Saturday, February 28, 2009
IKF Technologies--a report
A group of individuals bought a listed company in 2004 and turned it around. The software company they bought, has now expanded into telecom and even into the emerging bio-fuels business.IKF Technologies is today a Rs 180-crore company and growing. In 2004-05, when the company was taken over by Pradeep Dutta and Sunil Kumar Goel, it had a share capital base of Rs 10 crore. Over the last two years, the company has invested in putting together infrastructure and technology, which has paid off. It grew its web development, software and BPO businesses internationally, to Australia and the UK.In 2006, it set up a 31-seat BPO for Tata Teleservices. “The initial couple of years went into restructuring and settling down in the core business,” says Pankaj Garg, director at IKF Technologies, which counts domestic telcos and banks among its clients. Though the promoters realise that they are late entrants in BPO outsourcing, they are looking at new markets.IKF has now set up offices in Germany, Brazil, Dubai and Russia, and is hoping to see growth from these markets over the next two years. The idea of getting into telecom was there since 2006 but “since it was difficult to get a licence at that point in time, it never materialised”, says Garg. But it finally got a Category ‘A’ licence for Internet Service Provider (ISP) by the Department of Telecommunications (DoT) in January. Since then, it has been busy setting up its network. “We have already spent Rs 4-5 crore, and another Rs 8-9 crore will be spent in the future on developing the network,” informs Garg. As an initial foray in telecom, the company decided to get into VoIP services, a segment, which is not too crowded. That’s how IKF Tel came into being. The company is almost on the verge of launching its VoIP services for the retail market, having already launched the same for enterprise customers.IKF has earmarked $2-3 million for its telecom business, of which, says Garg, $1 million has already been spent over the last one year. IKF expects revenues of Rs 100 crore from its telecom business in the next three years, growing both organically and inorganically. Taking its quest for emerging technologies forward, IKF is into bio-fuels too. “The chairman of the company, Dr RP Singh, who is a former scientist at the Indian Agriculture Research Institute, led us into this field,” says Vishal Rawat, president bio-diesel at IKF Green Fuel. IKF Green Fuel is also planning to get into ethanol, solar and wind energy in the near future. For bio-diesel, though, it has signed an MoU with the government of Madhya Pradesh through which it is seeking 200 hectares of wasteland for jatropha cultivation and will also be setting up an oil extraction plant with an investment of Rs 30 crore.It also engages in contract farming on private wasteland. “We have one refinery already at Udaipur, which can produce 3,000 litres a day but at the moment, it is being used for trial runs. We expect commercial production to start by 2010-11,” says Rawat. Commercial bio-diesel production would need a steady flow of jatropha seeds. To this effect, IKF has 10,000 hectares of jatropha under cultivation, both on leased and owned land. “By 2008-end, we hope to reach the 30,000-40,000 hectares mark,” says Rawat. Meanwhile, research is on for better seeds with agricultural universities and other institutions.The company has been granted permission by the government of India for a GDR issue to raise Rs 500 crore. About Rs 200 crore are already been allocated for IKF Green Fuel, indicating the company’s commitment to the growing sector. It is also exploring JVs in Brazil and South Africa for plantation and extraction there. “We want to be the leader in the bio-fuels market by 2015,” says Rawat.IKF Tech plans to grow jatropha in Africa-------IKF Technologies, the country's first corporate jatropha refiner, has formally approached African Governments — Swaziland, Mozambique and South Africa — for permission to cultivate the plant. Armed with detailed project reports, the company has also applied for an area of 50,000 acres of wasteland in each of these countries for organised jatropha farming. Mr Mukesh Kumar Goel, a director of the company, told Business Line that official responses, however, were awaited. According to the company's estimates, the cost of acquiring the land (total 1.5 lakh acres), nursing the plants till the first fruition after 18 months, and setting up crushing facilities would be Rs 3,000 crore. In a phased manner If permissions were obtained, the purchases or acquisition of land through lease and taking up the plantation projects would be done in a phased manner over a long period of time. IKF has sought to own the land in Africa, and prefers not go in for contract farming, Mr Goel explained.In India, it has opted for the contract-farming model in Rajasthan, where its existing refinery is located, in an area of 5,000 hectares. In Meghalaya, however, IKF cultivates on its own land.Its refinery was commissioned in March this year. Currently, it is procuring jatropha seeds from the open market since it began farming the plants in Meghalaya roughly 12 months ago.Though the first flush of seeds takes 18 months, jatropha harvests are available twice a year in the period after maturing. One hectare can accommodate roughly 2,500 plants.The yield per tree in one harvest, according to thumb rule, is around 3.5 kg and from one kg of seeds, a little over 300 ml of bio-diesel can be had.The company has a one-year renewable technology agreement with Indian Oil Technologies Ltd, a subsidiary of Indian Oil Corporation, for perfecting mixing grade bio-diesel.Refinery in Gujarat :It has proposed to set up another refinery in Gujarat with a capacity of 1 lakh tonnes per annum at a cost of Rs 50 crore.It has also sought permission for contract farming of jatropha in Gujarat and Chhattisgarh.In Rajasthan, it has a refinery running with a capacity to produce 3,000 litres a day.As a Market Analyst, I am strictly recommending this stock.CMP: INR 3. It's future prospect is bright. Stock price will definately touch arround INR 200+ in 2012
IVRCLINFRA a Report
Company Profile:IVRCL operates in infrastructure sectors namely Water & Environment, Transportation, Buildings and Power. It has a large client base, which includes public sector clients (ONGC, BHEL, IOC etc), private sector clients (Birla Institute of technology, Tata projects, Jindal Steel & Power) and Central and State Govt. clients (Airport Authority, Indian Railways, Ministry of Defence etc). Its operations cut across geographical frontiers of the sub-continent, with headquarters in Hyderabad and administrative offices in Chennai, Cochin, Bangalore, Pune, Kolkata, Jodhpur, Chattisgarh, Ahmedabad and Goa.Construction Sector:Construction is the second largest economic activity after agriculture in India. Construction sector can be classified into three segments: -1. Real Estate: The sector has suffered a meltdown in 2008 due to high interest rates and demand destruction. However we believe it will improve in the coming months due to the decrease in property prices, falling interest rates on home loans and favorable tax treatment.2. Infrastructure: This constitutes roads, water, ports, airports, freight corridor, power, etc. Investment in the infrastructure is robust and is at the center of the various stimuli that the Government is offering.3. Industrial Construction: This constitutes sectors like steel, textiles, fertilizers, and oil and gas refineries. This is where the maximum fall in demand is taking place and worries remain.Construction sector uses raw materials like steel, cement apart from using large working capital. The stock prices of leading companies dropped by an average 84% for the 6-months to early September 2008 due to the credit crises, slump in the housing market, increase in the prices of construction material, increase in rate of interest and increase in the prices of oil. But due to the decrease in interest rate, inflation and cut in the prices of steel, the sector is beginning to gain strength and deserves an upgrade.Financial Position:For the FY’08 the Net sales increased by 54% to Rs 3867 crore from Rs 2506 crore. The company derived Rs 3693 crore of its revenues from Engineering and Construction and about Rs 259 crore from Real Estate in the FY’08. The EBITDA also showed an improvement by 91.5% to Rs 572 crore. The Net profit registered a growth of 74% to Rs 283.4 crore from Rs 163 crore.For the second quarter of FY’09 the net revenue increased by an impressive 65% to Rs 1137 crore, due to faster execution of projects. The EBITDA grew by 69% to Rs 91.28 crore. The net profit showed an excellent improvement by 90% to Rs 67 crore from Rs 35.25 crore. This was due to high revenues and lower tax rate. Interest cost however more than doubled during the quarter due to high borrowings. The order booked during the second quarter FY’09 was worth Rs 2586.6 crore and backlog of orders during the same period was worth Rs 13,800 crore.The total net worth in FY’08 increased to Rs 2480 crore. The company also has stock options worth Rs 1 crore. The secured and unsecured loans, which the company has, were worth Rs 1725 crore. On the asset side a major portion consisted of current assets. The Debt/Equity ratio as on 31st Mar 08 stood at 0.66.During the year, some of the Foreign Currency Convertible Bond (FCCB) holders have exercised their option of converting their bonds into equity shares. Till the date of the Balance Sheet, amounts aggregating to US $ 18.10 million worth of bonds were converted into 3,545,284 equity shares of the face value of Rs.2 each. Rs 7.1 crore has been debited to the Profit and Loss account during the year towards foreign exchange translation difference on Foreign Currency Convertible Bonds and deposits in foreign currency.Subsidiaries:IVRCL’s major subsidiaries are:-IVR prime Urban Developers Ltd: IVR Prime is dedicated to creating luxury-intensive urban infrastructure. Its net profit for the FY’08 increased by a spectacular 750% to Rs 176 crore from Rs 20.6 crore in FY’07.Hindustan Dorr-Oliver Ltd (HDO): Hindustan Dorr Oliver Limited (HDO) is an Indian EPC company having its core business activities in providing Engineered Solutions, technologies and EPC installations in Liquid-Solid Separation applications. The company’s core business focus is on Water Management. Its net profit for the FY’08 increased by 47% to Rs 22.64 crs. Sector wise order booked in FY 2007-08 accounts for 54% in environment, 27% in minerals, 14% in fertilizers and 5% in pulp and paper. IVR Prime and HDO are listed subsidiaries on NSE.Chennai Water Desalination Ltd: Executing the most prestigious contract of Chennai Sea Water Desalination Plant Project at Minjure, Chennai.Alkor Petroo Ltd: is a Hyderabad based subsidiary of IVRCL engaged in Oil & Gas Exploration & Production. It has an association with Gujarat State Petroleum Corporation Ltd (GSPCL).Investment Positives:IVRCL has a very strong order book, making it an attractive investment. The order book remains extremely healthy at Rs 15500 crore. Recently the company bagged a few more orders, latest being from Bangalore Metro Rail Corp, IOC and Karnataka Water Supply Board in the first week of Jan 09. This will inflate the order book to a massive Rs 16000 crore approx. It has the best Order book to Turnover ratio in the industry. Also, NHAI has been going slow on orders in the last two years and it is expected to complete orders for more than 6000 kms in the one or two months- thrice the orders placed in 2007-08. IVRCL is expected to be one of the biggest beneficiaries of this.Steel companies announced a price cut during Sep 2008, which will help reduce the cost of material for construction companies. The price of the cement is also expected to ease in the future. This will shore up margins considerably.Decreasing rates of interest and easing inflation is bound to create a positive impact on the construction companies. With the decrease in rate of interest the cost of borrowing has reduced to a great extent, making the condition favorable for taking more debt to finance the projects.Mid cap stocks such as IVRCL are exposed to infrastructure segment, which is expected to grow in the coming future. India, which is Asia’s 3rd largest economy, is in need of greater infrastructure spending for the next 10 years for economic expansion. India has allocated huge expenditure for the building of airports, highways and for the Commonwealth Games in 2010.Concerns:Any delays in implementation of the projects undertaken by the company may affect its profitability.For more funding requirement the company has to depend on leverage, which will cause increase in the rate of interest to be paid on debt. Increasing interest costs may have a dampening affect on the profits.There is a risk that the government could change certain regulations for the construction sector. The biggest threat relates to availability of 80IA benefit to construction companies. IVRCL has got an award from IYAT in this regard. We believe the government is not likely to enact unfavorable regulations for the sector given the present environment.The table clearly places IVRCL as one of the most attractive bets in the Construction space. The company is growing at a phenomenal pace (change in Net profit of 74%) vis-à-vis its competitors and boasts of some fantastic orders in its kitty.Valuation:IVRCL has shown a good financial performance for the FY’08 and for the second quarter FY’09. The company has a strong order book and currently it is undervalued, making the stock a good investment. In our view it is one of the best plays in the Indian infrastructure.
best stock for 2009 according to BUSINESS TODAY
Business Today magazine had recently published list of top 20 stocks to buy or watch in 2009. One may treat these as buy stock advice, strictly for long term investment. Mentioned here are good stocks that are strong to survive slowdown in 2009 and emerge as best stocks out of gloom. They are very chep stocks in terms of value investing for long term valuations. The list is in alphebetical order.Business Today had spoken to 11 of the brightest minds on Dalal Street and got them to identify their favourite long-term value picks.
Aventis Pharma
Focus on lifestyle segment keeps it in good healthFor some time now, smart money has been moving into shares of multinational pharmaceuticals companies. After India entered the product patent regime in 2005, the fortunes of MNC pharma companies have changed for the better.They can now introduce new blockbuster drugs of their foreign parents and enjoy the profits. Aventis Pharma is one such well-placed MNC.It is focussing on fast-growing lifestyle segments like cardiovascular and diabetes in the domestic market. Aventis has a few strong products in this segment like Amaryl (anti-diabetes) with a 4 per cent market share and Cardace (cardiovascular segment) with a 28 per cent market share.
Besides, its parent Sanofi-Aventis, France, has a huge pipeline of molecules under development in the lifestyle category.But what has impressed analysts is the aggressive introduction of its parents’ products in the Indian market. Says Rajiv Thakkar, CEO, Parag Parikh Financial Advisory Services (PPFAS): “Aventis’ overseas product introductions in India will expand its domestic business over time.”Another factor, Thakkar says, that will benefit the stock is its debt-free status and a hefty cash balance. Thakkar, however, has not put a target price on the stock and cautions that the uncertain market may play spoilsport in the short-term. But in the long term, he says, “the stock has the makings of a multi-bagger.”—Clifford AlvaresAxis BankStrong business model to offset succession worriesThe stock market often reacts sharply to news from the banking sector. Axis Bank’s stock dipped sharply—slipping nearly 18 per cent to Rs 394.50 on January 27, 2009, down from Rs 485 on January 9, 2009. The market, already edgy over slowdown fears, was more worried over the retirement of Axis Bank’s long-time chairman P.J. Nayak, and the issue of a successor. Axis Bank’s advances continue to grow at a decent clip of over 50 per cent at a time when credit expansion has slumped.The bank is facing a squeeze on margins as lending rates are falling while borrowing costs have yet to come down. Another hitch is possible stake sale of 21.5 per cent in Axis Bank held by administrator of the special undertaking of UTI. Says Vaibhav Agarwal, analyst, Angel Broking: “Axis Bank has been focussing on retail liabilities business before increasing its loan assets. Its fee income too is doing well.”—Clifford Alvares
Bharat Electronics
Armed for growthJust when large manufacturers are curtailing their activities to save on costs, Bharat Electronics is opening a support centre at Kochi, Kerala, to serve its growing clientele. A Navratna public sector undertaking which gets 80-85 per cent of sales from the armed forces, BEL’s turnover and profit after tax have been rising consistently for four decades now. It is talking to global players like Lockheed Martin, Boeing and EADS to make the most of the government’s “offset” clause, which requires any foreign company bagging an order worth over Rs 300 crore from India’s defence sector to share 30 per cent of it with Indian firms.It also gains from its links with the Defence Research & Development Organisation. Says V.V.R. Sastry, BEL’s Chairman & Managing Director: “We are interacting with DRDO for developing new products.” Over the last one year, the BEL scrip has slid some 59 per cent, but broking houses still bet big on it. Says Dolat Capital’s Sameer Panke: “In the last five years, while the defence budget has grown at 12 per cent, defence capital expenditure grew at 23 per cent. BEL is a big beneficiary of this increase. The company has strong cash flows and no debts at all.’’—K.R. Balasubramanyam
Bharti Airtel
More subscribers, more towers, and now more spectrumBharti Airtel typifies the success story of Indian mobile telephony. Its outstanding execution skills have made it the market leader. Over FY2006-08, Bharti cornered 26.5 per cent of the all-India incremental mobile subscriber additions. In the third quarter (fiscal 2009), it reported an increase of 41.5 per cent in gross revenues on a year-on-year basis, and 9 per cent on a sequential basis. During the same period, its mobile subscriber base grew by 55.3 per cent y-o-y and 10.5 per cent q-o-q to 85.7 million. Says Sunil Mittal, CMD, Bharti Airtel: “Bharti’s strategy of extensive roll-out ahead of competition, especially in new villages, has yielded rich dividends.”The company is also well placed with its telecom infrastructure business, given the need for rapid network expansion by current and new operators. Bharti, with the largest tower portfolio in India through Infratel, is likely to be a key beneficiary. Then there are other reasons why the stock is a good bet. The spectrum allocation imbroglio seems to have been resolved. Says Hitesh Agrawal, Head of Research, Angel Broking: “The spectrum issue was critical for the sustained growth of the telecom sector. Now the medium-term growth requirement of Bharti has been taken care of.”Checkout: Bharti Airtel - Investing In Stock From Telecom Sector—Rishi Joshi
BHEL
Everybody wants light in dark times—and BHEL has the spark.Bharat heavy electricals, the largest manufacturer of power plant equipment, is one company that is unlikely to be hit by the economic gloom. It knows the government will spend freely to improve the power sector. And the government does not cancel orders. So, BHEL, which has 64 per cent of the power plant market, has been ramping up capacity.By December 2007, it had increased capacity from 6,000 MW a year to 10,000 MW, and is now taking it to 20,000 MW by 2011-12. Says Pulkit Bakliwal, analyst at Sharekhan: “The 11th Five-Year Plan has envisaged capacity addition of 78,000 MW.BHEL has been the major beneficiary of the spending.” Government projects account for around 85 per cent of BHEL’s order book of Rs 1,04,000 crore, giving it high revenue stability. “Even in the present scenario, orders placed by government institutions are unlikely to get cancelled,” says Bakliwal, pointing out that the cash-strapped private players may have to do so. “This gives BHEL a huge comfort level,” Bakliwal adds.But there are bumps on the road ahead. BHEL could face project delays and a lag before new orders start coming in. The stock, at slightly above Rs 1,320, is trading at a premium. Says Bakliwal: “A strong balance sheet and huge cash pile of about Rs 8,400 crore would help BHEL sail smoothly through the challenging business environment. We recommend a buy with a price target of Rs 1,546 over the next 12 months.”—Manu Kaushik
CRISIL
Ratings become vital during downturnsThe global credit crisis has hit the capital-raising plans of Indian companies.The only window open these days is through domestic debt issues or bank borrowings.Here’s where a debt rating from CRISIL, India’s largest rating agency, helps. Another growth avenue has been created by the Basel-II norms to rate corporate loans given by banks.Says Jigar Valia of Parag Parikh Financial Advisory Services (PPFAS): “It’s a small component now, but it’s going to be a phenomenally fast-growing business. It’s a perpetual and stable income.” CRISIL’s work for its parent Standard & Poor’s is a cash cow.Adds Valia: “Even in years of de-growth, this company was trading at a PE multiple of 20 times; but thanks to the financial crisis, the stock is cheap.”—Clifford Alvares
Engineers India
No fear of input cost hikesOne of Asia’s leading design and engineering companies, Engineers India builds petroleum refineries, industrial projects, offshore structures, metallurgy and power projects. India’s substantial investments in infrastructure have given it an order book of Rs 8,000 crore, to be executed over 3-4 years. It has begun protecting its margins by signing open-book orders—input cost hikes are passed through.Says Ajay Parmar of Emkay Global Financial Services: “The stock looks quite attractive… there are no worries about the management since the government holds a 91 per cent stake… it has zero debt and high dividend payout. It’s a very safe bet in the current market scenario.”—Rishi Joshi
GMDC
Sitting on a mine of wealthThe share price of Gujarat Mineral Development Corporation was one of the worst affected when Gujarat government asked state-run companies to fork out 30 per cent of their profit before tax for social work. Despite this, the stock is still seen as a good value pick—the bad news has been discounted. Profitability is expected to get a boost from the recent lignite price hike. “Full impact will be seen in the next financial year,” says Sameer Ranade, analyst at PINC Research.The government may reverse the 30 per cent rule, since minority shareholders at some other companies have mutinied. GMDC’s moves into the power sector will add to valuation.—Virendra Verma
HCl Technologies
Seeking a global footprintAs India’s fifth-largest IT services exporter, straddling a diverse portfolio of services that ranges from R&D to enterprise, BPO and infrastructure management, HCL Technologies has a de-risked model as it is essentially in high-growth, high-end, low competition areas. It is looking at inorganic growth.The acquisition of UK-based Axon last year is expected to help it become a major player in SAP implementation, an area from which it expects to get a quarter of its revenues, against 11 per cent now. Says Vineet Nayar, CEO, HCL Technologies, “We have successfully integrated Axon to dominate the SAP space globally.”Anagram’s V.K. Sharma says: “We feel the worsening global macroeconomic situation and slowdown in IT spending is factored in at this price. The stock trades at almost 8 per cent dividend yield, limiting its downside from these levels.”—Rishi Joshi
HDFC
Pioneer grows biz in slowdownAt a time when the home loans business is in the dumps, a lower third-quarter profit at India’s largest housingfinance company did not ring any alarm bells. Housing Development Finance Corporation actually boosted net interest income by 18 per cent to Rs 785 crore but was hit by higher running expenses. Analysts did not waver from their “buy” rating.HDFC’s asset quality has improved further, it has valuable subsidiaries in insurance and asset management and it has been consolidating its business. HDFC’s asset quality has improved in December 2008. Says Gaurav Dua of Sharekhan: “Throughout its history, HDFC has shown a healthy growth.”
Aventis Pharma
Focus on lifestyle segment keeps it in good healthFor some time now, smart money has been moving into shares of multinational pharmaceuticals companies. After India entered the product patent regime in 2005, the fortunes of MNC pharma companies have changed for the better.They can now introduce new blockbuster drugs of their foreign parents and enjoy the profits. Aventis Pharma is one such well-placed MNC.It is focussing on fast-growing lifestyle segments like cardiovascular and diabetes in the domestic market. Aventis has a few strong products in this segment like Amaryl (anti-diabetes) with a 4 per cent market share and Cardace (cardiovascular segment) with a 28 per cent market share.
Besides, its parent Sanofi-Aventis, France, has a huge pipeline of molecules under development in the lifestyle category.But what has impressed analysts is the aggressive introduction of its parents’ products in the Indian market. Says Rajiv Thakkar, CEO, Parag Parikh Financial Advisory Services (PPFAS): “Aventis’ overseas product introductions in India will expand its domestic business over time.”Another factor, Thakkar says, that will benefit the stock is its debt-free status and a hefty cash balance. Thakkar, however, has not put a target price on the stock and cautions that the uncertain market may play spoilsport in the short-term. But in the long term, he says, “the stock has the makings of a multi-bagger.”—Clifford AlvaresAxis BankStrong business model to offset succession worriesThe stock market often reacts sharply to news from the banking sector. Axis Bank’s stock dipped sharply—slipping nearly 18 per cent to Rs 394.50 on January 27, 2009, down from Rs 485 on January 9, 2009. The market, already edgy over slowdown fears, was more worried over the retirement of Axis Bank’s long-time chairman P.J. Nayak, and the issue of a successor. Axis Bank’s advances continue to grow at a decent clip of over 50 per cent at a time when credit expansion has slumped.The bank is facing a squeeze on margins as lending rates are falling while borrowing costs have yet to come down. Another hitch is possible stake sale of 21.5 per cent in Axis Bank held by administrator of the special undertaking of UTI. Says Vaibhav Agarwal, analyst, Angel Broking: “Axis Bank has been focussing on retail liabilities business before increasing its loan assets. Its fee income too is doing well.”—Clifford Alvares
Bharat Electronics
Armed for growthJust when large manufacturers are curtailing their activities to save on costs, Bharat Electronics is opening a support centre at Kochi, Kerala, to serve its growing clientele. A Navratna public sector undertaking which gets 80-85 per cent of sales from the armed forces, BEL’s turnover and profit after tax have been rising consistently for four decades now. It is talking to global players like Lockheed Martin, Boeing and EADS to make the most of the government’s “offset” clause, which requires any foreign company bagging an order worth over Rs 300 crore from India’s defence sector to share 30 per cent of it with Indian firms.It also gains from its links with the Defence Research & Development Organisation. Says V.V.R. Sastry, BEL’s Chairman & Managing Director: “We are interacting with DRDO for developing new products.” Over the last one year, the BEL scrip has slid some 59 per cent, but broking houses still bet big on it. Says Dolat Capital’s Sameer Panke: “In the last five years, while the defence budget has grown at 12 per cent, defence capital expenditure grew at 23 per cent. BEL is a big beneficiary of this increase. The company has strong cash flows and no debts at all.’’—K.R. Balasubramanyam
Bharti Airtel
More subscribers, more towers, and now more spectrumBharti Airtel typifies the success story of Indian mobile telephony. Its outstanding execution skills have made it the market leader. Over FY2006-08, Bharti cornered 26.5 per cent of the all-India incremental mobile subscriber additions. In the third quarter (fiscal 2009), it reported an increase of 41.5 per cent in gross revenues on a year-on-year basis, and 9 per cent on a sequential basis. During the same period, its mobile subscriber base grew by 55.3 per cent y-o-y and 10.5 per cent q-o-q to 85.7 million. Says Sunil Mittal, CMD, Bharti Airtel: “Bharti’s strategy of extensive roll-out ahead of competition, especially in new villages, has yielded rich dividends.”The company is also well placed with its telecom infrastructure business, given the need for rapid network expansion by current and new operators. Bharti, with the largest tower portfolio in India through Infratel, is likely to be a key beneficiary. Then there are other reasons why the stock is a good bet. The spectrum allocation imbroglio seems to have been resolved. Says Hitesh Agrawal, Head of Research, Angel Broking: “The spectrum issue was critical for the sustained growth of the telecom sector. Now the medium-term growth requirement of Bharti has been taken care of.”Checkout: Bharti Airtel - Investing In Stock From Telecom Sector—Rishi Joshi
BHEL
Everybody wants light in dark times—and BHEL has the spark.Bharat heavy electricals, the largest manufacturer of power plant equipment, is one company that is unlikely to be hit by the economic gloom. It knows the government will spend freely to improve the power sector. And the government does not cancel orders. So, BHEL, which has 64 per cent of the power plant market, has been ramping up capacity.By December 2007, it had increased capacity from 6,000 MW a year to 10,000 MW, and is now taking it to 20,000 MW by 2011-12. Says Pulkit Bakliwal, analyst at Sharekhan: “The 11th Five-Year Plan has envisaged capacity addition of 78,000 MW.BHEL has been the major beneficiary of the spending.” Government projects account for around 85 per cent of BHEL’s order book of Rs 1,04,000 crore, giving it high revenue stability. “Even in the present scenario, orders placed by government institutions are unlikely to get cancelled,” says Bakliwal, pointing out that the cash-strapped private players may have to do so. “This gives BHEL a huge comfort level,” Bakliwal adds.But there are bumps on the road ahead. BHEL could face project delays and a lag before new orders start coming in. The stock, at slightly above Rs 1,320, is trading at a premium. Says Bakliwal: “A strong balance sheet and huge cash pile of about Rs 8,400 crore would help BHEL sail smoothly through the challenging business environment. We recommend a buy with a price target of Rs 1,546 over the next 12 months.”—Manu Kaushik
CRISIL
Ratings become vital during downturnsThe global credit crisis has hit the capital-raising plans of Indian companies.The only window open these days is through domestic debt issues or bank borrowings.Here’s where a debt rating from CRISIL, India’s largest rating agency, helps. Another growth avenue has been created by the Basel-II norms to rate corporate loans given by banks.Says Jigar Valia of Parag Parikh Financial Advisory Services (PPFAS): “It’s a small component now, but it’s going to be a phenomenally fast-growing business. It’s a perpetual and stable income.” CRISIL’s work for its parent Standard & Poor’s is a cash cow.Adds Valia: “Even in years of de-growth, this company was trading at a PE multiple of 20 times; but thanks to the financial crisis, the stock is cheap.”—Clifford Alvares
Engineers India
No fear of input cost hikesOne of Asia’s leading design and engineering companies, Engineers India builds petroleum refineries, industrial projects, offshore structures, metallurgy and power projects. India’s substantial investments in infrastructure have given it an order book of Rs 8,000 crore, to be executed over 3-4 years. It has begun protecting its margins by signing open-book orders—input cost hikes are passed through.Says Ajay Parmar of Emkay Global Financial Services: “The stock looks quite attractive… there are no worries about the management since the government holds a 91 per cent stake… it has zero debt and high dividend payout. It’s a very safe bet in the current market scenario.”—Rishi Joshi
GMDC
Sitting on a mine of wealthThe share price of Gujarat Mineral Development Corporation was one of the worst affected when Gujarat government asked state-run companies to fork out 30 per cent of their profit before tax for social work. Despite this, the stock is still seen as a good value pick—the bad news has been discounted. Profitability is expected to get a boost from the recent lignite price hike. “Full impact will be seen in the next financial year,” says Sameer Ranade, analyst at PINC Research.The government may reverse the 30 per cent rule, since minority shareholders at some other companies have mutinied. GMDC’s moves into the power sector will add to valuation.—Virendra Verma
HCl Technologies
Seeking a global footprintAs India’s fifth-largest IT services exporter, straddling a diverse portfolio of services that ranges from R&D to enterprise, BPO and infrastructure management, HCL Technologies has a de-risked model as it is essentially in high-growth, high-end, low competition areas. It is looking at inorganic growth.The acquisition of UK-based Axon last year is expected to help it become a major player in SAP implementation, an area from which it expects to get a quarter of its revenues, against 11 per cent now. Says Vineet Nayar, CEO, HCL Technologies, “We have successfully integrated Axon to dominate the SAP space globally.”Anagram’s V.K. Sharma says: “We feel the worsening global macroeconomic situation and slowdown in IT spending is factored in at this price. The stock trades at almost 8 per cent dividend yield, limiting its downside from these levels.”—Rishi Joshi
HDFC
Pioneer grows biz in slowdownAt a time when the home loans business is in the dumps, a lower third-quarter profit at India’s largest housingfinance company did not ring any alarm bells. Housing Development Finance Corporation actually boosted net interest income by 18 per cent to Rs 785 crore but was hit by higher running expenses. Analysts did not waver from their “buy” rating.HDFC’s asset quality has improved further, it has valuable subsidiaries in insurance and asset management and it has been consolidating its business. HDFC’s asset quality has improved in December 2008. Says Gaurav Dua of Sharekhan: “Throughout its history, HDFC has shown a healthy growth.”
Tuesday, October 14, 2008
Iceland stock exchange crashes 76%
Iceland’s stock exchange nose-dived 76% on opening this morning after trading was suspended for three days.
The Icelandic government took the decision to cease trading on Thursday after the country’s financial sector collapsed.
Local authorities say the index actually rose when financial stocks were removed as their continued suspension was causing a statistical anomaly.
The country has been on the verge of bankruptcy after the government was forced to take over its three largest banks, which held debts many times the island’s GDP.
Today, Iceland sought a €4bn loan from Russia, and may become the first Western country to seek support from the IMF in more than 30 years.
The country is also facing a legal challenge from the UK government, which has been forced to guarantee lost savings deposits in the British subsidiaries of Icelandic banks.
The Icelandic government took the decision to cease trading on Thursday after the country’s financial sector collapsed.
Local authorities say the index actually rose when financial stocks were removed as their continued suspension was causing a statistical anomaly.
The country has been on the verge of bankruptcy after the government was forced to take over its three largest banks, which held debts many times the island’s GDP.
Today, Iceland sought a €4bn loan from Russia, and may become the first Western country to seek support from the IMF in more than 30 years.
The country is also facing a legal challenge from the UK government, which has been forced to guarantee lost savings deposits in the British subsidiaries of Icelandic banks.
Monday, October 13, 2008
Switching to Cash May Feel Safe, but Risks Remain
By RON LIEBER Published: October 8, 2008
It’s a question we’ve all asked in our darker moments of late: Why not just put all of our investments in cash, 100 percent, just for a little while, until things calm down?
Some indexes around the world have fallen by a third or more.
Some people already seem to be acting on that instinct. In the first six days of October (through Monday), investors pulled $19 billion out of mutual funds that invest in United States stocks, matching the outflows for the entire month of September, according to TrimTabs Investment Research. “What clients are looking for is safety,” said John Bunch, president of retail distribution at TD Ameritrade. “They are seeking solutions that are backed by the federal government. Specifically, F.D.I.C-insured money funds and certificates of deposit. All of it is under the umbrella of, ‘Am I safe and insured?’ ”By fleeing for the comfort of safe and insured, however, investors with a time horizon beyond a few years may be doing real damage to their long-term finances. If you’re tempted to make a big move to cash right now, you’re doing something called market timing. It’s an implied statement that you’ve figured out the right moment to get out of stocks — and will also know the right time to get back in.So let’s dispense with the first part straightaway. The right time to move out of stocks was a year or so ago, before various stock indexes the world over fell by one- third or more. If you missed that opportunity, you’re hardly alone. But if you sell now, you’ll be locking in your losses. And once you’re in cash, there isn’t much upside. In fact, with interest rates low, you’re likely to lose money in cash, because inflation will probably eat up the after-tax returns you earn from a savings or money-market account. A guarantee of a small loss may sound good right now. But if you’re not bailing out of stocks once and for all, how will you know when it’s time to get back in? The fact is, any peace of mind you gain by being on the sidelines now will turn into a migraine once you see how much you can harm your portfolio over time by missing just a bit of any rebound.
H. Nejat Seyhun, a professor of finance at the Ross School of Business at the University of Michigan, put together a study in 2005 for Towneley Capital Management, where he tested the long-term damage that investors could do to their portfolios if they missed out on the small percentage of days when the stock market experienced big gains. From 1963 to 2004, the index of American stocks he tested gained 10.84 percent annually in a geometric average, which avoided overstating the true performance. For people who missed the 90 biggest-gaining days in that period, however, the annual return fell to just 3.2 percent. Less than 1 percent of the trading days accounted for 96 percent of the market gains. This fall, Javier Estrada, a professor of finance at IESE Business School in Barcelona, published a similar study in The Journal of Investing that looked at equity markets in 15 nations, including the United States. A portfolio belonging to an investor who missed the 10 best days over several decades across all of those markets would end up, on average, with about half the balance of someone who sat tight throughout. So moving to cash right now is just fine as long as you know precisely when to get back into stocks (even though you didn’t know when to get out of them). At some point, stocks will indeed fall enough that investors will remove the money from their mattresses and put it to work, causing prices to rise significantly. But, as Bonnie A. Hughes, a certified financial planner with the Enrichment Group in Miami, put it to me, there won’t be an e-mail message or news release that goes out when this is about to happen. It will be evident only afterward, on the few days when the market surges. And it gets worse for those who think they won’t have any trouble investing in stocks again later. Medium- or long-term investors who are considering a big move into cash right now are probably making an emotional decision, at least in part. For those who follow through, the same instincts will probably hurt when trying to figure out when to reinvest in stocks. “The emotional forces that drove them out of the market aren’t likely to let them back in ‘until things are better,’ ” Dan Danford of the Family Investment Center in St. Joseph, Mo., said in an e-mail message. “And for most people, things won’t feel better again until the market has already moved back up.” In fact, he added, plenty of people may not allow themselves to get back in until the market has already risen significantly. That situation is worth considering if you think your mood, or returns, can’t get any worse. “People feel worse missing out on the bounce-back that will inevitably come than they do hanging in there through the down period,” said Elaine D. Scoggins, a certified financial planner with Merriman Berkman Next in Seattle. The truly downbeat do not see the bounce as inevitable. This outlook is essentially a bet that our current predicament is so different that the equity markets won’t bounce back at all, even though they survived 1929, the Great Depression, 1987 and a major terrorist attack. I do not believe that the markets are in some kind of permanent decline, and I haven’t found an expert who does.That said, some retirees, or those close to leaving the work force, may be well-off enough to leave stocks behind for now. If the tumult in the economy and the decline in the markets have altered your risk tolerance, then it may make sense to move to a portfolio of Treasury bills, certificates of deposit and money market funds. Michael G. Coli, 56, of Crystal Lake, Ill., decided to take his 401(k) money out of the market in February. As an investor in his sons’ pizza restaurants, he noticed that an increasing number of customers were relying on credit cards. And as the owner of a winter home in Naples, Fla., he witnessed the housing market dive. Taken together, he decided to pull his retirement money, which he would need in five years, from the Vanguard Balanced Index Fund and move it all into certificates of deposit.“I had the feeling the economy was not on real firm ground,” Mr. Coli said. “I decided to get out and put it all in C.D.’s, and that is where I’ve been ever since.”If you can’t afford to live off the proceeds of cash investments (or dividends from your investment in your kids’ pizza joints), you may have no choice but to hold on to whatever stocks you have left. Then, you can hope for a rebound that will allow you to live out your later years more comfortably. Selling now and moving to cash could mean guaranteeing a lower standard of living for the rest of your life, because you’d be locking in your losses. But if you’re a bit younger, try to think of your investment portfolio in the same way you consider the value of your home, if you own one. After all, if you’re not moving anytime soon, your home is a long-term investment, too. “Today’s price is not your price. Your price is 10 or 20 years from now,” said Thomas A. Orecchio, of Greenbaum & Orecchio, a wealth management firm in Old Tappan, N.J. “Unfortunately, stock market investors don’t always see things that way.”
It’s a question we’ve all asked in our darker moments of late: Why not just put all of our investments in cash, 100 percent, just for a little while, until things calm down?
Some indexes around the world have fallen by a third or more.
Some people already seem to be acting on that instinct. In the first six days of October (through Monday), investors pulled $19 billion out of mutual funds that invest in United States stocks, matching the outflows for the entire month of September, according to TrimTabs Investment Research. “What clients are looking for is safety,” said John Bunch, president of retail distribution at TD Ameritrade. “They are seeking solutions that are backed by the federal government. Specifically, F.D.I.C-insured money funds and certificates of deposit. All of it is under the umbrella of, ‘Am I safe and insured?’ ”By fleeing for the comfort of safe and insured, however, investors with a time horizon beyond a few years may be doing real damage to their long-term finances. If you’re tempted to make a big move to cash right now, you’re doing something called market timing. It’s an implied statement that you’ve figured out the right moment to get out of stocks — and will also know the right time to get back in.So let’s dispense with the first part straightaway. The right time to move out of stocks was a year or so ago, before various stock indexes the world over fell by one- third or more. If you missed that opportunity, you’re hardly alone. But if you sell now, you’ll be locking in your losses. And once you’re in cash, there isn’t much upside. In fact, with interest rates low, you’re likely to lose money in cash, because inflation will probably eat up the after-tax returns you earn from a savings or money-market account. A guarantee of a small loss may sound good right now. But if you’re not bailing out of stocks once and for all, how will you know when it’s time to get back in? The fact is, any peace of mind you gain by being on the sidelines now will turn into a migraine once you see how much you can harm your portfolio over time by missing just a bit of any rebound.
H. Nejat Seyhun, a professor of finance at the Ross School of Business at the University of Michigan, put together a study in 2005 for Towneley Capital Management, where he tested the long-term damage that investors could do to their portfolios if they missed out on the small percentage of days when the stock market experienced big gains. From 1963 to 2004, the index of American stocks he tested gained 10.84 percent annually in a geometric average, which avoided overstating the true performance. For people who missed the 90 biggest-gaining days in that period, however, the annual return fell to just 3.2 percent. Less than 1 percent of the trading days accounted for 96 percent of the market gains. This fall, Javier Estrada, a professor of finance at IESE Business School in Barcelona, published a similar study in The Journal of Investing that looked at equity markets in 15 nations, including the United States. A portfolio belonging to an investor who missed the 10 best days over several decades across all of those markets would end up, on average, with about half the balance of someone who sat tight throughout. So moving to cash right now is just fine as long as you know precisely when to get back into stocks (even though you didn’t know when to get out of them). At some point, stocks will indeed fall enough that investors will remove the money from their mattresses and put it to work, causing prices to rise significantly. But, as Bonnie A. Hughes, a certified financial planner with the Enrichment Group in Miami, put it to me, there won’t be an e-mail message or news release that goes out when this is about to happen. It will be evident only afterward, on the few days when the market surges. And it gets worse for those who think they won’t have any trouble investing in stocks again later. Medium- or long-term investors who are considering a big move into cash right now are probably making an emotional decision, at least in part. For those who follow through, the same instincts will probably hurt when trying to figure out when to reinvest in stocks. “The emotional forces that drove them out of the market aren’t likely to let them back in ‘until things are better,’ ” Dan Danford of the Family Investment Center in St. Joseph, Mo., said in an e-mail message. “And for most people, things won’t feel better again until the market has already moved back up.” In fact, he added, plenty of people may not allow themselves to get back in until the market has already risen significantly. That situation is worth considering if you think your mood, or returns, can’t get any worse. “People feel worse missing out on the bounce-back that will inevitably come than they do hanging in there through the down period,” said Elaine D. Scoggins, a certified financial planner with Merriman Berkman Next in Seattle. The truly downbeat do not see the bounce as inevitable. This outlook is essentially a bet that our current predicament is so different that the equity markets won’t bounce back at all, even though they survived 1929, the Great Depression, 1987 and a major terrorist attack. I do not believe that the markets are in some kind of permanent decline, and I haven’t found an expert who does.That said, some retirees, or those close to leaving the work force, may be well-off enough to leave stocks behind for now. If the tumult in the economy and the decline in the markets have altered your risk tolerance, then it may make sense to move to a portfolio of Treasury bills, certificates of deposit and money market funds. Michael G. Coli, 56, of Crystal Lake, Ill., decided to take his 401(k) money out of the market in February. As an investor in his sons’ pizza restaurants, he noticed that an increasing number of customers were relying on credit cards. And as the owner of a winter home in Naples, Fla., he witnessed the housing market dive. Taken together, he decided to pull his retirement money, which he would need in five years, from the Vanguard Balanced Index Fund and move it all into certificates of deposit.“I had the feeling the economy was not on real firm ground,” Mr. Coli said. “I decided to get out and put it all in C.D.’s, and that is where I’ve been ever since.”If you can’t afford to live off the proceeds of cash investments (or dividends from your investment in your kids’ pizza joints), you may have no choice but to hold on to whatever stocks you have left. Then, you can hope for a rebound that will allow you to live out your later years more comfortably. Selling now and moving to cash could mean guaranteeing a lower standard of living for the rest of your life, because you’d be locking in your losses. But if you’re a bit younger, try to think of your investment portfolio in the same way you consider the value of your home, if you own one. After all, if you’re not moving anytime soon, your home is a long-term investment, too. “Today’s price is not your price. Your price is 10 or 20 years from now,” said Thomas A. Orecchio, of Greenbaum & Orecchio, a wealth management firm in Old Tappan, N.J. “Unfortunately, stock market investors don’t always see things that way.”
Those With a Sense of History May Find It’s Time to Invest
By ALEX BERENSON Published: October 11, 2008
The four most dangerous words for investors are: This time is different.
Ruby Washington/The New York Times
Five Weeks of Financial Turmoil In 1999, technology companies with no earnings or sales were valued at billions of dollars. But this time was different, investors told themselves. The Internet could not be missed at any price.They were wrong. In 2000 and 2001 technology stocks plunged, erasing trillions of dollars in wealth. Now investors have again convinced themselves that this time is different, that the credit crisis will push economies worldwide into the deepest recession since the Depression. Fear runs even deeper today than greed did a decade ago. But in their panic, investors are ignoring 60 years of history. Since the Depression, governments have become far more aggressive about intervening when credit markets seize up or economies struggle. And those interventions have generally succeeded. The recessions since World War II, while hardly easy, have been far less painful than the Depression.Now some veteran investors, including G. Kenneth Heebner, a mutual fund manager who has one of the best long-term track records on Wall Street, say that the sell-off has gone much too far and stocks are poised to rally powerfully if the downturn is less severe than investors fear.“The fact is, there are a lot of tremendous bargains out there,” said Mr. Heebner, who manages about $10 billion in several mutual funds. Indeed, by many measures stocks are as cheap as they have been in the last 25 years.He pointed to Chesapeake Energy, a natural gas producer that he owns in his CGM Focus mutual fund. In July, Chesapeake traded for $63 a share. On Friday, it fell as low as $11.99.He says that investors with a stomach for risk and a long time horizon should consider following Warren E. Buffett, who in the last three weeks has invested $8 billion in Goldman Sachs and General Electric.Mr. Heebner expects world economies to contract over the next year. But he said the market plunge in the last week was no longer being driven by rational analysis. Stocks are probably falling because of a combination of panic and forced selling by hedge funds that must meet margin calls from their lenders, he said.Mr. Heebner’s funds have not avoided the carnage this year. The CGM Focus fund is down about 42 percent so far in 2008. But his long-term track record is impressive. In the decade that ended Dec. 31, 2007, CGM Focus rose 26 percent a year, including reinvested dividends, making it among the best-performing mutual funds.Mr. Heebner is not alone in his optimism. “I think in years to come — I wouldn’t say months to come — we will perceive this as being a great value-buying opportunity,” said David P. Stowell, a finance professor at Northwestern and a former managing director at JPMorgan Chase. “Two and three years from now, it will seem very smart.”Even before their jaw-dropping plunge of the last month, stocks were not expensive by historical standards, based on fundamentals like earnings and cash flow. Now, after falling 30 percent or more since early September, stocks in stalwart, profitable corporations like Nokia, Exxon Mobil and Boeing are trading at nine times their annual profits per share or less. Many smaller companies are even cheaper. Some of those stocks are trading at five times earnings or less. Those ratios are historically low. Over all, the Standard & Poor’s 500-stock index is trading at about 13 times its expected profits for 2009, its lowest level in decades. In contrast, at the height of the technology bubble in early 2000, the stocks in the S.& P. traded at about 30 times earnings, the highest level ever. At the same time, the 10-year Treasury bond paid about 6 percent interest, compared with less than 4 percent today. Investors have fled stocks in favor of government bonds, insured bank deposits and other low-risk investments because they are deeply afraid of the worldwide economic crisis, said Stephen Haber, an economic historian and senior fellow at the Hoover Institution. But he said he believed that fear might have gone too far. “If there is good and wise policy, and government moves effectively, this need not play itself out in ways like the Great Depression, which is the image that is playing itself out in people’s mind,” Mr. Haber said. Government action typically does not work immediately, and banking crises around the world often require multiple interventions, he said.Still, optimists remain in the minority on Wall Street. Most investors seem to believe that the credit crisis will do substantial damage to stocks and overall economic activity.“We have never before seen for such sustained periods of time such a sustained turn away from risk taking,” said Steven Wieting, the chief United States economist for Citigroup. “This has broken out of the boundaries we’ve seen.” Economic activity appears to have slowed sharply in September, Mr. Wieting said. The panic last week took the biggest toll on financial companies, as well as companies that are highly leveraged. But stocks fell 10 to 30 percent even for companies typically thought to be resistant to economic downturns, like the manufacturers of consumer staples.For example, Newell Rubbermaid fell to $12.82 on Friday from $17.34 on Oct. 1, a 26 percent decline in 10 days. Newell Rubbermaid now trades at its lowest levels since 1990, and just eight times its expected earnings for next year. Yet Newell Rubbermaid, whose brands include Calphalon, is profitable and insulated from the credit crisis, said William G. Schmitz Jr., who follows household products companies for Deutsche Bank. “There’s really no balance sheet risk,” Mr. Schmitz said. The company also pays a 6 percent dividend.Newell Rubbermaid said in July that it would earn $1.40 to $1.60 a share for 2008, excluding restructuring charges. For 2009, stock analysts predict it will make $1.53 a share. And while a slowing economy may mean that people will be buying fewer products from Newell Rubbermaid, the recent plunge in oil prices will reduce its costs, Mr. Schmitz said.“The way the stock’s reacted, you’d think they were going out of business,” he said. Martin J. Whitman, a professional investor for more than 50 years, said that as long as economies worldwide could avoid an outright depression, stocks were amazingly cheap. Mr. Whitman manages the $6 billion Third Avenue Value fund, which returned 10.2 percent annually for the 15 years that ended Sept. 30, almost two percentage points a year better than the S.& P. 500 index. The fund is down 46 percent this year.“This is the opportunity of a lifetime,” Mr. Whitman said. “The most important securities are being given away.”
The four most dangerous words for investors are: This time is different.
Ruby Washington/The New York Times
Five Weeks of Financial Turmoil In 1999, technology companies with no earnings or sales were valued at billions of dollars. But this time was different, investors told themselves. The Internet could not be missed at any price.They were wrong. In 2000 and 2001 technology stocks plunged, erasing trillions of dollars in wealth. Now investors have again convinced themselves that this time is different, that the credit crisis will push economies worldwide into the deepest recession since the Depression. Fear runs even deeper today than greed did a decade ago. But in their panic, investors are ignoring 60 years of history. Since the Depression, governments have become far more aggressive about intervening when credit markets seize up or economies struggle. And those interventions have generally succeeded. The recessions since World War II, while hardly easy, have been far less painful than the Depression.Now some veteran investors, including G. Kenneth Heebner, a mutual fund manager who has one of the best long-term track records on Wall Street, say that the sell-off has gone much too far and stocks are poised to rally powerfully if the downturn is less severe than investors fear.“The fact is, there are a lot of tremendous bargains out there,” said Mr. Heebner, who manages about $10 billion in several mutual funds. Indeed, by many measures stocks are as cheap as they have been in the last 25 years.He pointed to Chesapeake Energy, a natural gas producer that he owns in his CGM Focus mutual fund. In July, Chesapeake traded for $63 a share. On Friday, it fell as low as $11.99.He says that investors with a stomach for risk and a long time horizon should consider following Warren E. Buffett, who in the last three weeks has invested $8 billion in Goldman Sachs and General Electric.Mr. Heebner expects world economies to contract over the next year. But he said the market plunge in the last week was no longer being driven by rational analysis. Stocks are probably falling because of a combination of panic and forced selling by hedge funds that must meet margin calls from their lenders, he said.Mr. Heebner’s funds have not avoided the carnage this year. The CGM Focus fund is down about 42 percent so far in 2008. But his long-term track record is impressive. In the decade that ended Dec. 31, 2007, CGM Focus rose 26 percent a year, including reinvested dividends, making it among the best-performing mutual funds.Mr. Heebner is not alone in his optimism. “I think in years to come — I wouldn’t say months to come — we will perceive this as being a great value-buying opportunity,” said David P. Stowell, a finance professor at Northwestern and a former managing director at JPMorgan Chase. “Two and three years from now, it will seem very smart.”Even before their jaw-dropping plunge of the last month, stocks were not expensive by historical standards, based on fundamentals like earnings and cash flow. Now, after falling 30 percent or more since early September, stocks in stalwart, profitable corporations like Nokia, Exxon Mobil and Boeing are trading at nine times their annual profits per share or less. Many smaller companies are even cheaper. Some of those stocks are trading at five times earnings or less. Those ratios are historically low. Over all, the Standard & Poor’s 500-stock index is trading at about 13 times its expected profits for 2009, its lowest level in decades. In contrast, at the height of the technology bubble in early 2000, the stocks in the S.& P. traded at about 30 times earnings, the highest level ever. At the same time, the 10-year Treasury bond paid about 6 percent interest, compared with less than 4 percent today. Investors have fled stocks in favor of government bonds, insured bank deposits and other low-risk investments because they are deeply afraid of the worldwide economic crisis, said Stephen Haber, an economic historian and senior fellow at the Hoover Institution. But he said he believed that fear might have gone too far. “If there is good and wise policy, and government moves effectively, this need not play itself out in ways like the Great Depression, which is the image that is playing itself out in people’s mind,” Mr. Haber said. Government action typically does not work immediately, and banking crises around the world often require multiple interventions, he said.Still, optimists remain in the minority on Wall Street. Most investors seem to believe that the credit crisis will do substantial damage to stocks and overall economic activity.“We have never before seen for such sustained periods of time such a sustained turn away from risk taking,” said Steven Wieting, the chief United States economist for Citigroup. “This has broken out of the boundaries we’ve seen.” Economic activity appears to have slowed sharply in September, Mr. Wieting said. The panic last week took the biggest toll on financial companies, as well as companies that are highly leveraged. But stocks fell 10 to 30 percent even for companies typically thought to be resistant to economic downturns, like the manufacturers of consumer staples.For example, Newell Rubbermaid fell to $12.82 on Friday from $17.34 on Oct. 1, a 26 percent decline in 10 days. Newell Rubbermaid now trades at its lowest levels since 1990, and just eight times its expected earnings for next year. Yet Newell Rubbermaid, whose brands include Calphalon, is profitable and insulated from the credit crisis, said William G. Schmitz Jr., who follows household products companies for Deutsche Bank. “There’s really no balance sheet risk,” Mr. Schmitz said. The company also pays a 6 percent dividend.Newell Rubbermaid said in July that it would earn $1.40 to $1.60 a share for 2008, excluding restructuring charges. For 2009, stock analysts predict it will make $1.53 a share. And while a slowing economy may mean that people will be buying fewer products from Newell Rubbermaid, the recent plunge in oil prices will reduce its costs, Mr. Schmitz said.“The way the stock’s reacted, you’d think they were going out of business,” he said. Martin J. Whitman, a professional investor for more than 50 years, said that as long as economies worldwide could avoid an outright depression, stocks were amazingly cheap. Mr. Whitman manages the $6 billion Third Avenue Value fund, which returned 10.2 percent annually for the 15 years that ended Sept. 30, almost two percentage points a year better than the S.& P. 500 index. The fund is down 46 percent this year.“This is the opportunity of a lifetime,” Mr. Whitman said. “The most important securities are being given away.”
Sunday, October 5, 2008
U.S. bank failures almost certain to increase in next year
SAN FRANCISCO, California (AP) -- Here's a safe bet for uncertain times: A lot of banks won't survive the next year of upheaval despite the U.S. government's $700 billion rescue plan to restore order to the financial industry.The biggest questions are how many will perish and how they will be put out of their misery, whether it's outright closures by regulators scrambling to preserve the dwindling deposit insurance fund or in fire sales made under government pressure.
Weakened by huge losses on risky home loans, the banking industry is now on the shakiest ground since the early 1990s, when more than 800 federally insured institutions failed in a three-year period. That was during the clean-up phase of a decade-long savings-and-loan meltdown that wound up costing U.S. taxpayers $170 billion to $205 billion, after adjusting for inflation.
The government's commitment to spend up to $700 billion buying bad debts from ailing banks is likely to save some institutions that would have otherwise died, but analysts doubt it will be enough to avert a major shakeout.
"It will help, but it's not going to be the saving grace" because a lot of banks are holding construction loans and other types of deteriorating assets that the government won't take off their books, predicted Stanford Financial analyst Jaret Seiberg. He expects more than 100 banks nationwide to fail next year.
The darkening clouds already have some depositors pondering a question that always seems to crop up in financial panics despite deposit insurance: Could it possibly make more sense to stash cash in a mattress than in a bank account?
"It sounds like a joke," said business owner Mauricoa Quintero as he recently paused outside a Wachovia Bank branch in Miami. "But it sounds safer than the turmoil out there right now."
Not as many banks are likely to fail as in the S&L crisis, largely because there are about 8,000 fewer today than there were in 1988.
But that doesn't necessarily mean the problems won't be as costly or as unnerving; banks are much larger than they were 20 years ago, thanks to laws passed in the 1990s.
"I don't see why things will be that much different this time," said Joseph Mason, an economist who worked for the U.S. Treasury Department in the 1990s and is now a finance professor at Louisiana State University. "We just had a big party where people and businesses overborrowed. We had a bubble and now we want to get back to normal. Is it going to be painless? No."
With more super-sized banks in business, fewer failures could still dump a big bill on the Federal Deposit Insurance Corp., the government agency that insures bank and S&L deposits. The FDIC's potential liability is rising under a provision of the bailout that increases the deposit insurance limit to $250,000 per account, up from $100,000.
Using statistics from the S&L crisis as a guide, Mason estimates total deposits in banks that fail during the current crisis at $1.1 trillion. After calculating gains from selling deposits and some of the assets of the failed banks, Mason estimates the clean-up this time will cost the FDIC $140 billion to $200 billion.
The FDIC's fund currently has about $45 billion, a five-year low. But the agency can make up for any shortfalls by borrowing from the U.S. Treasury and eventually repaying the money by raising the premiums that it charges the healthy banks and S&Ls.
Through the first nine months of the year, 13 banks and S&Ls have been taken over by the FDIC, more than the previous five years combined.
The FDIC may be underestimating, or least not publicly acknowledging, the trouble ahead. As of June 30, the FDIC had 117 insured banks and S&Ls on its problem list. That represented about 1 percent of the nearly 8,500 institutions insured as of June 30. Entering 1991, about 10 percent of the industry -- 1,496 institutions -- was on the FDIC's endangered list.
Although the FDIC doesn't name the institutions it classifies as problems, this year's June 30 list didn't include two huge headaches: Washington Mutual Bank and Wachovia. Combined, WaMu and Wachovia had more than $1 trillion in assets; the assets of the 117 institutions on the FDIC's watch list totaled $78 billion.
Late last month, WaMu became the largest bank failure in U.S. history, with $307 billion in assets, nearly five times more, on an inflation-adjusted basis, than the previous record collapse of Continental Illinois National Bank in 1984. The FDIC doesn't expect WaMu's demise to drain its fund because JP Morgan Chase & Co. agreed to buy the bank's deposits and most of the assets for $1.9 billion.
Regulators dodged another potential bullet by helping to negotiate the sale of Wachovia's banking operations to Citigroup Inc. in a complex deal that could still end up costing the FDIC, depending on the severity of future loan losses. On Friday, a battle of banking giants erupted when Wachovia struck a new deal with Wells Fargo & Co. without government help, and Citigroup demanded that it be called off.
The banking outlook looks even gloomier through the prism of Bauer Financial Inc., which has been relying on data filed with the FDIC to assess the health of federally insured institutions for the past 25 years.
Based on its analysis of the June 30 numbers, Bauer Financial concluded that 426 federally insured institutions are grappling with major problems. That's about 5 percent of all banks and S&Ls.
About 15 percent of the banks on Bauer's cautionary list have more than $1 billion in assets. Not surprisingly, the troubles are concentrated among banks that were the most active in markets where free-flowing mortgages contributed to the rapid run-up in home prices that set the stage for the jarring comedown. By Bauer's reckoning, the largest numbers of troubled banks are in California, Florida, Georgia, Illinois and Minnesota.
"It's important for people to remember that not all these banks are going to fail, just because they are on this list," said Karen Dorway, Bauer Financial's president. "Many of them will recover."
James Barth, who was chief economist of the regulatory agency that oversaw the S&L industry in the 1980s, doubts things will get as bad as they did then.
"It's scary right now, but it's not as scary as a lot of people are making it out to be," said Barth, now a senior fellow at the Milken Institute, a think tank.
Mani Behimehr, a home designer living in Tustin, California, isn't feeling reassured after what happened to WaMu and Wachovia. After he heard the news that WaMu had been seized and sold to JP Morgan, he rushed out to withdraw about $150,000 in savings and opened a new account at Wachovia only to learn about its sale to Citigroup two days later.
"I thought this is the strongest economy in the world; nothing like that happens in this country," said Behimehr, 46, who is originally from Iran.
The tumult is creating expansion opportunities for healthy banks. Industry heavyweights such as JP Morgan, Citigroup and Bank of America Corp. have already rolled the dice on major acquisitions of financially battered institutions in hopes of becoming more powerful than ever.
Smaller players such as Clifton Savings Bank in New Jersey are bragging about their relatively clean balance sheets to lure depositors away from rivals that are wrestling with huge loan losses. The bank, with about $900 million in total assets, says just one of its 2,300 home loans is in foreclosure.
"There is going to be a flight to quality," predicted John Celentano Jr., Clifton Savings' chief executive. "People are going to start putting their money in places that were being run the way things are supposed to be run: the old-fashioned way.
Source:- http://www.cnn.com/2008/US/10/05/shaky.banks.ap/index.html
Weakened by huge losses on risky home loans, the banking industry is now on the shakiest ground since the early 1990s, when more than 800 federally insured institutions failed in a three-year period. That was during the clean-up phase of a decade-long savings-and-loan meltdown that wound up costing U.S. taxpayers $170 billion to $205 billion, after adjusting for inflation.
The government's commitment to spend up to $700 billion buying bad debts from ailing banks is likely to save some institutions that would have otherwise died, but analysts doubt it will be enough to avert a major shakeout.
"It will help, but it's not going to be the saving grace" because a lot of banks are holding construction loans and other types of deteriorating assets that the government won't take off their books, predicted Stanford Financial analyst Jaret Seiberg. He expects more than 100 banks nationwide to fail next year.
The darkening clouds already have some depositors pondering a question that always seems to crop up in financial panics despite deposit insurance: Could it possibly make more sense to stash cash in a mattress than in a bank account?
"It sounds like a joke," said business owner Mauricoa Quintero as he recently paused outside a Wachovia Bank branch in Miami. "But it sounds safer than the turmoil out there right now."
Not as many banks are likely to fail as in the S&L crisis, largely because there are about 8,000 fewer today than there were in 1988.
But that doesn't necessarily mean the problems won't be as costly or as unnerving; banks are much larger than they were 20 years ago, thanks to laws passed in the 1990s.
"I don't see why things will be that much different this time," said Joseph Mason, an economist who worked for the U.S. Treasury Department in the 1990s and is now a finance professor at Louisiana State University. "We just had a big party where people and businesses overborrowed. We had a bubble and now we want to get back to normal. Is it going to be painless? No."
With more super-sized banks in business, fewer failures could still dump a big bill on the Federal Deposit Insurance Corp., the government agency that insures bank and S&L deposits. The FDIC's potential liability is rising under a provision of the bailout that increases the deposit insurance limit to $250,000 per account, up from $100,000.
Using statistics from the S&L crisis as a guide, Mason estimates total deposits in banks that fail during the current crisis at $1.1 trillion. After calculating gains from selling deposits and some of the assets of the failed banks, Mason estimates the clean-up this time will cost the FDIC $140 billion to $200 billion.
The FDIC's fund currently has about $45 billion, a five-year low. But the agency can make up for any shortfalls by borrowing from the U.S. Treasury and eventually repaying the money by raising the premiums that it charges the healthy banks and S&Ls.
Through the first nine months of the year, 13 banks and S&Ls have been taken over by the FDIC, more than the previous five years combined.
The FDIC may be underestimating, or least not publicly acknowledging, the trouble ahead. As of June 30, the FDIC had 117 insured banks and S&Ls on its problem list. That represented about 1 percent of the nearly 8,500 institutions insured as of June 30. Entering 1991, about 10 percent of the industry -- 1,496 institutions -- was on the FDIC's endangered list.
Although the FDIC doesn't name the institutions it classifies as problems, this year's June 30 list didn't include two huge headaches: Washington Mutual Bank and Wachovia. Combined, WaMu and Wachovia had more than $1 trillion in assets; the assets of the 117 institutions on the FDIC's watch list totaled $78 billion.
Late last month, WaMu became the largest bank failure in U.S. history, with $307 billion in assets, nearly five times more, on an inflation-adjusted basis, than the previous record collapse of Continental Illinois National Bank in 1984. The FDIC doesn't expect WaMu's demise to drain its fund because JP Morgan Chase & Co. agreed to buy the bank's deposits and most of the assets for $1.9 billion.
Regulators dodged another potential bullet by helping to negotiate the sale of Wachovia's banking operations to Citigroup Inc. in a complex deal that could still end up costing the FDIC, depending on the severity of future loan losses. On Friday, a battle of banking giants erupted when Wachovia struck a new deal with Wells Fargo & Co. without government help, and Citigroup demanded that it be called off.
The banking outlook looks even gloomier through the prism of Bauer Financial Inc., which has been relying on data filed with the FDIC to assess the health of federally insured institutions for the past 25 years.
Based on its analysis of the June 30 numbers, Bauer Financial concluded that 426 federally insured institutions are grappling with major problems. That's about 5 percent of all banks and S&Ls.
About 15 percent of the banks on Bauer's cautionary list have more than $1 billion in assets. Not surprisingly, the troubles are concentrated among banks that were the most active in markets where free-flowing mortgages contributed to the rapid run-up in home prices that set the stage for the jarring comedown. By Bauer's reckoning, the largest numbers of troubled banks are in California, Florida, Georgia, Illinois and Minnesota.
"It's important for people to remember that not all these banks are going to fail, just because they are on this list," said Karen Dorway, Bauer Financial's president. "Many of them will recover."
James Barth, who was chief economist of the regulatory agency that oversaw the S&L industry in the 1980s, doubts things will get as bad as they did then.
"It's scary right now, but it's not as scary as a lot of people are making it out to be," said Barth, now a senior fellow at the Milken Institute, a think tank.
Mani Behimehr, a home designer living in Tustin, California, isn't feeling reassured after what happened to WaMu and Wachovia. After he heard the news that WaMu had been seized and sold to JP Morgan, he rushed out to withdraw about $150,000 in savings and opened a new account at Wachovia only to learn about its sale to Citigroup two days later.
"I thought this is the strongest economy in the world; nothing like that happens in this country," said Behimehr, 46, who is originally from Iran.
The tumult is creating expansion opportunities for healthy banks. Industry heavyweights such as JP Morgan, Citigroup and Bank of America Corp. have already rolled the dice on major acquisitions of financially battered institutions in hopes of becoming more powerful than ever.
Smaller players such as Clifton Savings Bank in New Jersey are bragging about their relatively clean balance sheets to lure depositors away from rivals that are wrestling with huge loan losses. The bank, with about $900 million in total assets, says just one of its 2,300 home loans is in foreclosure.
"There is going to be a flight to quality," predicted John Celentano Jr., Clifton Savings' chief executive. "People are going to start putting their money in places that were being run the way things are supposed to be run: the old-fashioned way.
Source:- http://www.cnn.com/2008/US/10/05/shaky.banks.ap/index.html
Subscribe to:
Posts (Atom)
