SEBI has proposed wide-ranging changes in the way fund performance is currently presented. But it is not clear whether investors will know how to use it and whether they will
Market regulator Securities and Exchange Board of India (SEBI) has proposed a new set of quantitative measures for disclosing an equity scheme's performance. SEBI has proposed that fund returns will be calculated and disclosed in an annualised manner by using both capital gains (change in NAV over a period of time) and the dividend paid out per unit. The returns are proposed to be compared to a popular index such as Nifty and Sensex apart from the scheme's own chosen benchmark. This will give a clearer picture of comparison between absolute returns of a scheme, benchmark returns and the market indices (Nifty or Sensex), especially since index funds are proving to be a better bet than many actively-managed funds. SEBI wants risk-adjusted return to be disclosed as well. The volatility of benchmarks and the schemes is also proposed to be disclosed which will provide a comparison between risk of the scheme, benchmark and the market. Funds may be asked to disclose the beta of a scheme to show the volatility of portfolio and that of the Nifty or Sensex.
Expense ratio will also be a part of disclosure as expenses have a direct bearing on the fund performance. SEBI also wants portfolio turnover ratio disclosed. A higher turnover indicates that the fund manager is churning the portfolio very often.
Reacting to the SEBI proposals, Ajit Dayal, director, Quantum Mutual Fund told Moneylife: "It's very good that SEBI is trying to standardise performance which has become a racket in the industry where people are using performance numbers to fool investors. Unfortunately over 15 years of existence, many of the large fund houses in the industry have chosen not to bother about their investors and worry more about the assets that they can gather."
However, another CEO of an asset management company felt that while all this information is completely useful, it is impractical to expect the investors to understand them and act upon them. "This information is useful for financial planners and advisors. And they already have access to this data. To put all this sophisticated information in the public domain is simply overkill."
"It's great that there is more transparency from what has largely been a most unfriendly stance towards the investor industry. But it does not take away the fact that risk is different for different investors," added Mr Dayal.
The stock markets have taken a plunge in May. Based on past patterns, what should we expect for the month of June? Here is a study of the historical behaviour of the markets over the past 20 years
The stock markets have taken a beating during the month of May. The Sensex ended the month of May at 16,944, a 3% decline over its opening level. How does this performance augur for the month of June and even the rest of the year?
Moneylife took a look at the historical data, searching for some clues in the market patterns. We started from the year 1990. Over these years, the Sensex has ended positive in June on 12 occasions. This does not look statistically significant. But it gets interesting once you consider only the occasions when May was negative. The Sensex ended negative in May, eight times (excluding this year). Out of these eight occasions, the market has continued its downward momentum into the month of June only on three occasions, while witnessing a trend reversal five times. That translates into a high 62.5% probability of the June month ending in positive territory. Indeed, the stock markets have rebounded after hitting a low of 15,960 on 25th May.
A previous Moneylife study into the market trend for the June quarter showed an interesting trend. Since 2002, the Sensex has ended the June quarter in the opposite direction every year. Last year, it ended positive over the March quarter closing. Does this mean that the markets will end up lower than the March quarter closing?
We had pointed out then that unless the Sensex gets weighed down by the high valuations and sudden global shocks, it may proceed to turn in a solid performance in the coming year. Since then, the developments in Europe have raised concerns over a possible contagion, which has taken its toll on the markets. The doubts over Europe are expected to persist for the time being, which are likely to keep the markets on tenterhooks for the coming month. Over the last few weeks, foreign institutional investors have taken out large sums of money from the markets in a panic. Domestic investors have stepped in to cushion the impact to some extent.
A look at the multiplex operator’s performance over the past eight quarters indicates that its projected performance is impossible to achieve
PVR Ltd has 136 screens currently and claims to have plans to add 120-150 screens over the next two years, which it hopes will boost its flagging net profit margin from 1.8% (FY09-FY10) to 10% after two years. Is this possible or will it be like one of the fairytale stories that it shows in its many screens? In a recent interaction with analysts, Ajay Bijli, chairman and managing director, PVR said, "When our screen count hits 180-200, the margin and profit after tax (PAT) will increase from 5%-5.5% to 10%-12%. That is because the selling, general & administrative expenses (SG&A) get spread over a larger number of screens." This argument may turn out to be a piece of fantasy.
One look at the performance of PVR Ltd in the last eight quarters shows that the margin target is impossible to achieve. In last eight quarters, total sales (between June 2008- March 2010) were Rs567.59 crore and the operating profit during the same period was Rs73.49crore, yielding an operating profit margin of 13%. Based on such margins, net profit during the eight quarters was Rs10.33crore, a net margin of just 1.8%. The best PVR has achieved in the last eight quarters is a net margin of 8% in December 2009.
Based on the past eight quarters' performance, the average annual revenues are around Rs285 crore; operating profit was around Rs37 crore and net profit Rs5 crore. PVR has plans to open 120-150 more screens over the next two years. Will this radically change the profitability to lead to a 10% net margin after two years? If we consider a 50% growth in screens over two years, revenues could hit Rs480 crore, operating profit Rs70 crore and net profit Rs22 crore. PVR claims that net margin would be 10% after two years. However, for the net margin to be 10%, it has to have a profit after tax (PAT) of Rs48 crore which means that the other expenses should be only Rs22 crore (difference between Rs70 crore operating profit and Rs48 crore net profit).
This seems to be impossible given that depreciation alone would be Rs40 crore expected for FY2011 and interest cost would be about Rs17 crore expected for FY2011. The company spokesperson was not available for comment. According to Mr Bijli, the push to PVR's profitability will come from the slower growth of SG&A. But this cost was just Rs37 crore in FY2010. Even if this cost stays constant, net margin will hardly budge.
Most of the multiplex players are finding it difficult to report good profit margins because of flawed business models. The key challenge in this business is high cost versus footfalls. The operational cost is very high in this business and it is difficult to increase the footfalls because of the high ticket price. Apart from the ticket rates, movie-watching can burn a hole in the pocket when you factor in parking charges and the steep rates for food and beverages. A medium-sized serving of popcorn costs Rs60-Rs80, coffee Rs50-Rs70 and a soft drink Rs60- Rs100. The average ticket price in any multiplex in Mumbai is between Rs160-Rs280. The other challenges in this business are the other entertainment options (including watching movies on TV) and piracy.