Investing: November 2005 Archives
I attended an information session at my old alma mater - the Rotterdam School of Management, and found that my favourite professor was teaching an elective at that time on investment management. So I ducked into the class to relive the experience again.. One of the topics covered was how to pick mutual funds based on factor and style analysis. Well, to cut a long story short, she told us that a very distinguished Nobel laureate called William Sharpe who's studied funds in depth suggested that the best ways to pick a mutual fund were in this order of descending importance Expense ratio Churn of stocks held ... The message was - find the funds that have the lowest operational and transaction costs. Amazing isn't it? The market and the fund's mandate makes sure that no one fund can beat the market at all times. So effectively, funds will yeild the same return on investment - in the long term. The only way an investor can get above average returns is if the fund's costs were lower... :-) I wonder if I can use this principle in pricing other physical products and services. (Any ideas would be appreciated here) When I worked in India for an outsourcing firm, there was tremendous cost control.. The message being - the lower your costs, the more value you can provide to a customer, and the better the chance you will survive in the long term. Lessons that are tough to forget. But it was nice to hear them again in a totally different context.
Interestingly, Mckinsey and Co has published a special report on India: a series of articles about Indian business and the future of business, reform, and opportunities in India. It's called Fulfilling India's promise, and is a really interesting resource, especially if you're looking for some long term ideas.
Market roundup Diwali - the festival of lights is finally upon us. Typically in the week before Diwali, there is a rise in the Sensex. Popular belief in India goes that if one makes money on Diwali, one makes money all through the year. Well, to no surprise, the Sensex went up by 200 points, It also fell 176 points the very next day! Over the last month, the stock market fell in the first week, and slowly inched up in the remaining three weeks. In my previous article last month, I had mentioned how there was a disconnect between volume growth (negative) and sensex increase (positive). That never happens. It's a tipping point for a fall. That was borne out, and the stock market then fell. There were some reasons though. It seems that most of the stocks were being priced at 18 -20 times FY2005 earnings. In the second quarter (equivalent to the third quarter in the US, as Indian companies close their books on March 31st), Companies other than the IT majors didn't do too well - the EPS in some cases (Grasim) fell by 20%, and in one case, Ranbaxy made a loss of Rs. 100 million in the quarter as compared to a Rs. 750 million gain in the same quarter last year. This pushed down all stocks. Another reason was that FIIs have been gradually withdrawing money (booking profit) and reacting to rising interest rates in the US. This interest rate hike caused the Rupee to depreciate against the dollar, which impacted earnings. Indian Mutual funds have stepped in to partially offset the loss in volume, but the Indian stock market still remains a relatively shallow market. Some important sector news:
The automotive sector BMW confirmed that it will invest Rs. 1.1 billion to build a factory in Chennai, India to produce 3 series and 5 series cars. The production is meant for the local market. All over Asia, BMW sells around 95,500 cars of the BMW, Mini and Rolls Royce brands. The plan is to bump this up to 150,000. All auto manufacturers reported double digit sales growth. Maruti, which had underperformed the last quarter was back with a 14.7% yoy growth in October. The sweet spot seemed to be the Alto, WagonR, Swift and Zen models which clocked a 35% growth. Cheaper models like the 800 and expensive models like the Esteem and Baleno had a 17% growth. Tata Motors had a sales growth of 17% in October as compared to the same period last year. Most of this came from the sales of buses and trucks - the commercial vehicles segment (18%) In comparison, the cars segment grew by 5.4% Bajaj Auto had vehicle sales increase of 37% in October as compared to the same period last year. Motorcycle sales were up 43%, three wheelers (called auto-rickshaws) were up 15%. Exports were up 49%. A little statistic: If the GDP falls 2%, the automotive components business falls by 10%. I feel that the same measure could also hold for the car and motorcycle businesses. Tyre manufacturer Goodyear will invest $18 million in expanding its factory in India. This will be done in 2006. It has just completed an investment of $ 30 million in capacity increase. The company has a 15% market-share in India, and will increasingly use it's Indian factory to supply tyres globally, besides meeting the growing domestic requirement. After this capacity expansion, production will be 10,000 radial tyres per day.
FMCG A normal monsoon, good economic growth and strong consumer confidence are helping all consumer products companies do well. Hindustan Lever (a division of Unilever) invested in product improvement, advertising and managed to increase profits by 17% in the last quarter. Proctor and Gamble on the other hand managed to increase profits by 21%. Growth was in all sectors - washing detergents, cosmetics, food, and healthcare. Marico grew net profit by 14%.
Healthcare While the domestic market is pretty stagnant in healthcare - as seen by flat sales and low revenues of medical equipment sales, medical outsourcing continues to boom. Here's an example: Max Healthcare has a division called Neeman, headquartered in North Carolina, which is involved in clinical research services. It has established a link up with several hospitals in the US, Western Europe, Nicaragua, India. It has recently entered into an alliance with Sinequanon, a clinical research organisation that provides clinical trial services to pharma companies in Brazil, Argentina and Chile. They feel that they can increase revenues to $100 million in 3 years and the total opportunity in backoffice processing of clinical research - hospital site management, database management and monitoring is worth $ 1 billion.
Market roundup Diwali - the festival of lights is finally upon us. Typically in the week before Diwali, there is a rise in the Sensex. Popular belief in India goes that if one makes money on Diwali, one makes money all through the year. Well, to no surprise, the Sensex went up by 200 points, It also fell 176 points the very next day! Over the last month, the stock market fell in the first week, and slowly inched up in the remaining three weeks. In my previous article last month, I had mentioned how there was a disconnect between volume growth (negative) and sensex increase (positive). That never happens. It's a tipping point for a fall. That was borne out, and the stock market then fell. There were some reasons though. It seems that most of the stocks were being priced at 18 -20 times FY2005 earnings. In the second quarter (equivalent to the third quarter in the US, as Indian companies close their books on March 31st), Companies other than the IT majors didn't do too well - the EPS in some cases (Grasim) fell by 20%, and in one case, Ranbaxy made a loss of Rs. 100 million in the quarter as compared to a Rs. 750 million gain in the same quarter last year. This pushed down all stocks. Another reason was that FIIs have been gradually withdrawing money (booking profit) and reacting to rising interest rates in the US. This interest rate hike caused the Rupee to depreciate against the dollar, which impacted earnings. Indian Mutual funds have stepped in to partially offset the loss in volume, but the Indian stock market still remains a relatively shallow market. Some important sector news:
The automotive sector BMW confirmed that it will invest Rs. 1.1 billion to build a factory in Chennai, India to produce 3 series and 5 series cars. The production is meant for the local market. All over Asia, BMW sells around 95,500 cars of the BMW, Mini and Rolls Royce brands. The plan is to bump this up to 150,000. All auto manufacturers reported double digit sales growth. Maruti, which had underperformed the last quarter was back with a 14.7% yoy growth in October. The sweet spot seemed to be the Alto, WagonR, Swift and Zen models which clocked a 35% growth. Cheaper models like the 800 and expensive models like the Esteem and Baleno had a 17% growth. Tata Motors had a sales growth of 17% in October as compared to the same period last year. Most of this came from the sales of buses and trucks - the commercial vehicles segment (18%) In comparison, the cars segment grew by 5.4% Bajaj Auto had vehicle sales increase of 37% in October as compared to the same period last year. Motorcycle sales were up 43%, three wheelers (called auto-rickshaws) were up 15%. Exports were up 49%. A little statistic: If the GDP falls 2%, the automotive components business falls by 10%. I feel that the same measure could also hold for the car and motorcycle businesses. Tyre manufacturer Goodyear will invest $18 million in expanding its factory in India. This will be done in 2006. It has just completed an investment of $ 30 million in capacity increase. The company has a 15% market-share in India, and will increasingly use it's Indian factory to supply tyres globally, besides meeting the growing domestic requirement. After this capacity expansion, production will be 10,000 radial tyres per day.
FMCG A normal monsoon, good economic growth and strong consumer confidence are helping all consumer products companies do well. Hindustan Lever (a division of Unilever) invested in product improvement, advertising and managed to increase profits by 17% in the last quarter. Proctor and Gamble on the other hand managed to increase profits by 21%. Growth was in all sectors - washing detergents, cosmetics, food, and healthcare. Marico grew net profit by 14%.
Healthcare While the domestic market is pretty stagnant in healthcare - as seen by flat sales and low revenues of medical equipment sales, medical outsourcing continues to boom. Here's an example: Max Healthcare has a division called Neeman, headquartered in North Carolina, which is involved in clinical research services. It has established a link up with several hospitals in the US, Western Europe, Nicaragua, India. It has recently entered into an alliance with Sinequanon, a clinical research organisation that provides clinical trial services to pharma companies in Brazil, Argentina and Chile. They feel that they can increase revenues to $100 million in 3 years and the total opportunity in backoffice processing of clinical research - hospital site management, database management and monitoring is worth $ 1 billion.
