Part 1: MACROECONOMIC ANALYSIS…………..
THE UNION BUDGET
AND THE CAPITAL MARKETS
Professor Russi Jal Taraporevala
On March 23, 1995, the impressive new trading ring of the
Bombay Stock Exchange (BSE) was packed to capacity. The
stock market had turned bearish after the budget presentation.
The BSE Sensitive Index (Sensex) had lost 105 points in the
post-budget trading session.
The audience extremely eager to know what Professor Russi
Jal Taraporevala had to say in his thirty-first post-budget
analysis. On the past thirty occasions, he had missed predicting
the behaviour and level of the Sensex only twice. Last year ,
after he had said, "Boom ! Boom !Boom !!! the market reached
an all-time high on September 12,1994. What did he have to
ANALYSIS of this Budget must be seen in the context of the unprecedented seven
consecutive bumper monsoons and the various structural and other changes
introduced by the Finance Minister in the last four years.
Also, this years analysis must take into account the Political changes that have
occurred and are likely to occur in the year ahead.
First, the incumbent Congress was swept out of power, first in Andra Pradesh and
Karnataka, then in Gujarat and Maharashtra. Today, states covering more than 75%
of India's land mass as also its population, are governed by non-congress or regional
parties. Elections to the Lok Sabha are to be held by mid-1996. There is also a
distinct possibility that these elections may have to be held earlier than Jun.'96,
the last month legally laid down. Also, the Congress may not obtain an absolute
majority in these elections. There are dissidents within Congress, and this infighting
is weakening the party now. Thus, the possibility exists that the next Central
Government have to be formed by a condition. It may, therefore, be unstable,
change periodically and, be unable to control state governments. Great political
uncertainty could result for some time.
What is the relevance of these possibilities? First, this Budget will be the last one
from the present Congress government and Manmohan Singh. Even if elections to
the Lok Sabha are held in Jun.'96, the Budget which normally would have been
presented by end- Feb.'96, can only be a vote of account. And the main Budget will
have to be presented later in 1996, according to precedent, by the f/n of the next
Second, between now and the imminent Lok Sabha elections, various populist
measures may be attempted or promised by various political parties. These wreak
havoc on the fiscal situation and the entire economy. Political turnmoil and the fear
of uncertainty are bound to affect investors perceptions. They may decide on a wait-
and-watch policy. They may sit on the sidelines or try to evaluate the risks and buy
shares only at substantially lower prices, to discount the political risk. Indeed, the
present Budget already included a already includes a large dose of populist
Let us now take a look at economic indicators prevalent on the Indian scene last
year. the gross national product (GNP) at 1980-81 prices rose 4.3% in 1992-93,
4.3% in 1993-94, 5.3% and is estimated to rise around 5% in 1995-96. The Eight
Plan target for GNP growth rate of over 6% per year in the remaining two years.
India's population (911 million) continues to rise inexorably at 2.1% pa. Thus India's
per capita growth is no more than 3.5%.
The index of agricultural production rose 4.1% in 1992-93, 2.2% in 1993-94 and is
estimated to rise 2.2% in 1994-95. Similarly, figures for foodgrain production in
those years were 180 million tonnes, 182 million tonnes, and 185 million tonnes,
respectively. 1994-95 saw the seventh consecutive bumper monsoon.
The Economic Survey of the government of India stated, 'What two-thirds of out
workforce deriving its livelihood from agriculture and allied activities. The
performance of these sectors still holds the key to the improvement in real incomes
and living standards of the bulk of India's population. The agricultural sector
accounts for 30% of the gross domestic product (GDP). The Economic Survey
stresses, "To accelerate GDP growth rate, a long-term growth of 3% in Indian
agriculture should be the desirable goal." For Indian to grow at more than 6%, the
agricultural growth rate must be atleast 3%.
The Economic Survey draws attention to certain important factors which have
influenced agricultural production: "Gross investment in real terms (at 1980-81
prices) in agriculture has stagnated. From 18% of the total gross capital formations
in 1980-81, it declined to 9% in 1992-93. 'This suggests the need to strengthen
incentives for attracting greater private investment in agriculture'.
The Economic Survey further stressed, ' The likelihood of acceleration in private
investment in agriculture will depend on the pace of development of agricultural
processing and export of value added non-traditional agricultural products. This
highlights the vast scope for the food-processing industry. "Agricultural exports,
other than those of raw cotton (including wastes), registered a remarkable growth,
from Rs.7043 crores in 1992-93 to Rs.10062 crores in 1993-94. This year should see
a further consolidation of its export performance".
This first bottleneck in India's growth rate growing beyond 6% is the low agricultural
growth rate. We have enjoyed seven good monsoons. Another cannot be expected; a
weak or even a much weaker monsoon than last year is likely. But, fortunately,
public stocks of foodgrains, which provide invaluable insurance against bad weather,
touched a record level of 31 million tonnes in Jan.'95, compared to the required
minimum level of 15 million tonnes.
The index of industrial production rose 2.3% in 1992-93, 4.1% in 1993-94 and is
estimated to rise 8% in 1994-95. The government hopes that it will rise 10% in
1995-96, which appears unlikely. The Finance Minister said in his budget speech, "
Today, Indian industry is experiencing a vibrant broad based recovery, with an
industrial growth of 8.7% between Apr.'94 and Nov.'94. The manufacturing sector is
growing even faster at 9.2% and the capital goods sector, at 24.7%.
The past year has probably been the best year for Indian industry since
independence. Net profits of major industrial corporations in 1993-94 were 60%
higher than the previous year, and in 1994-95 they jumped more than 80% in the
first six months, over the corresponding period last year. For the whole year,
industrial profits are estimated to rise 80-100%over the previous year. This hyper
growth rate of profits is not likely to continue. It can be estimated that the jump in
the industry in the coming year will be a healthy 40%.
The public sector
The public sector retards India's economic progress. The government has been
disinvesting shares of healthy public sector undertaking, but has refused to
genuinely privatise them, holding on to 51% of the capital of these companies. Thus,
the management and work culture have not changed at all, an will not change. In
1993-94, there were 120 profitable sector undertakings of the central government,
which made a net profit of Rs.9722 crores. But, there were 117 loss making units
which lost Rs.5287 crores. Thus, on a total investment of Rs.159307 crores, PSUs
showed a net-profit-to-capital employed ratio of only 2.7%.
PSUs are a major bottleneck in national growth. Their working should be improved or
they should be sold off or, as a last resort, shut down.
The Finance Minister has said," infrastructure is another area of potential weakness.
If an economic growth of 7-8% is to be achieved, which ahs been attained by other
countries and which alone can provide jobs for out entire labour force, there is need
for much higher investment and efficiency in key infrastructure sectors such as
power, roads, ports, irrigation, railways and telecommunications. "It has been
estimated that in the next five years, these sectors will require a further investment
of perhaps nearly US $ 500 billion. For GNP to grow at even 5.6%--- the target of
the Eight Plan -- the infrastructure must grow at least 8%. Infrastructure
developments has, therefore, been offered in many cases to the private sector.
During 1994-95, infrastructure growth was mixed, but it was less than 8%.
Coal production, which provides tow-thirds of the total energy consumption, grew at
a disappointing 3.2% compared to the target of 4.2%. Electricity generated grew
8.4%, but the plant-load factor fell from 58.8% in 1993 to 57.5% in 1994. Power
shortages have continued. The government has fortunately received 138 new
proposals from the private sector to install 58745 MW, involving an investment of
more than Rs.219927 crores. Forty-one of these proposals are from foreign sources.
The petroleum sector's performance continues to be disappointing. Crude oil
production in 1989-90 peaked at 34 million tonnes and thereafter declined to 27
million tonnes by 1993-94. The estimate for 1994-95 is around 29 million tonnes.
More than half the country's requirement has to be imported. In 1993-94, imports
were no less than 43 million tonnes, valued at Rs. 17730 crores.
India's healthy foreign exchange position could be dramatically and adversely
affected if there is a substantial hike in the price of petroleum products.
Transportation and Communications:
Telecommunications, postal services, railways, civil aviation, roads and ports are all
strained at their full capacity and urgently need expansion. In some of these the
private sector has been invited to participate. India cannot have a higher rate of
growth if its infrastructure does not have a growth rate substantially higher than 8%.
According to the Economic Survey , employment, both in the public and private
sectors ( in the organised sector), was 262 lakh in 1990, rising to 271 lakh by 1993
-- a growth of only 9 lakh. Yet, the Finance Minister claimed in his speech that new
jobs (or the total employment growth) amounted to 3 million in 1991-92, 6 million in
1992-93 and 6 million in 1993-94. He stated that the increase is expected to be
higher in 1994-95. But India's population rose steadily during this period, resulting in
the unemployment problem becoming more acute.
Savings and investment
One of the most disturbing indicators in the Indian economy is the decline in gross
domestic savings as a percentage of GDP at current market prices, from 23.7% in
1990-91 to 20.2% in 1993-94. Similarly, gross domestic investment as a percentage
if GDP at current market prices fell from 27% in 1990-91 to 21% in 1993-94. China
which has a growth rate of 10% has a savings rate of 39%. Indonesia has a growth
rate of 7% and a savings rate of 38%, and Thailand which has a growth rate of 7%
has a savings rate of 35%. The secondary market rose dramatically upto sep.'94 and
fell back thereafter.
The Bombay Stock Exchange (BSE) 30-share Sensitive Index (Sensex) rose steadily
after the last budget, peaked in Sep.'94 and slid thereafter. The primary market
remained buoyant throughout. From April-94 to Feb.'95, as many as 890 new
companies were listed on the BSE.
In the same period, the total capital raised on the BSE through prospectuses was
Rs.21580 crores. All new issues were fully subscribed or over subscribed and, in
Feb.'95 no less than 197 new issues raised Rs.7147 crores.
The new issues market began to show signs of fatigue and stain in Feb.'95 because
of the abnormal bunching of issues. The average amount raised in the previous ten
months in the new issues market on the BSE was Rs. 1443 crores a month. Thus,
Feb.'95 saw an unprecedented amount of new issue activity. The average number of
issues per month from Apr.'94 to Jan.'95 was 92; in Feb.'95, there were 197 issues.
Thereafter, the new issue market weakened.
Aggregate money supply or M3 rose to 15.7% in 1992-93, 18.2% in 1993-94 and
18.6% between Apr.'94 and Jan.'95. the Reserve Bank Of India attempted to follow a
tighter monetary policy after May'94. From Jun.'94 to Aug.'94, the cash reserve ratio
was raised from 14% to 15%.
There was, and is a serious situation regarding inflation and price behaviour. The
whole sale price index rose 7% in 1992-93, 10.8% in 1993-94 and 11.5% in
1994-95. The Finance Minister has surfaced again as a serious problem. We will
tackle it on priority basis in the year ahead.'
The foreign exchange situation is the brightest part of the Indian economy. Foreign
currency reserves have now crossed US $ 20 billion. In 1990-91, they had shrunk to
as low as US $ 1 billion. If one adds to this, gold and SDR reserves of US $ 4 billion,
out reserves are nearing US $ 25 billion.
But our debt is not going down. Outstanding debts were US $ 84 billion in 1991, US
$ 85 billion in 1992, US $ 90 billion in 1993, US $ 91 billion in 1994, and around US
$ 91 billion in 1995. Therefore, debt as a percentage of GDP in these years was as
high as 30%, 41%,40% and 36% respectively, and is estimated at 35% this year.
debt as a percentage of current receipts during this period was 32%, 40%, 30%
25% and an estimated 24%.
The external position is extremely comfortable at the moment but dependent on
various factors: first , the balance of payments -- exports rose dramatically and
today cover 95% of our imports; second, capital inflows and outflows; and third the
price of oil and petroleum products.
Bottlenecks to growth
The bottlenecks in the way of India's growth rate exceeding 6% are: one low
investment growth rate of agriculture; two abysmal performance of PSUs; three the
low growth rate of infrastructure; four, the fall in the rate of domestic savings and
investments; and last, further bottlenecks may arise if there is political uncertainty
at the Centre.
THE revenue deficit of the Indian government in the budget estimate for 1994-95
was put at Rs.32727 crores. But it rose in the revised estimate for 1994-95 to
Rs.34132 crores, and in 1995-96 it is estimated to rise to Rs.35541. the budgetary
deficit in 1994-95 was Rs.6000 crores and in the budget estimate for 1995-96, it is
The fiscal deficit, which is really a critical figure, was Rs.54915 crores in the budget
estimate last year, but rose to Rs. 57634 crores. Therefore, fiscal deficit as a
percentage of GDDP was budgeted last year at 6%, but rose to 6.7%. for 1995-96,
the Finance Minister has targeted a figure of 5.5%, which appears optimistic.
On the revenue side, tax revenue has been remarkably buoyant. The budget
estimate for 1994-95 puts tax at Rs.86084 crores. The revised estimate puts the
figure at Rs.88770 crores, while the estimate for 1995-96 places the figure at
Unfortunately, non plan expenditure continued to rise inexorably. Last year's budget
estimate was Rs.105117 crores. The revised estimate shows a jump to Rs.113511
crores and the budget for this year puts the figure at Rs.123651 crores.
Total interest payments in the last budget were estimated at Rs.46000 crores and in
the budget for 1995-96, the figure is no less than Rs.52000 crores.
Defence expenditure has risen modestly. Budgeted at Rs.23000 crores, it came up
to the revised estimate for 1994-95 at Rs.23544 crores. This year, it is budgeted at
Subsidies continue to rise. Total subsidies were budgeted at Rs.8300 crores. In the
revised estimate, the figure is Rs.10826 crores and for the current year, the figure is
estimated at Rs. 10965 crores. The two main components in this total are the food
subsidy, which was budgeted last year at Rs. 4000 crores but in the revised estimate
was put at Rs.5100 crores, and is budgeted atrs.5250 crores this year, and the
subsidy on fertilizers for which last year's budgeted figure was Rs.4000 crores but
revised estimates show Rs.5166 crores, and the budget for 1995-96 provides for
Public sector disinvestment has been used to cover the deficit. The budget estimate
for 1994-95 puts the figure at Rs.4000 crores, but the revised estimate shows public
sector disinvestment at Rs.5237 crores. However this is an extremely misleading
figure, because it has been clarified that actual disinvestment was only Rs.2800
crores. The difference pertained to an amount related to the disinvestment in the
previous year, of which proceeds were received this year, plus the disinvestment to
employees in the public sector. For the current year, the Finance Minister has
planned disinvestment of Rs.7000 crores of share of public sector enterprises.
The Central Plan Outlay has been kept under reasonable control. Last year's budget
had apportioned Rs.70141 crores .but the revised estimates show that the
expenditure was only Rs.68316 crores which, at today's price levels, would be equal
to about Rs.75000 crores. The budget for the current year puts the Central Plan total
outlay at Rs.78849 crores. So there is no great or substantial jump in the Central
Plan expenditure. It shows only a marginal or modest increase in agriculture outlay
which, budgeted last year at Rs.2637 crores, is put at Rs.2853 crores in the revised
estimate and in the budget for the 1995-96, at Rs. 3023 crores.
Rural development, on which the Finance Minister always waxes eloquent, was
budgeted last year at Rs.6036 crores. The revise estimates show it at only Rs.5637
crores and the budget for the next year provides for Rs.6540 crores.
The outlay on energy was budgeted in the year at Rs.22857 crores, revised to Rs.
20,349 crores and budgeted for the current year Rs.23795 crores. The outlay on
industry minerals was budgeted last year at Rs. 10,394 crores, revised to Rs. 8872
crores and budgeted for 1995-96 at Rs.11598 crores.
In previous year, the Finance Minister obtained two-thirds of his levies through pre-
budget hikes. For example, last year, he raised Rs.2500 crore by hiking the price of
diesel and petrol. Then, Rs. 1500 crores was raised by increasing the issue price of
wheat, sugar, and Rs.997 crores by hiking railway charges thereby giving a total of
almost Rs.5000 crores.
This year, the only hike has been that of Rs.750 crores in railway freight charges.
Various pre-budget levies have not been attempted in view of the political
compulsions of the forthcoming elections.
The strategy of the budget is political. It contains a number of pro-worker
programmes with an eye on the forthcoming elections.
A Rural Infrastructure Development Fund is to be set up within the National Bank for
Agriculture and Rural Development (NABARD). This will take no less than Rs.2000
crores, which the Finance Minister wants commercial banks to contribute to and
therefore is not provided for in the budget.
NABARD is to create a credit line of Rs.500 crores to meet the needs of the
scheduled castes. Again, this is not on the budget.
The banking system is to provide Rs.1000 crores to khadi and village industries.
A new North-Eastern Development Bank with an authorised capital of Rs. 500
crores, which is to be set up, will be funded by financial institutions like IDBI, ICICI,
and even the UTI.
For 1995-96, the Finance Minister has promised a housing target of 10 lakh units for
the poor sections,, compared to 4 lakh units last year. he has also held out the
carrot of an old-age pension of Rs.75 per month for poor people over 65 years and a
lumpsum of Rs.500 on the death of the bread-winner in poor families and even pre-
natal and post natal care for the poor. The burden is to be shared by the Central and
the states. A committee will be appointed to organise such give aways. The Life
Insurance Corporation is to work out a life cover of Rs.5000 with an annual premium
of Rs.70. the Finance Minister has said that the Centre will contribute 25% of the
state, 25% and the beneficiary, 50% in respect of such policies, which will be
restricted to only one life cover per poor household.
There are schemes to provide meals to school children and a committee is to be set
up to work out the details.
All these announced schemes will cost the government (in the Budget) only about
Rs.1000 crores. But the total burden is no less than Rs.5000 crores, and the burden
that is to be borne by banks and financial institutions is no less than Rs.4000 crores.
The implications for the prices of shares of banking companies can only be negative.
Perhaps it is a smooth way of starting loan melas, to get votes as was done
The budget proposals on direct taxes are minor. The Finance Minister has noted that
the decision to reduce rates and thereby encourage compliances has yielded good
results. Personal income and corporate taxes taken together are expected to
increase by more than 25% in 1994-95. In the area of customs duty, the objective
was to reduce the high rates of import duty gradually, so as to lower costs of
production and improve competitiveness of user industries, while allowing domestic
producers facing competition from imported goods time to adjust. With regard to
excise duties, the objective was to simplify the structure, broaden the base, reduce
the duty rates which encourage evasion, shift to ad valorem rates as far as possible
and to extend the coverage of MODAVT.
In the field of indirect taxation, customs duties have been changes. The peak rate of
customs duty has been reduced from 65% to 50%. There are a large number of
reductions. The net loss in revenue due to reductions in customs duties is estimated
at Rs.1179 crores. But the Finance Minister hopes that this will be met by increased
compliance and better administration.
In the filed of excise duty, the changes are spread over a vast number of items. The
total gains due to increased excise duty are estimated at Rs. 335 crores, whereas the
loss due to reduction in excise duties is estimated at Rs.646 crores, amounting to a
net loss of Rs.311 crores. This again is sought to be made up by better compliance
and therefore, the Finance Minister has not taken note of it in the Budget.
The area of direct taxation again contains a few changes. In the filed of minor
changes were made. Thus, the personal income-tax limit has been raised from
Rs.35000 to Rs.40000 giving a maximum tax benefit of Rs.1200 in income tax.
For capital gains, on sale of bonus shares, the Finance Minister had amended the
statute to provide that original shares would be treated as having been acquired at
original cost. In respect of rights shares, cost was to be taken at nil if they were sold
by the shareholders at the price paid to the company. Because of bad drafting, bonus
shares to be at nil cost was not provided last year which is logical if the base of the
cost mechanism to calculate capital gains is changes. Now, this year, he has said, or
rather clarified that bonus shares will be treated at nil cost and this actually is
advantageous to shareholders.
Shareholders will gain as a result of the implementation of the new schemes of
costing of bonus shares, compared to the old average method costing. And,
therefore, those who are bemoaning this change, should recalculate it: it is in the
interest of shareholders. It may be argued that this may result in shareholders
selling old shares and keeping the bonus shares at zero value. Nonetheless, this is
not a change which can be condemned or criticised.
There are minor reliefs for individuals and Hindu undivided families. In corporate
taxation, there is no change in rates. Even the 25% surcharge ahs been continued.
Last year, the Finance Minister has solemnly promised he would remove this
surcharge. And yet there is not a mention of such a change. The Finance Minister has
recently said that this is unfinished business. Whose unfinished work will it be, is he
is not around to finish the business next year after the elections?
The budget provides for deductions of tax at source from income in respect of
income from units of specified mutual funds and UTI> this will perhaps make
investors put less money in mutual funds. It may make growth schemes of mutual
funds more popular. But, one should not attach too much importance top this.
A five-year tax holiday for infrastructure projects is to be given for building roads,
highways, expressways, bridges, airports, ports and rapid rail transport on a buy-
won-operate-and- transfer-basis. Further, tax concessions have to also been given to
institutions which finance such infrastructure projects, upto 40% of the income they
derive from such financing. These are certianly welcome changes, but it is a moot
question whether they will contribute to the growth of infrastructure projects do not
have taxable profits in the first-five years. Perhaps, a change to a later five-year
period may make such a concession effective.
Venture capital funds and companies are exempt from income-tax. The depreciation
of 100% on plant % machinery of less than Rs.5000 at cost is to be withdrawn
because they will form a part of a block of assets which will now get depreciation at
the rate of 25%. This will reduce the depreciation allowance in certain companies.
One concludes that this is basically a status quo pedestrian budget.
Part 2: SECTORAL ANALYSIS…………………
To make a Sectoral analysis, one has to assume certain things. The following
assumptions have been made.
The monsoon is assumed to be weaker than last year.
The comfortable foreign exchange situation is taken for granted. The rupee-dollar
exchange rate is assumed to be stable around Rs.31-31 to one US$.
Inflation is assumed to range between 9% and 12% in 1995-96
The rise in the gross national product is assumed at 5%.
The rise in the industrial production is assumed to continue at 8%, which is lower
than what the government expects.
The political situation is assumed ---- at least upto February 1996 ----- to remain the
same as it is today. Political changes cannot be predicted.
The fiscal situation is assumed not to be upset by political give-aways to the poor.
A moderate law and order situation is assumed to continue to prevail.
Half yearly results shows a spectacular turnaround in the central industry.
Profitability will be better in the second half. The industry will enjoy a bumper year in
1994-95. Demand now exceeds supply. Government demand, which was 40%
earlier, has remained low. But private demand, such as from exports, especially
from coastal plants in the west and the south, has developed well.
Capital costs to put up new units have increased so that not many new units may
come up. Indeed, shortages may develop in 1997-. The railway budget has increased
the freight burden on the cement industry. The budget has raised excise duty on
cement from Rs.330 to Rs.350 per tonne. With the extension of MODVAT relief to
packaging material, the bun should decrease by at least Rs.10 per tonne. But due to
soaring demand the cement industry will be able to pass on the burden of freight and
excise duty to its consumers.
Demand for cement will swell due to the budget providing for more houses for the
poor --- the government is committed to providing 10 lakh houses. Moreover, a tax
holiday has been given for infrastructure projects, which consumes a lot of cement.
The industry can look forward to a very good future.
The steel industry enjoys an absolute demand due to the boom in the engineering
and automobile industries. profits in the first half of 1994-95 were good. The second
half will be better. The Budget has lessened customs duty on certain steel products.
But this will have little impact on domestic producers, because internationally, steel
prices are climbing and expected to continue to rise throughout the year. prices and
profits of the industry are therefore likely to surge in 1995-96, beyond their
substantial rise last year.
MINI STEEL AND ALLOY STEEL
The industry has had a dramatic turn around. Demand has escalated and do have
prices and profits. The budget has slashed customs duty on capital goods and
components from 30% to 20 %. This may to some extent cut the cost of inputs.
The industry's financial performance in 1994-95 was good and next year is likely to
be much better. The sponge iron industry had a good year and has earned better
profits. Exports have developed in international markets. The industry can expect a
better demand in the coming year. it will not be affected much by the drop in
customs duty from 30% to 20%, because this is a new industry with low-cost plants.
The industry has benefited from an upswing in demand and prices in the
international market last year. domestic prices are linked and are equal to landed
prices of imports of aluminium. The Budget has reduced customs duty from 50% to
40%. This will perhaps result in only a alight drop in aluminium prices, but this will
be minor because international aluminium prices are expected to balloon in the next
tow years. Thus, this is a cyclical industry in its upswing now.
Profits for 1994-95 have been excellent and this year may be even better. Producers
have announced plans to expand capacities in spite of high capital costs. Exports are
The Economic Survey shows that the share of the organised sector, ie, mills, in the
production of cotton fabric has declined every year as a percentage of output. In
1989-90, mills produced 12.95% of the total fabric produced. Thereafter, these
figures diminished every year until in 1994-95, when mills will have produced only
6.18% of the fabric output. Powerlooms today control 72.8%, and handlooms cover
20.6% of the total fabric output in India.
The organised sector in the industry was doing moderately well till Sep.'94.
Thereafter, prices of raw cotton zoomed to unprecedented levels; indeed, they
almost doubled, whereas fabric prices did not advance proportionately.
The production of yarn has remained in the organised sector. The first half of the
fiscal year yielded good profits, but the billowing cotton prices after Stock
exchange.'94 could not be passed on to consumers, resulting in losses to many
units. The industry depends upon raw cotton prices for its profitability. Some mills
are now making specialised yarn, commanding niche markets in the manufacturing
sector. They will show better profits than ordinary yarn mills. But there is no special
advantage for investors to buy yarn mill shares, unless at very low prices.
The industry continued to boom during the past year. cuts in excise duty enabled it
to lower prices and expand the market. Polyester filament and polyester staple fibre
have enjoyed good demand and the industry has been running at full capacity
---almost 100%. The Budget has lessened import duties on petrochemicals like PTA,
PMT, and MFG--- from 60% to 35%. In some cases, this may lower the cost of
production and improve profitability. But today, international prices of these items
have made imports attractive.
Customs duties on all man-made fibres and yarn have been slackened from 65% to
45%. This will not affect the industry now, because international prices are much
higher than domestic prices. But profitability may be affected if, after 1996,
international prices tumble, which is expected. Last year's profitability was good, and
that for the next year should be even better.
Excise duty on polyester filament yarn has been eased from 69% to 57.9%, enabling
producers to crop prices by Rs.10 per Kg. This should further expand the market.
Polyester filament manufacturing capacity is being expanded, as demand is likely to
accelerate. Some new entrants in this field are building greenfield projects. Polyester
staple fibre continues to enjoy excellent demand. The demand for polyester staple
fibre is expected to double in two to three years, compared with the demand last
year. hence, capacity expansion is good and is rising. The only risk is a slide in
The industry's in intimately linked to the monsoon. Seven bumper monsoon have
guaranteed a continuous increase in profits of pesticide companies, during. The
Budget has moderated customs duty on some inputs.
The industry is changing and newer, more efficient pesticides are capturing a greater
market share. Major technological breakthroughs are likely to change the industry.
Multinational corporations, strong in research, may capture more of the market if
Indian producers do not develop better research facilities and are unable to produce
The future for pesticides is bright, but the risks are clear. The first risk is that arising
from the failure of monsoon, and the second is from technological changes.
The whole industry continued to enjoy good profits. Prices continue to be controlled
in the main products, but profits are assured through subsidies. Demand is in excess
of supply. And the imports continue.
Expansion of the industry is restricted by the lack of supply of feedstock like naptha
and gas. Some companies are planning to start plants overseas, if they cannot get
feedstock immediately. The industry has a bright, but steady, future. The only risk lie
is a change of government policy or subsidy reductions in future, risks which are not
great for the next two to three years.
VISCOSE FILAMENT AND VISCOSE STAPLE FIBRE
Producers have had a bumper year. they have been able to boost prices because of
flare-up in cotton prices.
These fibres are cheap substitutes for cotton. India is one of the largest producers of
these manmade fibres, and units in the industry are internationally competitive.
The export potential has also risen, but the increase in capacity is constrained by
shortages of raw materials within the country. The industry has an excellent future,
provided it can get raw material supplies. It may be allowed to import raw material,
but that may be difficult.
The industry has excess capacity and a relatively poor demand.
The Budget has trimmed import duties on caprolactum from 60%to 45%, but
international prices of caprolactum ---the major raw material in producing nylon --
have stepped up. So, only a small quantity may be imported. The industry remains
highly fragmented. All the plants are small and are uneconomic in size by
international standards. Nevertheless, profitability improved last year, though
minutely. The industry continued to produce the old fibre, which is not likely to see
a spectacular growth in demand.
The industry has had a better first half, but its fortunes have gone down with the
downswing in cotton mill's future. The budget has increased excuse duty concessions
to small-scale units. A reduction in income-tax of up to 30% of the income of new
comers, who enter by March 31, 2000, has been offered. Excise duty concessions
have been extended to units are likely to come into this industry
Large producers will have to concentrate on export markets and prices may
Paints units have always suffered severe competition from the small-scale sector,
and the concession granted to the small-scale sector in the Budget will intensify it.
Demand for specialised industrial paints has soared due to the boom in the
automobile sector, benefiting the largest producers. profits for 1994-95 will be a little
better than in the previous year. in future, the profitability of the organised sector,
will be linked to industrial paints which will be linked to the automotive and other
The industry has had an excellent year. the Budget has lessened import duty from
65% to 45%. But the industry is likely to face a flood of imports. Domestic prices are
comparable with the landed cost of imports of caustic soda. A fast international
prices may hit production. But, then the production of chlorine will decline because,
with every tonne of caustic soda, 0.9 tonne of chlorine is produced. Thus, when the
production of caustic soda slackens, the production of chlorine shrinks and prices of
chlorine flare up.
Many plants in the industry have to convert to membrane technology, are plagued by
high cost and inefficient. They may be badly hit by falling price induced by cheap
imports. Some new capacities are coming up. The industry has a steady future linked
with user industries.
Demand continues to be less than supply. The Budget has lowered import duty of
soda ash from 65% to 45%. 1994-95 has been a good year for the industry. Exports
have absorbed some of the excess domestic capacity. Today, the domestic price of
soda ash is slightly lower than the landed cost of imports. The industry is not likely
to be adversely affected by the flood of cheap imports, unless the international price
of soda ash collapses.
The market leader in the industry has expanded capacity and remains the lowest-
cost producer. It has, therefore, made good profits. But new units and some of the
smaller producers have high capital costs and will be more sensitive to fluctuations
in the international price in coming years.
PETROCHEMICALS AND PLASTICS
1994-95 was a good year because prices of the industry’s products rose dramatically
in international markets. This allowed Indian manufacturers to raise prices
continuously. The Budget has reduced import duties on many products, but these will
not adversely affect the industry as international prices have been waxing in the past
few months. They are expected to continue to rise because of shortages in global
markets. Excise duties have also been cut, enabling domestic producers to lower
prices. Around 1997-98, the international prices of its products may plummet due to
a downturn, and the industry may experience a squeeze on its prices and margins.
Worldwide, petrochemicals has become a cyclical industry with boom-bust cycles and
in India too, the industry will have the same characteristics.
Plants with new capacities have commenced production, and more are planned in
Demand continues to be in excess of supply. But the industry remains under the
Drug Price Control Order, which was revised in the middle of the last fiscal year. The
industry’s pricing is, therefore, constrained by the DPCO as also by internal
competition. However, under the new DPCO, profit margins will improve this year.
The industry has excellent export potential --- almost unlimited. The Budget has
slashed import duties on a few inputs which will lower costs. The industry is now set
to live with the new DPCO and will seek profits through greater sales in India and in
export markets. Companies which introduce new products and vigorously export
their products will flourish.
The tyre industry has had a moderate year. Supply continues to exceed demand.
The Budget ahs zipped up excise duty on tyres by 8%, but has given some minor
concessions. The industry is exporting tyres, but export prices have been
The tyre industry is reported to be operating an informal cartel which helps to
improve prices, but such increases face market resistance.
The paper industry has had a very good year. Output rose and prices were hiked
four times. At present, demand outstrips supply. The Budget has proposed a cut in
the import duty on paper from 65% to 40%, but this will not affect the industry, as
paper prices have escalated and continue to rise in the international market. Indian
paper manufacturers are actually exporting paper to neighbouring countries, and the
industry is set for substantial price increases, in line with trends in the international
market. It will flourish in the coming years after having gone through quite a few bad
1994-95 heralded a boomtime for the entire automobile industry. Production in each
and every sector rose and profits sky rocked. Car sales improved to around a quarter
million. The market leader continues to dominate, with more than 70% of the market
share. However, 1995-96 will see a complete change in the scenario in the car
market. Many new car models will be launched, and the market will be come fiercely
competitive. If all the projects announced are implemented in full, capacity could rise
to 5 lakh cars by 1996 and even to 8 or 10 lakh cars by 1999. Under these
conditions, it may b almost impossible for some producers to sell their cars, causing
great financial crises for them. The fittest will survive and inefficient producers will
go bankrupt. The trucks, tractors, three/ two wheelers have also had an excellent
year. The Budget contains minor import duty cuts on inputs for the auto industries,
which will expand margins. But it could also lead to price-cutting in a highly
competitive environment in future. Investors, therefore, have to be very selective
investing in shares of such companies.
1994-95 was the best year in the history of the industry. Demand in both the original
equipment and the replacement markets shot up and bumper profits were made. The
industry will have to expand to meet the greater demand in the domestic market.
New entrants are planning to come into the field and even export markets are
steadily opening up. The Budget has toned down excise duty on auto parts by 5% in
some categories, it has been cut from 20% to 15%, and in others, from 25% to
The industry today yields a better profit than the profitability of original equipment
manufacturers of automotive vehicles. Investors should invest in companies
producing top-quality automobiles ancillaries with access to the latest technology,
thus making their products acceptable for various new models of cars, trucks,
tractors, and two and three wheelers.
The industry experienced a turnaround in 1994-95 due to the boom in the
automotive and other engineering sectors. Profits soared dramatically. In some
items, demand exceeded supply and shortages developed the Budget has changes
the import duty structure on ball bearings in a minor fashion, which will not have a
Some of the inputs of the industry are imported and they have been given import
duty concessions. The industry will flourish in the coming year.
The industry has had a moderately good year. The Budget slashed customs duty on
copper and on optical fibres. The industry’s input costs will, therefore, go down.
Excise duty on cables has been lowered. The industry depends on government
outlays. Jelly-filled telecommunication cables and optical fibre cables appear to have
the greatest potential for profitability.
Hotels have had a bumper 1994-95 despite the plague in Surat in Sep.’94. hotel
occupancy rates have soared due to foreign businessmen visiting India to explore the
potential in India.
Existing hotel companies will slow record profits. The industry is planning a big
expansion in all categories of hotels, but the largest thrust appears to be planned in
the three-star category, where there is great-potential. New entrants are coming into
REFRIGERATORS, AIR CONDITIONERS AND WHITE GOODS
The air conditioning industry has at last been given a reduction in excise duty from
60% to 40%. This will enable it to roll back prices, spurring demand. Producers of
air-conditioners, refrigerators and white goods have had a moderately food year.
Leading multinationals have entered the industry, bringing the latest models and
technology into India. They are willing to take a long term view and even lose money
for a few years to establish a market share. The industry has, therefore become
extremely competitive. Companies without access to the latest technology and not
making world-class quality products are likely to go to the wall, and even close
The industry, which has a good year, is diversifying. The Budget has curtailed the
present income- tax benefit and restricted from shipping alone.
The deduction of income-tax on shipping profits has also been reduced from 100% to
50%. The industry has always had a cyclical nature. Investors should pick up
shipping shares during bad years and exit in the peak periods which invariably
The industry is enjoying a bumper year due to the fact that the international price
has almost doubled because of crop failure in Brazil. Prices in India have also swelled
and the industry has seen bumper profits.
The industry has had a difficult year. Production declined, prices slithered and
exports dwindled. But the industry will have a much better 1995-96. Production is
expected to surge , prices are likely to move up and exports have begun to advance
in new markets.
MACHINERY CAPITAL GOODS
The Budget has given many customs duty concessions to spur further growth in this
sector. It grew 25% last year and enjoys top priority with the government.
However, the profitability of these industries remains moderate and fluctuates with
the country’s industrial growth rate.
The government has given this industry top priority the same period. The industry
has been growing at 26% pa in the last four years. The Budget has reduced customs
duties on inputs like malt, starch, poultry stock, packaging materials and machinery.
These concessions will lower the production and expansion costs. Excise duty on
items like cocoa and cocoa products has been slashed, enabling manufacturers to
lower prices. Demand is therefore expected to speed up. The industry has been
booming and has had a very good 1994-95. Some producers are even projecting a
fivefold increase in sales by 1999. New entrants, however, are coming in and some
of the most well-known multinational corporations have recently entered the field. It
is interesting to note that since 1991. Food processing has attracted investment
proposals of Rs.35000 crores including foreign investment proposals of Rs.7000
The export potential of food processing is also immense. The industry will enjoy
perhaps the highest growth rate in sales and profitability in the next few years.
The industry has had a moderate year. The Budget has increased the excise on them
by 7%. But the industry is facing a severe problem due to health consciousness
among consumers and demand may slow down.
COMPUTERS AND ELECTRONICS
The Budget has given sweeping concessions in customs duty on various items
imported by these industries. Software exports have been given open-ended income-
tax concession like other exports. Consumer electronics have been given concessions
in excise duties in respect of their imports of components. They will be able to
reduce prices and expand market penetration. Competition is fierce and only those
who produce the best will survive.
Part 3: Long Term Investment Strategy……..
ANALYSIS OF THE SHARE MARKET AND ITS
ON MACRH 8, 1994, the market opened at a level of 3695 on the BSE Sensitive
Index (Sensex). At that level, the price- earnings ratio was 47, the price-to-book
value ratio was 6 and the yield was 0.69%. the lowest point that the Bombay market
reached was when the Sensex touched 3600 on May 4. Thereafter, it rose steadily.
On June 3, the Sensex closed at 4053. It had decisively broken out on the upper side
of 4000. On July 29, the Sensex reached 4191. By August 31, it had galloped at
4588. On September 12, the Sensex closed at the all time high of 4631, at which the
price -earnings ratio was 47, the price-to- book value ratio was 7 and the yield
HIGHS AND LOWS
In April 1992, at the time of the scam, the Sensex had reached a high of 4547. At
that level, the price-earnings ratio was 56, the price-to-book-value was 10 and the
yield was only 0.48%. thus, at the new peak in Sep.'94, the value was better than at
the previous peak during the so-called scam period. The movement of the Sensex
from March 8 was no less than 1000 points, which is certainly a sharp boom. The
Sensex fell thereafter. By November 30, the Sensex had fallen to close at 4124; by
December 7, the Sensex tumbled below 4000, closing at 3978. On January 11, 1995,
it slipped to 3600, the rock-bottom level it had reached on May 4, 1994.
February 22 saw the Sensex at an all-time low. It closed at 3233, at which level the
price-earnings ratio was 29, the price-to-book-value ratio was 4 and the yield was
1.01%. Then came the Budget on March 15.
In the pre-budget session, the Sensex reached a high 3504 and the low and close of
3487. In the post-budget session, the high was 3436 and the low and close was
3399. So, from the a high in the pre-budget session, 3504, in that one day, the
Sensex fell 105 points, down to 3399. From the close of the pre-budget session, the
Sensex fell 88 points.
On the next day, March 16, the Sensex showed a high of 3367, a low of 3286 and
closed at 3367. At these levels, the price-earnings ratio was 30, the price-to-book-
value ratio was 4 and the yield was 0.96%. the market remained closed for the next
four days, due to a crisis. The Sensex hit a high and a low of 3291 and closed at
3294 on march 23. At this level, the price-earnings ratio was 29, the price-to-book-
value ratio was 4 and the yield, 0.99%.
WHY THE FLUCTUATIONS?
Now, the question is why did the market, in the face of continuing increases in
industrial profits throughout the year, fluctuate like this? There are certain
fundamental factors. The market rose slowly after May 4, 1994 and rapidly after
June 3, 1994 because of excellent corporate results which were announced for
1993-94: the peak came in Sep.'94. There was a change in the political
environment, which is a fundamental factor. Between September and October,
assembly elections were announce, which created some uncertainty in investor's
minds. Further political developments left them worried. Then came the plague,
which broke out in Surat and which worried investor because they feared industrial
production would be disrupted.
The role of Foreign Institutional Investors (FIIS0 and the Global Depository Receipts.
(GDRS) markets also affected the market. The number of FIIS registered with the
Securities and Exchange Board of India (SEBI) rose from 161 in April 1994 to 306 by
Mar.'95. in the early part of the fiscal year, it was expected that they would invest
US $ 3 billion directly in the Indian stock markets during the year. a member of the
Union cabinet even predicted this in public. In Mar.'94, the total cumulative
investment, ie. Starting from Nov.'92, of FIIS was US $ 1.65 billion. This rose to US
$ 3.002 billion by Oct.'94 ------- a rise of US $ 1.334 billion.
But from then onwards, the flow dried up. By March, the cumulative inflow was US $
3.156 billion indicating that from Nov.'94 to Mar.'95, the inflow was only US $ 154
million. The total inflow for 1994-95 is therefore estimated around US $ 1.5 billion, a
far cry from the expected US $ 3 billion.
On the Bombay Stock Exchange, in November, FIIS actually sold more value than
they purchased. Indeed, the net outflow was Rs.79 crores. In December, too. This
trend continued, though the net outflow was Rs. 6 crores. Net investment turned
positive only after Jan.'95.
Euro-issues and the market for GDRs and convertible bonds manifested a similar
trend from Apr.'94 upto Oct.'94. During this period, 25 issues raised $ 1.63 billion.
From Nov.'94, to Feb;'95, only four issued were launched, which raised only $ 350
million. The present situation is that FIIS have re-entered the market, but on a
modest scale. Thus, net investments were US $ 16 million in Dec.'94 US $9 million in
Jan.'95, and US $ 65 million in Feb.'95.
In the second half of the fiscal year, GDR prices were often below the share prices in
India, which further affected the secondary markets as FIIS sold Indian shares and
replaced them with the GDRs of the same companies. Thus, the fund flow of FIIS did
play a role in market behaviour and prices in 1994-95.
DECLINE IN FOREIGNER'S INTEREST
Now, what are the reasons for the decline in interest of FIIS after Oct.'94? First,
global investors had developed a fashion for investing money in emerging markets
after 1993 because of their perceived potential. Their argument ran as follows:
emerging markets account for 80% of the world's gross domestic product, only 10%
of the world's stock market value and a mere half-a-percent of world institutional
investment. It was expected that the growth potential of the emerging markets, and
even India, would be more than 6% per annum, whereas the growth potential of the
US, Europe and developed countries was perceived to be 2-3% per annum in future.
The interest is emerging markets began to evaporate after Oct.'94 due to the
following factors: US interest rates rose from 3% to 6%. Similar rises in European
interest rates made the US and European bonds attractive investments by end-1994.
Therefore, there was a tendency to sell the paper of emerging markets and move the
funds to invest in developed countries.
Second, foreign investors suffered huge losses in 1994 on shares, GDRs and bonds
of most emerging markets. Last, in India, FIIS suffered from lack of custodial
facilities, transfer deed registration problems and illiquidity dampen their enthusiasm
after Sep.'94. indeed after Oct.'94, emerging markets were called submerging
The market movement was linked to problems which are peculiar to the Indian stock
market. The Indian stock market developed illiquidity as a result of the SEBIs ban on
badls trading in early 1994. The volume of A group shares or specified list shares
became much greater than the volume of A group shares. But the volume and
liquidity of B group shares declined from Nov/'94 due to news of SEBI's ban on
renewal of contracts in that group of shares beyond the settlement period.
Then, there were problems connected with tainted shares, benami shares, shares
under objection and forges shares which compounded the settlement and delivery
problems during the latter part of the year.
Further, Indian promoters manipulated the prices of their shares in order to float
new issues at artificially high prices and GDRs at inflated values. These and other
dishonest practices drove away interest in Indian Euro-issues-- Indian and foreign
investors lost money on such investments.
Promoter's malpractices, like trying to obtain preferential allotments at high
discounts from market prices (which fortunately was stopped by SEBI) and diluting
the capital of their companies by private placements upset local and foreign investors
who saw share prices plummet due to dilution of share capital of various companies.
SEBI and the government must insist that promoters disclose their plans, if nay for
issuing further capital during the following 12 or 18 months, at the time of floating
new issues or GSRs. SEBI should not allow premia on shares of greenfield projects.
It should put a cap on premia, perhaps by using the old Controller of Capital Issues
SEBI should increase its scrutiny and vigilacne over new issues of large amounts, say
over Rs.50crores. It should insist on detailed disclosure of the shareholdings of the
promoters and perhaps even the directors. Details of the personal financial resources
of the promoters, their networth and borrowings, should also be investigated and
disclosed. SEBI should have some capital adequacy norms for promoters.
SEBI should control the flow of new issues in market. Bunching of huge new issues in
one month must be avoided as it imposes unnecessary pressure on the primary
market and indirectly even on the secondary market.
FACTORS WHICH WILL DETERMINE THE MOVEMENT
OF THE MARKET IN 1995-95
Fundamentals of companies which will influence market movements can be given
40% weightage. Working results of companies have been very good for the past
year. and even for the coming year, they are likely to be good, as profits will rise
another 40% and the fundamentals are bright.
The supply and demand for shares must be given 40% weightage in predicting
price behaviour. The demand for Indian GDRs or other types of Indian paper is
relatively good. FII demand has gone down, but it could pick up gradually, especially
after corporate results of the leading companies ion the past year are published.
Also, an expectation would make share prices appear very attractive.
The supply of shares, however, may outstrip demand at a particular point of time.
Many companies are waiting to enter the primary market to float DGRs and rights
shares. The total supply of shares mat exceed demand, which may push down prices
in the secondary market and the GDR markets. Hence, SEBI should regulate new
issues so that abnormal bunching of such issues in a particular month odes not
occur. The Government of India should also regulate the launching of GDRs.
The last factor which will influence share prices is the X-factor, to which 20%
weightage may be given. This concerns the psychology of investors. The psychology
of both Indian and foreign investors has been shaken, making them feel insecure
about the political environment. They have also suffered heavy losses in the market,
from its peak in Sep.'94 to its present lower levels.
In the coming year, this factor will influence market movements more than it did in
the past. Perhaps, in the coming year, this factor may demand, higher weightage
than 20%. The BSE authorities, SEBI, and other government authorities should try
their best to restore the investor's confidence in the share market, but it is
impossible to predict the course of political developments.
WHERE IS THE MARKET HEADING?
The following assumptions are made in predicting the market trend.
1. There will be a weaker monsoon compared to last year, but not a total failure.
2. The present political situation is assumed to continue upto the beginning of 1996.
3. Inflation is assumed to vary between 9% and 12%.
4. Interest rates are assumed to fluctuate narrowly.
5. Healthy foreign exchange reserves and export growth are assumed to continue.
6. The BSE, SEBI and the government are assumed to continue sensible policies in
the regulation and working of the markets.
7. It is not possible to anticipate breakdowns of the internal dynamism and working
of the share markets.
8. The international perception of emerging markets, especially India, is assumed to
9. In the worst scenario, ie, if all factors turn negative, the Sensex will have a low of
2500 and a high of 3500. In a medium-type scenario, the Sensex will have a low
of 2900 and a high of 3800. In the best scenario will be 3100 and its top will be
10. Any move below 2500 will lead to a perpendicular crash. Any move over 4000
will be temporary and will lead to a blow-off. In a year full of political uncertainty,
the market will fluctuate within these ranges at least until the Lok Sabha election
SIR JOHN TEMPLETON'S INVESTMENT PRINCIPLES
Here are 26 principles expounded by Sir John Templeton, one of the most famous
money managers in the world.
1. For long-term investors, there is only one object -- maximum total return after
2. Achieving a good record is a lot harder than most people think
3. Avoid putting all your eggs in the wrong basket at the wrong time. Every investor
4. If you buy the same securities as other people, you will have the same results as
5. To buy when others are despondently selling, and to sell when others are
greedily buying, requires the greatest fortitude, and pays the greatest reward.
6. Too many investors focus on 'outlook' and 'trend'. But more profit is made by
focussing on value. This means value investment is the best.
7. If a particular industry or type of security becomes popular with investors, that
popularity will always prove temporary and, when lost, will not return for many
8. Never permanently adopt any type of asset or any selection method. Try to stay
flexible, open-minded, and sceptical. Long-term results are achieved only by
changing from popular to unpopular types of securities you favour and you
method of selection.
9. The fluctuation of share prices is roughly proportional to the share root of the
10. When any method of selecting stocks becomes popular, switch to unpopular
methods. Too many investors can spoil any share selection method or any
market timing formula
11. It is impossible to produce a superior performance, unless you do something
different from the majority
12. In free-enterprise nations, earnings on stock market indexes fluctuate around the
replacement book value of the shares on the index.
13. The time for maximum pessimism is the best time to buy and the time of
maximum optimism is the best time to sell.
14. The time to sell an asset is when you have found a much better bargain to
15. In the stock market, the only way to get a bargain is to buy what most investors
16. In the long term, the stock market index will fluctuate around the long-term
upward trend of earnings per share.
17. Bear markets have always been temporary, and so have bull markets. Share
prices turn upward one to twelve months before the bottom of the business cycle,
and vice versa.
18. The time to buy a stock is when short-term owners have finished their selling,
and the time to sell a stock id often when short-term owners have finished their
19. The skill factor is selection is the largest for the common stock part of your
20. An investor who has all the answers does not even understand the questions.
21. 'This time is different' are among the most costly four words in market history.
22. Bull markets are born of pessimism, grow on scepticism, mature on optimism and
die on euphoria.
23. Buying opportunities are useful only if you have money to take advantages o
24. Upward spikes do not terminate bull markets.
25. The best performance is produced by a person, not by a committee.
26. If you begin with a prayer, you can think more clearly and make fewer stupid
ADVICE TO INVESTORS
1. Raise cash or cash instruments to levels equal to one-third of the total value of
2. Avoid the primary market. More than 95% of the issues launched last year. Were
of extremely poor quality. If you bought them, just get out or sell them.
Benjamin Graham had said. 'Most new issues are sold under favourable market
conditions, which mean favourable to the seller.'
3. Avoid investing in finance companies. Literally hundreds of them have been
floated. Most of them are under-capitalised and carry too much debt. Their
margins will shrink and most of them will go bankrupt. Even the few large and
good finance companies will be adversely affected by these trends.
4. Avoid investing in mutual funds. They are suitable for investors who have no time
or knowledge of the science of investment. Most mutual funds are risky. They
plunge to a discount on launching. Many of the recently launched mutual funds
have performed badly.
5. Invest in well-managed companies in growth industries. keep less than one third
of the value of your portfolio in the specified or "A" group shares which are of
mature companies in many cases.
6. Buy shares with strong financials and low debt.
7. Avoid shares of companies which are expanding at a reckless rate and which
require investors to invest very often in new or rights shares. Buy shares if
companies which have liberal dividend policies and give bonus shares often.
8. Do not pay fancy prices for shares trading at very high price earnings ratios. Buy
shares of growth companies if their price-to-earnings ratios do not exceed double
the average growth rate of their net profits for the past five years.
9. Do not buy shares of companies in which the management has no stake or equity
holdings. Avoid investing in shares of industrial groups whose managements seek
their won security by parking shares of group companies within a circle of
companies where the management has no shareholding, but is locked in in-
fighting or fighting with major shareholders. Buy shares of companies which have
clean, non-controversial and efficient managements.
10. Buy share of companies with internationally known brand names, especially in
the consumer products filed. These are subsidiaries of multinational corporations,
which often obtain the use of a brand names free, have access to the latest
technologies and produce top quality products.
11. Buy shares of companies which are internationally competitive and will be able to
flourish even if import duties are reduced to 20% or even zero.
12. Watch political developments and announcements of changes in government
policies which may affect, positively or adversely, the profitability of various
industries and companies. Invest in areas enjoying government priority as also
13. He pig-headed way to lose your money is to hold on to failing investments and
not cut your losses. The wise investor cuts his losses in time by selling out shares
which he has bought by mistake or through his own folly.
14. Stock markets disdain 'good' economics statistics, convinced by experience that
'good' is invariably followed by 'bad'.
15. When you know that a company is basically sound and its stock is being
hammered to a rock bottom price, there is no reason not to but its share.
16. The future belongs to those who earn it.