Rules to Invest in the Stock Market

The Stock Market has been an enigma to many investors over the past 2 years. We have seen the great highs of 21000 and we have dug deep down to the 7000 levels. The stock market movement is not rocket science but the perception of a majority of Indian investors is otherwise.

Markets move in a cycle, after every high there is a low and after every low there is growth and a subsequent high. But, we feel that the market is unidirectional. If the market is going up (in a bull run) we expect it to run indefinitely and if it is going down (in a bear run) we expect it to stay down forever. Let us take an example that happened recently. Two months back the markets were hovering around the 21000 levels and everyone was full of positive news that the markets will touch 23000 by year end or by next year. The bubble burst within days and it crashed an average of 300 to 400 points every day and went back to the 18000 levels. Again people started correlating bombings in Korea and said that the markets would stay down. Again surprises galore and within a few more weeks the market is back in the 20000 levels.

The Market is never going to grow tired of throwing surprises which effectively means that the best and the most knowledgeable market gurus need to pay attention and watch out for it.

Amidst all this commotion, the market has taught us a few very valuable lessons that we need to remember. It would be good if we keep these lessons in mind and be a prudent investor to avoid burning our fingers.

Rule 1: Always Stay Cautious

There is a saying in physics, what goes up has to come down, that is gravity. Stock markets aren’t proficient in physics and they don't really follow the laws of gravity. People feel that if there is a steep growth in the market values, they feel correction will eventually happen and the story other way round is true to a certain extent as well. So the best approach is to stay cautious when people are acting out of impulse.

At the current levels, the Indian economy is definitely healthy and in a much better shape than its world counterparts, however when the market goes up to new heights despite similar fundamental valuations, it definitely means that we need to exercise caution before jumping into the bandwagon.

The Lesson here is: Stay cautious and do get carried away by the market movements irrespective of the direction in which it is moving.


Rule 2: Forget the Herd Mentality

Though almost all of us (stock market investors) are decently educated and are civilized, a majority of us still follow the herd mentality. Have you seen a herd of cattle walking about in barren land? The first cow is walking because the owner is dragging it but the rest are following just because the cow in front of it is moving ahead. This is exactly what majority of us do. “Follow the Herd”

I am not saying that we must always stay unique and do the contra but still, we shouldn't be doing something just because everyone around us is doing it. When the markets crashed, some people panicked and started selling their holdings. This triggered further panic and everyone jumped on the sell flock and the market tumbled. Did the basic fundamentals of the companies change? NO. Did the companies go bankrupt? NO. Did news say that certain companies are making losses? NO. The answer will be a whole bunch of No’s to all possible questions that might trigger us to sell a stock. But still, we all sold our holdings and the market plummeted.

The lesson here is: Don't follow the herd. Do your research and stay invested. Don't sell just because people around you are doing it.

Rule 3: Book Profits Systematically

Though the rule is simple, this is probably the most difficult one to follow. When a company stock is going high all of us are tempted to say this “Just a little bit more and I will sell and make a good profit”. Haven’t we all been in this shoe? Definitely we have. But unfortunately, this approach rarely works. It is always advisable to exit from the market in phases. When we buy a stock, it is good to chart out a future course of action based on market movement. We must plan to sell a % of our holdings in the company when it reaches a certain level. This not only helps us to reduce risk but also provides us with an opportunity if the market moves on further. In the whole greed of a just a little bit more, many of us often lose all our holdings and sometimes even get into red.

The Lesson here is: Decide how much growth a stocks price can make over the next few months and decide a target. If the stock reaches the target, book partial or full profit so that, in case the stock tumbles, you don't end up with a full red portfolio.

Rule 4: Stay Away from Penny Stocks

We are all attracted to Penny Stocks. These stocks cost us around Rs. 10 or 20 each and even a small investor can afford hundreds of thousands of shares. Some of them even blow the roof and grow at over 50 or 60% in a matter of days. However, such rises may be purely based on rumors or speculations and they may lack sound fundamentals or financials. Every time you will see that a penny stock which was a hot pick during a bull run, will be nowhere to see when the markets go bust. In fact, these are the ones that go down first and some may even shut down their businesses.

The Lesson here is: Stay away from penny stocks. It is better to buy the shares of a good company with solid fundamentals at Rs.1000 than buy 100 shares of a tom-dick-n-harry company at Rs.10 each.

Rule 5: Forget Fear and Greed

Fear and Greed are two things that determine the way we act or react. When the markets were at the 21000 levels, everyone was sure that it would keep moving northwards, however when the decline started when least expected, panic selling occurred and the market fell terribly.

Fear and greed always have an upper hand in markets, during bull run markets are driven 70% by greed and 30% by fear whereas the same is reverse in case of bear phase. A contrarian strategy always helps, when people are fearful that the markets will come down be greedy to grab the stocks at a particular price, when people are greedy that the markets will climb further be fearful and start exiting from the markets.

The Lesson here is: Don't be afraid of making losses. Every person who claims he is a stock market guru would have incurred losses at some point of his life. The trick is to avoid greed and make wise decisions that can bring profit to us.

Rule 6: Don't forget Debt

Almost every stock market expert would say – “Keep a portion of your investment in debt instruments like band deposits or bonds” Yes you read me right. Debt is a very important asset class. It gives us the cash cushion that we always need and also gives our portfolio its much needed diversification. All wise investors know that they mustn’t put all their eggs in the same basket.

The Lesson here is: Have a diversified portfolio and don't forget debt instruments. You may end up with lesser profits than your counterparts during a bull run but you will be the happiest man of the lot during a bear phase or a market crash.

To Conclude:

Am not trying to be spoil sport about the market going to new heights and nor am I suggesting that the market will go down again. All I am saying is, it is better safe than sorry. After all, its our hard earned money isn’t it…

Happy Investing!!!

Market Ratios

Market Ratios are useful in measuring investor response to owning a company’s shares and also the cost of issuing shares to the public. Almost all of these ratios can be used to take decisions as to whether we should invest in a company’s stock or not. The ratios that fall under this category are:

1. Earnings Per Share (EPS)
2. Payout Ratio
3. Dividend Cover
4. P/E Ratio
5. Dividend Yield
6. Cash Flow Ratio
7. Price to Book Value Ratio (P/B or PBV)
8. Price to Sales Ratio
9. PEG Ratio

Earnings Per Share:

EPS is a very good indicator of a company's performance. It measures the amount of earnings per each outstanding share of a company’s stock.

Formula:

EPS = Net Profit / Total No. of Common Shares or

EPS = Net Income / Total No. of Common Shares

Here the EPS calculated from the Net Profit would always be lesser than the one calculate from the Net Income but invariably both give us a good measure of the ability of the company to grow and generate additional revenue.

Usually EPS values are compared between companies or between values of the same company over a period of years.

Payout Ratio:

Payout Ratio a.k.a Dividend Payout Ratio is the ratio that tell us the amount of dividend paid by the company to its common stock holders in comparison to its total income for the same time period. This percentage tells us how much dividend is paid by a company in comparison to its total revenues.

Formula:

DPR = Dividends Paid / Net Income for the same time period

A Good DPR is always a sign of a well performing company. If two stocks from the same industry are picked for comparison, the one with the higher DPR always scores more than the one that has little or no DPR.

Dividend Cover:

Dividend Cover is actually the inverse of the Dividend Payout Ratio. It is calculated by comparing the Earnings Per Share (EPS) and the actual dividend paid out per share.

Formula:

DC = EPS / Dividend Paid

P/E Ratio:

P/E Ratio also called Price to Earning Ratio refers to the price paid for a share relative to the annual net income/profit earned by the company per share. The P/E ratio is an indicator of how much investors are willing to pay for a company's share. A higher P/E ratio means that investors are willing to pay a higher premium for a company’s share in comparison to its actual value. A stock with a higher P/E is more expensive than the one with a lesser P/E.

Formula:

P/E = Market Price Per Share / Diluted EPS

The P/E value of a share keeps changing everyday based on the market price fluctuation of the company’s stock.

Dividend Yield:

The Dividend Yield refers to the ratio that helps us identify the dividend income generated by a company for its share holders. A good dividend yield means that the company is doing good business and is also sharing its profits with its investors/share holders.

Formula:

Dividend Yield = Dividend Per Share / Current Market Price per Share

Or

Dividend Yield = Total Dividend Paid / Market Capitalization

Cash Flow Ratio:

The Cash Flow Ratio is used to compare a company's market value to its cash flow.

Formula:

CFR = Market Price per Share / Present Value of Cash Flow per Share

Cash Flow per Share = Total Cash Flow / Total No. of outstanding Shares

Price to Book Value Ratio:

The PBV is a financial ratio that is used to compare a company’s book value to its current market price. Book value denotes the portion of the company held by shareholders.

Formula:

PBV = Market Capitalization / Total Book Value as per the Balance Sheet

Or

PBV = Market Value per Share / Book Value per Share

Book Value per Share = Total Book Value / Total No. of outstanding shares

A point to note here is that, PBV ratios do not directly provide us any information on the company’s ability to generate profits for itself or its shareholders. It gives us some idea of whether an investor is paying too much for what would be left if the company were to go bankrupt immediately.

Price to Sales Ratio:

The Price to Sales Ratio (PSR) is a valuation ratio for stocks that is similar to the EPS ratio we saw earlier in this article. It is used to identify how much of revenue is generated compared to the company’s market price.

Formula:

PSR = Market Capitalization / Total Revenue

Or

PSR = Current Market Price per Share / Revenue per Share

Revenue per Share = Total Revenue / Total No. of Outstanding Shares

PEG Ratio:

Price/Earnings to Growth Ratio is used to determine the relative trade-off between the price of a stock, the EPS and the company’s expected growth. In general, the P/E ratio is higher for a company with a higher growth rate. Thus, using just the P/E ratio would make high growth companies appear to be overvalued in comparison to its peers. It is assumed that by dividing the P/E ratio by the earnings growth rate, the resulting ratio is better for comparing companies with different growth rates.

Formula:

PEG Ratio = PE Ratio / Annual EPS Growth

PEG ratio is a widely employed indicator of a stocks possible true value. Similar to PE ratios, a lower PEG means the stock is undervalued. The PEG is favored by many over the PE ratio because it also considers the company’s growth prospects. The PEG ratio of 1 is sometimes said to represent a fair trade-off between the values of cost and the values of growth, indicating that a stock is reasonably valued given the expected growth. A crude analysis suggests that companies with PEG values between 0 to 1 may provide higher returns

Debt or Leveraging Ratios

Debt Ratios measure the company’s ability to repay its long-term debt commitments. They are used to calculate the company’s financial leverage. Leverage refers to the amount of money borrowed in order to maintain the stable/steady operation of the organization.

The Ratios that fall under this category are:

1. Debt Ratio
2. Debt to Equity Ratio
3. Interest Coverage Ratio
4. Debt Service Coverage Ratio

Debt Ratio:

Debt Ratio is a ratio that indicates the percentage of a company’s assets that are provided through debt. Companies try to maintain this ratio to be as low as possible because a higher debt ratio means that there is a greater risk associated with its operation.

Formula:

Debt Ratio = Total Liability / Total Assets

Debt to Equity Ratio:

This ratio is used to identify the financial leverage of the company i.e. to identify the degree to which the firm’s activities are funded by the owners money versus the money borrowed from creditors.

The higher a company’s degree of leverage, the more the company is considered risky.

Formula:

DER = Net Debt / Equity

Note: This is the same as the Gearing Ratio that was discussed in Efficiency Ratios

Interest Coverage Ratio:

This ratio is used to determine how easily a company can repay the interest outstanding on its debt commitments. The lower the ratio, the more the company is burdened by debt commitments. When a company’s interest coverage ratio is 1.5 or lower, its ability to meet its interest expenses becomes questionable. An interest coverage ratio of < 1 indicates that the company is not generating sufficient revenue to satisfy its interest expenses. Formula:

ICR = EBIT / Interest Expenses

EBIT – Earnings Before Interest and Taxes

Debt Service Coverage Ratio:

DSCR is similar to the other debt ratios. This is a measure of the amount of cash flow available with the company to meet its annual interest and principal payments on its debt obligations. A DSCR of less than 1 means a negative cash flow. i.e., the company is not generating enough cash flow to meet its debt obligations. Company's try to keep their DSCR to be a value much higher than 1.

Formula:

DSCR = Net Operating Income / Total Debt Service

Activity Ratios

Activity Ratios or Efficiency Ratios are used to measure the effectiveness of a firm’s use of resources. Good companies would always put their resources to optimum utilization. Better the activity or efficiency ratio, the better it is for the company and it means the company is utilizing its resources properly and effectively.

The ratios that come under this category are:

1. Average Collection Period
2. Degree of Operating Leverage
3. Days Sales Outstanding Ratio
4. Average payment period
5. Asset Turnover Ratio
6. Stock Turnover Ratio
7. Receivables Turnover Ratio

Let us take a look at these ratios in a little bit more details.

Average Collection Period:

Most organizations make sales on credit. They usually deliver goods/services to their customers without taking the payments due immediately. There could be a credit cycle understanding between them and their customers who would make periodic payments for the goods/services rendered to them. This ratio is used to calculate the efficiency with which an organization is able to collect the payments due to them from their customers.

Formula:

ACP = Accounts Receivable / (Annual Credit Sales / 365 days)

Here, only credit sales are taken into consideration. Cash sales that are settled immediately are not considered for this calculation.

Degree of Operating Leverage:

DOL is a ratio that is used to identify the changes in the operating leverage that a company requires with growth in sales and income. As and when a company grows and its sales increases, the operating costs also increase and the operating leverage required by the promoters also changes. This ratio helps us identify that value.

Formula:

DOL = Percentage Change in Net Operating Income / Percentage Change in Sales

Days Sales Outstanding Ratio:

The DSO ratio is a financial ratio that illustrates how well a company’s accounts receivables are being managed. Here accounts receivables refer to the amount of money due to the company for the services/goods provided to its customers.

Formula:

DSO = Accounts Receivable / Average sales per day or

DSO = Accounts Receivable / (Annual Sales / 365)

Average Payment Period:

Average Payment Period is the total opposite of the Average Collection Period. This is the average time taken by the company to pay off its credit purchases.

Formula:

APP = Accounts Payable / (Annual Credit Purchases / 365)

Asset Turnover:

Asset Turnover is a financial ratio that measures the efficiency of a company’s use of its assets in generating revenue or income for the company. A higher asset turnover ratio implies that the company is operating efficiently and is able to generate solid revenue income using the assets at their disposal.

Formula:

Asset Turnover = Sales / Average Total Assets

Stock Turnover Ratio:

Also called the Inventory Turnover Ratio, this is a measure of the number of times inventory is sold or used in a time period corresponding to the average inventory held by the company. This ratio can help us determine how efficiently the company is using its inventory (raw materials) to generate revenue and income. i.e., how quickly is the company able to transform the inventory into finished goods that can be sold and generate an income.

A high turnover rate means that the company is utilizing its available inventory effectively but a very high value may cause risks of inadequate inventory levels. Whereas, a low turnover rate means that the company is overstocking or there are deficiencies in the production strategies.

Formula:

STR or ITR = Total cost of goods sold / Average Inventory

Receivables Turnover Ratio:

The Receivables turnover ratio is used to measure the number of times on an average; the receivables are collected during a particular timeframe. A good receivables turnover ratio implies that the company is able to efficiently collect its receivables.

Formula:

RTR = Net Credit Sales / Average Net Receivables

Liquidity Ratios

Liquidity refers to the ability of a borrower to pay his debts as and when they fall due. Good liquidity is a requirement of all companies especially banks and other financial institutions. Imagine going to your bank to withdraw cash and the cashier at the counter says, I don't have enough money in the branch come back later. It would be frustrating wouldn't it be? This would not happen if the bank had enough liquidity to meet its daily customer withdrawal needs.

Ok, now coming back to the topic, Liquidity Ratios are the ratios that can be used to measure the liquidity of a company. As a rule of the thumb, all companies must have good liquidity ratios.

The four main ratios that fall under this category are:

1. Current Ratio or Working Capital Ratio
2. Acid-test Ratio or Quick Ratio
3. Cash Ratio
4. Operation Cash-flow ratio

Let us take a look at each of them in detail.

Current Ratio:

The Working Capital Ratio or Current Ratio is a financial ratio that measures whether or not a company has enough cash to pay off all the debt payments that are due over the next 1 year (12 months) It compares the organizations current assets and its current liabilities.

Formula:

WCR = Current Assets / Current Liabilities

Ex: Let us say ABC Corp has total assets of 5 crores and owes State Bank of India a loan of 3 crores to be repaid before the end of next year, the WCR for them would be

WCR = 5,00,00,000/3,00,00,000 = 1.66

This effectively means that, as of today ABC corp has 1.66 rupees for every rupee of debt it owes SBI.

Though this is good, an acceptable WCR in market terms is 2 or greater which shows that the company is sufficiently liquid and financially stable.

Acid Test Ratio:

Acid-test or Quick Ratio measures the ability of a company to use its cash or near cash assets to extinguish or pay-off its current liabilities immediately. Near cash assets are those that can be quickly converted to cash at close to their book values.

Formula:

ATR = (Current Assets – (Inventories + Prepayments)) / Current Liabilities

A company with a quick ratio of less than 1 cannot currently pay-off all its current liabilities. Any good company would want to maintain their acid test ratio to be greater than 1 at all times.

Cash Ratio:

Cash Ratio is a financial ratio that is used to identify the amount of a company’s assets that are maintained as cash or near cash entities. This is extremely important for banks and financial institutions (If you go back to the beginning of this article to the bank – cash withdrawal example, you can now relate the fact that I was in fact talking about this ratio only)

Formula:

Cash Ratio = (Cash + Marketable Securities) / Current Liabilities.

Companies strive to maintain a good cash ratio but at the same time try to ensure that they do not hold on to too much cash that is lying idle in their bank accounts.

Operation Cash Flow Ratio:

Operation Cash Flow Ratio is a financial ratio that is used to identify the percentage of money raised by the company as part of the operation cash flow to the total debt the company owes. Operating cash flow is the cash generated from the operations of the organization after excluding taxes, interest paid, investment income etc.

Formula

OCFR = Operation Cash Flow / Total Debts

Profitability Ratios

Profitability Ratios measure the company’s use of its assets and control of its expenses to generate an acceptable rate of return. The purpose of these ratios is to help us identify how profitable an organization is. As an investor I would like to invest only in company’s that are profitable and in best case profitable than all their industry peers.

Some of the ratios that can help us identify a company’s profitability are:

1. Gross Margin or Gross Profit Margin
2. Operating Margin or Operating Profit Margin or Return on Sales (ROS)
3. Profit Margin or Net Profit Margin
4. Return on Equity (ROE)
5. Return on Investment (ROI)
6. Return on Assets (ROA)
7. Return on Assets DuPont (ROA DuPont)
8. Return on Equity DuPont (ROE DuPont)
9. Return on Net Assets (RONA)
10. Return on Capital (ROC)
11. Risk Adjusted Return on Capital (RAROC)
12. Return on Capital Employed (ROCE)
13. Cash Flow Return on Investment (CFROI)
14. Efficiency Ratio
15. Net Gearing or Gearing Ratio
16. Basic Earnings Power Ratio


Gross Margin or Gross Profit Margin:

Gross margin or gross profit margin is the difference between the sales and the production costs of the company after excluding overhead, payroll, taxation, and interest payments. It expresses the relationship between gross profit and sales revenue. It is a measure of how well each rupee of a company's revenue is utilized to cover the costs of goods sold.

Higher gross margins for a manufacturer reflect greater efficiency in turning raw materials into income.

Most company’s work towards attaining a particular gross profit margin or bettering it. So in many cases, the selling price of the finished goods is determined based on the margin that the company wishes to attain by selling these goods.

Example: Let us say Mr.X manufactures leather belts and sells them to retail show-rooms. The cost that Mr.X incurs during the production of a single premium quality belt is Rs. 400/- He wishes to maintain a profit margin of 25% on his products. So the price he would sell his belts to his retailers is Rs. 500/-

Formula:

1. Gross Profit / Net Sales or
2. (Net Sales – COGS) / Net Sales

Operating Margin:

Operating Margin is a measurement of what proportion of a company’s revenue is left over, before taxes and other indirect costs are incurred, after paying for variable costs of production like wages, raw materials etc.

A good operating margin is required for a company to be able to pay for its fixed costs like interest on its debt. A higher operating margin means that the company has less financial risk.

Formula:

Operating Margin = (Operating Income / Revenue)

Operating income is the difference between operating revenues and operating expenses

Net Profit Margin:

Net Profit margin is an indicator of the profitability of an organization. This refers to the actual amount of profit the company makes after deducting taxes and operating expenses. All company’s strive to attain a good or rather high net profit margin. A net profit margin is also an indicator of the ability of the organization to control cost and also a good pricing strategy.

Formula:

Net Profit Margin = (Net Profit (After Taxes)/ Revenue) * 100%

Note: It is easy to confuse gross profit margin and net profit margin. Gross profit is the amount of money left after paying for the operating expenditure. Net profit is the amount of money left after paying for operating expenses as well as government taxes. This is the actual amount of profit that goes into your pocket.

Return on Equity:

Return on Equity is a measure of the returns generated by every share of common stock of a company. High ROE does not mean any immediate benefits but an increasing ROE year-on-year means that the company is doing well and is able to grow on its profits.

Formula:

ROE = Net Income / No. of Shares

Net Income – This is the total income of the company after paying preferred stock dividends
No. of Shares – This is the total number of common shares in the market (Does not include Preferred Shares)

Return on Investment:

Return on Investment or Rate of Return or just return is the ratio of the money gained or lost on an investment relative to the amount of money invested. In business perspective, return on investment is the amount of money earned relative to the amount of money put up as capital. ROI is usually expressed as a percentage.

Formula:

ROI = Net Income/Average Owners Equity or

ROI = Net Income/Invested Capital

Return on Assets:

Return on Assets percentage shows us how profitable a company’s assets are in terms of generating revenue. This number tells us what the company can do with the assets it has i.e., how many rupees the company has earned based on every rupee of asset they control. It is a useful number for comparing two evenly matched or competing companies in the same industry. This number may vary widely when we compare companies across industries. Usually companies in capital intensive industries will have lower return on assets.

Formula:

ROA = Net Income from Assets / Total Assets

Return on Assets DuPont:

Return on Assets DuPont is a ratio that shows how the return on assets depends on both asset turnover and profit margin. The DuPont Method or Formula breaks out these two components (asset turnover & profit margin) in order to determine the impact of each on the profitability of the company. This ratio helps to highlight the impact of changes in asset turnover and profit margin.

Formula:

ROA DuPont = (Net Income/Sales) * (Sales/Total Assets)

Return on Equity DuPont:

DuPont Corporation created this type of calculation for Return on Equity. This theory breaks down ROE into three distinct elements. This analysis enables the analyst to understand the source of superior (or inferior) returns by comparison with companies in the same industry or even between industries.

Formula:

ROE DuPont = Profit Margin * Asset Turnover * Equity Multiplier

Profit Margin = Net Profit / Sales
Asset Turnover = Sales / Assets
Equity Multiplier = Net Profit / Equity

Return on Net Assets:

The Return on Net Assets is a measure of the financial performance of a company that considers the use of its assets into account. The assets the company has at its disposal is also considered as a source of income while calculation of this parameter. Higher the RONA, the better it is for the investors. This directly means that the company is putting its assets to effective use and is generating additional revenue out of the assets rather than let them stay idle like say in a bank account.

Formula:

RONA = Net Income / (Fixed Assets + Working Capital)

If you see this formula, the working capital is also taken into consideration. This is because; the company is anyways using its working capital to generate revenue/income. This number RONA would equate to the Return on Investment if the company’s assets are generating zero revenue.

Return on Capital:

Return on Capital is a financial measure that qualifies how well a company can generate cash flows (income) relative to the capital that was invested in the business. Here capital invested includes all monetary capital invested into the business like long-term debt, common and preferred shares etc.

When the ROC is greater than the cost of capital, the company is generating value a.k.a, the company is making profits. Whereas if the ROC is less than the cost of capital, the company is making losses.

Formula:

ROC = (Net Operating Profit – Adjusted Taxes) / Invested Capital

ROC is usually indicated as a percentage.

Risk Adjusted Return on Capital:

RAROC is a risk based profitability measurement for analyzing the risk-adjusted financial performance of the company and for providing a consistent view of the profitability across businesses. RAROC is usually used in banking parlance where companies have to handle the risk of losses.

In business enterprises, risk is traded off against benefits. RAROC is defined as the ratio of risk adjusted return to economic capital. The economic capital is the amount of money which is required to secure the survival of the organization in a worst case scenario; it is a buffer against expected shocks in the market values. Economic capital is a function of credit risk, market risk and operational risk and is often calculated by VaR (Value at Risk). This use of capital based on risk improves the capital allocation across the different functional areas of banks, insurance companies or any other business in which capital is placed at risk for an expected return above the risk-free rate.

Formula:

RAROC = Expected Return / Economic Capital or
RAROC = Expected Return / Value at Risk

Return on Capital Employed:

ROCE compares the earnings of the company based on the capital invested in the company. We compare the pre-tax operating income and the money invested as capital to run the business to derive the ROCE

Formula:

ROCE: EBIT / Capital Employed

EBIT – Earnings before Interest and Taxes
Capital Employed – This is actually the capital investment required to run the company. It can be shareholder funds, bank loans and other debt etc

Capital Employed = Total Assets – Current Liabilities

Cash Flow Return on Investment:

CFROI is a valuation that assumes that the stock market sets prices based on the company's cash flow and not on the corporate performance and earnings. It is calculated by comparing the gross cash flow generated by the company and the gross investment done into the same.

Formula:

CFROI = Gross Cash Flow / Gross Investment

Here Gross Investment refers to the Market Capitalization of the company.

Efficiency Ratio:

Efficiency ratio is a ratio that is usually applied to banks. It is used to determine how effectively an organization is able to carry out its operations. It is calculated by comparing the operating expenses and the revenue. A lower percentage is always better because it means lower expenses and higher earnings.

Formula:

ER = Expenses / Revenue

Net Gearing:

Also called as Gearing Ratio, this ratio is used to identify the financial leverage of the company i.e. to identify the degree to which the firm’s activities are funded by the owners money versus the money borrowed from creditors.

The higher a company’s degree of leverage, the more the company is considered risky.

Formula:

Gearing Ratio = Net Debt / Equity

Basic Earnings Power Ratio:

The basic earning power ratio (or BEP ratio) compares earnings apart from the influence of taxes or financial leverage, to the assets of the company. It is just a ratio of the earnings of the company and its assets and does not include the capital invested into the company or the tax and interest liabilities.

Formula:

BEPR = EBIT / Total Assets

Financial Ratio

A financial ratio is a relative magnitude of two selected numerical values taken from a Company’s Financial Statements. There are many standard ratios that can be used to evaluate the overall financial condition of a company. Financial ratios can be used by managers of a firm or shareholders (both current and potential) or banks or anyone else to gauge the financial strength of the company. They can be used also to compare the strengths and weaknesses of two or more organizations.

For Ex: If I were to buy a banking stock from the Indian stock market, I can compare the financial ratios of a few of the country’s leading banks like ICICI, HDFC, SBI etc and then choose the one which I feel has the most impressive financial background and strengths.

Sources of Data for Financial Ratios:

Financial ratios of all company’s can be calculated based on their financial statements that would be declared during their quarterly result announcement. Balance Sheet, Income Statement, Statement of Cashflows, Statement of Earnings etc are some of the documents from which the information required for calculating these financial ratios can be picked up. Also, if the company is listed in the stock market, its current stock price too is used for calculating some of these ratios.

Types of Ratios:

There are many different types of financial ratios that can be calculated based on their purpose. They include:

1. Liquidity Ratios – Ability of the company to pay off debt
2. Activity Ratios – How quickly a firm can convert its non-cash assets to cash assets
3. Debt Ratios – Ability of the firm to repay long-term debt
4. Profitability Ratios – To Measure the firms use of its assets and control of its expenses to generate an acceptable rate of return
5. Market Ratios – To Measure the investor response to owning a company’s stock and also the cost of issuing stock


Use of Financial Ratios:

Financial ratios can be used for comparison
• between two or more companies (ex: comparison between ICICI and HDFC Banks)
• between two or more industries (ex: comparison between the Banking and Auto industry)
• between different time-periods for the same company (ex: comparison on the results of the company in the current financial year and the previous year)
• between a single company and the industry performance

Ratios are generally meaningless unless we benchmark them against something else. Like say past performance or another company. Ratios of firms that operate in different industries, which face different risks, capital requirements, competition, customer demand etc can be very hard to compare.

Terms from a financial statement that will be used in calculation of a ratio:

1. Sales – This refers to the net sales done by the company during the reporting period (After deducting returns, allowances and discounts charged on the invoice)
2. Net Income – Amount earned by the company after taxes, depreciation, amortization and payment of interests
3. COGS – Cost of goods sold or cost of sales
4. EBIT – Earnings before Interest and Taxes
5. EBITDA – Earnings before Interest, Taxes, Depreciation and Amortization
6. EPS – Earnings Per Share

Subsequent articles would involve in depth details about the different types of financial ratios explained in this article.

Please Note: Many of these ratios are complicated and their explanations would run along to pages. I have tried to keep the explanation as short as possible to ensure that the topic does not become boring :)

Happy Reading!!!

Can I Withdraw Money from My Employee Provident Fund (EPF) Account?

Almost all of us are working for a company and we contribute a small percentage of our monthly salary into our EPF accounts. We all know that PF is a great saving instrument and it will help us generate a corpus for our retirement. All that being said, many of us do not know the fact that we can withdraw money from our PF account for emergency cash requirements. Yes, you read me right. WE CAN withdraw money from our PF accounts. After all, it is our money and we definitely have the right to take it when we need it the most.

A Word of Caution before we proceed:

The Purpose of the PF account is to generate a corpus for our retirement. So, we cannot and should not treat it like a bank account. We cannot try and withdraw every few months of whatever is left in our account. If possible, try to manage the situation without having to dip into the PF Savings. If nothing works, then check if you meet any of the below mentioned criterion and if you do, get the money from your PF Account.

Premature withdrawals can be made from your EPF corpus if the reason falls under any of the below mentioned categories and you satisfy all the necessary requirements.

Justified Reasons for PF Withdrawal
Reason	Requirements	Amount You Can Withdraw	No. of Times allowed
Marriage or Education	1. Must have completed 7 years of Service 2. Can withdraw for self/children/siblings marriage 3. Can withdraw for self/childrens education	50% of the corpus	3 times during your Total service
Medical Treatment	1. Can withdraw for medical treatment of self/children/spouse/parents 2. No Restrictions on No. of years of service 3. Hospitalization must be for a minimum period of 1 month or more	Total corpus or 6 times your Monthly Basic Salary (Whichever is lesser)	No Restrictions (Anytime)
Purchase or Construction of House	1. Must have completed 5 years of Service 2. House must be registered in your name or spouse's name or jointly owned	Upto 36 times your Monthly Basic Salary	Only Once in your Total Service
Repayment of Housing Loan	1. Must have completed 10 years of service 2. House must be registered in your name or spouse's name or jointly owned	Upto 36 times your Monthly Basic Salary	Only Once in your Total Service
Purchase of Plot	1. Must have completed 5 years of service 2. House must be registered in your name or spouse's name or jointly owned	Upto 24 times your Monthly Basic Salary	Only Once in your Total Service
Alteration of House	1. Must have completed 5 years of Service 2. House must be registered in your name or spouse's name or jointly owned	Upto 12 times your Monthly Basic Salary	Only Once in your Total Service
Pre-Retirement	1. Must be 54 years of age or 2. One year before Retirement whichever is Later	90% of your Total Corpus	Only Once in your Total Service

Things to Remember:

1. Salary here refers to your basic salary and not your total monthly salary
2. If the actual amount in your PF corpus is not enough to meet the multiple mentioned above, you will get whatever is present in the corpus. For ex: For repaying house loan you can actually get 36 times. If your Basic Salary is Rs. 10,000 you can get upto 3.6 lakhs provided your PF corpus actually has 3.6 lakhs. If your PF Account does not have 3.6 lakhs you will get whatever money is present in your PF Account.

Documents Required:

In the below section, the most important documents required to apply for the withdrawal facility is mentioned. Note that, the term Member here refers to the person on whose name the Employee Provident Fund account is held (a.k.a The Employee/You/Me)

Marriage:

Marriage Invitation card should be submitted along with form as proof for marriage through employer.

Education:

Member should apply in Form 31 through employer. A Bonafide certificate duly indicating the fees payable from the educational institution must be submitted as proof.

For Medical Treatment:

Member should obtain certificate from ESI or from employer that E.S.I. facility are not available for the member. A doctor of the hospital certifies that a surgical operation or hospitalization for 1 month or more is/was necessary. Incase of TB or leprosy etc, a specialist doctor should certify the disease. A certified proof for the said disease has to be submitted along with the application in Form 31 through employer.

Purchase of Flat/House:

House/Flat should be free from encumbrances or Legal Issues. An Agreement with the Flat promoter should be registered under the Indian Registration Act and submitted as proof along with the application form.

Alteration / Modification of House:

The Member must have resided atleast 5 years or more in the house that he/she wishes to alter/modify. I could not find any concrete evidence about the documents required in this case. I assume you will need some sort of quotation that will state the amount you will incur in the alteration of the house from a registered contractor/builder. Without this, there is no way to know if you really are going to alter your house.

Repayment of Loan:

Property must be singly or jointly owned by the Member. Proof of owning the property & repayment of the loan must be submitted along with the application form. The amount will be paid directly to the loan lending agency and will not be released to the member.


To Conclude: As mentioned in the beginning of the article, the purpose of the EPF corpus is to help us post Retirement. It is advisable to leave it as such and reap the full benefits of compounding post retirement. Of course, if it is an emergency the money is all yours to spend.

Happy Saving!!!

Some Additions - 19-Oct-2012:

One of our blog readers had emailed me asking what could he do to withdraw his EPF corpus after he quit his job. The employer too wrapped up and went out of business. So, he is now stuck without know how to get his money. I believe some of our blog readers who resign from a company in not-so-good kind of terms with their current employer too face scenarios where they do not cooperate in the withdrawal of our life savings. So this next section is for them:

What happens if my past employer is Unavailable?

In the rare scenario that your old employer is unavailable (They closed down or for whatever reason) you can still get the Transfer/Withdrawal completed.

In such a case – the employee (you) has to submit an identity proof (PAN Card, Voters ID Card, Ration Card or Passport) and proof of residence (Copy of electricity bill, landline phone bill or drivers license) must be submitted along with the form.

The Withdrawal request is usually attested by the employer involved. In this case, if the old employer around to attest it you can get the form attested by the bank manager (of the bank branch where you hold an account, the account where the PF money will get credited) and then submit it to the PF Office.


Where can I get the PF Forms?

The following website has all the forms you will need with respect to your EPF Accounts.
http://www.epfindia.gov.in/downloads_forms.html


Things to remember:

1. Final settlement withdrawal request can be made only after 2 full months after resignation
2. Any payment above Rs. 2000/- will be done via direct credit into the bank account.
3. Form 19 is for EPF withdrawal and Form 10C is for EPS (Pension) withdrawal
4. EPS withdrawal will be approved only if your PF account was active for a continuous 10 year period.


An Appeal:

If you feel this article would be useful to all your friends and colleagues employed in India, please share the link to them. Let them also get this important information that maybe useful in future.

All - It seems there is some problem with the comments widget for this article because there are more than 200+ comments in this article. So, if you have any queries about this article or EPF Withdrawal leave your comment in the facebook page of this blog and I will answer it. Thank you for the understanding

Illegal Stock Market Activities

The Stock Market is a very sensitive and fragile entity whose value may rise and fall without apparent reason. As you may already know, the price of a stock may go up or down based on the demand and supply theory. So, coming to the topic, an illegal stock market activity is one where the actions of an individual is considered unethical and may cause losses to one or more investors (others) or may result in unusual profit for the person involved in the activity.

For ex: Scams perpetrated by Telgi or Harshad Mehta which resulted in losses to numerous Indian Investors can be considered illegal stock market activities.

Please Note: All of the activities mentioned in this article are illegal and all countries have laws forbidding citizens from indulging in such practices and they can be fined and/or imprisoned for the same when caught. Please do not try to do them and also do not help people who are trying to do it because it is a crime.

Now that we know what an illegal stock market activity is, let’s take a look at the types of these activities. The two main illegal stock market activities (and the most commonly occurring ones) are
1. Insider Trading and
2. Front Running

Insider Trading:

Insider Trading is one where an individual with upfront information about a company or organization and its business buys the stock of that company before the news goes public thereby gaining an undue advantage over the rest of the investors.

For Ex: Let us say you are the managing director of ABC Bank Ltd which is a stock market listed company. After weeks of negotiation you know that ICICI bank the country’s leading bank has accepted to buy your company and issues shares of its own company to investors who hold shares of your company. As any intelligent investor would know, shares of an ICICI Bank are much more valuable than shares of an ABC Bank. Once this news of ICICI acquiring ABC Bank goes public people will start accumulating shares of ABC Bank so that they can benefit out of the acquisition. This will send the price of ABC Bank skyrocketing. So, knowing this information, if you buy shares of ABC Bank for your personal share trading account before this news goes public, you can sell them off once the acquisition is complete and the share price has exploded. This way you gain an undue advantage and make a profit at the expense of the company.

This is insider trading.

So, to avoid this almost all company’s have rules related to trading of its own shares by its employees especially ones that are higher up in the food chain. Employees of a company cannot buy/sell shares of their company during predetermined windows every year for ex: during quarterly financial result announcing period. This is to avoid those employees who may possess vital statistics reg. the company performance from taking advantage of this to make quick bucks in the stock market.

By now you are mumbling, what else constitutes insider trading. Let us say your brother in law or uncle is working for a large organization which is going to post impressive annual results. He tips you of the same and you buy shares of that company. Though there is no rule stopping you from buying the share because you are not its employee, it is illegal because you got the inside information from your relative who is working for them. Hence this too constitutes Insider Trading.

Or, let us say you work for a brokerage firm for example ICICI Direct and you are a relationship manager who gets detailed reports about stock recommendations to the valued customers of the brokerage house. You are only supposed to share this information with your clients and not anyone else. You cannot buy shares from your wife’s account based on the recommendations or tip of your friend or relative to do the same because this is proprietary insider information which is meant strictly for the customers of the brokerage house and not everyone else. Hence this too constitutes Insider Trading.

Coming to a hypothetical situation – Lets say you are in a restaurant and a bunch of businessmen in your neighboring table are talking aloud about their company’s results and expecting jump in their share prices, you go ahead and buy the share prices. Though you heard from an insider about the company and bought the share, you do not have any concrete evidence that the company is indeed doing great and the share price may go up. In all probabilities the shares may go down and you may lose your money. Since your decision to buy the share would be considered an impulsive buy based on a rumor you heard, this will not constitute Insider Trading. But do remember the fact that, you are risking your hard earned money based on some small talk you heard in a restaurant is dangerous and it could all be a bluff and you may end up losing money.

Front Running:

Now that we have elaborated on what is and is not insider trading, let us take a look at the next big illegal activity in the stock market. “Front Running” is an activity wherein a stock broker/dealer who executes trades uses his position to execute trades for himself before executing the orders for his customers to gain from the difference in time gap between the orders executions. Let me explain with an hypothetical example.

Let us say that Mr. X is working for a trading house and is in charge of placing orders for its high value customer. The brokerage house attached to them has sent a recommendation to its customers to accumulate ICICI Bank shares with immediate effect. Because of which, many of its customers have placed huge orders to buy ICICI shares.

The trading day opens with ICICI shares @ Rs. 1000/- per share. The Trading house has received orders from numerous customers to buy around 1 lakh shares at market price. Mr. X knowing the fact that because of all these orders, the price of ICICI shares would go up, places an order of 1000 shares for himself at the day open price and then proceeds to place the remaining orders. By the time all the other orders are executed, because of the heavy demand for the shares, the price of ICICI has become Rs. 1050/- per share by midday. Taking advantage of this, Mr. X sells off his 1000 shares pocketing a lump profit of Rs. 50,000/-

This is “Front Running” and is illegal. A person who is executing trades for a brokerage/trading firm is not supposed to place his interest ahead of his customers and hence is not supposed to do this.

You are now thinking, what if Mr. X places orders for himself after executing the orders of his customers. Is this illegal? Of course No. This actually is termed as tailing and is not illegal. Because the person is placing orders for himself after his customers it will not affect their interest and hence is not illegal.

Apart from these 2 types, there are many other illegal activities that are prohibited in the stock market.

Painting the tape – Engaging in a series of transactions in securities that are reported publicly to give the impression of activity or price movement in a security;

Marking the close – Buying and selling securities at the close of the market in an effort to alter the closing price of the security;

Improper matched orders – Engaging in transactions where both the buy and sell orders are entered at the same time with the same price and quantity by different but colluding parties;

Engaging in buying activity at increasingly higher prices and then selling securities in the market at the higher prices (hype and dump) or vice versa (i.e. selling activity at lower prices and then buying at such lower prices);

Wash Sales – Engaging in transactions in which there is no genuine change in actual ownership of a security taking into consideration internal control systems adopted by the firms to prevent manipulative practices;

Squeezing the float – Taking advantage of a shortage of securities in the market by controlling the demand side and exploiting market congestion during such shortages in a way as to create artificial prices;

Disseminating false or misleading market information through media, including the internet, or any other means to move the price of a security in a direction that is favorable to a position held or a transaction; and

A Word to Wrap up:
Institutions like SEBI or SEC (USA) were created to safeguard the interests of the investors and to prevent anyone taking use of the stock market for their personal gains thereby causing losses to others. Their sole purpose is to protect the investor public and punish the wrong doers who indulge in the aforementioned illegal activities.

So, as responsible investors we should abide by all the laws and should not indulge in such dubious activities.

Please Note: I have made references to ICICI Bank and ICICI Direct just for explanation purposes. Since it is one of the largest and most famous banks in the country I thought people reading my article would be able to relate to the contents better and hence their usage. This does not mean that I endorse the brand or suggesting such incidents may happen in it. It is used strictly for the sake of example/illustration and nothing else.

IPO Process Explained

We all know what an IPO is and what the purpose of an IPO is for the company issuing the share. But, not many of us know the different requirements that a company must satisfy in order to go public and the different stages in the life cycle of an IPO. The purpose of this article is to elaborate on this. So, lets get started.

What is an IPO – To Refresh:

An IPO stands for Initial Public Offering, wherein a company issues its shares to the public for the first time. Investors can place requests to buy these shares and once done, the share gets listed in a registerd stock exchange and the company uses the share issue proceeds for its development/growth. Before we take a look at the steps in an IPO process, lets take a look at the entry norms for an IPO.

Entry Norms for an IPO:

Not all company’s can issue shares to the public. SEBI has provided a list of requirements that need to be met by a company if they wish to go public. A company that wishes to go public needs to meet all of the below mentioned criteria…

Entry Norms I or EN I:
1. Net Tangible assets of atleast Rs. 3 crores for 3 full years
2. Distributable profits in atleast 3 years
3. Net worth of atleast 1 crore in 3 years
4. If there was a change in name, atleast 50% of the revenue in the preceeding year should be from the new activity
5. The issue size should not exceed 5 times the pre-issue networth of the company

To provide sufficient flexibility and also to ensure that genuine companies do not suffer on account of rigidity of the above mentioned rules, SEBI has provided 2 alternate routes to company’s that do not satisfy the criteria for accessing the primary market. They are as follows:

Entry Norms II or EN II:

1. Issue shall be only through the book building route with atleast 50% allotted mandatorily to Qualified Institutional Buyers (QIBs)
2. The minimum post issue face value capital shall be Rs. 10 crores or there shall be a compulsory market-making for atleast 2 years

Or

Entry Norms III or EN III:

1. The “Project” is appraised and participated to the extent of 15% by FI’s/Scheduled Commercial Banks of which atleast 10% comes from the appraiser(s).
2. The minimum post issue face value capital shall be Rs. 10 crores or there shall be a compulsory market-making for atleast 2 years
3. In addition to the above mentioned 2 points, the company shall also satisfy the criteria of having atleast 1000 prospective allotees in future.


Steps in an IPO Process:

Let us now have a look at how an initial public offering process is initiated and reaches its conclusion. The entire process is regulated by the 'Securities and Exchange Board of India (SEBI)', to prevent the possibility of a fraud and safeguard investor interest.

Selection of Investment Bank

The first thing that company management must do when they have taken a unanimous decision to go public is to find an investment bank or a conglomerate of investment banks that will act as underwriters on behalf of the company. Underwriter's buy the shares of the company and resell them to the general public. The company must also hire lawyers that can guide them through the legal maze that an IPO setup can be. It must be ready with detailed financial records for intensive fiscal health scrutiny that SEBI would perform. Some companies may also opt to directly sell their shares through the stock market, but most prefer going through the underwriters.

Step 1: Preparation of Registration Statement

To begin an IPO process, the company involved must submit a registration statement to the SEBI, which includes a detailed report of its fiscal health and business plans. SEBI scrutinizes this report and does its own background check of the company. It must also see that registration statement fulfils all the mandatory requirements and satisfies all rules and regulations.

Step 2: Getting the Prospectus Ready

While awaiting the approval, the company, with assistance from the underwriters, must create a preliminary 'Red Herring' prospectus. It includes detailed financial records, future plans and the specification of expected share price range. This prospectus is meant for prospective investors who would be interested in buying the stock. It also has a legal warning about the IPO pending SEBI approval.

Step 3: The Roadshow

Once the prospectus is ready, underwriters and company officials go on countrywide 'roadshows', visiting the major trade hubs and promote the company's IPO among select few private buyers (Usually corporates or HNIs). They are fed with detailed information regarding company's future plans and growth potential. They get a feel of investor response through these tours and try to woo big investors.

Step 4: SEBI Approval & Go Ahead

Once SEBI is satisfied with the registration statement, it declares the statement to be effective, giving a go ahead for the IPO to happen and a date to be fixed for the same. Sometimes it asks for amendments to be made before giving its approval. The prospectus cannot be given to the public without the amendments suggested by SEBI. The company needs to select a stock exchange where it intends to sell its shares and get listed.

Step 5: Deciding On Price Band & Share Number

After the SEBI approval, the company, with assistance from the underwriters decide on the final price band of the shares and also decide the number of shares to be sold.

There are two types of issues: Fixed Price and Book Building

Fixed Price – In a Fixed price issue – the company decides the price of the share issue and the number of shares being sold. Ex: ABC Ltd public issue of 10 lakh shares of face value Rs. 10/- each at a premium of Rs. 55/- each is available to the public thereby generating Rs. 6.5 Crores.

Book Building – A Book building issue helps the company discover the price of the issue. The company decides a price band and it gives the investor an option to choose the price at which he/she wishes to bid for the company shares. Ex: ABC Ltd issue of 10 lakh shares of face value Rs. 10/- each at a price band of Rs. 60 to 70 is available to the public thereby generating upto Rs. 7 Crores. Here the amount generated through the issue would depend on the highest amount bid by most investors.

Step 6: Available to Public for Purchase

On the dates mentioned in the prospectus, the shares are available to public. Investors can fill out the IPO form and specify the price at which they wish to make the purchase and submit the application. This open period usually lasts for 5 working days which is a SEBI requirement.

Step 7: Issue Price Determination & Share Allotment

Once the subscription period is over, members of the underwriting banks, share issuing company etc will meet and determine the price at which shares are to be allotted to the prospective investors. The price would be directly determined by the demand and the bid price quoted by investors. Once the price is finalized, shares are allotted to investors based on the bid amounts and the shares available.

Note: In case of oversubscribed issues, shares are not allotted to all applicants.

Step 8: Listing & Refund

The last step is the listing in the stock exchange. Investors to whom shares were allotted would get the shares credited to their DEMAT accounts and for the remaining the money would be refunded.

Difference between IPO in India and Abroad:

1. In India the book the book is built directly but in the west the underwriter takes the shares on his books and then allots shares to the investors
2. In India the book building process is transparent whereas in the US it is confidential
3. In India the book has to be open for a minimum of 5 business days and the period needs to be revised if the price band is revised whereas it can be opened and closed anytime abroad
4. Abroad, the price band is soft – meaning the bidder can bid for a price outside the price band too whereas in india the band is fixed.
5. Retail investors in india have to put in a cheque or block an equivalent amount corresponding to the IPO bid in their DEMAT accounts but QIB’s do not pay any margin. Whereas abroad, neither category needs to pay any margin.

Other Questions:

What will happen if the company does not receive a minimum subscription of atleast 90% of the net offer to the public including devolvement of underwriters within 60 days of issue closure?

The company will have to refund the entire subscription amount received within 8 days.

Can a company whose listing is due raise additional capital?

No.

Should the Red Herring prospectus disclose the exact price of the issue?

No.

What is the maximum price in a price band?

The cap price should not be more than 20% of the floor price. For Ex: if the floor price is Rs. 100/- the cap price can be at max Rs. 120/- an issue with price band Rs. 100 – 150 is not possible

Can the issue price be revised?

Yes, provided the revision on either side is not beyond 20%

What is the time limit an IPO may remain open?

An IPO cannot remain open for more than 7 working days which can be extended to upto 10 days in case the offer price band was revised

If your net worth is Rs. 10 crores, how much IPO can you go for?

50 – 10 = 40 crores.

You can go for upto 40 crores to ensure that your post issue net worth does not go beyond 5 times your pre issue worth.

Who should the investors approach in case of delay of refund order?

SEBI

Personal Loans – De-mystified

The title sounds interesting and so will the article. Again, this is something I have wanted to write for quite some time. Personal Loans have become pretty famous over the past decade and almost every bank in our country is giving personal loans to its customers. If you are someone working in an IT Park or a Industrial Park, you would have definitely seen people from a number of banks waiting with colourful pamphlets in their hands near your office gates trying to sell you one. If you are one such person and have been tempted to think, shall I take this because this guy says its very low interest, this article is exactly for you. For the others, its always good to know about certain things that maybe useful for us. Ok, lets get started.

What is a Personal Loan?
A Personal Loan is an agreement between a lender (bank) and a borrower (customer) wherein the lender offers a fixed sum of money to the borrower which the borrower agrees to repay as equal monthly instalments over a fixed duration of time. The definition of other commonly known loans like a car loan or a home loan is almost the same as above with just one small difference. In case of a home loan or a car loan, the bank can lay claim to your house or car if you fail to repay the money. The Personal Loan is an unsecured loan wherein, the bank does not have any guarantee to your payment.
The documentation is relatively quite simple and you will get the money within 7-10 working days. Repayment terms are quite flexible, usually between 1-5 years. All this makes them very attractive.

Below are a few things you need to keep in mind before taking a personal loan…

Do you ‘really need’ this Personal Loan?

This is the most important question. Do we really need the loan is something we must ponder before taking the decision of applying for one. Be Cautious!! The loan may be easy, but that doesn’t mean that it is good for you.

There are two main reasons for such a warning.

First of all, personal loans are usually taken to go on a vacation trip, buying stuff for home such as LCD/Plasma TV or for a marriage, etc. All these are mainly personal use items. Taking loans to finance consumption is one of the worst financial mistakes you can ever make. Financial prudence suggests that you should always save some money regularly. Getting a PL is doing exactly the opposite i.e., spending today out of the unearned (and possibly uncertain) future income.

Secondly, these loans are quite expensive. Though your loan agent may say that the interest is low, it is still high.
A Point to Ponder:

A Bank makes money by giving loans to people and we make money by depositing surplus cash with the bank and earning an interest. If banks offer us interest rates of around 8% per year and they need to make a good profit on the money you deposited with them – imagine at what rates they will lend it?

So think twice! Do you really need to take this burden?

When does it make sense to apply for a personal loan?

Sometimes, personal loans may not be such a bad idea. It can help in debt restructuring. Suppose you have run-up a substantial outstanding on your credit cards and are finding it difficult to pay it off from your monthly income. And currently you don’t have any investments or FDs or some other savings, which you could utilize for paying the credit cards. Then, it may be wise to take a personal loan to pay-off the credit card bills, as the interest rate on credit cards could be 2-3 times that of a personal loan. Thereby, you would be saving a lot on the interest.

Or there could be a medical emergency that requires fairly large sums at a short notice.

Consider the alternatives

Before you jump on to the easy decision of taking the PL, consider other alternatives. Can your family, friends, or colleagues help you out in your financial crises? Your current situation could be a temporary problem and you could pay them back within a few months.

Do you have some illiquid investment, such as an LIC policy? Or do you have some bluechip shares, which you don’t want to sell? It is possible to get a loan against such investments and at a much cheaper rate.

Or you have a property (preferably commercial) rented out on lease. Many banks would be willing to lend you money against the future rental income from the property.

The above mentioned options are cheaper options to get money (of course the first being the cheapest wherein you usually do not pay interest to your friends or family) rather than pay higher interest on personal loans.

A Point to Ponder:

Have you ever wondered why banks offer mortgage loans or loan against securities at much cheaper rates than personal loans? The reason is the mortgage loans are safer for banks because if you do not pay them off, they can take possession of whatever is mortgaged and recover all or part of the debt you own them. Whereas in case of personal loans, the bank has no such option. Hence they charge you more, trying to recover as much money from you in the shortest span of time.

How much should you borrow?

Banks will work out your loan eligibility based on your income, age, commitment & liabilities, work experience etc. They would also take into account whether you are a salaried person or self-employed. A joint applicant like a working spouse would also enhance your loan limit.
Just because the bank says that it can lend you a certain amount, it doesn’t mean that you should take whatever maximum amount the banks are willing to lend. You should work out your need and the comfort level with which you can repay it. How much money is absolutely essential? How much EMI can you afford every month without compromising your living style? Will you be able to meet all your fixed expenses such as rent, school fees, telephone, electricity, travel, insurance premiums, etc. without straining your budget? Etc…

As a thumb rule, make sure that the total repayment per month on your personal loans, credit card outstanding and such other similar loan facilities do not exceed more than 15-20% of your monthly take-home salary. Worst case scenario try to cap it at 25% of your salary.

Documents required for a Personal Loan

As mentioned earlier, the documentation required for applying for a personal loan is very minimal as compared to many other loans.

They include:

One or two Photographs
An Identity Proof: PAN card, passport, or driving license, etc.
Residence or Address Proof: Passport, ration card or electricity/telephone bill, etc.
Income Proof: For salaried persons, the banks may ask for the latest salary slip, Form 16 and 6-months bank statement. A self-employed person would be asked to furnish 2-3 years IT returns, accounts, etc.

The exact requirement of documents may vary from bank to bank. If you are an existing customer to the bank, they may opt to process the loan with lesser documentation.

To Conclude: A Personal Loan is a boon for the needy. It is an easy way to raise money for emergencies or urgent requirements. But, if you can avoid taking the loan and manage without it, it is all the more better.

Will the Indian Market Sustain this Momentum?

This is a million or rather a billion dollar question. Everyone including you and me is surprised over the fact that the Indian stock market is strongly growing and the BSE is currently trading at an all time high of around 21000 points. This is indeed excellent news for all investors across the globe; who have invested in the stock markets in India. But happiness isn’t the only thing that’s on everyone’s minds. Caution or skepticism is also abundant among knowledgeable investors. The purpose of this article is multifold and will cover the status of the global and Indian markets, the outlook for the next few months. Lets get started!!!

Status of the global markets over the past month

The global markets in the USA, UK, China etc have been growing slowly but steadily over the past month on the back of improved economic news. Recent news suggests that the slowdown phase is probably over and policymakers across the globe have started to ease up on the tightening measures to aid this growth. Europe has been encouraging on the economic front and their policy towards the same has only fuelled further growth. Good manufacturing data is coming in from the US, China etc which suggest that the double dip recession maybe receding. US Consumer spending has increased significantly in the last quarter and the weekly jobless claims have also fallen, which is evident in the stock markets numbers.

The US Markets posted a net growth of around 5% in the numbers at the end of the month when compared to where it was at the beginning of the same. Similarly the European markets posted a growth of around 3% and the asian markets around 5%.

Overall the market outlook as a whole looks positive as well as promising.

Status of the Indian Market over the past month

The Indian stock market began on a positive note and has shown solid progress over the past month. The stock market is currently trading at the 21000 levels which is where it was a couple of years back before the global meltdown happened. Strong global cues, good or rather great Q2 advance tax payments by corporates and companies and sustained buying by FII’s boosted the sentiments of the Indian investors. FII’s have made investments of more than $5 billion over the past one month. The repo rate has been hiked 0.25% and has gone up to 6% and the reverse repo rate has gone up by 50 basis points to 5%. New policy decisions from the government of india about the reduction of corporate taxes helped sustain the growth of the markets.

The local markets posted solid gains of around 10% over the past month which is much higher than the growths posted by the US or the Euro markets.

Will the Indian markets be able to sustain the momentum?

If we compare india with its other emerging market peers, the Indian markets’ valuations are fair and justified though they are at a slight premium. Though our economy is sensitive to global shocks, india is a highly domestic-driven economy unlike our peers China or Brazil who are more dependent on exports and rely on the commodity markets for their GDP growth/expansion. This distinguishing factor will be greatly reflected in the equity valuations in our stock markets. Therefore, our markets will continue to attract a large share of FII inflows when compared to its peers.

The high domestic demand is the reason why, india was the first to recover from the slowdown. Though we have a solid export contribution to our GDP, the local or domestic demand contributes an even higher number and hence the earlier recovery.

Your next question is going to be – How long will this Rally continue?

Predicting the market especially one like the Indian market where liquidity is one of the important trend determining factors is extremely difficult. Even experts have burnt their fingers with their suggestions/recommendations. Coming back to the topic, liquidity flows will strongly determine the direction of the market, especially the flows from the FIIs. Also, the doubts about the US getting into a second recession or avoiding the same will determine the global equity flows. As for now, the global economic situation looks stable and we can expect the markets to perform strongly for the next few months.

Financial Industry, Capital Goods, Infrastructure, Power, Media, Hotels and Pharma can be expected to outperform the market. Whereas Automobiles, Consumer durables and a few of the banking stocks might underperform the market.

What Strategy should a small investor follow now?

This is by far the most trickiest question given the current scenario. In my personal opinion, small investors should invest only in large or big midcap companies with a sound management and fundamentals. Stay away from small caps or penny stocks that you do not know much about. Buy on dips would be a good strategy.

Pick out a good company and start buying in small portions everytime you see that the price is correcting or coming down by a decent number.

Overall, the market sounds positive and investing in good companies for the long term would definitely prove beneficial to all investors.

Happy Investing!!!

Coal India IPO Price Finalized

In my previous article on the Coal India IPO I had elaborated about this
humongous IPO given out by the government of india and the details of the same.

If you recollect, the offer price band was Rs. 225 – 245 per share. The IPO received a
magnificent response from investors and was totally oversubscribed 15.28 times. (i.e.,
for every 1 share available for sale, there are 15.28 people willing to buy it)

Because of the overwhelming response, the offer price has been fixed at the higher
end of the price band i.e., Rs. 245 per share. Of course, retail investors will get an
extra 5% discount on the price that is Rs. 12 per share, so the price we would be
getting the shares (if you subscribed and got shares allotted) is Rs. 233/-

Oversubscription Details:

Though the IPO was overall oversubscribed 15.28 times, a major chunk of it was from
QIBs and NIIs followed by retail investors.

QIB’ s – 24.7 times
NII’ s – 25.4 times
Retail Investors – 2.31 times

Undersubscription Details:
The company had reserved 63,163,644 equity shares (nearly 10%) of the issue for its
employees. Amid fears of privatization of the CIL, it received a stone cold response
from its employees. This section was subscribed only 0.1% which means that 99.9%
of the shares in this section were not subscribed.

By now, you are mumbling, what about the employee’ s portion of the shares which is
subscribed only 0.1 times. My dear reader, yesterday there was also a press release by
the authorities. They confirmed that the undersubscribed shares from the employees
portion would be shared in the ratio of 50:35:15 between QIB’ s, Retail and HNI’ s.

i.e., if 100 shares are available from the employees quota, 50 would be allotted to
QIB’ s, 35 to retail investors and the remaining 15 to HNI’ s.

Note: The chances of retail investors getting shares allotted is very high. Majority
of people who subscribed @ Rs. 245 per share would be allotted shares because the
retail investors section is oversubscribed only 2.31 times and also a majority of the
investors would not have bid at the higher price band and would have stuck to the
lower band of Rs. 225 or nearer amounts. Plus there is this extra shares available from
the employees Quota. So, the chances of us getting shares allotted is significantly
high. Lets keep our fingers crossed.

Happy investing!!!

Terms used in this article:

QIB – Qualified Institutional Buyer
HNI – High Networth Individual
CIL – Coal India Ltd
NII – Non Institutional Investors

Good News for Stock Market Investors

The title sounds interesting and in-fact the news that am gonna elaborate in this article
is good news for all of us.

As you may already know, we are all Retail Investors – the individuals who trade in
the Indian stock market with our personal DEMAT accounts. We are individuals who
invest small amounts of money in the stock market and trade in stocks.

Yesterday, SEBI has hiked the limit allowable for retail investors in IPO’ s and FPO’ s
for subscription. What was earlier 1 lakh has been hiked to 2 lakhs.

Let me explain with an example:

Let us take the case of the magnificent Coal India IPO that was available last week. In
my article on Coal India IPO I had mentioned that the maximum number of shares available for
retail investors (per person) is 425 – 400 (depending upon the price) this is because
the limit for retail investors was 1 lakh.

Assuming this news had come a week before, it would have been:

Maximum shares available for retail investors (per person) is: 850 – 800.

This indeed is very good news for retail investors who can spare upto 2 lakhs for an
IPO or a FPO.

Happy Investing!!!

Terms/Abbreviations Used in this Article:

SEBI – Securities and Exchanges Board of India
IPO – Initial Public Offering
FPO – Further Public Offering
DEMAT – Dematerialized Account, An account used for share trading. .

Coal India IPO

Coal India, the world’s largest Coal producing company is giving out its IPO. This is something that has created a furor in the Indian stock market and people are scrambling to mobilize funds to subscribe to this IPO.

Let us take a look at the vitals of this IPO before we proceed with our analysis:

Issue Price: Rs. 225-245
Lot size: 25 shares and multiples of 25 thereafter
Minimum Bid: 25 shares
Minimum Investment Amount: Rs. 5625/-

Issue Opens: 18 Oct 2010
Issue Closes: 21 Oct 2010

Listing On: BSE and NSE (Expected in the 1st week of November)

Shares available for public to buy: 5684.73 lakh shares

Max shares available for a Retail investor: 425 – 400 (depending on the price)

Lead Manager: Citigroup global markets India Pvt Ltd.
Registrar: Link Intime India Pvt Ltd
Issue Size: 14,211 Crores (@ the base price of Rs. 225 per share)


Yes you read it right; the amount that is going to be raised is INR 14,211 Crores. This is going to be the biggest IPO ever in the history of the Indian stock market. No wonder it has created a lot of news and media attention. Let us look at this offering in more detail.

What does the company Coal India do?

Coal India is the world’s largest coal mining company which is fully owned by the government of India. It operates 471 mines across 8 states in India. It is also the largest coal reserves holder in the world.

Coal is the largest contributor to the power generation plants of India for generation of electricity. Being the single largest miner, the company generated a turnover of more than Rs. 50,000 Crores last financial year and posted a profit of over Rs. 9000 Crores.

Why the IPO?

The objective of the IPO is to carry out the divestment of 631,636,440 equity shares by the selling shareholder - government of India. This IPO is a part of the government's divestment programme and the entire amount will go to government, which will hold 89.99% stake post dilution.

We can expect divestment of many such government of India owned enterprises in the forthcoming months.

Should we Subscribe to Coal India IPO?

By now, you are murmuring, just tell me should I subscribe to this IPO or should I not. Well my dear reader, it is not so simple. The answer is – it depends on you. Read on to find out more.

Is the Pricing Appropriate?

The promoters of the issue have come up with a very attractive pricing. The project Earnings Per Share (EPS) of CIL Ltd is Rs. 15/- for the FY 10. Even at the lower price band of Rs. 225 per share, the issue is at 15 times the PE multiple which is very sensible. But at the same time, another point to be considered is the fact that, global players in the same field are all running at 11 to 13 times their PE multiple which may make some people feel that the pricing is a little bit on the costlier or expensive side.

Given the fact that, this is a fully owned by Government of India company, that is sitting on gigantic coal reserves and is posting solid profits and turnovers, a 15 times PE multiple is not such an expensive bargain.

Verdict: Of course Yes. The price is appropriate and for that matter very attractive.

Icing on the Cake: CIL Ltd has offered an extra 5% discount to retail investors (you and me) who subscribe to the issue. This discount is applicable only to retail investors and all others (Institutional, Mutual Funds, High Net worth Individuals, Foreign buyers etc) have to pay the full issue price whereas we get a 5% discount.

Simply put: If the issue price is decided as Rs. 230/- per share we (retail investors) will be able to buy it at 218.50/- whereas the other category of investors have to pay the full Rs. 230/- per share.

Tip: A Retail Investor is someone who is an individual who is trading on his own behalf using his earnings/money. Also, a retail investor cannot subscribe for an IPO with a value of more than Rs. 1 lac.

Will this be a repeat of Reliance Power?

We all know what happened to Reliance Power. Don’t we? It is still fresh in my memories. Reliance Power came up with the largest IPO on date with a value of over Rs. 11,000/- Crores. It was the most oversubscribed IPO that people had ever seen. It was offered at a price band of Rs. 405-450 per share and rumors were afloat that the company would be touching a price of Rs. 700/- on the listing day.

There were a majority of people who were extremely positive about the IPO and wanted to make a fast buck with the offering and there were a small minority like me who were skeptical about the issue. Let me tell you why.

1. The IPO was significantly overpriced. NTPC the nation’s largest power producer was trading at around Rs. 200/- per share. Reliance Power was planning to produce as much power as NTPC 3 years down the lane and was still quoting a price which was twice as much as NTPC.
2. You know that a shares price is determined by the demand-supply theory. More buyers for a share means – price goes up. More sellers for a share means – price goes down.
3. Everyone wanted to sell on the day of listing at Rs. 700/- or more per share.

A Grave contradiction to point no.2. Everyone was subscribing to the IPO with the idea of selling the shares on the day of listing at more than 50% profit. Simple logic tells us that, if everyone is going to sell and there are not enough buyers, the price of the stock falls. And that is exactly what happened.

The share is currently trading at around Rs. 160/- per share after going to below Rs. 100/- per share during the recession period.

Verdict: Maybe.

Reason supporting the Repeat: This time again, people are expecting solid listing gains and are expecting to make profits out of the same.

Reason against the Repeat: This is a government of India Company that is very large and profitable. Most importantly it is not gravely overpriced so the issue may not end up like reliance power.

Should you Subscribe to the IPO?

Verdict: It Depends.

If you are planning on listing gains or a quick buck – I would be a bit skeptical because if a repeat of the Reliance Power fiasco happens, you may end up burning your fingers.

If you are planning on a solid long term investment – Then you can definitely subscribe to the issue because:
1. It is a government of India owned company
2. It posts solid profits and turnover every year
3. It is sitting on the worlds largest coal reserves
4. The chances of price appreciation in the forthcoming months are very high. Even if the shares takes a small plunge due to listing day sells, it is sure to bounce back and give good returns to investors.

Happy Investing!!!

Disclaimer: All the contents in the above mentioned article are my personal thoughts and they are not recommendations to buy or subscribe to this IPO. The reader is requested to think on his own accord before taking the decision to subscribe to the IPO and the author cannot be held responsible for any losses arising out of the same.

Are IT Industry stocks winning picks now?

The Indian IT Industry has been in the news for both good and bad reasons over the past few years. They put India as a force to reckon with in the IT field a few years back and are still doing it now, but at the same time they were in news for pink slipping employees during the recession. But all said and done, the Indian IT Industry is back on its feet after the long recession and people are speculating on these stocks like never before.

Anyone who has the habit of reading newspapers would have read two kinds of news. One from the Indian media about Indian IT cos riding high on profits and is poised on recruiting thousands of aspiring engineers in the forthcoming year and the other is from the president of the United States Mr. Obama about tighter offshoring norms and higher VISA fees. So as laymen investors many of us are confused about what is going on and are IT cos good bets now from the investment standpoint. The purpose of my article is to throw some light on this confusion.

Please note that – this by no means is a recommendation to buy IT Company stocks. This is purely my personal opinion about how IT cos may perform in the forthcoming years and is not a trading/buying suggestion.

First of all, I would like to apologize for a lengthy article and secondly, I firmly believe in the fact that, DO NOT Invest by hearsay. Get all your facts right before you invest your hard earned money in any company. That is why such a lengthy article. Please read on  ….

IT Cos – The Darlings of the Indian Stock market in the past Decade

The Indian IT Cos have been the darling picks of the Indian stock market over the past decade. Notably Infosys and TCS have been the flag bearers of the Indian IT Industry over the past decade (Of course I am proud to have worked for both these giants for nearly 3 years each) Not only have they grown from a few hundred people to over 1 lac employees, but also their share prices have sky rocketed in the past few years making a lot of millionaires in India. The price of Infosys stock at the time of writing this article is Rs. 2895/- and that of TCS is Rs. 873/-. Considering the fact that the stock market has just started recovering after languishing for months in 4 digit numbers, these numbers are pretty impressive. Even during such lean times, these cos weren’t the worst to be hit by the stock market collapse proving the fact that, these cos have been and most probably will be darling picks of the Indian stock market.

How does an IT company make money?

This is a simple question for a majority of us because we work in this industry but for the rest it’s still a puzzle. Let us take a simpler example which everyone can correlate. All of us hold bank accounts and invariably we would’ve tried the online banking facility. The website you login is an application which is developed by an IT software professional. Similarly there are millions and zillions of customers out there who need IT applications and our IT cos create them to help the customers carry out their business in a better/faster way. In return, the customers pay us for our service and this is how the IT cos make money.

The next question in your mind would be, how come these guys make such staggering profits? Read on for the answer…
IT cos charge its customers in US Dollars on a per hour basis and pays its employees in rupees. Let us take a look at a typical calculation. Lets assume company ABC Infosystems charges its clients USD 30 per hour of effort of its employees, net revenue per employee per month works out to USD 5280 per month (@ 8 hours per day and 22 days a month) This amount if calculated in Indian Rupees is more than 2 lacs.

You might be tempted to think that not all software engineers get paid 2 lacs per month and the cos should be making killer profits. Unfortunately employee salary is not the biggest contributor to the cos expenditures. Buildings, infrastructure, power, water and other logistics for running a company account for the major chunk of a cos budgeted expenditure. Of course salary is a significant contributor but definitely not the biggest.

This is why, even though a cos net revenue runs to a few thousand crores for a financial year, the profit runs to only a few hundred crores.

Why do companies outsource their IT operations?

The reasons are very simple and are as follows:
1. Cheaper workforce - We work for 1/4th or 1/3rd the price at which people from the local town would work for
2. Lack of skilled manpower – Not many countries has skilled manpower to contribute effectively to the IT operations for the cos growth.

The Boons and Banes of Outsourcing!!!

Outsourcing has been a boon for developing nations like India and China where skilled and cheap manpower has drawn thousands of jobs and millions of dollars in revenue but unfortunately it has been both a boon and bane for the country’s from which their local cos outsource jobs.

The Boon Part: A company from USA, by outsourcing 100 jobs to India would boost its profits significantly because the cost of employing 100 people in USA is nearly 4 or 5 times costlier than what it costs from India, plus the chances of getting 100 skilled IT professionals in the nearby locality to finish the job is also not 100% likely.

The Bane Part: 100 locals from USA would have to look somewhere else for their jobs

Can the US clients survive without the IT workforce from India?

The answer is an emphatic NO. (My personal Opinion)

There are thousands and thousands of Indian IT professionals who are working day and night for their customers in the United States. Finding an equal number of people in USA willing to do the same work and more importantly at the same wages is nearly impossible.

Most Importantly – If the US cos have to replace its entire outsourced workforce with locals, they will probably go bankrupt. I don’t think they will have any surplus left after paying employee wages to post any profits.

What are the difficulties IT Cos may face in the US market?

As of today, the United States accounts for 50% or more of the revenue earned by the Indian IT cos. With the economy in USA still struggling and with unemployment rates at new highs, the US government is urging businesses to recruit local talent for their human resource needs and avoid/reduce outsourcing. It is even promising benefits to companies that generate employment to Americans. This could partially motivate large corporations to hire locals in order to gain benefits like tax rebates or access to bailout funds etc. This would significantly affect the growth plans that IT cos would’ve planned for the next few quarters. They would have to aggressively market themselves in order to get new projects and fresh revenue.


Are IT Cos going to be hit by the new legislations/restrictions imposed by the US Government?

This is a very important question which will determine the future of these IT Cos. As of now, the restrictions are not very extensive and proper planning & due diligence on the part of IT cos can help them sail out of this storm. For Ex: IT cos may pass on the extra cost incurred due to higher VISA fees to their customers in order to retain their profit margins.

Considering the bigger picture, the answer is YES. IT Cos in India will be affected by newer legislations laid down by the US government in its attempt to reduce unemployment. But, it will not ruin the Indian IT cos.

IMHO, Dealing with the negative hype created by the news media would be much more of a challenge to the IT cos than dealing with such challenging business situation. The sales people for the leading IT cos have enough talent and skills to hunt for new business opportunities. This would be much easier than trying to minimize the damage that negative media hype can cause.

How will all this affect the Share Prices of IT Companies?

The stock market at times reacts in an impulse. If you see news that reads like below:

US President Obama, bans offshoring of jobs. Mandates companies to hire only locals

What would your instant reaction be if you hold stocks of IT cos? You’ll think, Oh my god, let me sell off my holdings at whatever profit I can make today. I don’t want to lose money. A classic example of “Panic Selling”

Am not blaming any of my dear Indian investors, I would’ve done the exact same thing if such a news had come up in my initial years of stock market investing. The problem is, we are all scared that we will lose our hard earned money and there is nothing wrong in thinking like that.

News like these, if they come up, they can badly affect the price of the IT cos stocks. But it will be short lived. The moment you see another news like below

IT Major Infosys signs multi billion dollar deal with ABC Ltd USA

Investors will start buying the stock and the price will rise again.

What will IT Cos do to handle the situation?

The IT giants in India have already weathered the recession and have proved that we are much more than what the world thinks we are. The upcoming few months are going to be difficult but not as bad as the recession. So below is what I feel will happen.
1. Cos will try to reduce their exposure to the US markets. As of now more than 50% of the revenues of Indian IT Cos is from the US markets. I even read an article on Infosys planning to reduce exposure to US markets to 40% from the present 65% over the next few years.
2. Cos will not hire every week. They will hire on a need basis maintaining a good bench strength to ensure that they do not run short of resources in case of huge deals coming through
3. Sales persons will be set stringent targets. They are the face and the voice of the IT Cos to their customers and a bulk or all of the load of gathering new business will be on their shoulders
4. Billing rates for workforce maybe reduced in order to boost customer chances of outsourcing because of cost benefits
5. Luxurious benefits to top managers may be cut in order to maintain cost effectiveness and profit margins
6. Exorbitant salary hikes to people while switching jobs may be reduced to an industry standard hike level
7. etc…

In short, IT Cos will try harder than ever to boost their revenue and reduce costs in order to grow their profit margins – which in turn would invite more investors to buy their shares.

Verdict:
In my personal opinion, this is not the end of the world for the Indian IT cos. They are backed by thousands of talented individuals and a strong management that has propelled them from a hundred employees to more than hundred thousand of them. We Indians are known to thrive under unforgiving situations and I am sure that our IT cos will come out as shining stars and two years down the lane, they’ll still be the market leaders as they are now.

Happy Investing!!!!