FIIs - Boon or Bane

We have time and again heard business news channels blaming FIIs for every ‘massive’ selling which our Indian stock markets have to bear.

It’s analogous to ISI having a ‘hand’ in all terror activities taking place in India.

Though, I’ll not comment on the latter point, let me share my views on the former.

• From the beginning of this calendar year, we have had 166 trading days (including Aug 30, 2011) across the last 8 months.

• On Jan 3, 2011, Nifty opened at 6,177.45 and on Aug 30, 200 it closed at 5,001.00.

• Year to Date (YTD), the Nifty has lost 18.08% (if not for the 2 days of fantastic recovery, the loss was 22.23%)

• Out of the 166 trading days, the Nifty closed lower than the previous day on 93 days (56% of the trading days)

o On these 56% days, a trading day closed anywhere between -0.01% to -3.32% over the previous trading day

o Out of the 44% days, a trading day closed anywhere between +0.01% to +3.49% over the previous trading day

• Domestic Institutional Investors (DIIs - Banks, DFIs, Insurance and MFs and New Pension System) have been net buyers in 5 out of the last 8 months.

• FIIs (Foreign Institutional Investors) have been net buyers in 4 out of the last 8 months

• The biggest surprise

o DIIs have been net buyers to the tune of Rs. 22,594 crores

o FIIs have been net sellers to the tune of Rs. 16,446 crores

o Net-Net, there was more money put in the market than what was taken out in the last 8 months

If I consider the opening level of Nifty on the first trade day of a month vis-à-vis the closing level of Nifty on the last trade day of a month

• Only in 2 months (March & June) was the net level of Nifty in the positive

• Combined trades of FIIs & DIIs, months in which they were net buy were Mar, May, Jun, Jul

• Only in 1 month (March) were FIIs and DIIs on the same side in terms of market position (Net Buyers)

• All other months either FIIs have been net buyers / net sellers while DIIs have been net sellers / net buyers

We continue to be driven by what ‘West’, ‘Westerners’ do, either directly or indirectly.

This has been for the “good, bad, ugly” for our culture (past, present, future), economic policies, financial markets and anywhere else where we can see its influence.

• DIIs have shown confidence in our own markets, so should retail investors

• India is the 3rd fastest country (as per GDP growth rates for Q 1 – FY 2011-12) in the world today even at 7.7%

• Our country is more internal consumption driven than other developed markets

• India will be an economic super power sooner than later.

• When FIIs sell – BUY; when they buy – SELL

• FIIs will always pull out their money as and when they make profits

• Avoid stocks where FIIs holding is significant

IPOs of 2010 - A Reflection

Thought I would share my analysis of IPOs of 2010; a year which saw the stock market run upto 21K on the Sensex and then started to taper off. Today the Sensex is at almost 19K.

• There were 64 odd companies which tapped the primary market (IPOs).
• I have excluded 6 FPOs from my analysis (SCI, Power Grid, NTPC, REC, Engineers India, NMDC).
• IPO ratings have also been a new feature among most of the IPOs. Ratings were to help investors make better judgments before they invested in companies.
• The credit agencies (some of them are well-known) are CRISIL, CARE, ICRA, Fitch & Brickworks.
• Ratings are on a scale of 1 to 5 with 5 being the highest.
• Absolute returns is the absolute (non-annualized) profit or loss from the date of IPO listing till date.
• Annualized return is the return extrapolated to a per annum basis.

Here’s the low down:
Companies with IPO Rating of 1, 2 and No Rating
• Out of the 64 companies which had an IPO in 2010, 25 companies had a rating of 1 or 2 (including 2 which did not have a rating).
• From the previous point, it can be implied that 39% of last year’s IPOs were of companies with weak financial status / fundamentals
o Out of these 25, only 7 have a positive return till date (28% of the weak companies gave a positive return till date)
o 2 IPOs gave returns in the range of 0 to 10% profit
o Remaining 5 (out of the 7 IPOs with positive returns) gave above 10% (2 IPOs in fact have more than 30% profit)
o Negative absolute return range is from -22% to -80%

Companies with IPO Rating of 3
• Another 21 companies out of 64 had an IPO rating of 3 (33% of all IPOs last year had average financials)
o 6 IPOs have positive returns
  - 5 of the 6 have returns in excess of 75% absolute returns
  - The same 5 have an annualized returns of 77% (pa) as the lowest and 298% (pa) as the highest
- Out of these 5 super performers 3 companies have been listed for less than a year
o Remaining 15 IPOs had negative absolute returns ranging from -12% to -93%.
- Out of these 15 IPOs, 7 companies (with negative returns) have been listed for over an year on the stock markets.
o Negative absolute return range is from -12% to -93%

Companies with IPO Ratings of 4 and 5
• Finally, 18 IPOs had a rating or 4 or 5 (28% of all IPOs last year had strong financials)
o Only 2 had a rating of 5 – (Coal India and MOIL)
o Coal India’s absolute return is 54.57% (annualized 110.66%)
o MOIL’s absolute return is 0.97% (annualized 2.56%)
o 5 IPOs (including Coal India and MOIL) have a positive return
o 13 IPOs absolute return ranges from -3% to -55%

Summary
• Only 18 out of 64 IPOs gave positive returns; that’s a dismal 28% success rate of making any profit through IPOs
• 15 out of 64 IPOs gave a positive return more than the return on a fixed deposit (FD rate assumed as 8% pa)
• 8 out of 64 IPOs gave absolute returns of more than 50%; that’s a success rate of 1 in 10
• IPO ratings are only indicators so DO NOT invest in IPOs based on ratings
• Set your profit margins when you invest in IPOs; 10% absolute returns on listing is a safe bet
• Book your profits as soon as you hit your profit margins; preferably take out you capital and leave the profit in shares
• Always invest on the last day of the IPO
• Look at the subscription levels before you decide to invest in an IPO
• Set stop loss levels and exit stocks before you lose out most of your capital
• Don’t be in love with your investments in IPOs
o Don’t be too greedy for more profits
o Don’t wait for a share to come back to its cost price to exit; cut your losses
• Hindsight is always 20 / 20
o Murphy’s Law works; shares will always move up after you sell and always fall after you buy
• It’s better to pay 15% as tax on ‘short term capital gains’ than 20% (or 30%) as tax on interest from FDs. Hence, a 10% absolute return in an IPO is better than a 10% pa return on a FD.

Disclaimer: The views given above are my own and care has been taken to be as accurate as possible in representation of facts, figures and interpretations.

Stock Price Sources: BSE, NSE

Gold - Is it Worth to Buy Now?

Over the last few weeks gold has been creating new highs because everyone seems to think that gold is a safe investment class.

Dollar / Euro / Pound, etc are unsafe as their respective countries have economic problems.

But will there be a situation when you and I will buy petrol / vegetables in exchange for gold. Will we move back to a barter system? When countries have stopped using gold as standard for printing currency, how will investment in gold (by us or countries) help? When people and countries realize that, everyone will sell.

In India, people buy gold in jewellery form as it can be passed on to the next generation and hence not an investment class.

Surprisingly, (as per reports from the World Gold Council), in Q 2 of 2011, the demand in Gold ETFs (pure investment category) fell as compared to Q 2 of 2010. The increased demand for gold was by virtue of the increase in demand in gold jewellery. India and China accounted for 52% of global bar and coin investment and 55% of global jewellery demand.

So, if there’s a second recession, consumption for gold jewellery will fall and so will the prices. All it needs is India and China to grow slower than last year (these countries need not be in recession but slower growth will have its own impact).

Another fact, gold as an asset class gave positive returns in the decade 2001 – 2011; prior to which it was more or less stagnant. Prior to 2001, we have had economic crisis in other parts of the World and in India but gold never gave returns the way they have done in the last decade.

Buy stocks of strong companies. Keep investment in gold (as ETFs, jewellery, coins, bars, etc) to less than 5% of your portfolio.

Gold & Real Estate - Investment Options?

Many a times I have been asked whether gold is a good investment option. Similar questions are asked about real estate (empty land or built up area).

My response has been both yes and no.

Yes – as long as I am able to make a profit on an investment made in these items, they are an investment class. But so is any other commodity like Crude Oil, Silver, Steel, Rubber, Pepper.

No – as by and large, these commodities have no intrinsic value. These commodities are never sold at a cost price + proft margin. Their value is determined by the dynamics of demand (need to buy) to supply (need to sell).

In case of companies, there’s always a book value of the company, which is the fair value of the company per share. In commodities, there’s no fair value.

Investment in real estate, atleast in India, is fraught with risks many of us are oblivious about. As transaction value is large and so is the inherent risks, the reward (if all goes well) is also pretty high.

Also, if my neighbour’s property was sold at X, does not mean I will get X as a minimum. My property will valued when your ‘need to sell’ meets someone else’s ‘need to buy’. If I am in a crisis and my ‘need to sell’ is high, then Ill get a price lower than X.

Next Edition: Gold – Is it Worth to Buy Now?