Archive for May, 2009

GDP up 6.7% but Nifty EPS down 9%

13 comments Written on May 30th, 2009 by
Categories: Funnymentals, Nifty
According to Bloomberg, India's economy grew "more than estimated" at 5.8 percent last quarter, to take the annual growth in the last four quarters to 6.7 percent. (Let me point out that I find this "estimate" business egregious. To tell us something is good news because a fall was less than expected, or a rise was better than expected is saying, our expecters are consistently wrong, and we think you are stupid enough to believe them. Note that no one that estimated ever comes out and says, "Shoot me, I was drunk when I said that!". But I digress) This might sound refreshing, and indeed, the markets reacted by going up as much as 4% at some point, reflecting a sense of euphoria paralled only by inhaling, er, green shoots. So are we out of the woods? Or are we just smoking weed?

Let's take a look at the P/E of the Nifty and the EPS growth again, just over the last five years.

For the last two years, EPS growth has been slowing down from a dizzy 30%, and is negative since Jan 09. It's at -9% today, and the P/E currently is 20.82. The EPS at the same time last year was 235, and today, it's 213. Why does that happen when the overall GDP grows 6.7%?

One factor is that companies issued fresh shares. Any fresh shares issued, though, must necessarily add to EPS growth - after all, if I sell shares, I get money, and that money yields me returns? And for the likes of Tata Steel, which has received money years ago for dilution today, it makes more sense to have grown EPS because they've had time for the money to have grown itself. But no, we have still contracted on EPS.

I need to take a harder look at what contributed to the EPS fall - was it net profits, or increased share capital? Did margins fall dramatically? Did sales increase at all? How much of EPS was "other income" then and now? Collecting this data is hard work, and I'll do it sometime this decade, unless someone already has (please point me!).

Still, the facts stare us in the face. GDP grows 6.7%, and our top 50 companies "grow" EPS by (-9%). And our markets are still valued at a 20 P/E.

The recession hasn't quite taken its toll here. Not a single real estate player goes bust? And they're quite heavily levered. Not a bank, a big broker, a financial institution of repute - no, I think this is too early to be the end. It may just be the end of the beginning.

What will be interesting is where we can go from here - any further rise in the Nifty will only increase the P/E, and it's unlikely our EPS will reverse course (in fact, there are likely to be a lot of financial, manufacturing and export contractions visible over the next two quarters). The forward EPS can only be somewhere around 200. And bear market P/Es are known to go to 10. A "buy" signal then should be around 2000? Or around the 10 P/E mark, I imagine. At this P/E I can only say "sell" to fundamental investors.

Technicals based traders would have exited this passage with a stop loss after my first sentence. But if, by a quirk of fate, you're here, note that funny-mentals can adversely impact trading.

What I can't disagree with is that markets just got a helluva lot more interesting. Work is more fun than I can imagine!

Posted in Funnymentals, Nifty

NSE changes lot sizes for 144 stocks

6 comments Written on May 30th, 2009 by
Categories: Futures, Options
After the sudden upmove, a number of stocks have gone so far north that their lot sizes, which are usually calibrated to about 2 lakhs worth contracts each, are now a lot more expensive. So, from September, 144 stocks will have a realigned lot size.

19 stocks have had their lot size divided by four, 122 are cut to half and 2 have been rounded off after division. Only one stock, Sterling Biotech, has seen the lot size go up.

The last time this kind of operation was announced was in December 2008, increasing lot sizes for contracts starting March 2009. And now, this will happen only for contracts expiring in September 2009, i.e. new contracts introduced after the June expiry. Lot sizes for the June, July and August expiries do not change.

Why not? Because they've been traded for the last few months - remember that the June contract opened after the March Expiry, i.e. on March 27th. But there's nothing wrong with doing it technically, if you're cutting down lot sizes of course...you just multiply the held lots by the same number you are dividing the lot size. I think the NSE wants to do the same thing both ways - when they increased the lot sizes they *had* to wait three months.

Also the reason why they always choose a multiple is to let calendar arbitrage happen - where I would like to buy one contract and sell another, and thus hedge.

Overall, the idea is good and should help in liquidity and attracting retail participation. It may soon be time to revise contract sizes again, though I don't know which way!

Posted in Futures, Options

NPS (New Pension Scheme) has "hidden" charges

No Comments » Written on May 27th, 2009 by
Categories: NPS, Pensions
Sanjay Bhargava points me to this livemint article:
India’s New Pension System (NPS) promises the lowest fund management charges. But a closer look at the fine print brings out hidden costs.

The cost to the investor is high unless monthly investment is above Rs3,000 An investor depositing Rs500 per month, or Rs6,000 a year, will have to cough up as much as Rs800, or 13%, as charges in the first year. There is a one-time charge of Rs50 to the central record keeping agency and Rs40 to the point of presence, while Rs350 must be paid as annual maintenance charge. An investor also has to pay Rs30 every time one makes a deposit, switches a fund manager or even seeks a statement. Charges of demat, receipt of shares and charges by markets regulator Securities and Exchange Board of India are additional. Fund management charges are added to that.

"The cost to the investor is significantly higher unless he is investing Rs3,000 per month, as NPS is designed today," said U.K. Sinha, chairman and managing director, UTI Mutual Fund.

The attractiveness of NPS was the lower charges. Otherwise, compared to a mutual fund (much lower tax at 20%) or insurance (zero exit tax), it would have been non-competitive. But I have to do a more deeper post - time is a problem nowadays - to demonstrate the real cost and return expectations of the NPS. (Last year, though, they did very well, with nearly 15% returns, due to the big investment in govt. and corp debt)

Posted in NPS, Pensions

Hiding ULIP Commissions: Riding on Confusing Customers

10 comments Written on May 26th, 2009 by
Categories: ULIP
A friend recently told me about Birla Sun Life's Dream Plan and how they had "zero commissions". The skeptic that I am of greedy ULIPs and insurance agents, I decided to investigate. The relevant section is here:
Premium Allocation Charge

No premium allocation charge is deducted from your policy premium so all of your policy premium will be invested in the investment funds of your choice. For top-up premiums, we will first deduct a 2% premium allocation charge and then invest the remaining 98% in the investment funds of your choice.

Fund Management Charge

The daily unit price of each investment fund is adjusted to reflect the fund management charge. Currently the charge is 1.00% per annum for Protector, Builder and 1.25% per annum for Enhancer, but we may increase this charge in any time in the future subject to a maximum of 1.50% per annum.

Policy Administration Charge

The policy administration charge will be deducted monthly by canceling units proportionately from each investment fund you have at that time. The annual rate per 1000 of Basic Sum Assured is shown in Schedule B. We may increase this charge at any time after the 4th policy year, subject to a maximum increase of 5% per annum since inception.

This would make you think there are NO commissions because this is usually in "Policy Allocation Charge", which is zero for this policy?

Wrong.

They just moved the stuff around, and earlier where it would clearly be highway robbery (35% premium allocation charge etc.) now it's highway robbery by a guy in a suit and tie.

Let's look closely at the "Policy Administration Charge". In most other cases, this refers to a Rs. 40 to Rs. 100 per month fixed charge. But not in this plan. The "Schedule B" is a confusing table like this:

(Basic Sum Assured is per 1000 of Guaranteed Maturity Benefit. Policy Administration Charge - annual rate per 1000 of Basic Sum Assured)

How is the policy administration calculated? First, we get the Basic Sum Assured.

My friend had a plan with "guaranteed" benefit of 11.76 lakhs, for 20 years. He pays a premium of 48,000 a year. For that amount and the "100% guaranteed option" he comes in Band 4 (just under 12 lakhs). The Basic Sum Assured is Rs. 590 per 1000, which for his guaranteed amount is Rs. 693,840.

Note that this is the real insurance - the real "guarantee" is only at maturity. The actual amount they will pay if you die, is the basic sum assured plus about your premiums minus charges, with a 3% return. That's not much, as we will soon see.

Then, for this basic sum assured, you get the policy admin charge for Band 4, 20 year term. This is 2.98. And the first three years has a charge of 12.91. For the first year it adds up to 15.89, per 1000 of basic sum assured. For the 693.84K my friend had, it would be Rs. 11,025 per year.

Remember, he pays Rs. 48K a year as premium. He pays 11,025 as "policy admin charge" - a nearly 25% cut, this is going straight to the advisors pocket as commission. My friend just went from 0% commission to 25% commission.

(That's the first three years. After that it's 3% a year, still higher than mutual funds!)

And it's not easy, as you can see, to calculate what one would really pay. Get to a basic sum assured, find your "band", divide and multiply and do second level calculus and jump though three fire hoops before getting to the actual charge. (I exaggerate, but you get the point) For anyone with only a fleeting interest in finance, this policy can be easily missold. And it's likely even advisors don't understand this enough - but I believe they act to get the max commission in most cases. Either ways, the policy details are obfuscated, and likely deliberately, just to avoid customers instantly realizing the "obscene" commissions that such ULIPs charge. This is sophisticated highway robbery, with a smile.

Death to all ULIPs. Please do not buy them. If you have them, find the right time, and ditch them. Buy a term plan only.

Posted in ULIP

Low Cost Housing – Not quite "Altruistic"

5 comments Written on May 21st, 2009 by
Categories: RealEstate
Forbes India on Jerry Rao's New New Thing:
His hypothesis is a simple one. India’s real estate boom was built around its emerging middle class. Nobody gave low income housing too much thought. As Deepak Parekh, executive chairman of Housing Development Finance Corp. explains, “it was way too profitable to be doing something else.” Why sell low-cost houses as long as you get chumps to buy them at several times that price?

But when Ashish Karamchandani, CEO of research firm Monitor India, did the math for a study for public sector National Housing Bank in 2007, he was astounded. He found there are 23 million Indians earning at least Rs. 5,000 a month who do not own a house but aspire to do so. Doubtless, lenders know this potential but have stayed clear of pumping money into low-cost housing because of small ticket sizes of such loans. Also, they weren’t ready to take the credit risk with this segment.

A large addressable, but ignored market with a crying need for a winning business model. Could a fired-up entrepreneur ask for anything more?

I must agree here - lower cost housing is very important and has been ignored. I think there's money here, tons of it.

To those who want the math: An acre close to a city is available for about Rs. 50 lakh to 5 crores. That's between 100 and 1000 rupees a square foot. Let's just say 400 is what a low cost builder will get. Typically you could build a 1:1.5 to 1:2 FSI for lower income housing, so you can build around 80,000 sq. ft. in an acre (which is about 44K sq. ft). This is "built up" area, or what can be sold to a buyer (includes common area, lifts etc.). If you were to construct 700 sq. ft. houses it would be enough for those earning about 5-10K a month (and in Mumbai, even 10 lakhs a month, it seems). That's about 100 low cost houses per acre. Each house takes about Rs. 800 per sq. ft. to construct, so the construction cost of a house is about 5.6 lakhs. The land cost, at about 2 FSI, is about 1.4 lakhs (700 sq. ft at 2 FSI is 350 real sq. ft. x 400 per sq. foot cost). A total of 7 lakhs.

In an acre, if you can build a 100 flats, it will cost you about 7 crores. You could sell these flats at 10 lakhs each - a cost of 1400 per sq. ft. is cheap, especially where the other options are 300 sq. ft+. Economy of scale will make 1 acre plots difficult but you could do well with 3-5 acres at one spot.

If the demand is here, then getting the cost of the project financed by customers should be very easy - they can pay in 10 installments of 10L each. Assume then, that for construction and paperwork etc. you will need to only spend an upfront amount of Rs. 3 lakh per flat - the rest will come from the buyers' installments. You get revenue of 10 lakh on a cost of 7 lakh per apt - a profit of 3 lakhs. For an investment of 3 lakhs, that's a 100% return!

And I'm being conservative: Most builders will own land at substantially lower holding costs than the 2 crore an acre I expect someone to buy it at. Plus, construction costs will go lower as cement, steel, ceramics etc. drop off a cliff in terms of prices.

If it's so good why don't builders do this more often? Because the profit margins on premium apartments are substantially higher - 400-500%. It needs the thoughts of someone outside the industry to realise that even 100% is a great margin. Even if you account for the fact that not all flats will be sold early etc. it's a great deal - and the demand will get addressed where there is literally no large scale supply.

I love this space. With the real estate crunch for the lower middle class, and a glut in the high income space, it is our only real growth opportunity. Many people have realized it - like the article mentions, companies like Godrej, Tata and Sintex are scaling up. But don't believe for a minute that they are doing it from the goodness of their hearts. Oh no, they're not. They are just doing what should have been done by everyone far earlier - addressing the lower-middle-class demand, and earning a pretty good margin out of it.

Heck, if I had the money, I'd be doing it too.

Posted in RealEstate

NYT on the China-U.S. relationship

4 comments Written on May 17th, 2009 by
Categories: China
NYT: Will China Continue to bankroll the U.S.?
Over the past decade, China and the United States have developed a deeply symbiotic, and dangerous, relationship. China discovered that an economy built on cheap exports would allow it to grow faster than it ever had and to create enough jobs to mollify its impoverished population. American consumers snapped up these cheap exports — shoes, toys, electronics and the like — and China soon found itself owning a huge pile of American dollars. Governments don’t like to hold too much cash, because it pays no return, so the Chinese bought many, many Treasury bonds with their dollars. This additional demand for Treasuries was one big reason (though not the only reason) that interest rates fell so low in recent years. Thanks to those low interest rates, Americans were able to go on a shopping spree and buy some things, like houses, they couldn’t really afford. China kept lending and exporting, and we kept borrowing and consuming. It all worked very nicely, until it didn’t.

The most obviously worrisome part of the situation today is that the Chinese could decide that they no longer want to buy Treasury bonds. The U.S. government’s recent spending for bank bailouts and stimulus may be necessary to get the economy moving again, but it also raises the specter of eventual inflation, which would damage the value of Treasuries. If the Chinese are unnerved by this, they could instead use their cash to buy the bonds of other countries, which would cause interest rates here to jump, prolonging the recession. Wen Jiabao, China’s premier, seemed to raise this possibility in March, in remarks to reporters at the end of the annual session of China’s Parliament.

It's increasingly obvious that unless the U.S. consumer continues to spend, and spend on cheap Chinese imports, China will not prosper and thus not continue to buy Treasuries.

Two factors make this difficult. First, the U.S consumer is saving a lot more than he has been in the recent past.

(HT: Calculated Risk)

Unless the average income is going up, or the availability of credit is increasing (when you could save more but spend just as much) saving more must mean spending less. Given that GDP is contracting and unemployment is at an all time (number) high, average income is unlikely to be going up. And credit - hey we just came off a credit crisis and are deleveraging (meaning credit will come down). Savings thus, are cutting back on spending - okay, that is obvious enough anyhow - and lowered spending means the Chinese hurt.

Second, the signal the U.S. administration is giving is that a recovery must mean the re-employment of Americans. Which is taken to mean "buy American" - although it's likely that buying Chinese will feed a lot more American middlemen and companies. And the administration is penalising those that take any jobs abroad - even the ones at the bottom of the chain.

China could still recover if it fuelled domestic growth, one thinks? From the article:

Consumer spending now makes up about 35 percent of China’s gross domestic product, down from 40 percent in 2004 and almost 50 percent in the early 1990s. By comparison, the share is 54 percent in India, 57 percent in Europe and 70 percent in the United States.
Bumping that figure up will require cheap credit and at least five years; plus you have to change the frugal mentality of the average asian. Not quite helpful in the near term - and definitely not useful for U.S. treasuries. After all, why bother holding huge amounts of a foreign currency when a substantial amount of your GDP is internally fuelled; think of that as the equivalent of the U.S. holding the Euro as "reserve".

China's attempts to push the Yuan beyond it's borders is significant. If the U.S. continues to protects it's banks and go down the Japanese way, the U.S. Dollar will go down the route of the yen. That will mean some other trade currency, which could be the Yuan if China is serious enough. In the short term though, there is too much co-dependence to do something drastic or fast.

Posted in China

Congress Wins, Poised for a Big Rally?

5 comments Written on May 17th, 2009 by
Categories: Uncategorized
The Congress has won handsomely in the elections, with over 260 seats by the coalition - a majority is 273, which they can get with very marginal help.

The BJP wasn't quite the loser - only losing about 18 seats with the NDA going to 160. The losers really were (thankfully) the Left, which got routed in Kerala and West Bengal, and the "third and fourth fronts". Most importantly, Behen Maya Wati is not anything of consequence, the SP has substantially reduced clout as the Congress bumped itself up in UP, and Paswan drew a blank. Amma in TN didn't turn out to be a big deal, and Chiranjeevi in AP got a few seats but the UPA won the assembly. Rajasthan stuck with Gehlot - the Raje factor must have been prime in people's minds.

The losers in the election were the people who thought they could influence the outcome, by dictating what it will take for them to support the almost-won. Most of them now say "We'll sit in the opposition" like they have any real choice.

The BJP has drawn itself into a corner; with Advani looking like he'll quit politics (and about time, darnit) and Modi being a very scary alternative for a future PM.

Markets on the other hand will take this positively. It looks like they will open with a serious gap up on Monday, and the pundits say it will last a while. At least for the few days it will take to realise this was not a useful election to win.

The world crisis is far from over, and our Indian version has barely begun. From a political perspective, the budget will be important - at least to understand tax implications. Plus, of course, who's the FM, if PC is offered the Home portfolio instead. More importantly though, the room for fiscal jugglery has shrunk considerably. Now, the economy has to recover pretty much on it's own. The tax situation will soon show to be dire - collections will fall, quite dramatically, over the year. So I doubt there will be tax exemptions - if anything, they are likely to shut down or impair all the zero-export-income-tax schemes.

There isn't likely to be much inflation, but unless a real urban CPI comes up it's difficult to say where we are at any given moment - WPI seems to be malleable. There is a small hope for further disinvestment and for freeing up the oil business. But it's a rare time when Congress has a majority and stays non-commie - other than that one spark of goodness in the liberalization of 1992, which was admittedly done staring down the barrel of a gun. The whole Gandhi family has been commie from the start, and even now, with the huge Loan Waivers and fert subsidy, I see commie-ness thriving. Not only is the recovery going to be tough, but if there's enough commie attitude, it could take as long as the US (which is in substantially deeper doo-doo).

That requires more articulation. Meanwhile enjoy the markets while they last, and I think I will soon revive the short-only-strategy. Let the 4000 arrive!

Posted in Uncategorized

Countries in Recession (updated)

15 comments Written on May 17th, 2009 by
Categories: Crisis2008, Recession
Updated 17 May 09: Added Israel.

Updated 15 May 09: Added France.

Updated 19 Feb 09: Added Taiwan

Updated 23 Jan 09: Added Britain.

Updated 1 Dec 08: NBER Says officially, the US went into recession from December 2007.

Officially, at least:

Asia (Report Date, Country, GDP Growth):

Europe/Americas : Will keep this page updated.

Posted in Crisis2008, Recession

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