View Point
Are P/E Ratios Relevant?
Yamal Vyas
UPSIDE FACTORED
The improvement in stock
prices on such a large
scale means that the
upside in earnings for
the next few quarters has
already been factored.
LIQUIDITY MATTERS
Going by the liquidity,
There seems to be good
amount of steam left in
the market. As in the short
term it is liquidity which
really matters.
8 Dalal Street Investment Journal
While it is liquidity that determines the force of the
markets, P/E is just one among the many market
indicators that provides broad guidelines as to where the
market is headed
T
he manner in which the market
has been moving up has raised
some questions in the minds
of retail as well as institutional inves-
tors. The smart run-up in the first half
of FY 2010 has been historic. I have
never seen any half-year so bullish on a
continuous and sustained basis. We
shall not go into the figure, but the
broad facts are enough. The Sensex
and Nifty have more than doubled
from their March 9 lows, and also from
the March end levels. And that is not
all. Almost every portfolio must be
having at least a few stocks which have
quadrupled or more.
So obviously this is time for intro-
spection and for pausing to review the
situation in the market. The most com-
mon and popular ratio that is used in
such a situation is the Price Earnings (P/
E) ratio. This has gone up significantly
to more than 19 for the Nifty and Sensex
if we take the FY10 estimates. All time
high P/E s for these indices have been
around 23, and so one line of argument
says that there is still about 20 per cent
upside left before the market becomes
overheated. In terms of Nifty and Sensex,
this would mean levels of 6,000+ and
21,000. This sounds logical, but there is
another school of thought too.
The improvement in stock prices on
such a large scale without any significant
correction also means that the upside in
earnings for the next few quarters has
already been factored in the current
prices. This always happens in a bullish
market, as optimism and exuberance
have a tendency to go out of control
beyond a point. In that case, the funda-
mentals of the economy and corporate
sector do appear stretched at the current
prices. The current prices indicate that
the market expects the Nifty companies
to show a more than 20 per cent rise in
earnings in the current year. And even
that seems to be included in the current
(The writer is the founder of indiainvestment.com)
Oct 12 - 25, 2009
price. So what is the logic behind inves-
tor optimism even at these prices?
For one, the liquidity in the system is
very high. In fact, it is so high that the
success of three mega IPOs and the sub-
dued performance of two – which means
that the retail investors have had little
chance of exit - have not deterred the
retail investors who are imparting good
liquidity in the secondary market even
now. And the foreign and local institu-
tions are also flush with funds to invest in
the market. So we once again come back
to the question as to what is the prime
driving force behind the present boom
- fundamentals or liquidity or both?
In my view it is only liquidity which is
driving the market today. Fundamentals
do matter in the market and in the long
run only fundamentals prevail as we
have seen time and again. And yet the
real boom always comes about when
there is high liquidity in the market. We
have seen this earlier in 1992 (Harshad
Mehta), 2000 (Ketan Parekh) and 2007
( FIIs). This time around too the FIIs
are investing heavily in the Indian mar-
ket and the retail investors are just join-
ing the party. There seems to be good
amount of steam left in the market if
one goes by liquidity only. And one can
do that because in the short term it is
liquidity which really matters.
So we are face to face with the ques-
tion: Are P/E ratios relevant for the
market? Well, in my view, P/E is just
one among the many market indica-
tors which provide broad guidelines
as to where the market is headed, but
unless the P/E ratios reach unusually
high or low levels of say 8-9 or 23-24,
they do not provide any guidance about
share price movements in the medium
term. To put it in other words, extreme
P/E levels indicate that the market
will change direction. Period. I do not
think P/E has any other importance for
retail investors. DS
www.DSIJ.in

to have several things that we can
offer to the world, especially at a time
now when consumers, cutting across
their status in the global economy, are
seeking value in their spending. For
example, the predicted trend in the
global automobile sector is for con-
sumers to move on to smaller and
better fuel-economy providing vehicles
for which India is fast developing into
a major production hub, thanks to the
domestic demand that has nurtured this
sector on a constant growth path along
with our human skill sets, liberalising
trade trends, and a growing auto
component sector.
As consumers cutting across econo-
mies and their status are looking for
such cars, it is manufacturers (mostly
international brands) who, having set
their foot strongly in India, are aiming
to make the country’s production base
their global hub to meet such demand.
If we dig into the core of this success
story, it is the well-organised and better
trained labour force possessing quality
skill sets, along with strong labour laws,
which has supported this growth story.
Compared with the Chinese scenario,
what is to India’s advantage is the dif-
ference in the quality of skill sets and
the strong labour laws that had started
attracting the shift of some of the pro-
duction bases into India.
We can see that all those items of
exports that had picked up following
liberalisation have had a strong domes-
tic demand base leaving them nothing
to worry about except the compromise
they have to make on the value proposi-
tion that their exports would otherwise
have fetched. It is also a lesson for other
exporters that it will not remain a viable
proposition to set up 100 per cent
export-oriented industries. Also, it is
time for our trade policy, which focuses
on 100 per cent EOUs, to be tweaked
to help them tide over such crises giving
them some leg room in the domestic
market or make it mandatory to receive
the concessions therein to make invest-
ments in such units safer.
Being a nation of 1 billion-plus pop-
ulation, what we have as the strength to
take the economy sustainably forward
is our strong labour force. What would
help them keep stronger and take the
economy on a sustainable growth path
is development of the social infrastruc-
www.DSIJ.in
ture - education and health being its
two key sectors. On the education front
what is needed is appropriate orienta-
tion of labour force towards the needs
of the industry and services’ sectors, tak-
ing into account the constant changes
in the environment to help them bet-
ter adapt to it. While a strong base is
provided up to the secondary education
stage, at a higher level, specialisation
and exposure to exact environments are
those which are not much prevalent in
the form of technical education, though
the management education industry has
been quick to catch up on the best prac-
tices prevalent in the western countries.
Other sectors of education at a higher
level were also missing that orientation,
probably being not exposed to the inno-
vative ways it is done in the developed
countries. Pending reforms in the edu-
cation sector and passage of the Bill will
put the sector into proper perspective so
that the social sector can catch up with
globalisation based out of the country
itself rather than leading to extensive
migration which deprives the economy
of intellectual property. Secondly, the
health sector will have to be reoriented
looking into the western models such as
making family health coverage manda-
tory for workers. This will service the
health needs of the middle and high-
income groups of population in terms
of serious ailments from creeping into
their work performance.
The public health delivery model
adopted at the state level will have
to be improved towards better perfor-
mance and infrastructure to help the
[ ECONOMY ]
low-income group who otherwise can-
not access the private health delivery
system. A flexible policy and a competi-
tive compensation package for medi-
cal practitioners, along with improved
equipment and infrastructure for
focused delivery to the low-income sec-
tor to identified beneficiaries through
the proposed innovative national smart
card scheme, will help serve the objec-
tive. After better education is provided
and health is taken care of, employees
come to the market better protected by
the law. However, the same law should
not be a hindrance to employers in
generating better competition in the
labour market, which is necessary for
them to remain competitive in the glo-
balised scenario.
While it has to be partially achieved
within the corporate sector through
effective internally streamlined process-
es of performance management and
role rotation, externally labour market
reforms will help make wages and sala-
ries competitive. Having lagged in our
development process and averted the
financial crisis (not caught up much
with financial innovation that happened
in the developed economies), the cur-
rent efforts of the government to focus
on the hard and soft infrastructure sec-
tor are a noteworthy approach to take
the economy to the targeted 7 per
cent growth path this year. However,
reforms will have to be implemented
and monitored regularly for progress to
sustain the growth path banking upon
the people’s power that we fundamen-
tally possess. DS
Oct 12 - 25, 2009 Dalal Street Investment Journal 15
 Special Report

Real Estate Investment Trusts (REITs)

A New Investment
Avenue
REITs are a convenient investment vehicle for
retail investors with limited resources to take
advantage of appreciation in the real estate
market without having to invest directly in real
estate, says Paresh Lad

I
n the last 4-5 years many Tier-I
cities in India have witnessed a
huge boom in the prices of real
estate and now even Tier-II cities are in
the race. There is an investment vehicle
which uses real estate as a tool to gen-
erate decent returns for the investors
called as Real Estate Investment Trusts
or REITs. Real Estate Investment Trust
is a collective investment vehicle which
helps the investors to invest their
money in real estate asset class. REIT
carries out its functions through a real
estate investment management com-
pany (REIMC) which can be either
a privately held company or a public
one whose shares are traded on a stock
exchange.
History of REITs
The REITs find their origin in the
US way back in the 1960s when the
US Congress created the REIT. Today,
the US has the largest REIT market
which however is facing a tough time
since last couple of years more so
because of the sub-prime crisis which
left the mortgage markets all over the
world in the doldrums. Thereafter,
REITs spread their wings in Singapore
as well as in Japan. They also gained
popularity in Canada, where they were
introduced in 1993.
How a REIT functions:
The real estate is an asset class which
includes, land, building and any other
structure built on the land. For an
individual investor, it’s very difficult
to invest in real estate assets as the
prices are too high and a long gestation
period is involved. Even if you take an
example of “ready to move in” proper-
ties, as the prices are too high, very few
people can actually afford to think of it
as an “investment option”. Here comes
into play the REIT.
A real estate investment manage-
ment company (REIMC) pools the
money from investors and in turn
invests such money in real estate prop-
erties. This is just like the many mutual
funds in the market which invests
the money of common investors in
equities. Various investment options
available with a REIT are commercial
establishments, shopping malls, large
residential projects, hotels etc. The
income generated out of investments
made in these real estate assets is dis-
tributed in the form of dividends to the
REITs investors.
In case of REITs whose shares are
listed on a stock exchange, the inves-
tors enjoys the benefit of easy and
quick liquidity as they can sell the
shares of the REIT as and when they
want and thus their capital is not
blocked unnecessarily for a long period
of time.
Graphical presentation:
Salient features:
Real estate per se is a costly asset
class and hence it’s difficult for a com-
mon investor to invest in it and gen-
erate returns. This is made possible
by REIT. REIT provides diversifica-
tion benefit within real estate as well
so that investors are not exposed to

18 Dalal Street Investment Journal Oct 12 - 25, 2009 www.DSIJ.in


ended funds. In addition to this he is
heading 13 overseas offices of FT.
More You Travel More You Invest
When we started this column
our perception was that the great-
est investment gurus of all time may
have their own principles of investing
based on fundamental analysis of the
information available in the public
domain published in black and white.
However, after having discussed the
strategies of three gurus we can say
that our perception was not fully cor-
rect. All these gurus have had their
own beliefs and disbeliefs which may
be in contrast to each other but are
successful. The same is the case with
Dr Mobius, whose guru mantra for
investment was travel. Sounds odd but
it is true.
Dr Mobius spends around 300 days
annually shuttling from one location
to another just to get first-hand infor-
mation about the investment climate
of the country and the political situa-
tion. After this he makes an assessment
of the factors and decides his future
course of action. After spending 30
years in Asia and 40 years in the indus-
try, this practice has certainly paid rich
dividends. That’s one reason why Asia
Money Magazine in 2006 incarnated
him as one of the 100 most powerful
and influential people. Besides, the
Carson Group chose him as one of the
top ten money managers of the 20th
century. He has numerous other acco-
lades under his belt which makes him
one of the most powerful investment
managers of all times.
All About Trust
If you don’t trust the Indian stock
market and its growth story, learn
from Dr Mobius who thinks that
emerging markets are the best place
to invest. In respect to Asian markets
he once quoted that it is a “once in a
generation bargains”. Even after the
south Asian crisis he moved back to
Thailand, Malaysia and Hong Kong
- a move that paid off magnificently
in the last decade. At that time he was
of the opinion that in emerging mar-
kets opportunities are there and these
opportunities are amazing and incred-
ible as also beyond anyone’s reckon-
ing. But his principle was straight and
www.DSIJ.in
[ GURU MANTRA ]
simple: Invest for at least five years on the Asian markets and was recent-
ly quoted saying that the bull rally
Success Has Its Own Failure has already started in many Asian
A long-term investment principle countries. As far as Indian, Russia
has its own perils. As Dr Mobius and Chinese markets are concerned,
always insists on long-term investment, though he is not very keen in investing
during the decade of the Nineties his in these traditional emerging markets,
emerging market investing accumu- yet he is confident that the booming
lated a lot of fan following among commodity prices wouldn’t be ham-
the investors and AUM in his funds pered in their growth. In 2008, he was
swelled manifold. Having a good sum of the opinion that countries cannot
in his kitty, he has always invested subsidize prices and so price rise is
All Asian countries borrowed
heavily in US dollars and when
their local currencies fell, they
could not pay back the loans.
Central banks and governments
have certainly learned their
lessons
DR MARK MOBIUS, In Investors Chronicle
in blue-chip companies of Asia, an inevitable which proved true in that
example being HSBC Holding. Due year. As far as growth is concerned he
to this inclination his funds usually predicted that due to the slowdown
ignored the hidden values in small and growth will be moderate but wouldn’t
mid-cap stocks. This practice of Dr go into reverse direction, which was
Mobius greatly affected the chances again proved correct.
of Templeton’s offshore China’s funds, As far as his understanding of Asian
which lost 25 per cent in 1994, the markets goes he is quite confident
year in which the Asian flu hit Asia. about the appetite of these markets.
In the same way many critics have Due to this he is not at all concerned
questioned his aggressive bottom-up about the risk of capital flight. He is of
approach in the debacle of FT funds the view that though fund redemption
during the South Asian crisis and it is a risk and FIIs’ selling is putting pres-
was touted that Dr Mobius had lost sure on these markets, the local mar-
his touch. What was interesting is that kets are deep enough to take the strain.
he opened offshore Thai fund just He has clearly pointed out in many of
12 days before the devaluation of the his interviews that cheap money has its
currency which triggered a financial own perils but Asian countries learnt
crisis in the region. At the end of the their lessons 10 years ago so that they
fiscal 1997-98, this fund was at 53 per now know how to tackle this kind
cent. On the other hand, his India and of capital influx. “All these countries
Japanese offshore funds lost 27 per borrowed heavily in US dollars and
cent and the Korean fund fell 67 per when their local currencies fell, they
cent during the six months. could not pay back the loans,” he says.
“Central banks and governments have
Being Bullish On Asian Markets certainly learned their lessons,” is what
Dr Mobius is again very bullish he said to Investors Chronicle. DS
Oct 12 - 25, 2009 Dalal Street Investment Journal 21
 Special Feature: Infra
investors (both equity and debt). To
spur increased investor participatation
in India’s roads sector, the minister has
indicated that he is in favour of reforms,
such as revisiting the exit clause of
the project. The government is looking
at various innovative financing instru-
ments to fund road projects and attract
both domestic and foreign investors. It is
also planning to involve pension funds,
sovereign wealth funds, equity funds,
besides other available investment chan-
nels like banks for the purpose. Chanda
Kochhar, Managing Director and Chief
Executive Officer, ICICI Bank, says,
“The investment period in road projects
is long. So there is a need for innovative
financing which will cover both equity
and debt markets.”
Opportunities Galore
The government’s ambitious
plan for the roads sector has already
got the sectoral players like L&T,
Soma, Nagarjuna, JMC Projects,
Unity, Supreme Infrastructure,
Gammon Infrastructure, Afcons, DS
Constructions, Reliance, and IRB
excited. Says A M Naik, CMD, L&T,
“There has been a very visible change
in the roads sector in the last couple
of years but now with the govern-
ment linking economic growth with
the development of the roads sector the
pace of work will accelerate. The vari-
ous sectoral players will stand to ben-
efit.” With an eye on the main chance
Reliance Infrastructure (R-Infra), for
instance, plans to grow its roads port-
folio five times to Rs 220 billion by
2012 from the Rs 46 billion currently.
Problem Areas
Funds may not be a major issue but
land acquisition continues to be the
major ogre. A study of projects cutting
across sectors such as railways, roads
and power has revealed that the main
obstacle is difficulty in acquiring land.
The responsibility for acquiring land
is vested with the National Highway
Authority of India under the federal
roads ministry. The current practice is
for the centre to approach state gov-
ernments to identify land parcels and
negotiates the purchase price with the
owners, who are usually far flung rural
land owners. Unfortunately unclear
land titles, absent or incomplete rev-
enue records in villages and the frag-
24 Dalal Street Investment Journal Oct 12 - 25, 2009
mented nature of rural land holdings
have complicated the sale process with
a large number of families having to be
compensated for their land.
The Centre which has sought
increased spending on infrastructure
projects in a bid to counter the slow-
down found that up to 70 per cent of
190 projects were stalled on account
of land issues. The projects viability
has suffered thanks to the rising costs
thus forcing to embark on a mission to
identify the delayed projects and expe-
dite their completion in association
with the state governments. According
to the survey Bihar tops the list of
states with delayed highway projects.
The government is yet to pay compen-
sation for land acquired for eight proj-
ects. The problem is also seen in Uttar
Pradesh for the last four years where
the NHAI has been unable to obtain
land for projects because the state gov-
ernment has stipulated development of
a 10m-wide strip of plantation along
either side of the roads if it involves
felling of existing trees. The cap on
bids and limiting of players resorting to
JVs from the bidding process and short
supply of contractors also led to a slow-
ing down of the roads programme.
The Solutions
The National Highways Authority
of India (NHAI), in a bid to keep up
to its promise of delivering 20 km a
day of road construction, has con-
templated the opening of 150 Special
Land Acquisition Units (SLUs) and
10 regional offices across the coun-
try – these will have the mandate to
remove hurdles of land acquisition for
road projects. Under the new dispensa-
tion with a view to facilitate speedy
construction of roads projects will have
to acquire 80 per cent of the required
land before bids are allotted. The state
governments have been told to assume
the role of stakeholders in the projects.
In the event of unsatisfactory participa-
tion the projects will be in danger of
being abandoned. A proposal to set up
a dispute resolution mechanism on the
lines of the Lok Adalat is also currently
under examination. SS Kohli, CMD,
India Infrastructure Finance Company,
is of the opinion that the government
must share risks and NHAI should try
out alternative models while awarding
road projects. Currently the highways
body awards projects on either BOT
or annuity basis. He has also recom-
mended a subtraction in the period
of achieving financial closure in the
case of highway projects from six to
three months and the reduction in
the bunching of projects for bidding
to four or five instead of 20-30 at a
time. Meanwhile the highways author-
ity as part of its aggressive designs in
the roads sector is looking to address
its manpower problems. Says NHAI
Chairman Brijeshwar Singh: “At the
administrative level we are trying to
introduce a structure which will cater
to the needs of our road development
plan. We are restructuring and decen-
tralising our field organisation. We will
recruit 400 people in the next 12-18
months to deal with the manpower
shortage. Our emphasis is also on the
quality of construction.”
Will the established players be able
to deliver the mammoth task at hand?
The issue crying for an answer now
is of new qualification norms which
bar smaller road sector entities from
the bidding process on the plea of
not meeting required financial and
technical standards. The new system
has doubled the financial exposure in
terms of projects executed by a devel-
oper in the past five years to Rs 200
crore. It is obvious that very few play-
ers who have executed projects worth
the prescribed limits will make it to
qualification stage for every project.
Developers allege that the new condi-
tion will also prevent the government
from getting competitive bids at lower
price quotations. “These conditions
will reduce the number of suitors for a
project from 15-20, which is required
for competitive bid, to about six,”
laments National Highways Builders
Federation (NHBF) Director General
M Murali. The developers have said:
“By making the pre-qualification cri-
teria more stringent the government is
restricting the competition by denying
the competent, experienced and seri-
ous bidders from participating in the
bidding process for the forthcoming
highway projects under PPP (public
private partnership) model.” Political
grandstanding aside, it is only solutions
that enable a level playing field for all
which will allow a smooth road ahead.
The targets set by the Ministry will by
no means be a cakewalk. DS
www.DSIJ.in
 [ SPOTLIGHT ]

feet in the near future.

Although the market value of its
land bank is Rs 2,100 crore, the book
value of land in company’s balance
sheet is just Rs 250 crore, indicating
that the company has acquired the
land quite cheap. Due to the low cost
of land, the company would be look-
ing at developing its properties as and
when demand revives. A revival in the
real estate market would give a better
valuation of the land bank of the com-
pany going forward.
Some of the company’s commercial
real estate projects on the anvil are
as follows:
Patel Corporate Park, Mumbai:
Patel Corporate Park is a commer-
cial office development admeasuring
80,000 sq.ft. The project is located at
Jogeshwari in Mumbai and is ready township comprising of residential
for lease. and commercial developments, two PELÊs Order Book (Rs/Crore)
Patel Estate, Mumbai: Patel Estate Special Economic Zones (SEZs) and
is an office complex comprising one an Information Technology (IT) Park.
million sq.ft located at Jogeshwari in Approval for SEZ has been obtained
Mumbai. The company has already from Ministry of Commerce. However,
commenced work on this project and due to the economic slowdown last
is expected to complete it in the next year, the company has not pursued
few years. the project aggressively, but since the
Patel Eco-City, Bangalore: Located scenario is improving, it is expected to
at Electronics City in Bangalore do so going forward.
and spread over 120 acres of land,
Patel Eco City will be an integrated Overseas Presence Good Prospects
The company has subsidiaries in The Eleventh 5-Year Plan has envis-
Land Bank Details the USA and has carried out exten- aged an investment of US$ 514 bn in
Location Acres sive projects in the US, Arabian infrastructure, which would be shared
MUMBAI 27.1 Gulf, Sri Lanka, Nepal and Bhutan. between the Centre, states and the pri-
Jogeshwari 7.1 PEL acquired a controlling stake in vate sector. Going forward, the shares
Panvel 20.0 Michigan Engineers Pvt Ltd (MEPL), of Centre and states is proposed to
HYDERABAD 811.3 a specialty infrastructure construction be brought down by about 9 per cent
company specializing in underground and 1.5 per cent respectively, while the
Gachibowli 11.4
works and foundations, atypical share of the private sector is expected
Shamshabad 82.1 dredging, bridges, specialized sewer to register a quantum jump from 20
Maheshwaran 16.2 rehabilitation works and other heavy per cent to 30 per cent. The increasing
Mominpet 460.0 civil works. Furthermore the company thrust on infrastructure and the Public
Sadashivpet 120.0 acquired ASI RCC a US based engi- Private Partnership (PPP) model
Chewella 26.4 neering company having expertise in would lead to several new opportu-
the roller compacted concrete tech- nities for established players such as
Yadaram 60.1 nology which is used in construction PEL. Out of the proposed investment
Kollur 17.6 of dams in 1997. PEL also acquired in infrastructure in the Eleventh Plan,
Vattinagulapally 17.5 another US based engineering com- power, roads, bridges and water and
BANGALORE 89.3 pany Westcon Microtunneling Inc. irrigation are likely to account for
Electronics City 64.3 Through the acquisition of Westcon large chunk of the outlay. In the power
Whitefield 18.0 the company got access to the Micro segment, the hydropower and thermal
tunneling technology. PEL was the power projects present huge opportu-
Devenhalli 7.0 first company in India to have used nities for players such as PEL. Hence,
CHENNAI 200.0 the micro tunneling technology. This it is evident that Patel Engineering
Total Land Bank 1127.6 technology is used for constructing has excellent growth prospects and a
(Source: Company Data) small tunnels. bright future. DS

www.DSIJ.in Oct 12 - 25, 2009 Dalal Street Investment Journal 27

 Special Feature: Infra
West Bengal – Powering Ahead
From a power-deficit state to a power surplus one, West Bengal has come a long way
by investing in power projects in a big way
W
est Bengal, as the gateway
to south-east Asia, is on the
threshold of an industrial
resurrection. Revamping the existing
infrastructure while building up new
vestiges has become one of the top
priorities of the State Government.
Sponsorship of this development is
jointly borne by public and private
investments, which has well surpassed
the amount of Rs. 85,000 crore so far.
Power plays the major infrastruc-
tural key in the economic synthesizer.
It exercises a direct control over many
faces of development, i.e., agricul-
ture, industry, employment etc. The
demand for power is increasing at the
rate of 9% per annum in the state and
the capital investment in the sector
amounts to Rs. 10,500 crore so far,
which is a record in capital procure-
ment in a state-owned organization.
It is not only power production that is
benefited financially, transmission and
distribution of power are equally on
the gaining side.
West Bengal was a power-deficit
state when the Left Front Government
took over the reins. It has now turned
into a power-surplus one. Thermal
power has been the key area in the
state owing to geographical reasons.
Quite a few organizations belonging
to the State Government, the Union
Government and private houses
have been at work in unison to lend
the power structure of the state a
different composition.
Generation of electricity in the state
is carried out by the thermal and hydel
power plants under the West Bengal
Power Development Corporation
and some other agencies. The central
sector power allocations come from
28 Dalal Street Investment Journal Oct 12 - 25, 2009
National Thermal Power Corporation,
National Hydel Power Corporation and
Damodar Valley Corporation. Apart
from all these, captive generation units
and the solar, wind, hydro and bio-
mass-based power plants have been set
up and looked after by the West Bengal
Renewable Energy Development
Agency. The total installed capacity in
the state including captive generators
and non-conventional energy sources
is around 10,125 MW. Incidentally,
the number of consumers of electric-
ity in the state (excluding central sec-
tor power utilities) up to November
2006 stands at 82,85,025 households.
However, the demand for electricity is
shooting up.
The combined power production
capacity of all the thermal power proj-
ects of the state taken together is
7256.20 MW while the same of all
the hydro-power projects is 229.255
MW. Power stations with the genera-
tion capacity of 2470 MW of electric-
ity during the Tenth Plan period and
3550 MW during the Eleventh are
on the cards. An amount of Rs. 5000
crore is being injected into diversified
thermal power projects at Bakreswar,
Santaldih, Sagardighi and DPL, which
would yield not less them 1570 MW of
electricity collectively.
As one of the oldest power generating
units of the state, the Dishergarh Power
Supply Corporation, established in the
year 1911, used to supply power to the
collieries at the Asansol-Ranigunj belt.
In 1932, the company, on obtaining a
50-year licence, began to grow into the
life of the belt by illuminating them
with power supply, projecting upon the
path of industrial development.
In 1990, in a bid for stabilization
in supply in the area, the company
installed a 20 MW captive power plant
for the Eastern Coalfields at Chinakuri.
At present, the generating capacity of
DPSC stands at 9-10 MW, which is
supplied to keep the production float-
ing on viability. It has also ensured
uninterrupted power supply to ECL
during emergency such as landslide,
fire etc.
Decisions have also been taken to
enhance production and utilization of
power tapped from unconventional
sources during the Tenth Plan period.
The 320 KW Biomass Hybrid Power
Centre at the Sunderbans, three bio-
diesel generators with the total produc-
tion capacity of 55 KW, wind power
generator with the capacity of 40 MW
at Purba Medinipur are some of the
showcase examples to cite. All these
projects await completion shortly.
West Bengal Renewable Energy
Development Agency has exemplified
glowing resourcefulness in identifying
areas of rural needs for energy and
their renewable solutions. This autono-
mous agency, which is now acclaimed
worldwide, was formed under the
Department of Science and Technology
in 1993. It is crowned with the credit
of many firsts and foremosts, which, to
name a few, are Energy Park designated
to create awareness regarding power
and its proper uses, Rabi-Rashmi, a
housing project with 25 buildings at
Rajarhat energised with solar power
exclusively. Each of the buildings have
solar panels (2 KW) on roof top,
capable of supplying 100 litres of hot
water, among others.
In short, West Bengal is all set to
power ahead on the path of develop-
ment in years to come.
www.DSIJ.in
 o 88
Page N

IN FOCUS
You can win over inflation
with judicious investments
...84

FUND OF THE
FORTNIGHT
Reliance NRI Fund is a
winner all the way
...85

FINANCIAL
GUIDANCE
Investing funda for the
beginners
...90

INSURANCE
Insure online, but watch
the web
...92

Email your queries on financial planning, taxation,

mutual funds, insurance and banking products to
pf@dalalstreetjournal.com
and we will get experts to provide solutions
to your queries
www.DSIJ.in Oct 12 - 25, 2009 Dalal Street Investment Journal 79
 IN FOCUS
You Can Win Over
Inflation
This Diwali, as we celebrate the triumph of good over
evil, sit down and work out a strategy to help you cut
Hemant Rustagi
through the impact of inflation on your savings and
CEO,
Wiseinvest Advisors
investments
KEY POINTS
• One of the asset classes that have the potential to beat
inflation over the longer term is equities.
• It is important to evaluate your investment options carefully and
select those you will be comfortable owning for years.
he Diwali festival is around the corner and
T everyone is gearing up to celebrate the victory
of good over evil. One such evil is inflation that
erodes our purchasing power. In other words,
it can damage the value of our hard-earned
money year after year. Let us take an example of
someone who is 30 years away from retirement. If we assume a
5 per cent inflation rate for 30 years and that his current annual
expenditure is Rs 1,00,000, it will increase to over Rs 4,35,000
by the time he retires. Therefore, if he plans for Rs 1,00,000
per annum for his retirement, he would be having less than 25
per cent of what he would really require.
We all need to recognise the importance of defeating this
evil called inflation. Once we do that, all our dreams of lead-
ing a comfortable retired life, providing the best education
to our children, owning a comfortable house and having a
few other things that could facilitate a particular lifestyle can
become a reality. Needless to say, winning over this dangerous
evil is not an easy task. However, if we plan our investment,
invest in instruments that have the potential to beat inflation,
and are willing to make a few sacrifices today to have a better
tomorrow, it can be defeated. Remember, achieving this vic-
tory would require years of patience, planning and discipline.
Here is what you need to do:
Plan Your Investments:
The first step towards achieving the positive real rate
of returns i.e returns minus inflation is to have an invest-
ment plan in place. Though it can be quite challenging to
develop a strategy that not only withstands the turmoil in
different markets but also helps in achieving short-term as
well as long-term investment objectives, one can achieve it
by focusing on the correct asset allocation. The principles
behind asset allocation are simple and they can help you
control the risk, match your portfolio with specific financial
goals and increase the predictability of returns. The asset
allocation strategy can help you achieve realistic financial
84 Dalal Street Investment Journal Oct 12 - 25, 2009
goals within the defined time frame and that too without
losing sleep. Besides, one has to continuously work towards
curbing one’s expenditure. By doing so, more money will be
available for investments every month.
Make Equities An Integral Part Of Your Portfolio:
While commodities like gold provide an excellent hedge
against inflation, one has to aim to beat inflation over the
years. One of the asset classes that have the potential to beat
inflation over the longer term is equities. However, investing
in equities would mean taking higher risk as compared to
some of the instruments that give pre-determined or stable
returns. However, one can minimise the risk by investing
only long-term funds in equities as well as by following a
disciplined approach.
For example, a disciplined approach can go a long way in
building the retirement kitty large enough to have freedom
from the retirement blues.
Invest In Tax Efficient Options To Beat Inflation:
Considering that inflation eats into a substantial part of
returns over the years, tax efficiency of the investment options
plays a crucial role in improving the real rate of return in the
long run. While tax efficiency alone should not drive the
investment strategy, it can make a substantial difference to
your portfolio’s ultimate size. In other words, tax efficiency
has to be an essential element of any investment plan along
with portfolio mix, investment philosophy and management.
While paying taxes when necessary is understandable, paying
more taxes than necessary is not.
The ultimate objective of investing should be to fund your
current and future requirements by maximising your returns
in a manner consistent with your means, future needs and risk
tolerance. The tax efficiency becomes even more important
when one plans to achieve medium to long-term investment
objectives like children’s education, buying a house and retire-
ment planning.
Mutual funds are one of the most tax-efficient investment
vehicles. Some of the strategies to ensure that your investments
remain tax efficient are to minimize portfolio turnover and to
analyse the tax consequences before rebalancing your portfo-
lio. In other words, it is important to evaluate your investment
options carefully and select those you will be comfortable
owning for years. Remember, taking the time in the beginning
would mean that you have more to keep in the end.
www.DSIJ.in
 Next Topic
How are the mutual funds regulated? management theory.
Mutual Funds are regulated by SEBI guidelines except for Investor’s
UTI, which is governed by the UTI Act. It is expected that the Can you tell me what is Beta (B)? enemies:
law will be amended to bring UTI under the purview of SEBI. To put it briefly, the Beta (B) of
a share is a measure, which reflects
Greed and
How safe is the investment in mutual funds? the sensitivity of the return on the Panic
Since mutual funds invest in both risk free and risky asset security vis-à-vis the market return.
classes (e.g., shares), there is always a market risk. But, the risk The market return is the return you
is low for which the return generated also is not high. get by investing in the 30 shares,
which constitute the BSE index. Now
What are your recommendations for investment in mutual suppose, there is a share whose Beta are 3. It means that if
funds? the market returns increases by say 10%, then return from
a. If you are a small investor, mutual fund is your best bet. that share will increase by 3 times i.e. 30%. So the share
b. Mutual funds always have a risk. But due to diversification, outperforms the 30 BSE shares in the rising market. But
the risk factor is very low. what if the market falls? If the market return falls by 10%,
c. Even if large public sector banks like SBI launch some this scrip’s fall will also be 3 times sharp i.e. 30%. Can you
mutual funds, Canbank etc. these funds are in no way assess that high Beta means that the share is very volatile, i.e.
connected with these banks. Hence do not assume that in more risky?
the event of any default by the SBI Mutual Fund, the State If, during the bull phase of the market you come across
Bank of India can be held responsible. an analysis in an investment magazine where they have given
d. Do not go in for a private mutual fund started by the beta value of a share; you may invest in that share only if
promoters with no record. the beta value is high. But do not buy that share if the overall
e. Opt for a scheme, which is quoted in the market, rather market sentiment is low. If the beta value is less then 1, such
than an unlisted scheme. shares cannot give high return in a rising market but will add
f. Read NAV of mutual funds to find out the performance to your confidence in a falling market.
of your mutual fund scheme. UTI is still one of the best
mutual funds with a solid track record, though a track Can you summarize your advice on portfolio management?
record cannot assure good future performance. Finally, our suggestions to all investors would be:
g. Do not put all your investment in the same mutual fund. a. Define you own investment objective.
Diversify in a number of them. b. Develop your portfolio of financial assets depending on
your specific need of return, safety and liquidity.
How good is investment in new issues as a portfolio c. Do not speculate.
strategy? d. Read about companies and industries before investment
Investment in new issues generally gives the highest return. in stocks.
A good Rs.10 share is often listed at more than Rs.20 giving a e. Follow the fundamental and/or technical analysis
100 per cent return. But getting allotment is difficult because (explained in this book) and analyze before you invest.
most often these issues are excessively oversubscribed. You f. Timing and strategy for
can allocate a part of your funds for the “new issue lottery” acquiring and selling
provided you are ready to sacrifice the liquidity in return of assets are important and
“something or nothing”. apply the guidelines
given in this book.
Can an investor reduce all his risks through portfolio g. Rely on your own
management? analysis. Do not
Diversifying the portfolio can eliminate the stock specific ignore your instinct
risks called systematic risks. If you have about 12 shares or recommended tips
in your portfolio, generally the strength of one share will but do heed to them
obliterate the weakness of another. However, another element only after reading,
of risk is the unsystematic risk, which affects the entire market understanding and
equally badly. For instance, the Ayodhya issue. No matter getting convinced of
how much you diversify your portfolio, such unsystematic their analysis.
risk cannot be reduced below a certain point. h. Monitor your portfolio
Incidentally, this element of risk, below which unsystematic from time to time.
risk cannot be reduced, is measured by a mathematical Add or divest whenever
concept called “Beta” (B) in a portfolio necessary.
This is an excerpt from the Stock Market Book. If you wish to buy this book, please send a cheque for Rs 399
in favour of DSIJ Ltd and send to DSIJ Ltd, 101 A, 1st Floor, Uttam House, 69, P. D'Mello Road, Near Carnac Bridge,
Mumbai-400009. Or call us on 022-40629500 (100 Lines)

www.DSIJ.in Oct 12 - 25, 2009 Dalal Street Investment Journal 87

 FINANCIAL GUIDANCE
T Srikanth Bhagavat
Managing Director
Hexagon Capital Advisors
www.hexagononline.com
Investing Funda for Beginners
I am an IT professional working in Bangalore. I
Q have started reading your magazine Dalal Street
and it’s very good. Basically, I am a beginner in
investment markets. After reading the magazine I
feel it’s very interesting, impressive and encouraging
to start investing at the right time. So I would like to know what
are the best options for me for investing. Let me give my options:
I want to allocate Rs 10,000 every month for my investment
purpose. I have already invested in LIC policy and ULIP. Request
you to suggest me some good MFs/SIPs wherein I can get a good
returns either in short/long term. What should I need to have in
my portfolio? Also, it would be great if you can suggest me some
books where I could learn more about the shares, investments, etc..
- Shoba Jeevanram, Bangalore, on email
Ah! I finally have a query from Bangalore.
A You see, Ms Shobha, In my experience,
Bangalore has a very good proportion of edu-
cated, stable investors (and another one is getting
added, now!)
What does one need to have in their portfolio of invest-
ments? For a youngster to middle age, one should endeavour
to have a good proportion of equities in their savings. Along
with equities should be some bonds. The proportion of bonds
varies with the desire of the investor for safety. And to this
potent mixture, there must be a desire and a clear plan to add
property. And why are these three so important?
Equities are like the hero Indiana Jones – he takes the
viewer through a lot of excitement, action and tension before
finally winning at the end. In our story too, equities are
required to fight inflation and deliver higher returns over time.
And just like one has to give Indiana Jones his 120 minutes to
fight impossible odds before winning, an equity investor has
to allow about five years at least to see worthwhile gains.
Bonds are required to lend stability to your portfolio.
Though they yield less than equity, they need to be there
to lend that quality of stability, safety and liquidity. In the
category of bonds are fixed deposits, corporate bonds, and
90 Dalal Street Investment Journal Oct 12 - 25, 2009
Government of India bonds.
Here are my recommendations for your SIP. Choose the
profile that you think fits you best.
The best book for you to read and pick up on equity invest-
ing is ‘Buffetology’ by Mary Buffet, the daughter-in-law of the
legendary investor Warren Buffet. It is simple in its explana-
tion and conveys the essence of equity investing.
Conservative Moderate Aggressive
Equity 30% 50% 80%
Franklin India PE Ratio FoF DSP Blackrock Top 100 HDFC Equity Fund
Bonds 70% 50% 20%
Templeton India Short Term Plan Birla Sun Life Dynamic ICICI Prudential Income
Bond Fund Opportunities Fund
Restructuring The Portfolio
I am a regular reader of your column in Dalal
Q Street Journal. I am 35-year-old in central govern-
ment service. My monthly earning is Rs 28,000
(approx.) I can invest Rs 1,000 more per month
in addition to my existing investments. I want to
invest for the long term for my children’s education. I am a bit
confused about whether to go for term insurance policy of LIC or
mutual fund. I have heard about Century SIP from Birla Sun
Life Mutual Fund which also gives insurance cover on mutual
fund. If MF is worth purchasing, please suggest me a fund name.
My investment portfolio is as mentioned below. Please suggest if I
need any restructuring in my existing mutual fund selection.
(a) Provident Fund: Rs 10,000 p.m.
(b) PLI: Rs 635 p.m.
(c) GIC: Rs 900 p.m.
(d) LIC (term insurance): Rs 2,500 (yearly)
(e) LIC Money Plus: Rs 10,000 (yearly)
(f) ICICI Pru Invest Shield Cash Back: Rs 10,000 (yearly)
Mutual Funds (SIP):
(a) ICICI PRU INFRASTRUCTURE FUND (Dividend): Rs 1,000 p.m.
(b) HDFC TOP 200 (Growth): Rs 1,500 p.m.
(c) BIRLA SUNLIFE FRONTLINE EQUITY FUND
(Growth): Rs 1000 p.m. - Ezhar Haq, on email
A
Term insurance cannot be considered as invest-
ment at all, though it is the ideal insurance
product. That is because the sum assured is
paid only on death happening during the term
of the policy. If the risk does not happen in
the period then there is no benefit to the insured. So if you
are planning on saving for your children’s education, make an
estimate of what it might cost to educate them 10 years down
the line. For instance, if cost of education is presently Rs 5
lakh, the same would cost about Rs 13 lakh due to inflation.
Hence your savings target must be to accumulate Rs 13 lakh
which can be more or less accomplished if you saved Rs 5,400
per month in a portfolio of 70 per cent equity and 30 per cent
bond for the next 10 years. To match this, you must have a
term policy for Rs 5 lakh today. In the unfortunate event that
risk happened immediately, then the Rs 5 lakh insurance pro-
ceeds invested in a similar portfolio will still pay for the goals
you had set for your family. Your mutual fund portfolio is all
equity and looks reasonable for a long term objective. You
could very well add to it.
(Email your queries on financial planning, mutual funds,
insurance, etc. to pf@dalalstreetjournal.com)
www.DSIJ.in
 TAX QUERIES

Failure to file
Sales Tax Return
Failure to carry out tax audit under
Section 44AB attracts penalty
Abhay Vasant Arolkar
B Com (Hons),
LLB, ACS, FCA
My sales turnover is more than Rs. 40 lakh. I

Q am required to conduct tax audit under Income

Tax Act, 1961 in respect of my annual accounts
relevant to financial year ended March 31,
2009. However I have not been able to file my
KEY POINTS

• Failure to conduct tax audit invites penalty @ half per cent of total
turnover or Rs 1 lakh.

return on or before September 30, 2009. What

are the implications under the Income Tax Act, 1961? Thus, you will be given an opportunity by the assessing offi-
- Sundeep S., Pune cer before levying the penalty. Besides, if the tax is payable
on the due date of filing the return of income, an additional
Failure to carry out the tax audit u/s 44AB interest at one per cent per month or part thereof is charge-

A invites penalty under Section 271B @ half per

cent of the total sales turnover in business or
Rs 100,000, whichever is less. However, no
penalty is imposable on the person/assessee,
if he proves that there was reasonable cause for the default.
able on the outstanding tax liability u/s 234A of the said
Act. If the return is not filed on or before March 31, 2010,
penalty of Rs 5,000 will also be imposed u/s 271F.
(Email your queries on taxation to pf@dalalstreetjournal.com)

www.DSIJ.in Oct 12 - 25, 2009 Dalal Street Investment Journal 91