Is the Government’s policy overdrive a ploy to boost the stock market?

From a condition of growth deceleration, threat of credit downgrade, scams coming out of the woodwork and total policy paralysis, India is now being swept along by a sudden policy overdrive that has changed stock market sentiment from extremely bearish to almost wildly bullish.

After the recent announcements of 51% FDI in retail and a long overdue hike in diesel price, the UPA government’s largest ally, Mamata Banerjee’s Trina Mool Congress (TMC – literally ‘Grass Roots’ Congress), walked out of the government in a huff. That perhaps paved the way for three big-ticket reforms announcements this evening:

1. Passing of the Insurance Bill, including enhanced 49% FDI limit (from the earlier 26%)
2. Passing of the Pension Bill, including 26% FDI limit, and giving statutory authority to PFRDA
3. Passing of the Companies Bill, 2011 (a bill pending for nearly 2 decades)

Passing of the three bills by the Cabinet is only the first, albeit a big, step. All three bills need to be ratified by the Parliament, which will be a tough task because the UPA government has been reduced to a minority due to TMC’s withdrawal of support.

The BJP has already announced its opposition to the Insurance and Pension Bills. The Left parties and TMC will surely be joining hands with them. The UPA government will need to do some deft floor management to turn around allies providing outside support – like Mulayam’s SP, Karunanidhi’s DMK, Mayawati’s BSP. Needless to say, the latter will try to extract their respective ‘pounds of flesh’.

The Companies Bill may go through because the BJP is unlikely to oppose it – but one never knows in politics. So, why this sudden policy overdrive by a government that appeared almost moribund just a couple of months ago? The answer depends on who you ask!

Mamata Banerjee has already gone on record – in her typically eccentric and irreverent way – that all these so-called reform announcements have been made to deflect the public’s attention from the slew of scams in which the Congress Party has got mired in. The allegation may not be incorrect.

UPA policy makers are probably trying to make hay while Mamata fails to shine. Her recent protest rally in Delhi was a bit of a damp squib, and Sharad Jadav’s presence next to her on the dais has effectively negated her grand plan of forming a third front with Mulayam’s SP for the 2014 Lok Sabha elections.

Another reason could very well be a ploy to boost the stock market. Why? Because of its various welfare and subsidy schemes, the government is fast running out of money. Foreign credit-rating agencies and the RBI have told the government in no uncertain terms to cut its fiscal deficit, or face rating downgrades and continued low GDP growth.

Reducing spending should be the prudent option, but could cost the government dearly in the next polls. An alternative is to generate cash by reviving the divestment policy. A bullish stock market is a pre-requisite for absorbing large FPO and IPO offerings from PSU companies.

Tomorrow (Fri. Oct 5 ‘12) may bring a further surge in Sensex and Nifty indices. Use it to book part profits. Once the FPO and IPO offerings start hitting the market, a lot of liquidity will get sucked out.

Oil is on the boil – how can investors benefit? (A guest post)

Oil price is once again making headlines as it inches up towards the $100 mark. Food inflation shows no signs of cooling off, making another round of interest rate hikes by RBI almost inevitable. Rising price of oil will be an additional headache that will lead to rising import costs, worsening India’s trade deficit. Another rise in petrol and diesel prices – unless the government becomes proactive by reducing taxes – will further stoke the fire of inflation.

Is it all darkness and doom? In his guest post this month, Nishit looks at the silver lining. He discusses two stocks that are likely to benefit from higher oil price. Before we get to Nishit’s post, here is an announcement from Nishit’s friend Anuraag about an interesting Panel Discussion that readers in Mumbai may want to attend:

With the purpose of spreading awareness among Market Participants, in association with Eco Ashram, we are organising a Panel Discussion on the topic “Stock Markets or Rigged Casinos?” on 21st of January 2011 at "Y. B. Chavan Centre, Mumbai" from 5:00 P.M. to 7:00 P.M. The event is called "NATIONAL ECONOMIC DEBATE".

The Panelists are Dr. Ajit Ranade (Chief Economist, Aditya Birla Group), Shri. G. Anantharaman (Former Whole-Time Member, SEBI) & Dr. R. Vaidyanathan (Professor, Finance & Control – IIM, Bangalore).

The discussion will be followed by release of the book, “Sense, Sensex and Sentiments – The Failure of India’s Financial Sentinels” written by Shri. M.R. Venkatesh, Chartered Accountant.

For more details, contact:

Anuraag Gupta
Profound Consulting Pvt. Ltd.
502, A-Wing, Delphi, Hiranandani Business Park, Powai, Mumbai - 400076
Telefax: 022 25704357
Cell: +919892832789; anuraag@nedindia.com

-------------------------------------------------------------------------------------------------------------

Crude prices have risen to 92 dollars a barrel. Now, the question is how do we benefit from this? One way is buying crude as a commodity on the MCX Exchange, which is beyond the reach of most retail investors. My sincere advice to retail investors is to stay away from Commodity Trading. So, how do we play it on the stock markets?

We could buy companies dealing in crude. The downstream players are HPCL, BPCL and IOC. Now these companies mainly refine crude and sell the products. They have to bear a subsidy burden on Diesel and Kerosene. The government has come with a formula of 1/3^rd burden by refiners, 1/3^rd by government and 1/3^rd by the upstream companies like ONGC, Gail and Oil India. Now, crude prices can go over the roof and the government has no defined mechanism to handle it.

Keeping that in mind the downstream companies are strictly off the buy list. Coming to ONGC, the price which ONGC gets is strictly capped due to the subsidy burden. ONGC is supposed to come out with a FPO in mid-March 2011. The stock is getting split along with a bonus issue for which the record date is yet to be announced. So at the closing price of Rs 1205 (Jan 7 ’11), you would be getting 4 shares for every 1 share you buy now.

Arguments in favor of buying ONGC:

1. Government Company - so a very safe buy
2. EPS of 74 and P/E of 16 - so not very expensive. Safe play on crude oil. A multi-bagger over past 10 years. Can buy and hold
3. If the Government wants the FPO to go through, they will clear the air on subsidy burden, thus making it an attractive offering

Argument against ONGC:

1. The subsidy sword keeps dangling over ONGC. Until clarity comes nothing can be done to enhance profitability
2. FPO in March ’11. Experience over past 1 year is stock prices of government companies which come for FPO are usually kept depressed before the FPO, so folks get a good rate

Cairn India is a good company, which I like and had written about in a post in August ‘10. Here is the link:

http://investmentsfordummieslikeme.blogspot.com/2010/08/cairn-india-oil-story-worth-betting-on.html

To update the story, Vedanta has to get approvals from the government, which are expected in the middle of February ‘11. If this goes through, the Open offer will be at Rs 355 for a 20% stake. The promoters of Cairn have been paid Rs 50 as non-compete fee. There is speculation that the open offer could well be at Rs 405.

Now taking crude oil prices to be around 96 dollars, the fair value of Cairn is already around Rs 350. Vedanta has the muscle to pump in funds to make acquisitions and companies taken over by Vedanta in the past have sizzled post acquisition. Sesa Goa and Hindustan Zinc are prime examples.

Government approvals should be in place, ONGC will negotiate to get rid of their royalty burden on joint oilfields with Cairn in return for giving a NOC.

How do we play all this?

In Cairn, the downside looks limited, so should be bought now. One can buy ONGC during the FPO. The reason for this is FPOs are always at a discount to market price, plus the retail fraternity gets additional 5% discount to the offer price. By buying Cairn now, we are getting a crude oil exposure. Crude going up means the fair value of Gold is 1380 dollars. Normally 1 ounce of Gold should buy 15 barrels of Crude Oil. Time to add Gold along with the Crude.

Cairn India’s market cap is 1/4^th of ONGC’s. ONGC is the old giant whereas Cairn India is the new kid on the block.

-------------------------------------------------------------------------------------------------------------

(Nishit Vadhavkar is a Quality Manager working at an IT MNC. Deciphering economics, equity markets and piercing the jargon to make it understandable to all is his passion. "We work hard for our money, our money should work even harder for us" is his motto.

Nishit blogs at Money Manthan.)

Why small investors should avoid IPOs, FPOs (and NFOs)

Before I delve into the details, I think it may be prudent to clarify what the TLAs (Three Letter Acronyms) mean.

IPO stands for 'initial public offering'. That means a company is issuing shares to the general public for the first time. (It may have issued shares to promoters and private investors, but such shares were not traded in a stock exchange.) IPOs are issued at 'face value' plus a premium.

FPO means a 'follow-on public offer'. Companies may have sold a small percentage of shares, say 10% or 20% of their authorised equity capital, earlier. Now they need more money for expansion and/or to retire debt. An FPO is different from a rights issue - where shares are offered only to existing shareholders. FPOs are also issued at face value plus a premium.

NFO is a 'new fund offering' from a mutual fund house. Fund houses earlier called these IPOs, but were compelled by the authorities to change the name. Why?

Because a new fund has no prior track record whatsoever, unlike most companies that have to be in business for a while and attain a particular balance sheet size before they can issue shares. NFOs are issued at face value.

The short answer to the question (and I'm not sure that the authorities will be terribly pleased with it): Because investors get taken for a ride.

Aren't IPOs and FPOs tickets to quick riches? It used to be so in the 1970s and 1980s when the pricing was pre-approved by the stock exchanges, and there was enough left on the table for investors.

The current practice of pricing shares through a book-building process(and a French auction for the recent NTPC FPO) is supposed to 'discover' the best price, but actually causes uncertainty and confusion among small investors.

The 'red-herring prospectus' that is supposed to be part of the offer document including the application form, is either not available, or printed in tiny nano fonts that require a powerful microscope to read, or too voluminous to comprehend.

The end result? Most investors fill up the application forms without going through the company details - particularly the risk factors, including pending litigation, unpaid tax demands, potential forex losses and myriad other issues that are conveniently hidden in the fine print.

Even if investors have the patience to go through all the details, it is unlikely that they will be enlightened because of forward-looking statements (read 'pure fiction') about the future growth and profitability prospects of the company.

On top of it, the price-band given for the book-building process is mostly way higher than reasonable, aimed at squeezing out the last Rupee from the pockets of gullible investors.

Compound that with the fact that most IPOs, FPOs (and NFOs) appear when the stock market is at or near a peak - and you have got a perfect recipe for making losses.

Get-rich-quick schemes - in the stock market or otherwise - never benefit the investors. It is meant for the benefit of those who sell such schemes. So stay away from IPOs, FPOs (and NFOs). Stick to the tried, tested and trusted companies and funds. You will get rich - slowly.

(A hypothetical question for investors. Some one holds a gun to your head and forces you to invest in any one of three IPOs. The first company is raising money to retire its bloated debt. The second company is raising money for some planned acquisitions. The third company is planning to buy new plant and machinery for an expansion project. Which of the three IPOs will you subscribe to, and why?)