Change of Theme

The very purpose of starting a blog on financial/investment analysis, which I am still figuring out, was to share my learnings/experiences with people. The url and title of the blog was also thought on the same premise. But many friends/acquittances of mine who visited this blog, whenever they are bored of refreshing their pc screens, highlighted the trouble of typing such a long url "http://frommindofananalyst.blogspot.com. I agree.

Just to faciliate a shorter url http://justanalysis.blogspot.com and a theme of providing analysis in every article, whether it makes sense or not is on the reader, I am changing the blog address.

I hope to see more people, especially till the time funemployment is still around.

Economic Survey 2008-09 and Union Budget 2009-10

 

Recently, two of the most important documents in the economy came out - Economic Survey (ES) for 2008-09 and Union Budget for 2009-10. The post talks about the findings of the ES and the action taken in the Budget on lines of these findings. Also I attempt to highlight what are the results that could be expected out of budgetary actions. Some of the results/interpretations are taken from Economic Times and Business Standard.

 

S. No.	Economic Survey 2008-09 findings	Union Budget 2009-10 actions	Result
	Phasing out of all surcharges, cesses and transaction taxes Simplifying tax laws	Increase in tax-free limits by Rs. 10,000 Phasing out Surcharge on direct taxes, beginning with SC on personal income tax Deduction under section 80-DD for maintenance of medical treatment of dependents has been raised from Rs 75,000 to Rs 1 lakh	More disposable income in hands of individuals, leading more increase in demand Removal of FBT may increase taxable income in the hands of employees for perquisites like travelling, telephone, boarding and lodging, etc. With increased demand, more business with companies. Top sectors in terms of private final consumption expenditure are: Food, beverages & tobacco Gross rent, fuel & power Transport & Communication
		Increase in MAT rate from 10% to 15%	Increase in tax liability of companies especially in infrastructure sector as these get exemption from Income Tax under sections 80 IA, IB and IC.
		Tax holiday to an undertaking engaged in commercial production of natural gas on or after 1 April 2009 (section 80-IB (9)	Reduced tax liability for companies which have their productions on or after April 1, 2009 and not those which started earlier. Greater investment in gas sector is obvious.
		Abolishing Commodities Transaction Tax	Good news for traders but same was expected for Securities Transaction Tax.
		FBT abolished	Abolishing FBT will reduce corporate taxes but rise tax liability of employees. Also relief from compliance from one more tax regulation.
	Increase in Govt. Expenditure	Allocation for the Jawaharlal Nehru National Urban Renewal Mission (JNNURM), the flagship programme for urban infrastructure, has been stepped up by 87 per cent to Rs.12,887 crore The Railways have got Rs 5,000 crore over Rs 10,800 crore made in the interim Budget. NHAI has also got a higher allocation of Rs 8,578.45 crore in 2009-10, up from Rs 6,972.47 crore spent in 2008-09 IIFCL to refinance 60% of commercial bank loans for PPP projects Increased allocation for various agricultural and rural schemes	More business with companies in the sector wherein Govt. plans to increase expenditure. Companies in cement, steel, construction shall see more business.
	Sale of Govt. stake in Public Sector Undertakings (PSUs)	Disinvestment in Rail India Technical and Economic Services, Cochin Shipyard among others	Not much done on this front, though much was speculated by media. Listing should have made unlisted PSUs more accountable to the public (as investors). This leads to efficiency in operations and entrepreneurial talent management. Disinvestment of loss-making PSUs meant bring more business to the economy. It might lead to some retrenchment but shall surely add to the efficient use of resources by the private players which invests in these companies.
	Telecom: auction price can be fixed or be charged per unit of bandwidth per annum, or a combination of two disaggregating spectrum from telecom licence spectrum should be "traded" freely among telcos having licences	To clarity on the said topics was provided.	Clarity on spectrum policy and its expeditious implementation is of utmost requirement. Spectrum auction will not only provide revenue to govt., which seems to have become wanting after looking at the revenues of telecom companies, but shall also provide more businesses to companies and better services to consumers. Trading of spectrum by companies will also boost competition and will lower prices.
	Implement the goods and services tax (GST)	Smooth introduction of the Goods and Services Tax (GST) with effect from 1st April, 2010	Efficiency in tax collection, with removal of exemptions and different tax rates applied by State Govts. and Centre. Ease in compliance with tax regulations as GST would replace multi-stage taxes like Cenvat and service tax levied by the Centre and the VAT levied by states
	Linking interest rates on post office savings schemes with yields on government bonds or bank deposit rates		Loss in interest income for investors. Monthly Income Scheme and Kisan Vikas Patra provide return of 8% and 8.41% while yield on 364-day treasury bills and 10-year bonds provide returns of 4.5% to 6.5%, maximum difference of 3.91% With reduction in allocation to POS in investors' portfolio, investments in market-related assets like stocks and mutual funds may increase.
	Foreign Direct Investment increase in Defence > 49% Insurance > 49% Banks Nuclear power > 49% Retail	No action for retail	More investment leading to expansion, lower costs due to competition, better services. Help in ongoing fight for funds, also boosting equity participation
	Entry of foreign and rated domestic institutions to provide higher education	Introduction of a scheme to provide students from economically weaker sections full interest subsidy during the period of moratorium. The Scheme will cover loans taken by such students from scheduled banks to pursue any of the approved courses of study, in technical and professional streams, from recognised institutions in India. Provision for setting up and up-gradation of Polytechnics under the Skill Development Mission has been increased to Rs.495 crore. The provision for the scheme, 'Mission in Education through ICT,' substantially increased to Rs.900 crore. One Central University in each uncovered State and allocating Rs.827 crore Allocating Rs.2,113 crore for IITs and NITs, which includes a provision of Rs.450 crore for new IITs and NITs.	Leading to better education in India, at graduate and post-graduate level, which is of prime importance as India has a huge young population. Though we count this young India as an asset while comparing ourselves to countries like US and UK but till the time we transform this manpower into skilled hands. Provide accommodation to students who find number of institutes like IITs and IIMs very less as compared to the number of applicants.
	Decontrol sugar and fertilizer industry by converting producer subsidies to consumer subsidies	Move towards a nutrient based subsidy regime instead of the current product pricing regime	Providing the benefits to consumers directly will remove possibility of any tricks that are played by the producers who were getting subsidies on inputs. Moreover it will help small farmers take benefit of the fertilizers for their productions.
	Drug price control limited to drugs which have > 5 producers	No proposal regarding the subject. However, duties cuts were provided on some life-saving drugs.	Not a good news for manufacturers of medicines under price controls. Duties cuts will surely bring prices of these medicines down. Not a good news for pharma companies manufacturing these drugs.
	New bankruptcy law	No proposal regarding the subject.	Bankruptcy laws clear way for distressed companies. Also the assets (if any) with such companies can be put to their best possible use once the company is cleared w.r.t. its legal status.
	Market-determined fuel prices	No proposal regarding the subject.	Even if we take out kerosene and LPG from this gamut, still petrol and diesel are an important part of urban population's budget. Also, diesel affects almost all industries as it forms of their operating expenses as inputs or input services. Anyways for the oil marketing companies like Indian Oil, Hindustan Petroleum, Bharat Petroleum, Reliance Petroleum, etc. it is not good news.

 

I am still struggling to find out what economic indicators should one watch to have an idea where the economy is right now on the growth trajectory, so cannot comment on whether this budget is growth-friendly or consolidation-targeted. But still the kind of provisions for infrastructure development and employment generation clearly indicate the efforts on part of FM to re-ignite the growth engine.

 

Any suggestions/comments on the above are most welcomed at sabharwal. sunny@ yahoo.com.

POWER SECTOR

Why power sector?

• My understanding –
  
  • Still cities like Delhi are falling short of power supplies. With growing urbanization, more requirement should be noticed in times to come.
    
  • With concepts like SEZs coming up in all major cities and government's push to infrastructure sector, demand for power is bound to increase manifold.
    
  • Interest of foreign funds in our nuclear power sector also highlights importance of the sector.
    
• Facts –
  
  • According to a report by KPMG and CII, India's energy sector will require an investment of around US$ 120 billion-US$ 150 billion over the next five years. (Source: IBEF)
    
  • A recent study by consultancy major McKinsey estimates India's power demand to increase from the present 120 gigawatt (GW) to 315 GW–335 GW by 2017, if India continues to grow at an average of 8 per cent over the next 10 years. This would require a five- to ten-fold rise in power production, entailing investments worth US$ 600 billion over the next ten years. (Source: IBEF)
    
  • So far this year, 11 Indian companies have raised a combined $2.6 billion in equity, and three dozen more, including GVK Power, are looking to raise nearly $10 billion, according to Thomson Reuters data. (Source: Power sector to drive India capital raising | Reuters.com)
    

Which companies have been analysed?

Stocks having following traits:

1. Listed for more than 3 years.
   
2. Positive cash flows for more than 3 years
   
3. Below average industry P/BV ratio
   

Parameters for comparison

Ratio	Industry Average* FY 2008	Median* FY 2008
Long Term Debt-Equity Ratio	0.52	0.45
Current Ratio	1.97	1.75
Interest Cover Ratio	21.27	4.16
PBIDTM (%)	74.59	43.08
ROCE (%)	9.27	8.37
PAT Growth	131%	30%

* Data for following companies included Indowind, Reliance Infrastructure, Energy Development, Powergrid, TATA Power, NTPC, GVK, KSK Energy Vent, JaiprakashHydro, Entegra, NEPC, Torrent Power.

Companies worth investing

Ratio	Mar 2008	Mar 2007	Mar 2006		Mar 2005	Mar 2004	Remarks
Indowind
Long Term Debt-Equity Ratio	0.69	0.14	0.19		0.15	0.09	Average debt levels vis-à-vis industry
Current Ratio	5.46	3.42	8.27		3.11	1.99	very strong liquidity
Interest Cover Ratio	3.76	2.8	2.64		2.59	2.43	Average
PBIDTM (%)	49.39	47.03	43.16		52.44	14.96	Average
ROCE (%)	6.34	14.24	15.73		18.18	11.47	Below Average
PAT Growth	9%	19%	33%		34%		Concern over falling growth rate
Energy Development
Long Term Debt-Equity Ratio	0	0.18	0.6		0.91	1.09	very strong solvency with almost zero debt
Current Ratio	1.23	1.35	2.55		27.62	18.5	concern on liquidity
Interest Cover Ratio	49.84	75.65	7.11		2.62	1.34	Strong
PBIDTM (%)	36.78	24.85	90.6		88.24	80.25	Volatile and average growth
ROCE (%)	25.61	19.13	14.88		13.42	9.67	Constantly rising and above average return
PAT Growth	80%	121%	25%		240%		Volatile but above average growth
rELIANCE INFRASTRUCTURE
Long Term Debt-Equity Ratio	0.51	0.52	0.5		0.54	0.39	Average
Current Ratio	2.41	2.95	2.64		2.23	1.47	Strong
Interest Cover Ratio	4.73	4.48	5.07		4.8	6.97	Average
PBIDTM (%)	27.36	23.62	33.42		23.92	22.96	Below Average
ROCE (%)	9.8	8.69	9.68		8.52	10.13	Average
PAT Growth	35%	23%	25%		42%		Above Average