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  1. 1. Part 1: MACROECONOMIC ANALYSIS………….. THE UNION BUDGET 1995-96 AND THE CAPITAL MARKETS By 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 say now? 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. Political changes 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.
  2. 2. 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 government. 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 measures. Economic indicators 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%. Agricultural production 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
  3. 3. 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. Industrial production 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. Infrastructure 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
  4. 4. 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%. Power 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. Petroleum 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%. Employment 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.
  5. 5. 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. Money supply 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.' Foreign Exchange 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.
  6. 6. BUDGET PROPOSITIONS 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 Rs.5000 crores. 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 Rs.100787 crores. 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 Rs.25500 crores. 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 Rs.5400 crores. 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
  7. 7. 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. Budget Strategy 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.
  8. 8. 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 previously. 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
  9. 9. 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.
  10. 10. 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. CEMENT 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. STEEL 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
  11. 11. 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. ALUMINIUM 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 also burgeoning. COTTON TEXTILE 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. YARN 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. MAN-MADE FIBRES
  12. 12. 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 international prices. PESTICIDES 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 new items. 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. FERTILIZERS 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
  13. 13. 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. NYLON 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. DYESTUFF 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 fluctuate. PAINTS 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 industries. CAUSTIC SODA 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
  14. 14. 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. SODA ASH 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 future. PHARMACEUTICALS 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. TYRES
  15. 15. 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 unattractive. The tyre industry is reported to be operating an informal cartel which helps to improve prices, but such increases face market resistance. PAPER 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 years. AUTOMOBILES 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. AUTO-ANCILLARIES 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 20%. 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.
  16. 16. BALL BEARINGS 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 great impact. 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. CABLES 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 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 the industry. 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 down. SHIPPING 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 follow.
  17. 17. COFFEE 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. TEA 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. FOOD PRODUCTS 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 crores. 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. CIGARETTES 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
  18. 18. reduce prices and expand market penetration. Competition is fierce and only those who produce the best will survive.
  19. 19. Part 3: Long Term Investment Strategy…….. ANALYSIS OF THE SHARE MARKET AND ITS FLUCTUATIONS 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 0.69%. 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
  20. 20. 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.
  21. 21. 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 markets! 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 (CCI) formula. 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.
  22. 22. 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 improve slowly. 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 4000.
  23. 23. 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 are finalised. 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 taxes. 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 should diversify. 4. If you buy the same securities as other people, you will have the same results as others. 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 years. 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 price. 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 replace it. 15. In the stock market, the only way to get a bargain is to buy what most investors are selling. 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 buying.
  24. 24. 19. The skill factor is selection is the largest for the common stock part of your investment. 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 them.. 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 mistakes. ADVICE TO INVESTORS 1. Raise cash or cash instruments to levels equal to one-third of the total value of your portfolio. 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.
  25. 25. 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 high profitability. 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.