|»5 Minute Wrap Up by Equitymaster|
On This Day - 2 FEBRUARY 2010
They've got it wrong again! You shouldn't.
In this issue:
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A double dip depression in the US. A bubble economy in China. Yet, India is said to be one of the fastest growing economies of the world. Don't you want to learn more about investing opportunities in India? Know what 2010 holds in store for you as an investor? What are solid investment opportunities? How much should you invest in gold? In real estate?
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As against what the newspapers and business channels would like you to believe, bonus shares have never and will never increase the value of a stock. It only increases the stock's liquidity. The adjustment of the stock price to the bonus issue gives it the perception of becoming 'cheaper'. What investors fail to realize is that they are buying into diluted equity and thus are entitled to a lower EPS. More importantly, it does not change the fundamentals of the company. The net worth and margins are indifferent to the stock's liquidity. Also, more number of shares does not mean more dividend as there is a proportionate fall in dividend per share as well.
Promoters of small and midcap companies that have been acclaimed by the media for offering "free" shares to the minority shareholders have all the more reason to smile. For they are able to push up the share price without any fundamental reason. Really, they would be better off creating some serious long term value for their shareholders rather than resorting to bonus issues. We do not think that bonus issue is a bad thing in itself. But you as an investor need to make sure that you buy into a business because it can ensure healthy returns. Not because it can divide the shares you already own!
Data source: RBI
There are 27 of them, but only few have scaled up to the size and profitability necessary to attract investor attention. Nonetheless, as today's chart shows, Indian PSU banks have in recent years enhanced their appetite for equity capital. Infact over the past few years, they have outdone their private sector peers in terms of capital raised per issue. With the UPA government's disinvestment drive, several PSU banks have lined up their offerings in 2010 as well. While their competitiveness to the private sector in seeking better growth avenue is appreciated, we hope the PSU banks can match their private sector peers in terms of return on capital as well.
Global ratings agency Moody's has already sounded the warning bell. It predicts that more than US$ 800 bn worth of debt is likely to come up for refinancing over the next few years. And if the economy as well as bank lending remains weak, default rates on this debt would increase precipitously. Clearly, just when the US tries to kill one cockroach of bad lending, there emerges another.
He writes - "...in no sense would these capital market institutions be deemed 'too big to fail'. What they would be free to do is to innovate, to trade, to speculate, to manage private pools of capital - and as ordinary businesses in a capitalist economy, to fail."
The essence of Volcker's article is that regulators need to face up to the needed structural changes, and place them into law. "To do less will simply mean ultimate failure - failure to accept responsibility for learning from the lessons of the past and anticipating the needs of the future," he warns. These are indeed some wise thoughts in unwise times!
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