Your infra bet could begin to pay off, finally

The worst nightmare for an equity investor is losing money when others are making good returns. The nightmare seems to have become a reality for many investors who had bet on the infrastructure theme. As on June 1, the category of infrastructure mutual funds had lost 1.47% over the past year, according to Value Research, a mutual fund tracking entity. The S&P CNX Nifty, the broad market benchmark, had gained 9.32% during the period. The volatility in the markets of late has the investors further worried.

VOLATILITY DEMANDS CONSTANT MONITORING

History seems to be working against these schemes. Most infrastructure funds were launched in the bull market of 2007 and early 2008. They were severely hit immediately after as markets tumbled due to the global downturn. "The infrastructure stocks were given very high valuations in 2007," says Abhishek Jain, head of research-equity , Greshma Shares and Stocks. Most projects of infrastructure companies are in the early stages. The companies have been, therefore, seeing negative cash flows over the past five years, forcing investors to shun them. Last year wasn't kind to the sector.

The Reserve Bank of India increased policy rates by 2.5% since March 2010. Banks have responded to the RBI action by increasing lending rates. Infrastructure companies, with one of the most leveraged balance sheets due to heavy loans taken to execute the projects, suffered the most. That is because as rates increased , the companies had to pay more as interest. This affected their profitability. The companies could not look at the capital markets to raise money due to the high volatility in the stock market.

The spiraling commodity prices also dealt a blow to these companies . Infrastructure companies consume steel, cement, coal and other energy inputs on a large scale. Speculators and investors have been parking their funds in commodities to maintain their purchasing power which, in turn, has kept commodity prices high for some time. "In the past six months, the rising commodity prices have shrunk the operating margins of companies across sectors," says Shailesh Kanani, senior research analyst with Angel Broking. In the infrastructure space, the players are involved in competitive bidding for projects, and the lowest bidders take home the business .

As a result, there are no fat margins to fall back on during difficult times. Infrastructure companies also face the brunt of rising commodity prices rise since they work on the basis of fixed price contracts. They have to bear the rising prices, which reduces their profitability. Also, there has been considerable slowdown in the new orders coming their way. The government's spending has reduced. "Issues relating to environment, lack of stable management in various public sector undertakings , land acquisition policies and the recent state assembly elections had led to a dip in new business," says Shailesh Kanani. The mid- and small-sized companies have reported lower profits in the recent past, and they were punished by investors.

THE FUTURE OUTLOOK

However, the future doesn't look that bleak. According to bankers, the RBI may be almost done with rate hikes and there is limited upside for interest rates from here on. If the interest rates stay stable in the last quarter of 2011, infrastructure companies will be the key beneficiaries. "Commodity prices are unlikely to remain at these high levels for a long period of time," says Abhishek Jain. The withdrawal of quantitative easing in the USA is expected to curb commodities' prices in the short term.

This is expected to support the falling margins of infrastructure companies. "In the recent past, there have been developments that could benefit the infrastructure companies ," says Sadanand Shetty, VP and senior fund manager, Taurus Mutual Fund. "There have been, for instance, a meeting of a group of ministers to ensure smooth coal linkages, and the National Highway Authority of India has resumed awarding road contracts." As new orders start trickling in and more clarity emerges from the government on environmental issues, infrastructure companies will find the going good. The new land acquisition bill, which is on its way, will ease bottlenecks relating to land acquisition for large projects.

"The market has factored in most of the adversities facing the infrastructure companies and there is limited downside from here in this space," says an equity analyst with a mutual fund. The valuations are attractive for long-term investors. If the Indian economy is keen to achieve more than 8% growth over the next decade, infrastructure has to improve. In the past, it has been observed that any government at the centre increases infrastructure spending in rural areas in the second half of its tenure. If the trend were to continue , there will be ample business for infrastructure companies over the next two-to-three years. "This is a good time for an investor to gradually build the infrastructure portfolio," says Sadanand Shetty.

WHAT TO DO?

Equity investors make the most when they invest at distressed valuations. But infrastructure companies' businesses are complex and difficult to value. Beyond the quantitative factors, qualitative factors such as corporate governance and project execution abilities of each company also need to be evaluated. Though fund managers are capable of picking the better candidates for their portfolios, there is always the risk of unknown variables, such as changes in government policies or credit markets over a long period of time, that could affect companies in the sector.

"We prefer diversified equity funds over infrastructure funds, but if you are keen to invest in an infrastructure fund, it is better to invest with a five-to-seven year time frame," says Lovaii Navlakhi , managing director and chief financial planner, International Money Matters. "Existing investors can hold on to their investments if they have a fairly long-term view and their allocation to infrastructure fund is well within the limits prescribed by their asset-allocation plan," says Navlakhi. If you have invested up to 5%- 10% of your total equity investments in infrastructure funds, you can continue to hold them. But if you have invested more than that, it may make sense to sell a part of your holding to invest in a diversified equity fund.

Source: http://economictimes.indiatimes.com/personal-finance/savings-centre/savings-news/your-infra-bet-could-begin-to-pay-off-finally/articleshow/8742388.cms

Take your cues carefully from FII trends

Want to pick up some of the stocks that FIIs fancy? Don't do it blindly for the risks may be high.

Do you continue to hold yester-year education player Aptech and or wind equipment maker Suzlon Energy, which had a field day until 2007 but were battered in 2008? If you are fondly hoping they will go back to their 2007 levels, your hopes may well be dashed. Four years hence, these stocks are still trading at half their March 2007 prices, thanks to unceremonious dumping by FIIs. This is typically the kind of fall mid- and small-cap stocks are vulnerable to when FIIs lose interest in them. It is one key reason why retail investors have to be wary of blindly following FIIs in selecting stocks for their portfolio.

It has to be said, though, that stocks such as Shriram Transport Finance Company or City Union Bank, in which FIIs meaningfully hiked stakes (over 10 percentage points) in the 2007-11 period, have delivered phenomenal returns that less fancied stocks could not have matched. So, if you are a retail investor wishing to follow FII footsteps, what precautions should you take? Read on to know how to decipher the FII ownership trends.

FII stronghold

A look at the BSE-500 ownership pattern suggests that FIIs held as much as 15 per cent of the full-market capitalisation of the BSE-500 and a whopping 35 per cent of the free-float market cap as of March 2011, thus providing them considerable influence over stock markets. Domestic institutions (mutual funds and insurance companies), on the other hand, held a more modest 21 per cent of the free-float market cap. It is for this reason that FII trends cannot be ignored in the Indian context.

Sector trends

Let's first look at the long-term FII trends (in sectors within the BSE-500) to know sectors that have moved off the FII radar and those that are gaining ground. If we were to take the total allocation of the FIIs in BSE-500, and sift through the holding between the last four years from March 2007-2011, the most striking feature is the FIIs' heightened interest in non-banking finance companies and investment holding companies.

Their overall stakes in this sector were hiked from 5.5 per cent in March 2007 to 10.5 per cent in March 2011, making it the third most preferred sector of FIIs in the BSE-500 universe. The increase though was substantial only post March 2009. Aside of NBFCs, refineries and, more recently, steel and non-ferrous metals (following the commodity rally) as well as trading companies (such as 3M India, Adani Enterprises) are sectors in which FIIs have upped stakes within their overall portfolio allocation.

Among those that lost FII favour, the most conspicuous was telecom. From 9.5 per cent allocation in March 2007, this number dwindled to 3.2 per cent, thanks to both fundamental and governance issues in the sector. Brokerages and realty, too, dwindled to insignificant levels dragging the share prices of stocks in this segment to new lows. Interestingly, infrastructure developers continue to attract FII interest despite slack financial and stock performance. If these are the trends, what should a retail investor make of it?

Take the case of NBFCs. The sector has been re-rated rather swiftly, rather like the brokerage and realty stocks in 2007. And the fate of realty or brokerage stocks in the 2008 meltdown is well known. With demanding valuations prevailing in some of the NBFC stocks, investors would do well to be cautious in such sectors and book profits on rallies.

Similarly, sectors such as auto and cement and capital goods have been the more volatile FII fancies, with holdings being constantly churned. IT too, is one of the first sectors to be dumped in a downturn and also among the first in which FII picked stakes. In the FII's BSE 500 portfolio, the IT holding was anywhere between 8 to 15 per cent in the last four years; much of the churning pertaining to mid-cap IT. It is noteworthy that IT receives only 10.4 per cent sector weight in the BSE 500. Clearly, the FIIs tend to go overweight on the sector, thus having a higher influence on stock movements.

So are there any sectors where the FIIs have held reasonably steady? FMCG and pharma appear to be the most dependable on this count. With FII portfolio allocation varying within a safe 2-4 per cent in each of these sectors, they appear to be less under the influence of FII buying and selling. In both these sectors the FIIs have lower allocation compared with the BSE-500 weights.

The infrastructure sector, on the other hand, appears to be among the more promising space from the FIIs' perspective. The quiet accumulation of select stocks such as L&T and GMR Infrastructure and Engineers India at relatively low valuations appears to suggest that the sector may be turning ripe to deliver returns.

Mind the mid-caps

Sector trends apart, investors also need to be mindful of the market cap bias of the stocks they own. Even in FII overweight sectors/stocks, large-cap stocks are less affected by FII selling compared with mid-cap stocks. Take the case of large-caps Voltas or HDFC. FIIs reduced their stake by 10 percentage points in these stocks over the last four years. The stocks nevertheless went on to deliver over 20 per cent returns compounded annually.

The same though was not true of another capital goods company Jyoti Structures, in which FIIs reduced stakes by over 14 percentage points in the above period. The stock is still trading at half its March 2007 price despite sound financial performance. Stocks such as IVRCL or Gammon India, which, despite heavy selling, continue to have high FII stakes, have seen sharp volatility in their stock movements since the 2008 downturn and their stock price has declined over the years. Constant FII churning, also affected these stocks.

Apply this rule to stocks where FIIs are now upping their stakes. Large caps IDFC or Hindalco, for instance, may well bear the pain of any FII selling, given that FIIs have not jumped in to these stocks; the accumulation instead has been steady with the stock climb being gradual, backed by earnings growth. The same may not be entirely true of mid-caps such as Manappuram General Finance & Leasing or LIC Housing Finance that have caught the FII fancy in recent times, delivering astronomical returns of 135 per cent and 69 per cent compounded annually! Any steep hikes in FII ownership in mid-caps would, therefore, require caution, especially when the valuations appear stretched; while you may rest easy in the case of large-caps as long as they are fundamentally sound even if it means enduring a short correction.

Is there domestic support?

If you have still gone ahead and bought the mid-caps fancied by FIIs, be sure that there is some domestic institutional holding to support the stock as well. In other words, do the FIIs' domestic peers — mutual funds and domestic insurance companies (DIIs) — hold sufficient stakes in the stock and can they provide some buying support in the event of FII selling?

This was not the case with SKS Finance. With DIIs holding 5 per cent at the time of listing (and later reducing stakes further), this stock had a free fall ever since allegations of mismanagement broke.

Jain Irrigation Systems, Ansal Properties & Infrastructure, Anant Raj Industries or NDTV are some of the stocks where the domestic institutional holding is really low compared with the high FII ownership.

Source: http://www.thehindubusinessline.com/features/investment-world/article2077024.ece?homepage=true

Bonds Slump Most in 15 Months as Budget Deficit Goal Withers: India Credit

India’s corporate bond market is signaling that the government will fail to meet its target of cutting the budget deficit to a four-year low.

The yield on Steel Authority of India Ltd.’s 8.8 percent securities due in October 2016 surged 22 basis points, or 0.22 percentage point, last week to 9.79 percent as the state-owned company deferred its stock sale. The rates on the notes of Oil & Natural Gas Corp. and Indian Oil Corp., other companies in which the government plans to reduce stakes, touched the highest level in 16 months on growing concerns they won’t be able to sell shares this year.

Corporate bonds are bearing the brunt of investor concerns that the government will fail to raise $9 billion from asset sales by March 31 to cut the budget gap to 4.6 percent of gross domestic product. Sovereign notes, which ended the longest stretch of declines in 14 months last week, slid 1.4 percent this quarter, according to Bank of America-Merrill Lynch. Yields on 10-year bonds of 8.3 percent are more than double the U.S. rate and the highest among the so-called BRIC countries.

“There is no appetite at the moment for share sales as market sentiment is very poor,” Killol Pandya, who manages the equivalent of $300 million as the Mumbai-based head of fixed income at Daiwa Mutual Fund, said in an interview on June 2. “The government will definitely miss the disinvestment target and that’s bad for the fiscal deficit.”

Revenue, Expenses

India’s benchmark Sensitive Index of shares has slid 10.4 percent this year, the worst performance in Asia after Vietnam, posing a challenge to fresh equity sales. Steel Authority is “waiting for the market to stabilize,” Chairman C.S. Verma said in an interview on June 1, when the plan was shelved. The government aimed to sell a 5 percent stake in the nation’s second-biggest producer, boosting state revenue by about $672 million, based on closing prices on June 3.

The government’s budget, which assumed a 38 percent drop in energy subsidies, has come under pressure from rising oil prices, Reserve Bank of India Governor Duvvuri Subbarao told reporters last month. This year’s budget-deficit target is “difficult to achieve,” Chakravarthy Rangarajan, chairman of the Prime Minister’s Economic Advisory Council, told reporters in Mumbai on June 2.

Growth Slows

India’s 10-year bonds completed their first weekly rally since April on June 3 after official data on May 31 showed the economy expanded 7.8 percent in the three months to March, the least since the quarter ended December 2009. The yield on the government’s 7.8 percent bonds due in April 2021 dropped 19 basis points last week to 8.27 percent, according to the central bank’s trading system.

“The delay in the disinvestment process will certainly not give confidence to deficit hawks,” Ritesh Jain, the Mumbai- based head of investments at Canara Robeco Asset Management Ltd. that oversees $2.2 billion said in an interview on June 3. “Slowing GDP growth will also reduce tax collections. It’s a double whammy with expenditure expected to go up and revenue collections coming down.”

The 10-year bond yield will rise to between 8.5 percent and 8.8 percent by September if oil prices remain at about $100 a barrel in New York, he said.

Corporate Yields

The difference between India’s notes due in a decade and similar-maturity U.S. bonds has widened to 533 basis points from 463 at the end of last year. Rupee debt returned 0.9 percent this year, the second-worst performance among 10 Asian local- currency debt markets outside Japan tracked by HSBC Holdings Plc.

In the corporate bond market, the difference in yields between India’s top-rated three-year rupee company debt and similar-maturity government bonds has more than doubled to 205 basis points, from 83 a year earlier.

D.H. Pai Panandiker, president of RPG Foundation, an economic policy group in New Delhi, said the government still has time to carry out its share sales.

“It is too early to assume that share sale target will be missed, we are only in the first quarter,” he said. “I expect market sentiment to improve from September.”

The yield on the 8.54 percent notes of ONGC Videsh Ltd., a unit of the explorer, rose 42 basis points to 9.62 percent this quarter, according to data compiled by Bloomberg.

The rate reached 9.63 percent on May 31, the highest level since the securities were issued in January 2010. The yield on Indian Oil’s 11 percent bond due in September 2018 has climbed 30 basis points since March 31 to 9.76 percent. The rate touched 9.94 percent on May 27, the highest since October 2009.

Sentiment

“If the funds are not going to be mobilized through the equity route, then the companies’ debt burden will increase,” Shubhada Rao, chief economist at Mumbai-based Yes Bank Ltd., said in an interview on June 3. “Bond yields of these companies are simply reflecting sentiment from deferment of the share sales.”

The rupee has dropped 0.25 percent this year, the worst performance among Asia’s most-traded currencies after the Thai baht, as global funds sold $86 million more Indian shares. The currency traded at 44.90 per dollar at the end of last week, according to data compiled by Bloomberg.

The cost of protecting the debt of government-owned State Bank of India, which some investors perceive as a proxy for the nation, increased 20 basis points this year to 181, according to CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market.

Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a government or company fail to adhere to its debt agreements. A basis point equals $1,000 annually on a contract protecting $10 million of debt.

“I am very worried about the fiscal position,” Ramya Suryanarayanan, an economist at DBS Group Holdings Ltd. in Singapore, said in an interview on June 3. “When growth is slowing and the equity markets are not doing well, selling shares of state firms is a challenge.”

Source: http://www.bloomberg.com/news/2011-06-05/bonds-slump-most-in-15-months-as-budget-deficit-goal-withers-india-credit.html