billion (over Rs 5,000 crore) of Chinese loans, which was used to repay costlier domestic loans.

A host of power companies such as Lanco Infratech, Moser Baer Power and Adani Power have also previously expressed their interest in Chinese loans.

Research firm Crisil recently said that FCCBs worth Rs 22,000-24,000 crore (Rs 220-240 billion), maturing by March 2013, may not get converted into equity, as the current share prices of issuing companies are significantly below their conversion prices.

Crisil said that refinancing of these FCCBs with fresh debt would increase the interest burden of companies as most of the FCCBs carry very low or zero coupon rate.

On the other hand, companies lowering their conversion price could witness a sharp dilution in their equity, which will lead to further decline in their share prices.

Crisil also warned that companies with FCCBs worth Rs 1,500-2,000 crore (Rs 15-20 billion) could find it tough to meet the repayment obligations because of their weak financial profile and low promoter holdings.

The central bank RBI also recently warned of an impending FCCB crisis and due to a large-scale FCCB maturity.

"Estimates show that a very large proportion of these FCCBs may not get converted into equity thus requiring their refinancing at the much higher interest rates prevalent today," RBI said.

As per RBI data, FCCBs worth about $3.5 billion are maturing in the current fiscal 2011-12, while FCCBs worth about $4 billion would mature in 2012-13.

Things could improve thereafter with FCCB maturing worth about $627 million in 2013-14, $2.5 billion in 2014-15, $467 million in 2015-16 and only $25 million in 2016-17.

How you can gain from rising interest rates

Fixed income investors constantly search for products that offer them higher interest rates. With rising interest rates, company deposits and bonds have caught their attention, offering a lot to choose from.

Apart from the traditionally safe bank fixed deposits (FDs), today, there are company FDs from the likes of Mahindra Finance and Shriram Transport offering 10.50% to 10.75% per annum.

Moreover, there are listed bonds from Tata Capital, L&T Finance and Shriram Transport, which give a yield of about 11% to 12% per annum.

How they work for you

You can invest in company deposits through a distributor or agent. Bonds, on the other hand, can be bought through a distributor only when there is an initial public offer (IPO).

They are listed on the stock exchange after the IPO and can then be bought through a stock broker.Company deposits give you the option of receiving income monthly, quarterly, half yearly, annually or on a cumulative basis.

A bond gives you income in two ways. The first one is the coupon or the interest income, which could be payable monthly, half yearly or annually or on maturity. The SBI bonds, for example, pay interest annually.

The second way to make money is through capital appreciation. However, this could work vice-versa, too. "If interest rates were to move significantly upwards like now, the bond prices could move down," cautions Anup Bhaiya, MD and CEO, Money Honey Financial Services.

The way out is to hold it till maturity. Then there is no interest rate risk."Investors who plan to hold till maturity should buy these bonds. In case interest rates rise, there could be short-term mark-to-market losses on your portfolio," says Vishal Dhawan, founder, Plan Ahead Wealth Managers.

The problem areas

Unlike mutual funds, which score high on liquidity, both bonds and company fixed deposits are illiquid. In the case of bonds, since the issuances are small in size, once the initial sellers go away, trading becomes small, hence, exiting them could be difficult.

In the case of company deposits, premature withdrawal is not allowed before the completion of three months. If you wish to withdraw between the third and sixth month, you get zero interest income.

Company FDs are unsecured. In the case of bank FDs, the Deposit Insurance and Credit Guarantee Corporation of India guarantees repayment of Rs 1 lakh in the case of a default. Company deposits offer no such guarantee and the safety of the FD depends on the financial position of the company.

As a depositor with the company, you have no rein on any asset of the company in case it goes bankrupt. You will get your money back only when secured lenders have been paid.When it comes to tax, bonds are better than FDs.

If an investor holds a bond for less than 12 months and books any gain, he is liable to pay a short-term tax. If he holds it for more than a year and then sells it, he is subject to long-term capital gain tax. Interest earned on the bonds comes under the 'income from other sources' head and investors are liable to pay tax on it.

"Bonds are more liquid than FDs, are rated and secured. There is a chance to ride the interest rate cycle and take advantage by selling and booking profits," says Ajay Manglunia, SVP - Edelweiss Securities.

Be careful

While choosing company deposits, one has to be very careful. A corporate like HDFC offers you a 9.5% return, while smaller companies like Avon Corporation offer you an interest of 11-12% a year.

There are some real estate companies which offer you as much as 12% per annum for a three-year deposit. However, since they are not rated, they are more risky.The risk is higher when you are investing in smaller companies. Check the credentials of the promoters and their past track records.

"It makes sense to invest in companies that pay dividends and are profit-making," says Bhaiya. Avoid loss-making companies or those who do not pay dividends and check the servicing standards of the company.

In the case of NBFCs, the RBI has made it mandatory to have an 'A' rating to be eligible to accept public deposits. Investors should go only for AAA- or AA-rated schemes.

How to choose

Go for shorter tenures such as one year to three years. Avoid deposit schemes of manufacturing companies which are unknown or which do not have a track record. This way, you can keep a watch on the company's rating and servicing and also have your money back in case of an emergency.

Watch out for any adverse news on the company you have invested in and take necessary action if needed. Interest income from FDs and bonds is taxable. So if you are in the highest tax bracket, weigh your options accordingly. If there is a probability you may need the money before a year, it is best not to park it in company FDs.

"Diversify your money, spread it across companies, and do not put all the money in a single company," says Harish Sabharwal, chief operating officer, Bajaj Capital.

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How should India avert the coming slowdown

After the credit crisis , India (like many other developed and emerging economies) resorted to fiscal and monetary stimulus to push growth back to pre-crisis trend immediately. This was a justified policy action at the worst point of the crisis, but we believe the policy-makers overstayed the course.

The government maintained high expenditure growth (a large part of it tends to be revenue spending in nature) and the Reserve Bank of India ( RBI )) also left real policy rates in negative territory for a long period. While this easy approach did boost growth strongly, the low productivity dynamic accompanying it meant that the country faced challenges of inflation, current account deficit and tight inter-bank liquidity.

The most challenging symptom for the policy-makers has been inflation. Indeed, we believe that a large part of the food inflation is because of this low productivity dynamic of government spending in the rural India and less due to structural shift in protein consumption.

Structural shift cannot justify a cumulative rise of 55% in primary food inflation since January 2008.

However, a policy-induced growth slowdown now appears inevitable. A combination of factors - including persistent high inflation rate, higher oil prices, sharp rise in interest rates, and a weak global capital market environment - is likely to result in slowdown in growth. We have already cut our FY 2012 (year-end March 2012) GDP growth forecast to 7.7% and have highlighted further potential downside risks to GDP growth of about 50 bps.

We think the key debate now is not about whether growth will slow but rather what is the likely duration of the growth slowdown. Currently, we expect slowdown in growth in 2011 with a gradual recovery from 1Q2012. We believe there are two set of factors that will be important for India's growth outlook: (1) outcome of developed world growth and oil prices in the coming 12 months as the external drivers and (2) policy action to boost private investments as the domestic factor.

While external factors are unpredictable, the government needs to ensure it initiates policy reforms to lift private investments. We believe that for sustainable recovery in growth without facing major inflation pressures, the revival in productive dynamic - rise in private corporate capex - is the key. The overall sentiment toward business capex has been weak, as reflected in the yearly growth of engineering and construction companies' order book.

While there are signs of growth beginning to slow, it is not clear to us that the policy-makers fully appreciate the severity of potential growth downside risks to act quickly to boost investments. Indeed, with the cyclical macro environment locally as well as globally being so adverse, the onus on the government to push for a major policy reform to get the private sector to kick-start a major investment cycle is bigger. In this context, we believe there are three key sets of measures that government needs to initiate over the next six months to ensure that the duration of down cycle is not extended beyond two-three quarters.

First, we believe the government needs to implement an aggressive "campaign-style" effort to clear investment projects transparently with coordination from all key ministries - including finance, environment, commerce, transportation, electricity and coal. There needs to be a time-bound approach to this effort. This commitment is critical considering recent concerns in the market of perceived slowdown in the policy action within the government machinery post the emergence of graft related issues since the last quarter of 2010.

Second, the government needs to implement a tighter fiscal policy to create room for the private sector investments. We believe loose fiscal policy has been at the heart of the recent persistent inflation pressures and rise in cost of capital. The government needs to manage an aggressive reduction in the fiscal deficit to create adequate room for private corporate capex.

During the 12 months ending March 2012, the government is likely to run a deficit of 8.3% of GDP, including off-budget oil and fertiliser subsidy burden, compared with 9.3% of GDP in FY2011 (excluding 3G receipts). The estimate of fiscal deficit for FY2012 does not include the oil subsidy burden of 0.6% of GDP, which the government forces the state-owned oil companies to bear.

Third, we think there is a need to implement aggressive divestment of state-owned enterprises and to boost FDI inflows. Considering that the starting point for the loan-deposit ratio in the banking system is relatively tight and inter-bank liquidity is already in deficit, we believe it is important for the government to ensure that capital inflows remain buoyant to ensure, in turn, that liquidity constraints do not make it difficult to revive capex.

The government should aim to collect $15-20 billion through divestments over the next 12 months. India's gross FDI inflows declined by 32% to $24.2 billion in 2010 and net FDI inflows declined by 44% to $11 billion. India is one of the few emerging markets that registered a decline in FDI in 2010. We believe there is a need to increase FDI inflows with necessary policy reforms - including opening up foreign investment in organised retail distribution.

We believe a policy response from the policy-makers will be important to prevent a more vicious slowdown. In case slowdown in growth persists for more than two-three quarters, the risk of it becoming more vicious will rise, as the banking system could see a rise in non-performing loans, causing risk aversion among lenders.

Market Morning

1. Recent hike in Diesel, Keresone & Cooking gas will lead to further double digit figure of Inflation.

2. This will put further pressure on RBI to tame inflation & sustain growth in the economy

3. HDFC & Tata group take over Reliance as bigger market mover

4. Fuel duty cuts to upset Govt's tax calculation

HDFC, Tata groups overtake Reliance as bigger market movers

After losing out to Tatas as the most valued business house, Mukesh Ambani-led Reliance group has now slipped to the third position in terms of a corporate group's influence in moving the stock market benchmark Sensex.

On a stand-alone basis, Reliance Industries Ltd (RIL) remains the most influential of the 30-stock BSE Sensex, but it ranks below HDFC and Tatas taking into account cumulative weightage of their group companies on the index.

As per the information available with BSE, RIL's weight in Sensex is 10.73 per cent, which is bigger than any other stock on the index.

But, it is lower than Tata group's 11.17 per cent and HDFC group's 12.1 per cent at the group level.

About a year ago, RIL's weight was much higher at 14.16 per cent at the end of June 2010, which was biggest among all Sensex constituents, not only on a single company basis but also at the group level.

The Ratan Tata-led salt-to-software conglomerate has four companies on the Sensex, which also has two companies from Deepak Parekh-led HDFC group -- the flagship housing finance giant HDFC and private banking major HDFC Bank.

In comparison, RIL is the single Sensex company from the Mukesh Ambani-led group, which has only one more listed entity Reliance Industrial Infra Ltd.

Still, RIL has enjoyed the position of the most influential stock, not only on stand-alone but also on group basis, for a long time and movement in this stock has been crucial for any major fall or rise in the Sensex.

But, experts said, scenario seems to be changing as the benchmark Sensex rallied by more than 500 points last Friday without a single-point contribution from RIL, experts said.

They noted that it was an unprecedented development that the index has rallied by such a momentum without any help from its biggest heavyweight stock.

Sensex rose by 513.19 points or 2.9 per cent on Friday, even as RIL remained flat with a 0.03 per cent slip.

Commenting on RIL's under-performance, Way2Wealth's Chief Operating Officer Ambareesh Baliga said: "RIL hasn't been a contributor to the market movement specially on the positive side for a very long time."

"When the markets have fallen at that point of time RIL was a contributor. Last week, when the markets fell below 18,000-mark, Reliance was a contributor. In the fall it is a contributor but in the move up its not, because the stock has been a under-performer," he added.

RIL's Sensex weight has been falling over the past many months mostly because of the under-performance of the stock and a relatively better show by others.

At the end of June last year, the Tata group with four companies had total Sensex weightage of 8.8 per cent, while HDFC and HDFC Bank together had a weightage of 10.64 per cent.

Besides these, only Anil Ambani group has more than one company among the Sensex constituents.

However, both the ADAG firms on Sensex, RCom and Reliance Infra, are on their way out of Sensex and would be soon replaced by Coal India and Sun Pharma . Together, these two stocks have a Sensex weightage of 0.99 per cent.

The Sensex weightage of a stock is determined daily on the basis of the valuation of the free-float or non-promoter shareholding of these companies.

In terms of current stand-alone Sensex weights, RIL is followed by Infosys (9.56 per cent), ICICI Bank (8.4 per cent), ITC (7.23 per cent), L&T (6.54 per cent), HDFC Bank (6.08 per cent) and HDFC (6.02 per cent).

The Sensex weight of four Tata group companies are 4.57 per cent for TCS, 2.66 per cent for Tata Steel , 2.49 per cent of Tata Motors and 1.45 per cent of Tata Power.

Experts said that RIL's stand-alone highest weight could also come under pressure if it continues to under-perform and others like Infosys and ICICI keep up their rally.

However, the market is still hopeful of RIL regaining its earlier importance as a bellwether of the market.

Way2Wealth's Baliga said that RIL was a bellwether stock earlier but not now. However, it does not mean that the stock cannot bounce back to regain its lost status.

"People earlier used to pick up RIL, HUL, Infosys. The psyche has changed because RIL has been under-performing for a long time and automatically people tend to drift away from the stock if negativity persists for longer," he added.

Another analyst said that no stock can be expected to participate in each and every rally and there was no long-term threat to RIL's bellwether status.

However, a senior executive with a leading brokerage said that investors were favouring professionally-run companies which have their corporate governance rules in place.

"Besides, they are preferring widely held companies and not family run businesses. ONGC, Coal India, ICICI, Infy and L&T are the new icons. Companies with strong fundamentals, promising future, strong business strategy and heavy weightage on Nifty and Sensex are dictating the index," he added.

"Going forward, the market is going to be dictated by a combination of stocks, and not a single stock," he noted.

In terms of market valuation, the Mukesh Ambani-led group is currently ranked second with two companies (Rs 285,531 crore), after Tatas with their about 30 companies (Rs 430,659 crore). The HDFC group with three listed companies has a cumulative market value of Rs 210,220 crore.

Indirect QE3

Did Obama Just Announce QE3? Fellow Resource Prospector, Sovereign debt issues continue to roil the markets. Contagion from Greece has officially bled into Italy as shares of Italy's two largest banks, Unicredit and Intesa San Paolo, which were halted amid the pressures.Growth in the United States is anemic, if not completely stalled. And now on the eve of the end of the greatest monetary stimulus program ever, the program Ben Bernanke calls "Quantitative Easing," President Obama has recklessly and perhaps desperately announced he plans to tap into the United States Strategic Petroleum Reserve (SPR).The thing is, this reserve is supposed to be used during emergencies. So where's the emergency? If there is an emergency, maybe Obama should tell us about it. If there's not an emergency, then you have to wonder what's going on with our President.Here's some official "reasoning" from Obama on the topic, from March 11 of this year:"So we're going to try to do everything we can not only to stabilize the market, as I said, to the extent that we see any efforts to take advantage of these price spikes through price gouging, we're going to go after that. If we see significant disruptions or, you know, shifts in the market that are -- are so disconcerting to people that we think a Strategic Petroleum Reserve release might be appropriate, then we'll take that step. And we're going to monitor very closely."Okay, so that doesn't make any sense. Even on the face of it: if releasing barrels from the SPR is intended to stymie oil "gougers" then it will fail almost immediately. Oil speculators are smart cookies. They won't be burned by this move in a significant way. They'll probably take advantage of the market gyrations in a way that people in Government can neither predict or understand.But the real damage here is that this country will experience an emergency that calls for tapping into the SPR - and we'll have to cope with 30 million barrels less.So since we clearly aren't experiencing any kind of emergency, why would Obama tap into the SPR now?My best guess is that Obama and his cabinet hope that by tapping the SPR, they'll be able to continue the effects of QE and QE2 for a bit longer.Maybe, this release of 30 million barrels at a time when QE is supposedly finished will suspend disbelief in the recovery long enough to convince consumers and businesses that all is, indeed, coming up roses

MIRAE ASSET VIEW ON EQUITY MARKET

MIRAE ASSET –CONFERENCE CALL

OVERVIEW

There are concerns related to both global side and domestic side.

Global concerns are related to issues of U.S, Europe and china. On an overall basis global side is fragile.

In U.S recovery is not as per anticipation on account of overall slow growth and unemployment.

But the positive side of U.S at macro level is that, the savings rate is increasing.

U.S corporate profitability is in double digit i.e. more than 10%.With low leverage.

Dollar would remain weak compared to other currencies; if the situation deteriorates then QE3 would be introduced.

China

China’s CPI (consumer price index) is in excess of 5% and government is attempting to bring it to 4%.food inflation is more rather than the fuel prices.CPI is close to peak ,may reach 6% but it will come to 4%.auto sales is weak and property market is also affected in china.

Indian perspective

Issues concerning are crude price, large deficit, high interest rate and inflation.

From fundamental perspective crude prices will remain high due to higher demand and relatively lower supply. Crude prices will remain at ease level, over time government will take oil reforms.

Oil basket reforms have to happen in 2-3 months.

Portfolio management

Two third of sensex companies are not interest sensitive. Currently the valuations are reasonably attractive.

Invest in stocks with very high quality business, which will grow despite all the headwinds. Stocks which are not capital intensive and generate strong cashflow are good.

Positive sectors are IT, pharma, media, consumption, autoancillaries and high quality private sector banks.

Lupin, divi’s lab and cadila are stocks with good growth potential and cashflows in pharma sector.

Negative sectors are infrastructure, tropical commodities and sectors which are dependent on government policy.

Have an equal split of large and mid caps in your portfolio.

Rising inflation benefits toll road companies, not users

The current high inflationary environment will help boost revenues of toll road companies, said ratings agency Crisil.

Crisil, which has analysed the impact of the current inflationary environment on the revenues of 21 toll road projects that are currently in operation, expects toll revenues to grow by 20% in 2011-12. However, consumers should be prepared to pay higher toll charges.

"Operational toll-road projects stand to benefit from the prevailing high-inflationary environment, given that revisions in toll rates are linked to movements in inflation indices, and traffic growth is relatively inelastic," said Pawan Agrawal, director, Crisil Ratings. "This growth will be contributed almost equally by revisions in toll rates and an expected rise in traffic volumes based on our estimates of nearly 8% growth in the Indian economy," he added.

High revenue growth, coupled with low operating costs for toll roads will, therefore, enhance the cash accruals and debt repayment capacity of toll roads, and can positively impact ratings for toll road projects in the short term. Cumulative toll revenue for these projects stood at around 1,000 crore for 2010-11.

Companies that can benefit are toll road developers such as IL&FS Transport Networks , Ashoka Buildcon , Nagarjuna Construction , Shappoorji Pallonji , the GMR Group , and the GVK Group , among others. "The visible impact will be seen in FY11-12," said Mr Agrawal.

As per the Crisil study, road sector's concession agreements allow for the increase in toll rates to be linked to movements in inflation indices during the year, and the inflation rate has averaged at 9.5% in the past 12 months. Further, the growth in traffic on Indian roads so far has been largely inelastic, primarily on account of monopolistic features of roads (given the paucity of quality alternative roads), and its close linkage with economic activity.

Virendra D Mhaiskar, chairman, IRB Infrastructure Developers , said: "Benefit of high inflation will partially impact the toll fee for the projects bidded post 2008 as the tariff accounts for just 40% of WPI, under the new tariff norms." Projects bid prior to that were 100% co-related to the WPI.

Road traffic should, therefore, continue to grow at nearly 10% in 2011-12. Such strong revenue growth will augment the debt service coverage capacity of toll road projects, considering that the operating expenses for toll roads remain low. Expenses for toll road companies are primarily related to maintenance and upgradation, and generally range between 25% and 30% of revenues.

"The growth will contribute more to cash flows and bottomline," said Mr Agrawal. He, however, maintains that this outlook will work only in a scenario where interest costs remain steady. An increasing interest rate environment can put pressure on cash flows of roads, given that most infrastructure projects are usually highly leveraged. Toll road developers can mitigate the risk of rising interest rates by contracting debt at fixed interest rates. "Tapping the debt capital markets can provide operational road projects with an effective avenue to refinance their variable-rate bank loans, with long-tenure, fixed-rate bonds", added Mr Agrawal.

‘About $20bn of private equity is waiting to enter India

Private equity investors are sitting on cash to the tune of $20 billion to enter India. Harish HV, partner at Grant Thornton, a consultancy firm, says that prospects are looking brighter than before.

The key to getting that huge hoard in is the willingness of Indian entrepreneurs to look at ‘selling’ businesses and raising cash.

Over the past two-and-a-half years, business scions like Malvinder and Shivinder Singh of Ranbaxy, Ajay Piramal, and promoters of privately-held companies like Anchor Electronics and Luminous Inverters have exited their flagship businesses.

“The change in attitude of Indian entrepreneurs could trigger the necessary consolidation in several Indian sectors,” Harish told Firstpost.

Sudhir Sethi, chairman and Managing Director of IDG Ventures, a Bangalore-based venture capital (VC) fund, said that he expects $70-75 bn of private equity (PE) and venture capital investment in India by 2015.

He said that about $22 bn is required for follow-up funding of 660 current PE-funded companies. Then, about 2,000 companies in the IT and IT-enabled services sectors, manufacturing, engineering, construction and healthcare are expected to attract close to $30 bn in new PE and VC investments over the next four years. The rest is expected to find its way into still buzzing sectors like telecom, he adds.

The total investment by private equity investors over the last six years is estimated at $50 bn through 1,600 deals, according to a report prepared by Harish and his team along with theIndian Venture Capital Journal.

India received $116 bn of foreign direct investment during the same period. This shows that a sizeable chunk of the FDI is private equity investment.

A key issue with venture capital and private equity investment in India is that there is limited angel funding like in the US. (An angel is simply a wealthy individual investor who funds a small start-up. These start-ups then graduate to a level where they can get private equity or venture capital.)

“The pipeline of deals grows when angel investee companies graduate to the next level,” Sethi said. He believes angel investment will pick up in India, but it may take a few years. For now, established companies are getting growth capital.

Here are some key takeaways from the Grant Thornton report:

* PE investments have grown from $2 bn in 2005 to $19 bn in 2007. Thereafter, investment value fell to around $6.2 bn in 2010, registering a compounded annual growth rate of 25% over the past six years.

Firstpost Comment: The trend of private equity deals taking place in tandem with high valuation in the stock market is interesting. This means many private equity investors struck poor deals. In March 2011, Bain Capital, another consultancy firm, said that $1 trillion in cash or ‘dry powder’ was looking to enter high-growth emerging markets like India, China and Brazil.

* The real estate and property development sector clocked 203 deals worth $13 bn of the total of $50 bn PE investment over the past six years.

Firstpost Comment: Over the past one year, the value of real estate shares has tumbled by an average of 50%. This could have hurt targets of private equity funds that backed real estate projects. Expect PE funds to either stay away from this sector for a while or buy more equity at lower levels from promoters.

* Telecom, banking and power sectors got $6.8 bn, $5.9 bn and $3.7 bn respectively during the same period

Firstpost Comment: Investments by the likes of Temasek in Bharti Airtel and infrastructure company Bharti Telecom could be ripe for partial, if not complete, exit. The total investment of Temasek, the Singapore government arm that invested in Bharti and Bharti Telecom, is worth over $2.2 bn.
Similarly, in 2006, Providence Equity Partners invested $460 million in Idea Cellular for a 15% stake then. We have heard pundits speak about consolidation in this space. It could potentially be driven by the presence of PE funds.

Promoters pledge over 25% of holdings

Below is the list of companies with over 25% pledge promoters Holdings:

No.	Company	Equity Capital (No. of shares)	Promoter Holding (No. of shares)	Promoter Holding Pledged (No. of shares)	Promoter Holding Pledged (%)
1	Ansal Properties	157404876	72979793	71539034	98.02
2	United Spirits	130794968	36640760	32069407	87.52
3	Wockhardt	109435903	80585382	70158917	87.06
4	Essar Oil	1365667086	218020941	183123601	83.99
5	S Kumars	284978377	130288281	108226858	83.06
6	Orchid Chemical	70442076	21502616	17181383	79.9
7	Parsvnath	435181170	294448800	229228962	77.85
8	Orbit Corp	113961890	53546486	41350000	77.22
9	Ackruti City	72735871	60000000	45279500	75.46
10	Nagarjuna Fert	428181821	163924229	120882348	73.74
11	India Cements	307177157	77344493	56986625	73.67
12	Alok Inds	787798278	223376351	152427640	68.23
13	Unitech	2616301047	1270825068	864935072	68.06
14	ICSA	47750985	10454083	6861521	65.63
15	MIC Electronics	102498275	26526966	17060852	64.31
16	Suzlon Energy	1777365647	974741588	610501964	62.63
17	NIIT Tech	59251056	23283480	14493390	62.24
18	Omaxe	173567000	154725636	94945518	61.36
19	JP Power	2095680200	1823191222	1083700000	59.43
20	JSL Stainless	187315792	74466030	42841145	57.53
21	Everonn	19031900	8120398	4583489	56.44
22	Bombay Rayon	127900000	39259260	22035000	56.12
23	WWIL	453440038	286838172	160920500	56.1
24	TV 18	181767548	108600852	60101230	55.34
25	Strides Arcolab	57769171	16339023	8928285	54.64
26	Bajaj Hindusthan	228357111	79969365	43230574	54.05
27	Kingfisher Airlines	497779223	291757626	147537424	50.56
28	Network 18	118895641	68535371	30683109	44.76
29	Mercator Lines	244892073	98484066	43712500	44.38
30	Hotel Leela	387824992	211787380	92060250	43.46
31	Hero Honda	199687500	104259490	44248210	42.44
32	Indiabulls Real	402242239	92372204	35625223	38.56
33	Sintex	272990866	95430390	36400000	38.14
34	Tata Power	237307236	75482614	26860000	35.58
35	Gateway Distriparks	107999832	43748830	15500000	35.42
36	Tata Tele	1897196854	1474521319	493271182	33.45
37	Tata Global	618398570	217848023	70000000	32.13
38	Ispat Inds	2386799130	1589524045	477730463	30.05
39	Aban Offshore	43516515	23415889	7026900	30
40	Shree Renuka	671280850	255567980	76384740	29.88
41	Pantaloon Retail	201142539	90362248	26788845	29.64
42	Core Projects	109145636	52001291	13900000	26.73
43	Gujarat Alkalies	73436928	26964967	7119028	26.4
44	Bombay Dyeing	40546980	20133921	5235774	26
45	IRB Infra	332364110	248593072	63864100	25.69
46	KSK Energy	372630454	204706586	52000000	25.4
47	Bhushan Steel	212358310	146855495	37207970	25.33
48	NCC	256583810	51422613	13001000	25.28
49	KS Oils	425412755	148933067	37611700	25.25
50	Zee Enter	978076130	418472440	105437532	25.19
* Year end - March 31st, 2011