Reblog: How to Maintain Control and Discipline in Your Trading

If as a TRADER you want to have disciplined and profitable trading, The Core Concept you need to Understand is

As a Trader, you do not have any control on the market.

Nil Control on Market

You’ve either figured out or you will figure out the fact that not much at all remains under your control as a trader. Dealing with an endless set of variables using a mind that’s geared by nature to defining constants is a tough task.  Most of traders focus on returns and not focusing on the process of trading.

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Reblog: 3 Guidelines for Selecting Stocks Ideal for Retail Equity Investors

Equity markets are one of the key avenues for investors to create wealth for themselves. However, despite the significant return generating potential of equity markets in India, the participation of retail investors in direct equity markets remains very low.

Many a times, the factors assigned to low participation of retail investors in equity markets focus on the characteristics of markets like share price volatility, poor corporate governance, stock price manipulations, corporate frauds etc. These issues make it essential that a retail investor spend sufficient time while making her equity investment decisions.

It is advised that an investor should select any stock for investment only after doing her own assessment, which is sufficient to provide her the conviction about her investment decision. Investor’s own research & conclusions independent of general market opinion & sentiment are key essential for an investor to overcome the above mentioned issues.

However, retail investors, which many a times have a full-time day job to meet their financial needs, face peculiar problems while conducting stock research and monitoring of the stocks in their portfolio. Let’s see what are the key issued faced by retail investors everywhere and what are the guidelines by which retail investors can overcome their limitations.

Key Issues Faced By Retail Investors

A) Day-time job takes most of the time:

Most of the retail investors have jobs, which consume most of the time of the day available to them. With increasing time of commutation to office, especially in large cities, a retail investor finds that her almost entire day (7AM to 9PM) is consumed in daily office rituals.

B) No time to monitor/track companies during weekdays:

During weekdays, retail investors hardly get time to effectively monitor companies in their portfolio. Retail investors are not able to spare time to study the quarterly results/annual reports/company filings during working weekdays whereas these activities are essential for monitoring of the performance of the companies in the investor’s portfolio.

Most of the time, during the working weekdays, a retail investor is only able to track the price movement of her portfolio due to wide penetration of smartphone apps and mobile internet availability. However, only tracking of share prices is not sufficient for effective monitoring of portfolio performance.

C) On the Weekends:

The only time when a retail investor has some time at her disposal when she can analyse companies, read their annual reports, quarterly results filings, exchange disclosures etc. is on weekends. However, it is the same time, which she and her family expect to spend with each other after 5-6 days of exhausting working week.

Weekend is the only time available with the retail investor & her family for recreational, entertainment & bonding activities. Therefore, the retail investor finds it difficult to devote time to her equity investments on the weekends as well.

Therefore, it would be evident to retail investor that the key issue faced by her is lack of time. All her equity investing strategies should be centred on this key parameter so that she is able to devote sufficient time to her family, equity portfolio as well as other commitments.

However, it should not be assumed that a retail investor is at a disadvantage to full time/institutional investors. There are quite a few aspects, in which a retail investor despite her time consuming day-time job, is at an advantage when compared to full time and institutional investors. Let’s see:

Advantages of Retail Investors

A) No dependence on equity portfolio/markets for day to day living expenses:

A retail investor does not have to depend upon her earnings from equity portfolio to meet her day to day expenses like rent, EMI, children school fee, kitchen expenses etc. Her salary from the day time job is most of the times sufficient for these expenses. She does not need to get under stress if a company in her portfolio does not declare a dividend in any quarter. Whereas a full-time investor might face cash shortfall in meeting her household expenses, if her portfolio earnings are not as per expectations.

B) Gets investible funds at every month-end

A retail investor, if she manages her household expenses well, is able to save some surplus funds at the end of every month from her salary. This surplus or savings provide her regular source of funds, which she can invest in her equity portfolio. The fact that these funds are not dependent upon the performance of equity markets, empowers the retail investor to have the discipline of investing regularly irrespective of market performance. She can easily invest this additional money in new opportunities, without unnecessary churning in her equity portfolio.

A full time investor, whose only source of income is from equity markets, does not enjoy this benefit of regular source of funds every months for deployment in her equity portfolio. A full time investor might have to churn her portfolio i.e. sell existing stocks to generate funds, in case she finds an attractive opportunity in the equity markets. This portfolio churning might or might not prove to be a successful decision every time.

C) Can take long-term investment views:

A retail investor does not have to prove her portfolio performance to anyone. She is not being judged by markets/third parties based on the performance of her equity portfolio. As a result, a retail investor can afford to stay calm and behave in a peaceful manner irrespective of equity market results. She can easily focus her aim at the long term performance of the companies in her portfolio as she is not being questioned about her portfolio on a regular basis.

An institutional investor does not enjoy such freedom. The fund management team is continuously under scrutiny for the performance of the funds that are under their management. Most of the institutional investors, mutual funds (MF), private equity (PE) funds etc. have to disclose their performance to their investors regularly (daily for MFs, quarterly for PE etc.). The fund manager is continuously under pressure to showcase good performance whenever she sends out the periodic performance report to the investors. Even otherwise, large investors of the funds keep on calling/enquiring the fund managers about performance of their money.

Such continuous monitoring of performance, many a times, leads to short term defensive investment approach by fund managers, which is focused on avoiding tough questions from investors.

D) Can benefit from bear phases/lower stock prices by buying more:

As mentioned above, a retail investor is not answerable to anyone for her investment decisions. She can take her portfolio decisions without the need of such decisions looking justifiable to others. This ability gives an immense power to the retail investor to benefit from bear markets when she can add on to her favourite stocks, which are available at cheap prices. She can keep on buying stocks despite a continuous decline in stock prices.

An institutional investor does not have this unrestricted freedom. As mentioned above, all her decisions have to be approved by a board of trustees and have to be justified to large investors. In such a situation, institutional fund managers, most of the times avoid buying stocks when prices are falling as the fund manager might have to face tough questions on underperformance of the fund if the stock price of her newly bought companies does not recover soon enough.

E) Hold back buying when stock prices are high:

A retail investor does not have an obligation to invest her surplus funds in the equity markets as and when she get the salary. The retail investor can hold back the buying decision and sit on cash until she believes that the stock prices are available at attractive levels.

Many institutional investors like mutual funds, do not have such freedom. Mutual funds have to invest a certain portion of their funds in equities, which is determined by their fund guidelines/prospectus. E.g. if a mutual funds has the mandate of investing 90-100% of its funds in equities, then it has to keep at least 90% of funds invested in equities all the time irrespective of valuation levels of stocks in the markets.

Such mandated guidelines create hard times for mutual fund managers, who face fund movements at precisely the wrong times. Most of the mutual funds see higher investment by investors in bull markets when stock prices are rising. As a result, to maintain the minimum equity investment proportion, the mutual fund manager has to invest the fresh funds in stocks despite high valuations.

On the contrary, many a times investors withdraw their funds from mutual funds in bear markets. The fund manager to meet the fund requirement of redemptions has to sell the stocks when the stock prices are falling.

As a result, the mutual fund managers end up buying stocks in rising markets and selling stocks in falling markets. This is buying high and selling low, which is against the key principle of equity investment, which says that investors should buy low and sell high.

A retail investor is spared this forced buy high and sell low situation faced by mutual funds, as she does not have any obligation to invest funds available to her as she does not have a mandated equity allocation to be followed all the time irrespective of market valuation levels.

Until now, we could observe that a retail investor enjoys a lot of advantages over institutional investors when it comes to equity investing. The only issue which puts her at the back foot is the paucity of time at her disposal to analyse & monitor stocks.

Therefore, if a retail investor is able to find solution to the problem of lack of time, then she has all the abilities to perform well in equity markets and even match/outperform her institutional peers.

We believe that with careful planning, a retail investor can solve her problem of shortage of time to devote to her equity investments. If she takes care of some key guidelines while creating her portfolio, then she would be able manage her equity investments within the time at her disposal and also devote sufficient time to her family and other commitments.

Let’s see the key guidelines that a retail investor should follow while investing in stock markets and while creating her portfolio:

Key Guidelines for Retail Investors

Always invest in companies that won’t require intense/close tracking

A retail investor should try to invest in companies and create a portfolio, which do not require much tracking/monitoring. She can achieve this objective by following two key principles:

A) Only choose stocks with high margin of safety (MoS):

A retail investor should invest only in those companies, which enjoy a high margin of safety.  

1)  Margin of safety built in the purchase price of the investor:

It is determined by the earnings yield of the stock. The higher the earnings yield than the ongoing treasury/G-Sec yield, the higher the margin of safety.

2) Margin of safety built in the business model of the company:

  • Self-Sustainable Growth Rate (SSGR): Higher the SSGR than its achieved sales growth rate, higher the margin of safety. Read more about SSGR in the following article: Self Sustainable Growth Rate: a measure of Inherent Growth Potential of a Company
  • Free Cash Flow (FCF): Higher the proportion of cash flow from operations (CFO) available as free cash flow (FCF) post meeting all the capital expenditure requirements, higher is the margin of safety.

An investor would notice that the companies which have higher margin of safety in their business model have higher ability to successfully face tough economic times. This is because, in case of economic downturn, these company can safely:

  • reduce its profitability (i.e. give discounts) to generate higher demand
  • reduce dividends to conserve funds to make additional investments and
  • invest in fixed assets to improve its plant & machinery/technology (leading to lower NFAT)
  • and are still able to maintain their current sales growth rate.

Therefore, if an investor focuses on investing in companies, which have good margin of safety built in their business model, then she need not worry a lot about such companies, even if the economy faces a downturn as these companies can withstand downturns successfully and the investor would not face any negative surprises.

It is also essential that the investor purchases these companies at a reasonable price to equity (P/E) ratio levels, which ensure that her investments enjoy a reasonable margin of safety in the purchase price as well. The investor can follow the guidelines in the following article to determine the investable P/E ratio of the stocks:

B) Invest in as low number of stocks as possible:

Every new stock in the investor’s portfolio mandates her to follow certain key events to monitor the stock & company effectively. In a year, every new stock would require the investor to read:

  • 4 quarterly results
  • 4 shareholding pattern disclosures with pledge details
  • 1 annual report
  • 1 credit rating report
  • Regular stock exchange filings and
  • Monitoring the internet for news related to the company (Google Alert)

An investor would notice that a portfolio would 25 stocks would require the investor to read every year 100 quarterly results, 100 shareholding disclosures, 25 annual reports, 25 credit rating reports, about 250 stock exchange filings (assuming 10 exchange filings by each company in a year) and about 5,000 news items (Google alerts) related to these 25 companies.

Therefore, the time & effort required in regular & effective monitoring of each stock should lead the investor to have only that many stocks in her portfolio, which she easily monitor. It is advised that an investor should have as low the number of stocks in her portfolio as possible. This would ensure that she spends minimum amount of time monitoring her stock portfolio. In any case, the number of stocks should be such that she can sleep peacefully without worrying about high exposure to any individual company.

C) Choose stocks only after very high due diligence:

An investor should choose her stocks only after doing sufficient due diligence. This is to ensure that she has analysed the stocks from all the relevant perspectives of financial, business, management and valuation perspectives so that there is no weakness in the company that might have missed her analysis.

Once an investor has done sufficient analysis while initially buying the stock, then she might rest assured that the company would not give a lot of negative surprises to her during the regular monitoring. This would, in turn, reduce the time & effort needed from the investor in monitoring the stocks in her portfolio.

Until now, we have noticed that a retail investor is well placed to match & outperform her institutional counterparts because she does not have to face continuous scrutiny of portfolio performance. She can take a long term view, can benefit from bear markets and can deploy additional money every month into attractive opportunities irrespective of market conditions.

The only constraint that the retail investor faces is the scarcity of time at her disposal to effectively analyse and monitor her stocks because, after a hectic day job, she has to meet other commitments on her time related to family, recreation, entertainment etc.

We also noticed that a retail investor can counter the constraint of the lack of time by being very selective about her stocks. She should invest in very few companies, which enjoy high margin of safety in business and purchase price and select these companies after sufficient due diligence in terms of financial, business, management and valuation analysis.

By being very diligent in her stock selection, the retail investor would ensure that her portfolio companies do not put a lot of time requirement on her for regular monitoring and at the same time do not present her with negative surprises with their business performance.

Over time, we have noticed that there are certain type of companies and certain key guidelines, which if a retail investor follows diligently, then she would have higher probability of finding ideal stocks for her portfolio, which would be fundamentally sound as well as would not put a lot of pressure on her time for continuous monitoring/tracking.

Ideal Stocks for a Retail Investor

An investor should focus on investing in stocks of companies which are:

  1. growing at a respectable pace,
  2. have sustained profitability,
  3. are generating free cash flows,
  4. are conservatively financed [very low debt to equity (D/E) ratio: preferably debt-free] and
  5. are run by competent & shareholder-friendly management

Investing in stocks of the companies, which meet all the above criteria would ensure that the investor would invest only in the companies that have:

  • a competitive advantage depicted by sales growth with sustained/improving profitability
  • Presence of free cash flows would ensure that:
    • the sales/profits are genuine and the company is not doing aggressive sales recognition, fictitious sales recognition without cash collection as well as
    • ensure that the company does not have capital intensive business model because the company is able to meet its capex requirements from its cash flow from operations
  • Debt free status/low D/E ratio would ensure that:
    • the company has fundamentally sound capital structure
    • low/nil bankruptcy risk
    • low/no incentive to management/promoter to cook its books by doing accounting juggleries
    • low probability of the company facing liquidity constraints.
  • Management assessment is the most important factor as management/promoter is the person standing between the fruits of the business and the retail shareholder. If the management does not have interests of minority retail shareholders in its mind, then, unfortunately, the retail shareholder would not be able to benefit from the good business performance of the companies in which she has invested.

Therefore, we believe that if a retail shareholder focuses on being highly selective in her equity investments and invests in very few companies meeting the criteria of high margin of safety in their business and invests in them at an attractive price, then she has a very high probability of managing her time requirements between day time job, family and equity investments as well as she has high probability of matching/outperforming her institutional peers.

It is essential that the retail investor puts in sufficient due diligence before investing in any company and that she keeps the number of stocks in her portfolio to the minimum without losing her peaceful sleep.

It is also essential that she should invest only in companies, which meet the key parameters of sales growth with sustained/improving profitability, which are generating free cash flows, which are conservatively financed (preferably debt free) and are run by a competent & shareholder friendly management.

Once an investor has invested in such stocks, then she would be happy when the price of her stocks goes up as she would enjoy the feeling of building up wealth. Moreover, if the prices of her stocks goes down, then also she would be happy as she can buy more of such fundamentally good stocks.

If a retail investor is able to keep in view these guidelines while creating her equity portfolio, then we believe that she would be able to generate significant amount of wealth from equity markets without putting a lot of strain on her personal and professional life and with minimal risk of facing negative surprises in her stocks thereby ensuring the safety of her hard earned money.

Effectively, if the retail investor follows these guidelines, then she can sleep peacefully at night despite investing significant amount of her money in stocks.

With this, we have come to the end of this article in which we discussed the various key aspects, which we believe that a retail investor should focus on while investing in equity markets.

It would be a great pleasure if you could share your inputs about the additional factors and the guidelines, which you believe are essential for retail investors while dealing in stock markets.

You may write your feedback and inputs as comments to this article.

All the best to each one of us for our investing journey!

The original article is penned by Dr. Vijay Malik and is available here.

Markets rebound to end marginally higher on Friday, the eve of GST

Benchmark indices rebounded to ended marginally higher after a day of subdued trading as caution ahead of the launch of a goods and services tax (GST) kept investors on edge. The indices ended the month of June in negative, first monthly loss this year, even after they rose a bit in the late afternoon deals.

The revised tax structure will kick in from midnight, marking India’s biggest tax reform since independence, unifying its $2 trillion economy and 1.3 billion people into a common market.

The S&P BSE Sensex settled the day at 30,921, up 64 points, while the broader Nifty50 was ruling at 9,521, up 17 points.

In the broader market, the S&P BSE Midcap and the S&P BSE Smallcap bucked the trend to gain 0.6% each.

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Reblog: Investment Strategy: Confidence boosters

Capital expenditure plans provide clues about the business optimism of companies

Tracking the quarterly results is one of the major ways to read the pulse of an enterprise. Financial and operational performance in the latest three months can shade ample light on the direction of a company. However, the quarterly, half yearly or even yearly results have a serious lacuna. These numbers reveal little about the future. The figures are all about past. In the equity market, what gets counted is the outlook.

There are several questions when it comes to how a company is likely to fare in future. What will be the triggers to drive the top and bottom lines? What are the strategies and initiatives the company is embarking on? What is the optimism of the management and the level of confidence?

Investors can trace information about future expansion or capital expenditure (capex) plans undertaken in the recent past, are underway or at the drawing-board stage. These might provide clues about the business optimism of the management. A company normally commits funds to organic or inorganic projects after doing its homework by assessing the industry dynamics, competition and demand scenario.

Capital Market tracked growth plans of companies based on a variety of sources such as presentation, press releases, media briefing, notes to accounts and stock exchange announcements. The outcome is an interesting set of companies that are investing in assets to ensure expansion of market share and revenues.

Mid-cap Suprajit Engineering touched an all-time high of Rs 170 in January 2015. Since then the stock has reported a sharp correction but only to bounce back. Currently, the counter is trading at Rs 139.6 (5 February 2016) and seemingly moving closer to the historic peak. The buzz at the counter is not without reason. There are several developments that have resulted in buoyancy in the stock price.

Trail production at the Sanand plant in Gujarat had started and one of the major customers has approved the facility. Further, trail production at the Vallam Vadaggal plant in Chennai is expected to start in the fourth quarter of the current fiscal ending March 2016 (FY 2016). A marketing office has been established at Atlanta in the US to make inroads into the North American markets.

Besides, the Speedo cable business was acquired from Pricol in FY 2015. In May 2015, Phoenix Lamps, the manufacturer of Helogen lamps, was purchased to de-risk the product profile. The capacity expansion at the Pathredi facility in Rajasthan is underway.

Phoenix is a market leader in the country, with significant presence in the overseas markets through European subsidiaries Trifa and Luxlite. There is 61.92% stake in Phoenix. The restructuring is expected to be completed in some time. Capex of Rs 30 crore has been earmarked to improve the quality and operational efficiency. This will be largely financed through internal accruals.

The country’s largest automotive cable maker with 15 manufacturing plants close to customers is harboring global ambition. Key automotive clients include TVS Motor Company, Bajaj Auto, Hero MotoCorp, Royal Enfield, General Motors, Tata Motors, Renault Nissan, Volvo Eicher, Atul Auto, Mahle Behr, Lear and Brose India Automotive. John Deere India is a non-auto client. Around 82% of the revenues are derived from the domestic market and remaining 18% from exports.

Pricol aims to achieve turnover of Rs 1450 crore in the current fiscal as against net sales of Rs 1143 crore in the previous fiscal. The target is to achieving revenues of Rs 3000 crore by FY 2020. As part of the transformation strategy, the small-cap company unveiled a new logo in January 2016. The focus will be on entering new markets through acquisitions and tapping new product segments through research and development. The leverage is moderate, with a debt-to-equity ratio of 0.33 times end March 2015.

Pricol in January 2015 bought Melling do Brasil, an automotive power-train manufacturer in Brazil, as a part of the global expansion plans. Melling, renamed as Pricol do Brasil, serves domestic and international customers such as Volkswagen, Fiat, General Motors, Harley Davidson and Mack Trucks. The integrated facility has diverse manufacturing capabilities such as die casting, machining and robotic assembly. This acquisition gives Pricol an entry into the global four-wheel power-train products segment.

Commencing operations in 1974 and headquartered at Coimbatore, Pricol has manufacturing units at eight locations, seven international offices and employee strength of 5,100. The automobile industry is served across segments of two- and three-wheelers, cars and vans, tractors, commercial vehicles (CVs) and off-road vehicles. Also, there are industrial clients.

Pricol is the world’s second largest manufacturer of driver information systems for the two-wheeler segment and also the world’s fourth largest manufacturer of instrument clusters for tractor and off-highway vehicles. In the domestic market, the largest manufacturer of automotive pumps for the two-wheeler and telematics solutions for the tractors and off-highway vehicle segments is also India’s largest manufacturer of speed governors and cabin tilt mechanisms for CVs.

Adani Ports and Special Economic Zone will be expanding existing terminal Adani International Container Terminal Pvt Ltd (AICTPL) at the flagship Mundra port in Gujarat. AICTPL is an equal joint venture (JV) with Terminal Investment, an arm of Swiss-based Mediterranean Shipping Company SA, the second largest shipping liner in the world. The expansion is being carried out to create a trans-shipment hub for the Middle East, South Asia and India.

Post completion of expansion, AICTPL will emerge as the country’s largest container terminal, with a total quay length of 1,460 meters and cargo-handling capacity of 3.1 million 20-foot equivalent unit (Teus). The terminal will be equipped with 15 super post-Panamax quay cranes, capable of handling 18,000-Teu container vessels.

Further, the expansion will position Mundra as the major transshipment hub in the country, the Middle East and South Asia providing congestion-free and cost effective solution. Construction has commenced and the terminal will be commissioned in 15 months.

Also, upon completion, Mundra will emerge as the largest container port in the country, with a cumulative capacity of 6.6 million Teus, with four container terminals spread over an area of approximately 146 hectares. At present, the Mundra port is the largest private commercial port in the country. Adani Port aims to achieve a vision of handling 200 million tonnes (mt) of annual cargo by FY 2020. This expansion will help to move closer to its target. Around 110 mmt of cargo was handled last fiscal.

Apart from Mundra, the other ports in portfolio are Dahej, Hazira, Kandla, Dhamra, Murmugao and Vizag. In aggregate, a cargo volume of 144.25 mt was handled in FY 2015. Also, a free- trade warehousing zone is being operated at Mundra over an area of 168.41 hectares. Approval has been obtained from the Central government to set up another multi-product special economic zone (SEZ) over an area of 1856.5 hectares adjacent to the existing multi-product SEZ at Mundra.

Raymond added 30 new stores and closed three non-performing stores in the December 2015 quarter, taking the total store count to 1,044, with aggregate space of 1.92 million square feet (sq ft). Renovation of 24 stores has been completed, while another 20 stores are under renovation. In the current fiscal, 75 stores are to be renovated. This count will touch 100 by March 2016. As many as 67 stores were opened and 26 closed in the nine months ended December 2015.

A capex of Rs 252 crore was incurred in the nine months ended December 2015. This comprised Rs 130 crore for capacity expansion of the denim and shirting business, Rs 28 crore for the acquisition of Robot System Pvt Ltd and balance for store rollout and maintenance. The product portfolio includes branded textiles, branded apparel, denim, garmenting, luxury cotton shirting, tools and hardware and auto components.

Net debt increased Rs 289 crore to Rs 1726 crore in the nine months ended December 2015. The net debt-to-equity ratio was up a marginal to 1.09 times end December 2015 compared with 1.01 times a year ago. The increase in debt was partly due to capex and partly on account of enhanced working capital requirement. Working capital is expected to decline in the March 2016 quarter, easing pressure on the debt-to-equity ratio.

Owing to the challenging global economic environment, slowdown in major world economies and falling commodity prices, there was slowdown in demand in the export markets and subdued domestic consumer demand in the December 2015 quarter. Also, the earlier onset of the end of season sale adversely affected businesses. Consolidated revenues grew 8% in Q3 of FY 2016 to Rs 1508 crore. However, operating profit measured in terms of earnings before interest, depreciation and amortization declined 5% to Rs 148 crore and net profit plunged 28% to Rs 40 crore. Advertisement and selling and marketing expenses were enhanced 47% to Rs 102 crore. Investment in brand-building and expansion and modernization of the retail network will continue.

Syngene International has drawn capex plans worth around US$ 200 million to be implemented from FY 2016 to FY 2018. The capital spend will be for a research and formulation center. This apart, the focus will be on late-stage and commercial manufacturing including expansion of the active pharmaceutical ingredient (API) plant, the commercial new commercial entity (NCE) manufacturing plant and the biologics manufacturing plant. Last, capex will be incurred for other services and new capabilities including oligonucleotides, viral testing services and antibody-drug conjugates. The funding requirements will be met through internal accruals and debt.

There are plans to set up a new manufacturing facility at the Mangalore SEZ and is in the process of acquiring 40 acres of land and obtaining necessary approvals. The estimated expenditure for setting up the facility is US$100 million and is contingent of various factors. Further, stock exchanges will be intimated appropriate details in the first half of calendar year (CY) 2016 after completing the detailed engineering for the proposed project.

Established in 1994, the subsidiary of Biocon is the country’s first contract research organization, with experience in novel molecule discovery and development services. The integrated service platform offered is for small and large molecules including antibody-drug conjugates and oligonucleotides. Around 95% of the revenues come from overseas market, with 221 clients across multiple sectors.

Hindustan Zinc (HZL) is all set to invest around Rs 8000 crore in expansion of mines and smelting operations over the next three to five years, as per multiple news report published in January 2016. The Vedanta group company aims to enhance the existing ore production levels from to 14 million tonnes per annum (mtpa) from 9.36 mtpa and finished metal production to 1.10 mtpa from 0.85 mtpa. With the latest technology, large investment in capacity expansions and continuous exploration, production will be increased manifold and yet there will be reserves for another 30 years. The 1966-incorpated miner completed 50 years in January 2016.

Also, a new fertilizer plant, with capacity to manufacture 0.5 mtpa of di-ammonium phosphate, is to be set up in the Udaipur district in Rajasthan, with an estimated capital outlay of Rs 1350 crore.

Cash and cash equivalents of debt-free HZL were at Rs 32639 crore end December 2015. Out of this cash hoard, Rs 23581 crore has been invested in mutual funds, Rs 5575 crore in bonds and Rs 3480 crore in fixed deposits. A conservative investment policy of investing in high-quality debt instruments is followed.

Primarily engaged in mining and smelting of zinc, lead and silver, operations include five zinc-lead mines, four zinc smelters, one lead smelter, one zinc-lead smelter, seven sulphuric acid plants, a silver refinery plant and five captive power plants in Rajasthan. Also, a rock-phosphate mine is operated in Maton near Udaipur. There are zinc, lead and silver processing and refining facilities in Uttarakhand. In addition, there are wind-power plants in Rajasthan, Gujarat, Karnataka, Tamil Nadu and Maharashtra, with aggregate captive power capacity of 474 MW and wind power of 274 MW.

Bharat Forge (BFL) plans to set up an integrated automotive components hub in the Nellore district of Andhra Pradesh at an estimated capital outlay of around Rs 1200 crore. The unit will provide employment to around 3,000 individuals. Chairman and Managing Director Baba Kalyani announced the plan in January 2016 at the CII Partnership Summit held in Visakhapatnam in Andhra Pradesh (AP).

Additionally, another memorandum of understanding has been signed with the AP government to set up a multi-modal facility for industrial components, defence and aerospace components including a supply chain. This facility will be located in the Anantapur district. For both these locations, land has been finalized and physical possession will be taken shortly.

The Kalyani group company is the world’s leading power-train and chassis component manufacturer. Customer base includes almost all the leading global automotive original equipment manufacturer (OEM) tier 1 suppliers and various OEMs in the industrial segment. There is significant present in the overseas market, with revenue contribution of around 68%, while the remaining 32% comes from the domestic market.

Several strategic goals have been set to be achieved by FY 2018. The intention is to increase the passenger-vehicle revenues to 15% from 5% of sales. The aim is to foray into the aerospace sector. Contracts have been signed with four marquee customers. Further, the objective is to be debt-free and improve the return on capital employed and return on net worth ratios to over 20% by CY 2018. Last, revenues are to be doubled to Rs 7000 crore by FY 2018.

There are plans to tap the defense opportunity in a major way. The opportunities pursued include components, artillery programs, Defence Research and Development Organization programs and offset programs and services. Currently, components and sub-systems are being supplied to the Indian defense establishments.

Idea Cellular, the country’s third largest telecommunication company with a revenue market share of 18.5%, revised upwards the capex guidance to Rs 7500 crore from Rs 6500 crore given earlier. This is the second upward revision compared with the original guidance of Rs 4500 crore. The increase in capex is owing to the accelerated fourth-generation (4G) telecom services rollout. As many as 3,239 2G cell sites and 7,678 3G and 4G cell sites were rolled out in the December 2015 quarter, taking the network site count for 2G to 1,22,515 and for 3G and 4G to 47,545.

The process of rolling out 4G services has begun, with the launch in four service areas of Tamil Nadu, Kerala, Karnataka and Andhra Pradesh in December 2015 and three service areas of Madhya Pradesh, Punjab and Haryana in January 2016. The 4G services are being expanded in these seven services areas. In the remaining three services areas of Maharashtra, Orissa and North East, the 4G services will be launched by March 2016. The intention is to cover 750 towns and villages in these 10 service areas by June 2016.

The total addition to the gross block including capital work-in-progress was Rs 2310 crore in the December 2015 quarter. This excluded capitalized foreign exchange fluctuation of Rs 27.7 crore, spectrum capitalization and capitalized interest of Rs 1330 crore related to capitalized spectrum.

Recently, an agreement was signed with Videocon Telecommunications for transfer of right to use 5 MHz contiguous 1,800-MHz spectrum for the leadership service areas of Gujarat and Uttar Pradesh-West. The aim is to use this spectrum to launch high-speed 4G services in these markets. On completion of the transaction, the fourth generation (4G) (LTE) service capability will expand to 12 service areas, covering 75% of the revenues and 60% of the industry revenues. The overall spectrum quantum will increase to 280.7 MHz.

In September 2015, the Reserve Bank of India gave in-principle approval to set-up a payments bank to Aditya Birla Nuvo (ABNL). ABNL (51%) jointly with Idea (49%) will set up the payments bank.

The JV partners are likely to launch services by the second half of CY 2016. The JV will leverage Idea’s over two million retail distribution channels across 3.83 lakh towns and villages to promote a range of services such as opening of savings bank account, domestic remittances and merchant payments. The JV will be tying up with third parties to offer a range of credit, investment and insurance products.

As part of forward integration, Shree Pushkar Chemicals & Fertilisers commenced commercial operations for a new reactive dyes plant in January 2016. The plant, with an installed capacity of 3,000 tpa, is located at Lote Parshuram in Maharashtra. Already, the new unit has two months of orders on hand. Reactive dyes is a class of highly-colored organic substances primarily used for dyeing textiles, for cellulosic fibers like cotton and also wool. With reactive dyes, Shree Pushkar emerged as a one-stop shop for dyestuff manufacturers catering to the textile sector. There is an arrangement with Huntsman Corporation for sales of dyestuff. Huntsman is a US-based company and a global player in the manufacture and marketing of dyes and petrochemicals.

Two additional plants for dye intermediates will be commissioned shortly to meet the captive requirement. These two units include H-Acid, with installed capacity of 750 tpa, and vinyl sulphone, with capacity of 1000 tpa. Mutual funds held 8.45% stake in the almost zero-debt mid cap end September 2015.

Established in 1993, the leading manufacturer of K-acid in the domestic market operates in four businesses of dye intermediates (revenue contribution 71%), acid complex (8%), cattle feed (17%) and fertilizers (3%). Products are marketed through 125 dealers across Maharashtra, Gujarat and Karnataka. Lately, units to manufacture mixed fertilizers (20,000 tpa) and sulfate of potash (10,000 tpa) were commissioned.

There is exclusive marketing arrangement with DCM Shriram Chemical & Fertilizers for single super phosphate in Maharashtra and Karnataka and tie-up with Shivam Chemicals for marketing of di-calcium phosphate in Karnataka.

Established in 1935, Cipla (market capitalization Rs 45785 crore) is considered a pioneer in the domestic pharmaceutical industry. But it is lagging compared with new-age peers such as Sun Pharmaceuticals Industries (Rs 206203 crore), Lupin (Rs 81161 crore) and Dr Reddys Laboratories (Rs 53043 crore) on the trading floor in a major way. However, in future, the scenario can change and it might able to catch up with the peers if the grand plan envisaged by the management sees the light of the day.

The aim is to grow the North America business to 20-25% from a mere 8% of overall sales by CY 2020. The intention is to maintain the momentum of filing 10-15 Abbreviated New Drug Applications (Andas) every year and focus on limited competition opportunities. In the North American markets, building of partnerships will continue for launch of first-to-market and differentiated generics such esomeprazole, dymista nasal spray, budesonide respules, escitalopram and finasteride.

At present, the focus is on the domestic and emerging markets, with little presence in the developed markets, where the profit margins are lucrative. With 35 manufacturing facilities, revenues are garnered from over 150 countries. A few of the manufacturing facilities are approved by the US Food and Drug Administration (FDA) and United Kingdom’s Medicines and Healthcare Products Regulatory Agency. There is presence in 30 therapeutic categories and over 1,500 products are on offer. In the domestic market, the third-largest player has a network of 6,500 distributors. As many as 22 of the brands feature among the top 300 brands. In South Africa, the third-largest generics player has a market share of 5%. In other emerging markets, there is front-end presence in 20 markets, with leadership position in Sri Lanka, Yemen, Kenya and Uganda. In the respiratory segment, there is the world’s largest inhalation portfolio of 28 molecules and combinations in multiple dosage forms and strengths that are available in 100 countries including the developed markets.

In the US, 147 Andas have been filed, there is partnership with 20 companies and 60 products have been commercialized. Cipla-label products were launched in the US around a year ago and there is positive response from customers. Lately, a definitive agreement was signed for 100% acquisition of Invagen and Exelan Pharma, both US-based firms. These buys are expected to help accelerate the growth plans.

In the European Union, there is direct presence in 10 countries and business-to-business presence in 30 countries through 50 partners. Key respiratory products salmeterol fluticasone and mometasone have been launched in select European markets. The current focus is on boosting volume market share.

The emphasis is on research. Research & development spend increased to 7.3% (US$ 130 million) of revenues in FY 2015 from 4.5% (US$ 50 million) in FY 2012 Around 200 development projects are underway. The top 50 projects address a market size based on innovator sales of
US $ 30 billion.

Mutual fund owned 6.57 % equity end December 2015 in a moderately leveraged firm with a debt-to-equity ratio of 0.14% end March 2015.


Investors should focus on the bottom lines while evaluating these companies. Healthy financials, with moderate or low leverage is essential to finance the growth plan. A debt-laden balance sheet and growth plans can be a deadly cocktail if the proposed investment meets with dismal demand in future.

Telecommunication companies such as Idea Cellular and Reliance Communication are investing in infrastructure to strengthen their services against the impending attack by Reliance Jio, about to launch its communication services. This is a classic example of preventative capex and may or may not deliver the desired results.

Also, investors should assess the operating profit generated by these companies. Internal accruals are a crucial source of finance. Robust operating profit can ease the funding burden on companies.

Last, these companies should be seen from the medium- to long-term perspective. Investments can take a long time to fructify and investors need to be patient during the intermediate period. In fact, there is risk of failure that can result in wealth destruction instead of creation. This business risk is anyhow not detachable in equity investment.

Preparing for growth
Companies with ambitious plans to expand footprint



Reliance Communications

Capex enhanced to Rs 4000 crore for the fiscal ending March 2016 (FY 2016) from Rs 3000 crore earlier. A significant portion will be for increasing third generation (3G)) telecommunication footprint.

Essel Propack

In Europe, a new line has been added to debottleneck capacity and to make headspace for further growth in the non-oral care segment.

Finolex Industries

Capacity of PVC pipes and fittings will be increased to 3,10,000 million tonnes (mt) by FY 2017 from the current level of 2,50,000 mt, with estimated capital outlay of Rs 30 crore.

Indusind Bank

Opened 51 new branches and 43 ATMs in the September 2015 quarter, taking the total account to 905 and 1621, respectively. Aims to double branch count to 1204 by FY 2017 from 602 in FY 2014. Reported loan growth of 29% in Q3 of FY 2015, which is within the targeted level of 25-30% over FY 2014-FY 2017.

Manpasand Beverages

To increase market reach and penetration, tied up with Germany-based wholesale major Metro Cash & Carry to tap urban markets. Products Mango Sip and Fruits Ups will be available at Metro outlets.

Supreme Industries

Envisaged capex of around Rs 200 crore for FY 2016 comprising nine-month period. Commercial production at new units at Kharagpur in West Bengal and Malanpur in Madhya Pradesh have commenced and expected to achieve normalcy in the March 2016 quarter. Expects overall volume growth of 12-15% in the current fiscal.

Firstsource Solutions

Entered into a definitive agreement with ISGN, a provider of mortgage technology and services, to acquire its BPO division. Over 700 employees from the division in the US and India will be absorbed. The acquisition will help penetrate into the growing US mortgage BPO market with marquee customers; strengthen the banking, financial services and insurance portfolio; and offer opportunities for cross selling of services.


The Oberoi, New Delhi, will be closed effective from 1 April 2016 for two years for major renovations. The hotel is expected to be ready for commercial operation by 1 April 2018. Renovations are expected to cost Rs 325 crore apart from a hit on the revenues over a period of two years. The Delhi property contributed 14% to the revenues in FY 2015.

IFB Agro Industries

Modernization project 50 kilo liters per day grain distillery at Noorpur in West Bengal completed and commercial production commenced mid January 2016.

Grasim Industries

Consolidated capex of Rs 1940 crore in the nine months ended December 2015 compared with planned capex of Rs 2590 crore for entire FY 2016. Drawn capex plan worth Rs 4055 crore for FY 2017 and onward. Of this, Rs 3800 crore will be towards the cement business.

Andhra Cements

Captive power plant of 30 MW set up is undergoing trial run.

Apar Industries

The new capacity addition project in Odisha is going as per schedule. The plant is expected to be commissioned by Q3 of FY 2017.


Estimated capex in FY 2016 and FY 2017 is likely to be Rs 100–125 crore each.

Sutlej Textiles and Ind

Acquired Birla Textile Mills in September 2015 from Chambal Fertilisers and Chemicals.

Source: Companies, stock exchange announcements

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Reblog: Two Important Investment Principles

I was recently reading through some old investor interviews from the excellent Graham and Doddsville newsletter from Columbia Business School, and I came across an interview with Glenn Greenberg of Brave Warrior (formerly Chieftain Capital). A couple years ago I commented on a talk that Glenn Greenberg did at Columbia, where he discussed his investment approach. My own investment approach tends to fall in line with Greenberg’s investment philosophy as well as his portfolio management approach. Despite a few misses here and there (notably Greenberg’s investment in Valeant, a company I discussed last year in this post), his overall performance has been outstanding over the past 3 decades.

But putting Greenberg’s individual investment ideas aside, I’ve always like his general approach, specifically the following two points:

  • Focus on the quality businesses (he lived through the stock market crash of 1987, where the market tumbled over 20% in one day, and he wanted to ensure that if that ever happened again, he would feel comfortable with the businesses he owned)
  • Position Sizing: If it’s not worth putting 5% of your portfolio in the stock, then it’s probably either too risky, outside your circle of competence, or doesn’t have enough upside

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Sensex ends on Friday 152 points lower, Nifty below 9,600 as investors book profits

The benchmark indices settled lower on Friday as investors booked profits in financials such as State Bank of India and auto makers such as Maruti Suzuki India. The negative trend in European and Asian markets also impacted the sentiment.

The S&P BSE Sensex ended at 31,138, down 152 points, while the broader Nifty50 settled at 9,574, down 55 points.

In the broader market, the S&P BSE Midcap and the S&P BSE Smallcap indices shed over 1% each.

Market breadth depicted weakness. There were more than three losers against every gainer on BSE. 1,936 shares fell and 683 shares rose. A total of 137 shares were unchanged.

For the week, both the indices logged small weekly gains on hopes the Reserve Bank of India will cut interest rates after minutes from a monetary policy committee meeting earlier this month showed one member acknowledging that inflation had eased.

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A new feature on StockArchitect – F&O Activity

The Indian equity market has a long history and there are many participants in it. These participants include retail traders / investors, institutions (Domestic as well as Overseas), prop desks, arbitrageurs, hedgers, etc. Retail participants invest in the market both directly and indirectly through institutions. These institutions are known as Domestic Institutional Investors (DIIs) and comprise of Mutual Funds, Banks, Insurance companies etc.

On the other hand, Foreign Institutional Investors (FIIs) or Foreign Portfolio Investors (FPIs) are overseas entities registered in India and allowed to invest in the Indian stock markets. They play an important role in our market as they hold a decent chunk of overall investment in Indian equities.

FII activity in cash market segment should not be traced as a trading signal because they invest with long term perspective mainly. This data should be used as a helping tool for forming a positional view on the market. For short term trading their future & options activity should be tracked.

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Reblog: 21 Ways To Improve Your Trading System

how to improve a trading system

Trading systems are not only good for making money in financial markets but they are also extremely useful for learning. Unfortunately, trading systems often get discarded early on after a couple of poor back-test results.

Sometimes it is better to improve an existing model that needs work than to start afresh with a totally new system. In this article I look at 21 ways you might be able to improve on your existing trading system:

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Reblog: The Worst Mistakes Beginner Traders Make

Traders generally buy and sell securities more frequently and hold positions for much shorter periods than investors. Such frequent trading and shorter holding periods can result in mistakes that can wipe out a new trader’s investing capital quickly. Here are the ten worst mistakes made by beginner traders:

1. Letting Losses Mount

One of the defining characteristics of successful traders is their ability to take a small loss quickly if a trade is not working out and move on to the next trade idea. Unsuccessful traders, on the other hand, get paralyzed if a trade goes against them. Rather than taking quick action to cap a loss, they may hold on to a losing position in the hope that the trade will eventually work out. In addition to tying up trading capital for an inordinate period of time in a losing trade, such inaction may result in mounting losses and severe depletion of capital.

2. Failure to Implement Stop-Loss Orders

Stop-loss orders are crucial for trading success, and failure to implement them is one of the worst mistakes that can be made by a novice trader. Tight stop losses generally ensure that losses are capped before they become sizeable. While there is a risk that a stop order on long positions may be implemented at levels well below those specified if the security gaps lower, the benefits of such orders outweigh this risk. A corollary to this common trading mistake is when a trader cancels a stop order on a losing trade just before it can be triggered because he or she believes that the security is getting to a point where it will reverse course imminently and enable the trade to still be successful.

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Nifty ends below 9,600, down almost 1% for the week; Nifty IT slips 0.8%

Benchmark indices swung between gains and losses on Friday to end the day flat amid lack of global as well as domestic cues. Nifty50 settled the week 0.8% lower, its first weekly loss in six weeks, breaking its longest gaining streak since late 2014 while Sensex ended the week 0.6% lower.

Gains were capped by a sharp correction in pharma and IT stocks on worries over their earnings outlook while ITC, Tata Motors continued to support the market.

The S&P BSE Sensex settled at 31,056, down 19 points, while the broader Nifty50 ended at 9,588, up 10 points.

In the broader market, the S&P BSE Smallcap pared gains to finish 0.1% higher after rising 0.5% to hit its record high, while the S&P BSE Midcap index was up 0.2%.

Pharma was the top losing index amid worries about their earnings outlook because of pricing pressures in the United States, down 1.8%. Lupin was the biggest laggard on the index, down over 4% followed by 4% Divi’s Lab, Cadila Healthcare, Sun Pharma and Cipla.

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