Companies & Sectors
Sales of Indian companies are slowing down

Weakening real activity has meant that top-line growth has been in freefall, dragging down profits along with it, says Nomura Equity Research in its research note on September quarter earnings preview

Net sales of Indian companies have been growing at an ever-slower pace over the past three years due to external considerations like inflation, depreciating rupee etc., according to a research note on September quarter earnings preview by Nomura Financial Advisory and Securities. This observation is clearly shown in the graphs below:



With topline growth falling, the bottomline has been under pressure in most companies. Nomura sums it up with the remark, “Weakening real activity has meant that top-line growth has been in freefall, dragging down profits along with it.” This observation is shown in the graphs below:


Sectors with high operating and financial leverage have to live with increasing pressure on operating and net profit margins, warns Nomura in its India Equity Strategy note. Industries facing domestic economy continue to remain a drag and are expected to make negative contributions to aggregate profit growth in the quarter.


The bright side of the problem has been that while competition has put margins under pressure, significant relief from weak raw material prices has been an important offsetting factor in protecting sequential downside to gross margins; Nomura notes that despite being in freefall, net sales growth has exceeded cost of goods sold growth over the past five quarters.


Even though recovery is expected soon, there is a warning that it may not benefit all investors in the stock market. Recovery is not broad-based - a large part of the year-on-year growth in market aggregates is on account of a handful of exporting sectors, beneficiaries of a depreciating rupee and the nascent global economic recovery. More specifically, excluding non-PSU oil & gas, autos (led by JLR), IT services and pharma from aggregate numbers: net sales growth falls from 14.1% to 8.6%; operating profit growth falls moderately from 15.5% to 13.3%. Net profit growth falls from 9.4% to no growth, points out Nomura.


Sector-wise performance and forecast is shown in the graph below:



The research note concludes that as the market recalibrates its expectations of a rate cutting cycle in the face of improving current account deficit numbers and the potential delay of the Fed taper (in light of the negative implications of the current fiscal impasse in the US0, valuation does not offer much comfort. The 12-month forward consensus-based earnings multiple for the market is currently at 13.2x (versus a five-year average of 14.3x) is not encouraging given the negative outlook on growth, with possible exception of upside from export growth.


The percentage change in corporate earnings for Sensex companies during the last quarter is shown below:



‘America Is Not Stupid’ wins IRS recognition as tax-exempt non-profit

US tax regulators recognize two related dark money groups, even though they appear to have made misleading statements on their applications for tax-exempt status

The IRS has granted nonprofit status to America Is Not Stupid – a so-called dark money group best known for a 2012 election ad featuring a talking baby who compared the smell of his diaper with a Montana senator.

As ProPublica wrote in January, America Is Not Stupid and a related group, A Better America Now, applied for IRS recognition in the run-up to the 2012 election, swearing under penalty of perjury that they would not spend money on elections.

Then both groups went ahead and did exactly that, spending more than $125,000 on mailers and ads opposing Democratic candidates in Texas and Montana.

Despite these disclosures, records show, the IRS gave A Better America Now its stamp of approval as a social welfare nonprofit in April and recognized America Is Not Stupid in late June, decisions that elicited amazement among campaign finance watchdogs.

Marcus Owens, a nonprofit lawyer who ran the IRS Exempt Organizations division from 1990 to 2000, questioned whether a controversy that erupted earlier this year, over the agency subjecting certain conservative nonprofits to extra review, had damaged its ability to fulfill its regulatory functions.

“The oversight has collapsed,” Owens said. “The current people in Exempt Organizations have no tax law enforcement experience and no exempt organization experience in particular. And they’ve been charged with making this particular headache go away.”

Because of the government shutdown, the IRS could not be reached for comment. In the past, the IRS has not commented on stories about specific groups. Talking about individual taxpayers violates the law.

No one from either America Is Not Stupid or A Better America Now responded to emails and phone calls asking for comment.

In May, the IRS admitted that it had flagged the applications of Tea Party and related groups for extra review, dooming many to years of limbo. That admission turned into a firestorm, leading to the immediate resignation of the acting IRS commissioner and the eventual replacement of the top officials in the Exempt Organizations division. Senate and House committees started investigating. The Treasury Inspector General for Tax Administration expanded its initial audit. And the Justice Department announced a criminal inquiry. (Later, records were released showing that the IRS was also flagging liberal groups with “progressive” in their names.)

Since the Supreme Court’s Citizens United ruling in early 2010 opened the door to increased political spending by corporations and unions, nonprofits like America Is Not Stupid have taken on an expanding role in U.S. elections. That’s largely because they do not have to identify their donors, unlike super PACS, leading them to be dubbed “dark money” groups.

About 150 of these nonprofits spent more than $254 million in 2012 on ads, phone calls and mailings reported to the Federal Election Commission. Almost all the donors of that money have remained anonymous. Most of that money — more than 85 percent — was spent by conservative groups, according to the Center for Responsive Politics and research by ProPublica.

These groups are allowed to spend limited amounts to influence elections, as long as they can prove their primary purpose is “social welfare.” But ProPublica has shown how dozens of social welfare nonprofits have underreported their political spending, or spent money on elections despite telling the IRS they would not do so.

In its 2012 annual work plan, the IRS recognized the problem, announcing it would take a hard look at nonprofits and “serious allegations of impermissible political intervention.”

If the agency’s exchanges with America Is Not Stupid and A Better America Now are any indication, however, the augmented focus on nonprofits has been less than ferocious.

The IRS sent ProPublica the groups’ applications for recognition last November, even though they had not yet been recognized and the documents were therefore not supposed to be made public. We wrote stories about these and several other pending applications, bringing it to the IRS’ attention that these groups had pledged that they would not spend money on elections, yet did so.

According to IRS records, neither group ever amended its application to reflect its political spending.

In response to IRS questions about their applications, though, the groups acknowledged that they had spent small amounts on elections – a contradiction that apparently did not hobble their chances for recognition.

A month after receiving IRS recognition in April of this year, A Better America Now changed its story again. It filed its 2012 tax return and asserted – again, under penalty of perjury -- that it had spent no money to influence elections. ProPublica reported this in July.

The group’s president, Bob Portrie, lawyer Eugene Peek, and accounting firm LBA Group, all out of Florida, did not return calls and emails for comment.

The IRS told ProPublica that the 2012 tax return for America Is Not Stupid was unavailable as of last month. Renae Duncan, the group’s certified public accountant in Texas, said she would pass on an inquiry from ProPublica to Miguel A. Gutierrez, the group’s president, on Monday morning. He has not yet responded.

In replying this May to IRS questions on America Is Not Stupid’s application, Gutierrez provided several examples of the group’s activities as proof that it had a bona fide social welfare mission of improving the good of a community — the critical factor in maintaining tax-exempt status.

He said the group had created a website,, and had authored articles “regarding how underserved communities or minority populations and economically disadvantaged small businesses may be affected by certain U.S. federal rules and regulations in the coming years.” There’s no sign of any such articles on the website or elsewhere, however. (On Monday, one of the website’s top stories was on “CoralActives: Breakthrough Acne Skin Care.”)

To showcase the group’s “educational content,” Gutierrez pointed to the main website for America Is Not Stupid, a single page with 156 words on it.

He told the IRS that the nonprofit conducted polls in Montana, Nevada and Texas, targeting heads of households with Hispanic surnames. But the only poll included in the response didn’t mention Latinos at all. Instead, it asked Montanans about which candidates they planned to vote for in the 2012 election.

The group’s president also said the group held events, including one in San Antonio to “openly discuss topics affecting the Hispanic population in the U.S., including, but not limited to, healthcare, the housing market, jobs and the economy, and various education issues.”

Gutierrez said the event was held on Oct. 26 — just before the 2012 election. The event was free for the first 3,000 people, and billed to the public as strictly entertainment, an evening featuring comedian Paul Rodriguez and the Leslie Lugo Band playing music “to dance into the night.”

But former Bush official Hector Barreto gave the keynote address, Gutierrez told the IRS. One detail America Is Not Stupid didn’t mention: Barreto also happened to be the co-chair of Juntos Con Romney, Republican presidential candidate Mitt Romney’s Hispanic steering committee.

Nothing Gutierrez said in his May 24 response to the IRS seems to have raised any red flags with the IRS, however.

A month after receiving it, the IRS recognized America Is Not Stupid.



Edelweiss Debt & Corporate Opportunities Fund: Another hybrid scheme

The scheme would invest over half its portfolio in debt and the remaining portion in equity. For the equity portfolio, it will invest in opportunities arising out of corporate actions

Edelweiss Mutual Fund (Edelweiss MF) plans to launch an open-ended hybrid scheme—Edelweiss Debt and Corporate Opportunities Fund. The scheme would invest in debt & money market instruments having average maturity of up to three years and would invest in equity arbitrage opportunities and corporate actions related opportunities to generate high returns. The scheme would invest over half its portfolio in debt and the remaining portion in equity. Edelweiss Absolute Return Fund is an equity-oriented scheme from Edelweiss MF which employs a similar equity investment strategy. The returns of this scheme have been considerably volatile and negative at times despite investing in arbitrage opportunities, as the scheme bets on the corporate actions of companies. Similarly, in the new scheme, the equity allocation which can go up to 50% of portfolio can bring additional risk. Surprisingly, according to the regulators product labelling guidelines, the scheme labels itself as ‘medium risk’.

According to the scheme information document, “The investment strategy (of the scheme) would be to predominantly invest in a diversified basket of debt & money market instruments having average maturity of up to 3 years. It will also opportunistically allocate some proportion of assets in equity & equity related instruments, primarily focused to benefit from equity derivatives and arbitrage strategies and will invest in opportunities arising out of corporate actions announced in stocks to generate high returns with moderate levels of risk and liquidity.”

Corporate actions are events that bring material change in the functions of a publicly listed company that can affect stakeholders, for good or bad. The term ‘corporate actions’ includes actions such as stock splits, dividends, mergers and acquisitions, rights issues, spin offs as also special situations arising out of corporate activities like initial public offering, follow-on public offering, buy back, delisting, open offers, bonus, offer-for-sale etc. The fund managers of the scheme will carefully analyse any such instances and participate in the same as such if according to their analysis they feel such actions would create value for the investors.

To moderate the risk, the new scheme will invest in arbitrage opportunities between spot and futures prices of exchange traded equities (for e.g. buying the basket of index constituents in the cash segment and selling the index futures, buying ADR/GDR and selling the corresponding stock future, etc). The scheme will also invest in low risk derivatives strategies. These strategies will involve any combination of cash, futures and options.

Below are the performances of equity oriented schemes of Edelweiss MF:

None of the schemes have a track record of more than five years and have failed to attract investors. None of the scheme have a corpus above Rs50 crore.

In terms of taxation, as the allocation to equity is less than 50%, the new scheme will not be treated as an equity scheme. The debt portion of the scheme would be managed by Rahul Totla who has four years of work experience and Mr Paul Parampreet will manage the equity portion of the scheme. He has a work experience of more than eight years


Other details of the scheme

Investment amount:

Minimum of Rs. 5,000/- and in multiples of Re.1/- thereafter.

Minimum of Rs. 1,000/- and multiples of Re. 1/- thereafter.


Benchmark Index:

CRISIL Short Term Bond Fund Index –85% and CNX 500 –15%


Exit load:

If the Units are redeemed / switched out on or before 180 days from the date of allotment – 0.50%

If the Units are redeemed / switched out after 180 days from the date of allotment – Nil


Expense ratio:

Maximum total expense ratio (TER) permissible under Regulation 52(6) Upto 2.25%

Additional expenses under regulation 52(6A)(c) Upto 0.20%

Additional expenses for gross new inflows from specified cities under Regulation 52(6A)(b) Upto 0.30%


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