Sunday, 23 November 2008

Day Trading Guide - November 24, 2008

Source: TheHinduBusinessLine

Aries Agro (Rs 45.30): Buy

We recommend a buy in Aries Agro from a short-term perspective. It is apparent from the charts of Aries Agro that it was on a medium-term down trend from September high of Rs 162 to its 52-week low of Rs 35 recorded in late October.

The stock found support at its 52-week low and began to consolidate sideways in the price range between Rs 35 and Rs 44 for almost four weeks. On November 21, the stock conclusively penetrated its 21-day moving average by gaining Rs 5.50 or 13.8 per cent accompanied with above 2-week average volume.

With this, the daily relative strength index has entered in to the neutral region from the bearish zone and weekly RSI is recovering from the ‘oversold’ territory. The moving average convergence and divergence is steadily rising towards the positive territory.

We are bulling on the stock from a short-term perspective. We anticipate the stock’s up move to prolong further until it hits our price target of Rs 51 in the approaching trading sessions. Traders with short-term perspective can buy the stock, while maintaining a stop-loss at Rs 42.

Source: TheHinduBusinessLine

Citi India staff face downsizing; severance offers made

‘Not a bad idea to opt for the package’.

Mumbai, Nov. 22 Some of Citi India’s employees have been sounded out on severance; this comes close on the heels of the parent bank recently announcing it would cut 52,000 jobs in the US over the next year on the back of mounting loan losses.

The bank’s Indian operations — with a staff strength of around 11,000 — would be downsizing too, said insiders. A senior Citi India official, who declined to be identified, said employees across senior, mid, and junior levels face retrenchment. “The severance package is not too bad. It may not be a bad idea to opt for it as the bank could face a takeover sooner or later,” the official said.

Across the group
Offers of a severance package have been made not only to staff from the bank, but also to employees in Citi’s capital markets arm and Citifinancial, the group’s non-banking subsidiary in India, he added.

Developments at the bank come in the wake of Mr Sanjay Nayar, former CEO for India and South Asia, Citibank, moving to Kohlberg, Kravis, Roberts & Co as its first chief executive officer and country head for India. Citigroup has appointed Mr Mark Robinson in Mr Nayar’s place.

A senior Citifinancial official said: “I have no information as yet about lay-offs. As far as business goes, we have restructured our operations by stopping small-ticket retail advances to customers in the Socio-Economic Categories B and C as we have faced a lot of defaults. We are now focussing only on extending big ticket advances to SEC A customers, who have the wherewithal to repay loans.”

The official pointed out that, as part of the cost-cutting exercise, some of Citifinancial’s unviable branches may be closed down. “Earlier, a customer could get a loan from us with minimum fuss. But with loan defaults rising, we have tightened the credit appraisal procedures. We now also have a fraud check mechanism in place. So, a customer now has to wait longer to get a loan from us,” he said.

Incidentally, Citigroup Inc, which reported a $5.1-billion loss in the first quarter of its accounting year, said in April 2008 that its Indian operations suffered higher credit costs (provisions against bad debt and write-offs) and increased recovery costs.

India driven
It said the Indian operations contributed to the decline in Citigroup’s net income from Asia. The group had also said that under its international consumer finance business, “the net loss of $99 million was mainly due to an increase in credit costs of 92 per cent, primarily driven by India, and a repositioning charge.”

In the financial year ended March 31, 2008, Citibank India reported a 100 per cent jump in its net profit to Rs 1,804 crore, against Rs 900 crore in the previous year.

Source: TheHinduBusinessLine

UTI Mahila Unit Scheme: Invest

UTI Mahila Unit Scheme is a good investment option for women investors looking for a debt-oriented fund as part of their core portfolio. The fund’s consistent performance across market cycles and superior return (in the debt category) over three- and five-year period builds a good investment case.

High debt allocation with a marginal exposure to equity that is capped at 30 per cent provides comfort for a conservative investor. The scheme is open for resident and as non-resident Indian women above 18 years.

Performance: The fund’s five-year performance chart sports a compounded annualised return of 14.2 per cent — topping the debt-oriented fund category. Over the same period, the fund outpaced the category average by 5 percentage points.

In the shorter time-frame of one year it has generated -8.7 per cent, 0.7 percentage points less than the category average. The securities held in the debt portfolio have a yield to maturity of 10.25 per cent, thus partially containing the loss during this period. On the equity front, exposure to pharma stocks has also mitigated declines in the portfolio.

The fund’s average maturity period of two years (as of October), however, appears short-term, what with clear signs of an impending decline in interest rates. The management has stated that the fund has been actively managing its debt portfolio on the back of softening interest rates. New securities could also have higher maturity periods to lock into the higher interest rates.

Portfolio Overview: The fund’s debt and cash component in the October portfolio accounted for 85 per cent of the assets, with the rest were invested in equity. A sizeable proportion of the assets were invested in triple-A rated company bonds and the balance between pass-through certificates (securitised debt) and government securities.

On the equity side, pharmaceuticals, capital goods and banks have been the preferred sectors for the last few months. The fund preferred a buy-and-hold strategy in equity and has not churned the portfolio much. Since the beginning of the correction, the majority of the equity holdings in the portfolio were retained without much change.

Fund facts: The fund was launched in March 2001.The fund is jointly managed by Mr Amandeep S.Chopra and Mr Deb Bhattacharya. Being debt-oriented, it charges an entry load of 1.5 per cent and exit load of 0.75 per cent if redeemed with a year from the date of allocation. The fund is also subject to short-term and long-term capital gains. The NAV per unit is Rs 29.5.

Source: TheHinduBusinessLine


Investors looking for a defensive play in the current market can buy the stock of National Thermal Power Corporation (NTPC), trading at Rs 150 (price earnings multiple of 13). The stock has managed the market storm relatively better than many others. Compared to a fall of 43 per cent in the broad market (Sensex), it is down by 18 per cent only since mid-August. The market’s attraction for NTPC stems from three main factors — the large demand-supply gap for power, the company’s efficient operating profile and its emerging integrated business model with entries into coal mining and power trading.

The power major’s plant load factor (PLF) of 87.5 per cent in the first half of this fiscal, though marginally lower than the same period last year, is still way ahead of the industry average. PLF, despite the addition of fresh capacity of 1,000 MW since the same period last year, was affected due to maintenance shutdowns at some of its stations and also fuel scarcity.

While the company has addressed the fuel problem by ordering imports of 8.6 million tonnes of coal, gas remains a cause for worry. The imbroglio over gas supply for its current and expanded capacity at its gas-based stations in Kawas and Gandhar is pulling down the overall PLF of NTPC. The company has now switched to naphtha following the fall in price of the liquid fuel, but that may be a temporary solution.

It is steadily moving ahead in its backward integration into coal mining, the fruits of which will begin to be visible over the next few years. Meanwhile, of the 22,430 MW planned to be added in the Eleventh Plan (2007-12), NTPC has commissioned 2,490 MW while 16,180 MW are in various stages of construction. The company may yet fall short of the target given that about 2,600 MW of gas-based capacity is included in it.

The capital expenditure programme continues to be on track with an estimated Rs 12,670 crore to be spent this fiscal followed by Rs 18,700 crore in 2009-10. The company recently raised Rs 1,000 crore through bonds from the market at average rates of about 11 per cent even in the current tight liquidity scenario. Weighted average cost of the company’s total borrowings, at 7.2 per cent, is still on the low side.

Profits have grown at 15 per cent compounded annually in the last five years. In the first half of this fiscal, the unadjusted profit has fallen by 10.67 per cent year-on-year but the adjusted profit shows a growth of 8.64 per cent. In the same period, revenues have grown by 13 per cent, mainly owing to capacity addition, leading to higher generation.

Source: TheHinduBusinessLine

Magnum Emerging Businesses: Switch

Investors can consider exiting Magnum Emerging Businesses (MEB) Fund. The fund has consistently underperformed its benchmark BSE 500 during rallies as well as downturns such as the present one. Its aggressive positioning in the mid- and small-cap category may not be the best of strategies in the current environment.

Historical performance also suggests that the fund has not adequately compensated investors for the high risks undertaken. On a year-to-date basis, the fund’s NAV declined by 69 per cent - 13 percentage points more than its benchmark.

Suitability: Apart from companies with domestic growth opportunities, MEB seeks to invest in companies that are at a nascent stage in terms of growth or those with an export orientation or with outsourcing opportunities and also globally competitive corporates.

The theme appears riddled with uncertainties in the current scenario for the following reasons:

One, with global economies under the grip of slowdown/recession, companies with export markets or outsourced businesses could face relatively tougher times.

Two, small/emerging companies with aggressive growth strategies are often the most hit during difficult macro-economic and business conditions. Investors, too, tend to walk over to more mature businesses that can handle shocks better and bounce back quickly.

Investors can consider exiting their holdings in the fund and enter diversified funds such as HSBC Equity or HDFC Top 200. Magnum Contra is another option for those who prefer to switch to a scheme within the same fund house.

Performance: MEB kicked off with a quick phase of out-performance in 2004 and a good part of 2005, but struggled later on to decisively beat its benchmark. The periods of out-performance have been short-lived and marginal. The fund witnessed one of its best quarters in September 2005, earning 40 per cent in three months.

However, the mid-cap meltdown in late 2005 and the ensuing broader correction in 2006 was the beginning of distressing times ahead.

The fund’s three-year compounded annual return at -14 per cent as against the benchmark return of -2 per cent, speaks of the significant underperformance.

The fund’s inconsistency is also reflected in its monthly rolling return, where it beat the benchmark less than 50 per cent of the times since inception in September 2008. The monthly returns also suggest that while the margin of underperformance has been wide, the out-performance, especially over the last three years, has occurred only by a thin margin (couple of percentage points).

With a high exposure to currently underperforming sectors such as construction, engineering and power equipment, the fund’s NAV took deep cuts from the correction that began in January 2008.

While a number of mid-cap funds too have suffered sharp losses, MEB has declined steeper than mid-cap funds such as HSBC Midcap or Kotak Midcap as a result of its sector bets.

The fund held about 25 per cent in industrial manufacturing sector and 20 per cent in construction and related sectors as of October 2008.

With only about 9 per cent in cash and debt and very little exposure to relatively market-neutral sectors/stocks, the fund is relatively less hedged in the current market.

Source: TheHinduBusinessLine

MindTree: Buy

Holistic offering of IT and R&D

Improving operating metrics

Expanding Indian presence

The relatively strong business positioning and reasonable valuations make MindTree one of the best-placed players among the mid-tier IT companies.

Investments with a one-two year perspective can be considered in the shares of MindTree, considering its relatively strong business positioning among mid-tier IT companies and reasonable valuations.

Given the current difficult macro-environment where clients tighten IT spends and demand more value for money, MindTree may be one of the best-placed players in the mid-tier segment to weather the crisis. The company’s focus on applications delivery to the key areas of operations of the various verticals that it operates in, lends confidence in the current difficult macro-environment.

At Rs 234, the stock trades at seven times its likely 2008-09 earnings. This is at a slight premium to mid-tier players such as Hexaware Technologies and KPIT Cummins.

But MindTree’s blended offering of IT and R&D services, better revenue visibility on a wider vertical-mix, and an increasing domestic presence, may justify this premium. MindTree resembles any of the top-tier IT players in terms of service offering, but operates on a smaller scale. This apart, improvements in several key operating metrics and opportunities in areas such as testing, after the Aztecsoft acquisition, are positives for the company over the long run.


MindTree offers both IT and R&D services, catering to a wide range of clientele. Traditional services such as application development and maintenance (ADM), package implementation, testing and the like are delivered to clients across four-five verticals. MindTree also works on product-realisation services with clients who produce storage and server systems, consumer appliances, communication systems and automotive systems.

This mix of IT-R&D services is around 80:20 in terms of revenue contributions to the company. Over the long run, R&D services have the potential to lead to IP-led revenues that are not linked to the manpower added and, therefore, may provide scope for margin expansion.

In terms of vertical-mix, MindTree is also favourably placed, given the current problems in the financial sector. Manufacturing contributes 27 per cent of the revenues, BFSI (26.4 per cent) and travel and transportation (20.4 per cent); clients are other important contributors. For instance, in the manufacturing segment, MindTree works in areas such as distribution planning and sales routing, business intelligence, and trade promotion data management to give feedback to product managers. In the BFSI, the company is quite selective in the way it operates.

ADM services contribute nearly 75 per cent of its revenues. Though these command lower billing rates, they are non-discretionary in nature.

Gains from acquisition

This means that IT-budget tightening of clients poses less of a threat to project flows. Together, these factors lend better revenue visibility over the medium term for the company.

MindTree has also looked to grow inorganically and has acquired a 79.9 per cent stake in Aztecsoft at an enterprise value of Rs 360 crore. MindTree is funding over 50 per cent of this deal through internal accruals.

Aztecsoft works with clients in niche areas such as transaction portals, intranet and extranet portals of enterprises, independent software vendors and mobile and wireless companies. It counts Microsoft and AOL as its clients.

Aztecsoft has enterprise software capabilities in these segments and has capabilities in key technology areas such as SaaS, Web 2.0 and cloud computing. MindTree’s R&D division together with Aztecsoft’s capabilities would now be able to address the entire value chain of product development business.

Aztecsoft has a strong independent testing service practice, which is slated to be a key growth area of outsourcing, according to Nasscom reports.

India Presence

HUL, ICICI Bank, ING Vysya and Titan Industries are some of MindTree’s major clients in India. Over the past year, MindTree has been pursuing deals in the government and Defence segments.

It has also participated in the e-governance initiative, with a large project for the Rajasthan Government for citizen services.

Other assignments include work done for the Chief of Army Staff and the Deputy Chief of Army Staff and a consulting assignment to manage the logistics of a war.

India contributes around five per cent of Mindtree’s overall revenues and the company hopes to enhance this. The company is eyeing more such deals and gain from government spends on IT enablement.

Improving operating metrics

Over the last few quarters, the company has enhanced several operating metrics to optimise costs and manage margins.

Utilisation, which was at 65 per cent levels, is now 70.5 per cent and MindTree hopes to increase this over the next year or so. In terms of revenue-mix, the offshore component is over 70 per cent.

This makes MindTree a player with one of the best mix among mid-tier IT players.

A better offshore component ensures better margins (but lower revenues) compared to onsite where revenues come at lower margins. Million dollar client additions are healthy.

Repeat business at 99 per cent is comparable to top-tier IT players and indicates that there is no significant reduction in engagement with existing clients.

Attrition has also come down significantly to 15 per cent from 16.3 per cent.


There is a possibility of clients coming back for price reductions for deals, which may hurt realisations.

With several large companies in the BFSI space filing for bankruptcy, and with automotive companies also facing the heat, the overall pie of newer deals may be reduced for MindTree.

Source: TheHinduBusinessLine

Welspun Gujarat Stahl Rohren: Buy

Robust volume sales

Strong order book

Reduced guidance on steel plate

Since spends on pipelines happen only in the last leg of the entire oil & gas capex, order flows from ongoing capex may last a while.

Fresh investments with a two-three year perspective can be made in the stock of leading steel pipe manufacturer Welspun Gujarat Stahl Rohren .

The stock price has corrected significantly in the last couple of months following concerns that the fall in crude prices may possibly scale down the capex by global oil and gas companies.

This may be true of the incremental or fresh capex of these companies but it is unlikely that the plunge in oil price may affect the ongoing capex. To that extent, the company’s order book of over Rs 9,500 crore, executable over the next year and half, provides comfort.

At the current market price of Rs 91, the stock trades at about five times its likely FY-09 per share earnings, leaving ample scope for appreciation in the coming years.

Investors, nevertheless, should consider accumulating this mid-cap stock in lots since it may be subject to heightened volatility in price.

Demand scenario

To say that the global demand for pipes would continue to remain buoyant despite the global economic slowdown would be an exaggeration, as spends by oil and gas companies on E&P (exploration and production) activities may slow down.

However, it is unlikely to affect the expansion already undertaken by oil and gas majors.

Spends on pipelines happen only in the last leg of the entire capex and, thus, order flows from ongoing capex, may last a while. This does away with concerns that there may be any significant slowdown in demand for pipes in the foreseeable future.

Besides, demand may also get a lift from the need to replace some of the existing pipe networks in the US. That over 60 per cent of the existing line pipe network (over 1.5 million miles) in the US is over 30 years old and would soon be due for replacement, also lends ‘replacement’ market potential.

Strong presence in the export market and established relationships with many global oil and gas majors (in the US as well) reflect well on Welspun’s ability to grow its revenues, albeit at a slower pace.

The company’s order book, pegged at about Rs 9,500 crore (2.4 times FY-08 revenues), reinforces its stable prospects.

For the quarter ended September 2008, the company registered a 60 per cent growth in sales. Pipe volumes remained robust, witnessing a 34 per cent increase, while realisations grew by 12 per cent.

But the high sales volumes in Q2 were partly due to the deferment of shipments from first quarter when the government had imposed export tax on steel pipes. Blended pipe realisations that were up 4 per cent on a year-on-year basis registered a fall of over 7 per cent sequentially.

Operating margins, owing to higher raw material cost declined by 6 percentage points to 10.5 per cent.

Profits however declined by over 21 per cent due to forex losses (on account of realignment of net foreign currency exposure and ECB) of over Rs 88 crore during the quarter. If not for the forex loss, the company’s performance was commendable.


The company’s steel plate facility, which was initially intended for both captive use and commercial purposes, however, may prove to be less of a money-spinner than expected.

After the recent fall in steel prices, which has made the commercial sale of steel plates less profitable, the management has reduced its plate production guidance to 340,000 tonnes (for this year) from 600,000 tonnes in the beginning of the year.

Instead, it plans to focus on using its plate facility for captive consumption and for upgrading it to manufacture pipes for critical applications such as the for the power sector.

While for now the company’s dependence on the US (45 per cent of its revenues) does not ring any alarm bell, given the possibility that the capex on pipeline network will continue, it may backfire if the US economy remains in recession for more than a couple of years.

In such a scenario, Welspun’s spiral pipe manufacturing facility (expected to be commissioned by Q3 FY-09) in the US may also prove counterproductive. The company may then need to increase its revenue share from countries in West Asia and South America and even India.

Till such time, trends in order inflows for the company over the next two-three quarters may bear a close watch.

Source: TheHinduBusinessLine

Indraprastha Gas: Buy

Monopoly status in CNG

Zero debt, a plus

Rising conversion rate of private vehicles and buses to CNG and a monopoly in the Delhi market assure steady volume growth

Not too many stocks have held their ground in the meltdown of the last three months. Indraprastha Gas Ltd. (IGL) is one of them. Compared to the 43 per cent erosion in the Sensex since mid-August, the IGL stock has shed just 7 per cent with a low of Rs 98 and a high of Rs 121.

Though FIIs hold about 20 per cent of IGL’s equity, the stock has managed to stay afloat only because there are little concerns over its earnings prospects. Indeed, the stock is seen as a defensive bet during bad times such as these as its revenues and earnings are not directly linked to the economy.

The downside from the current price of Rs 104 appears minimal. Traditionally, the IGL stock has not been a fast mover during an uptrend and, as such, it will be fair to expect an upside of 15-20 per cent in the next one year, which is a reasonable return in the prevailing market. The dividend yield of about 4 per cent on the stock is a plus.


IGL, which supplies compressed natural gas (CNG) for automobiles and piped natural gas (PNG) to homes and commercial units, is a monopoly in Delhi. Commercial vehicles in the National Capital Region are bound by law to use CNG as fuel. However, it is the private vehicles that are now driving IGL’s growth.

The number of CNG vehicles on Delhi roads rose 71 per cent to 1.21 lakh vehicles in 2007-08 with most of the increase coming from private vehicles and some from buses. CNG sales from its 163 stations accounts for 92 per cent of revenues with the rest coming from PNG.

The high prices of petrol and diesel are behind the rising conversion of private vehicles to CNG. There is a big benefit for vehicle owners even after accounting for costs of conversion, given the wide gulf between the prevailing prices of petrol/diesel and CNG.

IGL sells CNG at Rs 18.90 a kg while petrol costs Rs 50.62 a litre and diesel Rs 34.86 in Delhi. During the second quarter alone, about 15,000 cars and 300 buses were converted to CNG.

IGL has an allocation of 2.2 million standard cubic metres of gas a day (MMSCMD) from its parent Gail. Its average sales were 1.5 MMSCMD by end-March; given the increasing trend in conversion since, IGL must now be averaging about 1.7-1.8 MMSCMD of sales a day. There is still enough room in the allocated supply for IGL to expand its sales.

Growth drivers

IGL plans to build 50 more stations by 2010 in time for the Commonwealth Games which is expected to spur higher demand for CNG. The company is also planning to branch into adjoining territories such as Greater Noida, Ghaziabad and Panipat.

The company has jointly bid with a private player — Siti Energy — for marketing rights in Haryana. Approval from the regulator — Petroleum and Natural Gas Regulatory Board (PNGRB) — is awaited.

Meanwhile, a decision by the Delhi Government to stop registration of diesel-driven small cargo carriers is expected to benefit IGL. Combined with the rising conversion rate of private vehicles and buses, IGL appears to be well-placed in terms of volume growth. There is also tremendous scope in PNG where the penetration rate is estimated to be less than 1 per cent. Though it is a time-consuming process to network residential and commercial units, once done, the business can add significant incremental volumes for IGL.

Growth barriers

The two most formidable barriers that IGL could run into are access to gas and regulatory norms. The company will soon be using up its full allocation of gas. Though new gas from the KG Basin is expected to flow, the price may not be as low as the artificially set APM price that it now pays.

While ordinarily it should be able to pass on the higher price, it needs to also keep an eye on the price of competing fuels. This will be the case especially in the new markets that IGL intends to enter where there will not be any mandate, as in Delhi, for vehicles to use CNG only.

Second, there are regulatory uncertainties with the PNGRB and IGL yet to settle the question of licence for Delhi. While IGL claims that it was formed before the regulator came into existence and, hence, the latter’s norms are not applicable to it, the PNGRB insists that IGL has to secure a licence from it. Meanwhile, the regulator has set till 2010 for IGL’s Delhi monopoly status to end.

Zero-debt company

IGL is well-placed to raise funds for expansion, given its zero-debt status. The company plans to invest Rs 500 crore over the next two years in expanding its network in Delhi. Revenues and earnings have been growing steadily; in the latest quarter, revenues grew by 22 per cent to Rs 243 crore while earnings rose 17 per cent to Rs 50 crore.

Source: TheHinduBusinessLine

Long and short of capital gains tax

How is capital gains tax applied to bonus, rights offers, open offers and buybacks?And what do you do with capital losses? Here’s a ready reckoner.

As the old adage goes, ‘Nothing is certain but death and taxes’. If stock market investing has caught your fancy, here too, you cannot avoid the taxman. Whether you are busy making money or burning your fingers out in the markets, take time off to comprehend how tax laws treat the gains and losses on your investments.

Taxing language

‘Long’ and ‘short’ in the taxman’s parlance have quite a different meaning than when used in the stock market context. To understand how the gains or losses we make on our stocks are taxed, we first need to get a grip on the distinction between long term and short term, in the tax context.

Shares are considered short-term assets if held for not more than twelve months. If the holding period exceeds twelve months, it is a long-term capital asset. Knowing this difference is important because the method of calculation of capital gains and the applicable tax rates vary under the two circumstances.

A capital gain is the excess of consideration received on transfer, over the cost of acquisition and incidental expenses. As a thumb rule, remember that for the assessment year 2009-10 (FY 2008-09), a short-term capital gain (STCG) from the transfer of shares is taxable at a flat rate of 15 per cent (excluding any surcharge/cess); long-term capital gain (LTCG) is exempt from tax. But this applies only when the transaction takes place through a recognised stock exchange and Securities Transaction Tax (STT) is paid.

Buybacks and open offers

What if the above conditions are not satisfied? This may happen in such circumstances as the sale of shares through off-market deals, buyback of shares by companies, and open offers or sale of shares of private companies.

Choppy market conditions, such as those that prevailed over the past year, have prompted many companies to announce buybacks. These companies may have bought back their shares held with you directly instead of routing it through the stock exchange. In that case, the tax treatment for LTCG and STCG varies.

Let’s say Anuj holds 1,000 shares of a company, which he bought at Rs 50 per share in June 2008. The company offers to buy back the shares directly at Rs 65 in November 2008 and he accepts the offer. In this case, the difference of Rs 15,000 ( 1000*65 – 1000*50) will be treated as STCG in the hands of Anuj. Since this transaction was not routed through the stock exchange and Anuj did not pay STT, the gain will be added to Anuj’s normal income under ‘other’ heads and taxed at his applicable slab rates.

Had Anuj bought these shares in June 2005 instead of June 2008, the holding period would have crossed 12 months by November 2008. Here, the LTCG , unlike in the previous case, is taxable. Income-tax law gives him an option in the method of calculation of gains.

He can choose to pay a tax of 20 per cent after indexation of his acquisition cost or pay a tax of 10 per cent without indexation, based on whichever is beneficial to him. With indexation, his cost would be 50,000 * 582/497 = Rs 58,551. (Cost of acquisition * Cost Inflation Index of the year of transfer / Cost Inflation Index of the year of purchase).

So, the gains would be Rs 65,000 – Rs 58,551 = Rs 6,449. Tax at 20 per cent will be Rs 1,290. Without indexation, the tax will be 10 per cent of Rs 15,000 = Rs 1,500. In this case, by opting for indexing his cost of acquisition, he saves on taxes.

When the acquirer of a company makes an open offer to you as a shareholder, you may be transferring your shares through an investment banker and may not pay STT. In that case too, you may have to shell out short term and long term capital gains tax at different rates than what would be applied to transactions made through the exchange.

Bonus, rights issues

Ashok holds 500 shares of a company, which he bought at Rs 20 per share. Let’s assume he receives a 1:1 bonus from the company. Ashok now holds 1,000 shares altogether. Theoretically, his total cost of acquisition of Rs 10,000 (500 *20) is now spread over 1,000 shares @ Rs 10 per share.

However, according to tax laws, the cost of acquisition for bonus shares (although theoretically Rs 10 per share) is to be taken as ‘nil’ for the bonus shares. Cost of acquisition of the original lot will be the price at which he bought the shares initially.

Hence, in the sale of bonus shares, the entire consideration received will be taxed as STCG or as LTCG, as per the rules already discussed. To figure out whether the capital gains are short-term or long-term, the date of the receipt of the bonus is considered.

When transferring shares acquired through a rights issue, the cost of acquisition will be the amount actually paid to obtain the right. The holding period will be calculated from the date of allotment of the rights shares.

First in, first out

Say, you bought 100 shares of Maruti at Rs 725 in June 2008. When the stock price fell further, you bought another 50 shares at Rs 500 at end October 2008. Today, you sell 30 shares at Rs 480. What will be your cost of acquisition? Rs 725 or Rs 500? Enter FIFO — the first in, first out principle. Accordingly, these 30 shares will be considered sold from the lot that first entered your account — 100 shares @ Rs 725 per share.

FIFO also ensures that you do not have a choice with respect to selling your bonus shares first. When holding shares in dematerialised form, you cannot ‘choose’ to sell the bonus shares before your original lot.

When a sale happens after a bonus issue, the price of shares sold will be matched with your originally held lot to calculate capital gains; only then will the bonus lot (with nil acquired cost) be taken into account.

Well, with the kind of turbulence that the markets have witnessed for nearly a year now, many of us are looking not at the prospect of a capital gain, but at that of a loss. So what are your options?

Capital loss

Tax laws allow you greater leeway on short term losses, than on long term losses. If you have incurred a short-term capital loss, it can be set off against any STCG or LTCG.

If there is no STCG or LTCG in the current year, you can carry forward the loss for a period of eight assessment years immediately succeeding the current assessment year (2009-10), during which you have incurred the loss.

A long-term capital loss can be set off only against a LTCG or carried forward (for eight years).

If you have incurred a long-term loss on shares which, had it been a gain, would have been exempt from tax, then, this loss has to be ignored and can neither be set off nor carried forward. Otherwise, it can be set off or carried forward and set off against any taxable LTCG.

Another point to be noted here is that if you propose to carry forward loss under the head “ capital gains”, then you must file your return of income showing the loss within the due date for filing the return (July 31 for individuals). If you don’t, you will forfeit your right to carry it forward.

Source: TheHinduBusinessLine

Smart domestic investors see value in falling market: Bhave

‘No evidence of any market manipulation so far’.
New Delhi, Nov. 22 “If you think that Indian investors don’t have money or are running away from the market (capital market), think again”, said the SEBI Chairman, Mr C.B. Bhave, here on Saturday.

A broad brush analysis by SEBI based on the published data of the transactions put through between September 1 and November 14, when secondary markets were collapsing, revealed that retail and high net worth investors had net bought about 25 per cent of the value of stocks net sold by foreign institutional investors (FIIs) and domestic brokers during this period.

Between September 1 and November 14, FIIs net sold Rs 22,000-crore worth of stocks, followed by proprietary trades of domestic brokers who net sold to the tune of Rs 700 crore.

On the other hand, in the same period, mutual funds net bought Rs 1,000-crore value of stocks, domestic institutions net bought Rs 16,000 crore and domestic retail and high net worth investors cumulatively net bought stocks to the tune of about Rs 5,600 crore.

“There are some smart guys sitting out there who think that this market is giving me the valuation where I need to invest. We should probably look at data a little more carefully. Data gives a more nuanced picture,” Mr Bhave said at the Hindustan Times Leadership Summit here.

On the recent trends in the secondary market, Mr Bhave said that the evidence seems to be that leveraged FII investors were going out of the market. Institutional investors whose clients had leverage were also leaving the market.

“But long-term funds like pension funds and university endowments are investing in the market. Lot of leverage is going out and equity is going into the hands of people who have patience.”

Mr Bhave also said that SEBI has so far not come across any evidence of market manipulation. At the same time, Mr Bhave also advised retail investors that equity investments carry risk, they should not leverage themselves to invest in the market and also that they should not put all their savings in equity.

On whether investors had reason to be worried about their investments in fixed maturity plans (FMPs), Mr Bhave pointed out that mutual fund investments were subject to market risk. FMPs faced heavy withdrawals, prompting SEBI to ask the MFs to tell the regulator what the underlying assets were.

“Our examination revealed that 90 per cent of the assets that MFs bought were rated AAA or A1+. We have no evidence at present that MFs were in difficulty because their underlying investments were bad.”

He, however, noted that MFs had liquidity issue and that fortunately in November the liquidity seems to have reversed.

“MFs in all had to borrow Rs 22,000 crore out of the window made available by RBI. Now I know the borrowing has gone down to Rs 4,000 crore. This is a good sign.”

Source: TheHinduBusinessLine

Govt asks airlines to cut fares after fuel price fall

NEW DELHI (Reuters) - India's airlines should cut airfares after jet fuel prices eased, the union aviation minister said on Saturday.

Fares rose by almost half last year but should start coming down by the New Year, Praful Patel, whose ministry controls state-run carrier Air India, said at a conference.

Patel's call to cut prices follows a similar proposal by the union finance minister to real estate, airlines, hotels and auto firms earlier this week to help stimulate the economy.

Growth is slowing after an average expansion of 9 percent or more over the last three years

"Now with fuel prices on the downward ... you must match it with the perception that fares are coming down," Patel said.

The union government has asked state-run oil firms to revise jet fuel prices every 15 days and extend credit lines to airlines. The aviation ministry is also seeking to cut sales tax on jet fuel to 4 percent by the year-end.

Jet fuel, which accounts for about 45 percent of an India airlines cost, is among the most expensive in the world due to sales tax of up to 30 percent in some Indian states.

Record oil prices have pushed airlines to the brink, forcing them to raise fares to stay in business after the deepest global financial crisis in 80 years cut off other funding options.

But higher fares have also scared away passengers. Air traffic grew by only 2.3 percent between April and August compared to 38 percent a year earlier, government data showed.

Though oil prices have tumbled lately, airlines resisted cutting prices as total costs are still high and their combined loss in the year to March 2009 is expected to be close to $2 billion.

"I certainly would not like to close the company," said Naresh Goyal, the chairman of top domestic airline Jet Airway. "We would do anything the ministry wants us to do provided we are profitable."

GLOBAL MARKETS WEEKAHEAD - Wanted: catalysts for buying

LONDON (Reuters) - Many financial assets across the world are looking cheap after the market ructions of the past year but investors in general have yet to rediscover the impulse to buy.

The mood appears to be so negative that even the odd bit of good news is quickly shrugged off by market players.

Consider, for example, last week's decision by Saudi Prince Alwaleed bin Talal to increase his stake in battered Citigroup because the bank's shares were "dramatically undervalued".

A statement of confidence from a major investor? Definitely. Yet shares in Citigroup closed down 26 percent on that day.

With global stocks as measured by the MSCI index having halved in price over the past 12 months, many investors are looking for a catalyst to bring them back into the market.

This is proving highly elusive, given the drumbeat of bad economic news and the still wobbly financial system.

Around 250 economists across Group of Seven nations told Reuters in a poll last week that they expected major economies to be in recession for as long as five quarters.

The Federal Reserve said the U.S. economy would contract until at least mid-2009.

And the number of major layoffs announced across the world since September has now risen to at least 261,000 jobs -- hardly conducive to a quick turnaround in consumer confidence.

The Organisation for Economic Co-operation and Development will give its latest view of the state of the world economy on Tuesday.

What many investors may need before they re-engage with riskier markets again is to see the trough of the investment cycle.

The problem is, that is not always known until well after it has been reached. Indeed, the bottom may already be here.

"We are in the process of bottoming, but it is a process not a single event," said Michael O'Sullivan, director of global asset allocation at Credit Suisse's private bank. "We are likely to do that for the next month or so."

O'Sullivan reckons investors will want to see a lot of things take place before a new investment cycle kicks off, including continued improvements in credit markets, a pickup in consumer confidence, an end to the U.S. housing slide and the VIX index below 50.

The latter, sometimes called the fear gauge, can be seen as a measurement of expected stock market volatility. It is currently trading around 80.


Perhaps reflecting this idea of markets bottoming, investors enter this week with a few ever-so-slight signs of improvement in sentiment.

Last week, for example, State Street's global investor confidence index hit a record low, but the November decline was small compared with a tumble in October. North American investor confidence levelled off almost completely.

Within a very gloomy Merrill Lynch fund manager survey, meanwhile, was a finding that fund managers had moved less underweight stocks than a month earlier -- that is, they were still negative about them, but less so than before.

They were also less positive about bonds and cash, both of which are key defensive plays.

In currencies, meanwhile, more respondents to the Merrill poll said the Japanese yen was overvalued than said it was undervalued for the first time since the current poll was launched about 7-1/2 years ago. Yen strength has been a key indicator of global risk aversion.

If there is a trend in this, it may become clearer on Thursday when Reuters releases its global asset allocation polls for November. Last month's polls -- which survey institutional investors in the United States, Britain, continental Europe and Japan -- showed record low exposure to stocks and a high for cash.

All this may be small beer, however. State Street reckons the real turning point for markets will not come until it sees its institutional investor clients turn back into buyers.

Flows suggest they are not yet doing so, it says.


This week's focus is likely to be on banks, oil and earnings.

Citigroup's troubles have come just when investors had begun to think that the worst of the financial side of the crisis was over -- albeit to be replaced by a global recession.

The bank has begun talks with the U.S. government as its plummeting share price raises doubts about its ability to survive, a person familiar with the matter said last week.

As for oil, its price has returned to the headlines because of its steep fall as deteriorating economies drain global demand. The price of crude dipped below $50 a barrel last week, marking a rough 65 percent decline since July.

This has combined with other price weakness to lead some investors and policy makers to see another problem heading their way -- deflation.

On the corporate front, third-quarter earnings remain mixed, with Thomson Reuters data showing more than half of European company reports so far coming in under expectations.

But with gloom can come opportunity. Societe Generale analyst James Montier, a well-known bear, reckons value is growing on many stock markets.

Looking at such measures as dividend yield to corporate debt yield, he finds that more than 10 percent of European, Japanese and British large cap stocks are a good deal.

DISCLAIMER: The author is not a registered stockbroker nor a registered advisor and does not give investment advice. His comments are an expression of opinion only and should not be construed in any manner whatsoever as recommendations to buy or sell a stock, option, future, bond, commodity, index or any other financial instrument at any time. While he believes his statements to be true, they always depend on the reliability of his own credible sources. The author recommends that you consult with a qualified investment advisor, one licensed by appropriate regulatory agencies in your legal jurisdiction, before making any investment decisions, and that you confirm the facts on your own before making important investment commitments.