»5 Minute Wrap Up by Equitymaster

On This Day - 23 FEBRUARY 2011
And the worst performing IPOs are...

In this issue:
» Hunger pangs for the poor Indians continue
» Common man's expectations from Budget 2011
» Indians' appetite for luxury cars on the rise
» 'Jobless youth' is a big problem
» ...and more!

-------------------------------------------- Free Guide --------------------------------------------
The Definitive Guide To Financial Planning
Claim Your FREE Copy Now! Click here!.
---------------------------------------------------------------------------------------------

00:00
 
Year 2010 would be a memorable one in the years to come. A year that marked the revival in global economy. A year that saw gold touch new highs. A year that saw a surge in silver prices. Closer home, India would remember it for the number of scams that were unraveled. But it was also a year that saw a huge flurry of IPOs by Indian companies. There were a whopping 73 companies that came up with their initial or follow-on public offerings during the year.

Interestingly, not too many of these offers are doing well on the bourses. In fact, almost 72% of these offerings are trading way below their offer prices. But the worst performing IPOs were actually those that were backed by the private equity (PE) funds. As per a study conducted by a leading daily, 80% of the PE backed IPOs are trading below their offer price. One of the biggest reasons behind this that most of these firms were looking to make killer gains on their own investments. And the buoyant stock markets provided them with the perfect opportunity to do so.

As a result, most of the PE backed IPOs priced at ridiculously high valuations. And since they were marketed so well by the companies' promoters and other brokers, investors just lapped up the shares that were offered. But eventually the prices of these offerings corrected to reflect the company's fundamental strength in most cases. Therefore, while the PE firms made a 'killing', the investors got stuck with stock losses.

This brings us back to the main issue of valuations. It is the most important thing to look at while investing in a company. Even if the company is fundamentally sound has an excellent track record, fantastic growth prospects and an honest management, still it has to be available at cheap valuations to invest in. Unless the valuations are compelling, one should stay away from the best of stocks. Only then can one maximize his return on investment.

Do you consider valuations to be most important while making an investment decision? Share your comments with us or post your views on our Facebook page.

01:30
 Chart of the day
 
300 m. That's the population of the US, and slightly less than the combined population of Brazil and Russia. In India, 300 m is the number of people haunted by hunger each day! We shamefully stand at the 67th position on the Global Hunger Index. Now that's an alarming situation, even worse than that faced by certain countries in the relatively poor African continent.

Data source: International Food Policy Research Institute

India's poor standing on the hunger front is despite the strong GDP growth rates clocked by the economy over the past few years. The situation is just going to get alarming as food prices continue to rise! Imagine the social unrest if nothing is done to alleviate the hunger of millions of Indians over the next few years.

02:20
 
We have already compiled the pre-Budget expectations for various sectors of our economy. Now, what does the common man expect from this year's Union Budget? Before we discuss that, let us ask ourselves one question. Which is the main concern plaguing us all? We all know it. It is inflation, inflation and inflation! So what are some measures that could give some relief to everyone's pockets? Here are a couple of things that a common man wants in this year's Budget.

Firstly, the tax slabs should be brought in line with the slabs proposed under the Direct Tax Code (DTC). The basic exemption limit should be raised from Rs 160,000 to Rs 200,000. For women and senior citizens, the limit should be raised to Rs 250,000 and Rs 300,000 respectively.

On a similar note, exemption limits for various allowances should be raised. The exemption limits were last revised in 1997. During the period between 1997 and 2011, the overall prices levels have shot up multifold. Hence, the exemption limits need to be brought in line with the market reality.

Also, individuals can currently claim deductions for specified investments only up to Rs 100,000. This should be further raised to Rs 200,000. This will have dual benefits. One, the common man will have a lesser tax burden. Two, it will give a great incentive to make investments which can then be meaningfully channelized to boost the economy.

03:25
 
The word Rolls-Royce immediately brings to mind images of luxury and grandeur. Clearly, if one wants to signal his arrival, there are very few statements that can better that of owning the super luxury premium automobile.

Thus, we sit up and take notice when the company's CEO tells us that India has become the second fastest market for Rolls-Royce in Asia. This further reinforces the fact that India has certainly arrived, isn't it? We believe there is a small problem here. Sales of ultra premium cars like Rolls-Royce are booming all right but how would you reconcile this with the fact that overall car and two-wheeler penetration in India is lower than even other developing nations. Thus, is this trend of rapid growth of high end car sales a sign of India's arrival or the growing divide between the rich and poor in India? Sadly, the answer is not easy to find. This is because rapid economic growth makes it difficult to pin point whether all of the society is actually getting rich or only a few minority at the expense of the majority. The trend in vehicle sales does give an idea of the lopsided economic development. Thus, till such time as overall penetration in India improves, there is no point in rejoicing at the fact that Rolls-Royce is warming up to India.

03:55
 
India in recent times has been attracting a lot of interest, one reason being its strong GDP growth. But the other thing that has caught the fancy of many is the country's strong demographic dividend. This essentially means that the country has a large number of working youth who will go a long way in enhancing the economic growth in the years ahead. In fact, according to the US census bureau, in 2011, India's working-age population will be 64.9% and is expected to peak at 67.5% in 2031. But is having a large number of working population simply enough for the economic health of India? Not really. What needs to be determined is how educated this youth is. More importantly, do they have the right skills that will match the expectations of the market and the industry? Education by itself has no meaning unless it has relevance and is applied in any workplace. In that aspect, India may not necessarily deliver. The services and manufacturing industries may not be able to absorb the huge bulge in India's young working population. This means that investments will have to be made in agriculture and agro-processing facilities and vocational training in these skills. Otherwise, India's uneducated youth could turn out to be a dangerous liability.

04:35
 
In the meanwhile, the Indian markets are trading in a narrow trajectory. India's benchmark index, the BSE Sensex was trading higher by about 5 points at the time of writing this. Stocks from automobile and energy sectors are the main gainers. However, IT stocks are witnessing the onslaught of the bears. Oil and gas was trading firm. The Asian Indices were trading weak with Hong Kong and Japan both in the negative territory. The European markets seem to have opened lower on account of weak sentiments.

04:55
 Todays investing mantra
"Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it." - Warren Buffett

Copyright © Equitymaster Agora Research Private Limited. All rights reserved.

Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement

Disclosure & Disclaimer: Equitymaster Agora Research Private Limited (Research Analyst) bearing Registration No. INH000000537 (hereinafter referred as 'Equitymaster') is an independent equity research Company. The Author does not hold any shares in the company/ies discussed in this document. Equitymaster may hold shares in the company/ies discussed in this document under any of its other services.

This document is confidential and is supplied to you for information purposes only. It should not (directly or indirectly) be reproduced, further distributed to any person or published, in whole or in part, for any purpose whatsoever, without the consent of Equitymaster.

This document is not directed to, or intended for display, downloading, printing, reproducing or for distribution to or use by, any person or entity, who is a citizen or resident or located in any locality, state, country or other jurisdiction, where such distribution, publication, reproduction, availability or use would be contrary to law or regulation or what would subject Equitymaster or its affiliates to any registration or licensing requirement within such jurisdiction. If this document is sent or has reached any individual in such country, especially, USA, Canada or the European Union countries, the same may be ignored.

This document does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Our research recommendations are general in nature and available electronically to all kind of subscribers irrespective of subscribers' investment objectives and financial situation/risk profile. Before acting on any recommendation in this document, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek professional advice. The price and value of the securities referred to in this material and the income from them may go down as well as up, and subscribers may realize losses on any investments. Past performance is not a guide for future performance, future returns are not guaranteed and a loss of original capital may occur. Information herein is believed to be reliable but Equitymaster and its affiliates do not warrant its completeness or accuracy. The views/opinions expressed are our current opinions as of the date appearing in the material and may be subject to change from time to time without notice. This document should not be construed as an offer to sell or solicitation of an offer to buy any security or asset in any jurisdiction. Equitymaster and its affiliates, its directors, analyst and employees will not be responsible for any loss or liability incurred to any person as a consequence of his or any other person on his behalf taking any decisions based on this document.

As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

Equitymaster Agora Research Private Limited (Research Analyst) 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407