A positive March quarter is positive for stocks

The market has risen in the March quarter. Based on past patterns, what should we expect? Here is a study of the historical behaviour of the markets over the past 25 years

After witnessing a few jitters in the month of January, stock markets have rebounded well to end the March quarter on a positive note. The Sensex ended the March quarter with a marginal rise over the December quarter of last year. How does this performance augur for the June quarter 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 1986. Over these years, the Sensex has ended the March quarter in positive territory 13 times (excluding this year).

Out of these 13 occasions, the market has continued its upward momentum into the June quarter as many as nine times. That translates into a high 70% probability of the June quarter ending in positive territory. Indeed, the bulls have been on a roll for the past seven consecutive weeks and are not slowing down. However, it means that valuations have run up substantially now. The market is now trading at a high P/E of 19 based on the expected March quarter results.

The June quarter trend over the last eight years shows an interesting pattern. Since 2002, the Sensex has ended the June quarter in the opposite direction every year. Last year, it ended positive. Will the alternating trend continue?  

The bulls have a lot to cheer about—strong corporate performance supported by strong FII inflows from countries with low interest rates may just turn out to be the booster dose for the markets as we head into the next fiscal year. Unless the Sensex gets weighed down by the high valuation and sudden global shocks, it may proceed to turn in a solid performance in the coming year.

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    SEBI gives a breather to brokers; leaves it to exchanges to handle sticky issues

    The market watchdog has extended the deadline for implementation of its ‘dealings between a client and a stock broker’ mandate till 30 June 2010 and will leave it to the stock exchages to handle sticky issues

    Market watchdog Securities and Exchange Board of India (SEBI) has given breathing space for brokers to comply with its earlier circular dated 3 December 2009 which laid down fresh rules on how to deal with clients but the pushed the sticky issues of implemenation to the stock exchanges. The deadline to implement the new rules was set at 31st March, but now brokers can complete the necessary process till 30 June 2010. Although there are no changes in the clarifications issued by SEBI, brokers are happy with the new timeline.

    Yesterday, Moneylife had reported first on how brokers were not able to keep up with the 31 March 2010 deadline for complying with the changes brought about by SEBI (read here).

    The broker community had sought an extension from SEBI to cope with the new rules. “The stock brokers are now directed to ensure the full compliance of the said circular dated 3 December 2009 in respect of all clients—existing and new—latest by 30 June 2010,” states the SEBI circular.

    “If it has given an extension of three months then it’s enough time to get our act together. SEBI has acknowledged that some time needs to be given and I think it is in the right spirit. We would have liked to have certain changes to be made but I think it’s fair,” said Alok Churiwala, MD, Churiwala Securities Ltd.

    However, what SEBI has done is a mere postponement of the issues that brokers would find hard to handle. Moneylife has learnt that SEBI has pushed the issue of implementation to the stock exchanges since it does not want to handle the problems thereof.

    Among the various changes initiated by SEBI are related to the KYC (know your customer) compliance norms. Maintaining KYC documents of existing clients is proving difficult for brokers while those who have online accounts will have a smoother transition. “It is not feasible to take signatures of clients on the form every year,” said a broker.

    According to sources, most of the brokers will have a difficult time complying with the rule even if it is implemented. A client has to sign around 80 times on a KYC form.

    Only brokers who are maintaining online transfer of funds will be able to deal with the new mandate smoothly. Brokers will have a tough time maintaining KYC forms for the older clients. Among the several changes made in the new KYC norms include having a font size of 11. According to sources, this would only make the form bulkier and the client may end up signing the form without reading the fine print.

    “Clients sign where they are asked to sign. It was happening earlier and will continue to happen. It’s not desirable but that’s how it has been. Earlier everything was a part of the same booklet and the client did not know what was compulsory and what was not compulsory. Now clients have a choice,” said Alok Churiwala, MD, Churiwala Securities Ltd.

    “People who are doing the transactions online will be able to make the transition smoother because they don’t have to change the system; others will have to get used to the new model. Whatever extension is given is welcome,” adds Mr Churiwala. 

    One of the changes proposed by SEBI is that funds lying in clients’ accounts have to be squared off at least once in a quarter or month depending on the preference of the client.

    But this is going to cause problems. This is because based on the initial deposit of funds and securities with the broker, clients are given an exposure for trading. “A compulsory settlement of funds and securities on a monthly/quarterly basis would result in the clients’ exposures being nullified. The exposure for trading would not be available to the client till such time that the client is able to replenish the funds and securities with the broker. The movement of funds and securities through paper instruments (cheques & Delivery Instruction Slips respectively) would imply that the client can be locked out from the market for two-three days. This would be the transit time required by the client to receive funds and securities from the broker and submitting it back to the broker for availing further exposure,” said the head of operations of a broking company.

    According to SEBI sources, transferring of clients’ funds back to their accounts on a monthly or quarterly basis cannot be implemented so easily by the brokers and the watchdog is aware of that aspect. After receiving concerns from the brokers’ community, SEBI does not want to retreat from its earlier stand and has settled for an extension of the deadline for three months with exchanges being asked to handle the fallout.

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    Trail goes cold on a $1-billion acquisition

    GMR acquired power utility InterGen, based in the Netherlands, at a transaction worth $1.10 billion in 2008. Two years later, not much financial information is available about the acquired company in the public domain

    GMR Infrastructure’s overseas acquisition of InterGen NV in 2008 was touted as one of the biggest Indian overseas acquisitions, specifically in the energy sector. Two years later, when InterGen’s assets form a significant part of GMR’s power assets, not much financial information about the Netherlands-based company is available in the public domain. 

    GMR had acquired the 50% stake in InterGen from AIG Highstar Capital II LP, a fund owned by the American International Group. Back in 2008, according to a press release issued by GMR, the transaction was valued at $1.1 billion.

    In October 2008, InterGen issued a press release on its website stating that GMR Infrastructure Limited had completed its previously-announced acquisition of a 50% interest in InterGen from AIG Highstar Capital and affiliates. The balance 50% in InterGen is held by Ontario Teachers’ Pension Plan. This Canadian pension plan has held this stake in InterGen since 2005.

    According to a Karvy Research note, InterGen’s total present operational capacity is around 6,254MW, of a total equity value of Rs32,226 million, thus placing GMR’s 50% stake in the power utility at a value of Rs16,113 million.

    This stake in InterGen is significant considering GMR’s total operational capacity (including all its subsidiaries)—and excluding InterGen—is only around 9,087MW. The total stake value of GMR in all the assets and projects owned by it is around Rs2,68,065.40 million, including InterGen.

    InterGen has 12 power plants located across the UK, the Netherlands, Mexico, Australia and the Philippines. GMR’s presence in these countries is only due to the InterGen acquisition.

    Despite InterGen forming a significant asset base for the group and GMR having acquired the stake at $1.1 billion, not much information is available about the company on GMR’s website or in its annual reports.

    GMR’s annual report for 2008 -09 states that the financial results of InterGen have not been considered in the consolidated results of the company pending conversions of Compulsory Convertible Debentures (CCDs).

    GMR’s results for the December 2009 quarter also state that the company has given a corporate guarantee of up to a maximum of $1.38 billion to the lenders on behalf of a fellow subsidiary to  enable it to raise debt for financing the InterGen acquisition.

    InterGen, with its headquarters in the Netherlands, was delisted from the Singapore Stock Exchange in 2008. The ‘financial reports’ section on InterGen’s website is also locked from public view. Thus, accessing the company’s financial data is almost impossible.

    According to one of the analysts tracking GMR, InterGen’s plants are operating satisfactorily, but not much data is available to state the exact operating profits of the company. An email sent to the GMR corporate communications department requesting more financial information on InterGen remained unanswered at the time of writing this article. Similarly, an email sent to InterGen was also not immediately answered.

    Though InterGen’s financial information is not available in the public domain, facts and figures related to the company’s existing—and planned—capacity as well as debt can be accessed only through analyst reports.

    As per the Karvy research note, InterGen has a total 8,086MW of net operational capacity (including 428MW under construction in the Netherlands). Of the 8,088MW, its net equity capacity is 6,254MW. About 70% of InterGen's capacities are sold on a long-term basis and the remaining on merchant basis.

    The note further states that InterGen’s market value is around Rs1,43,546 million. The company holds debt of around Rs1,86,550 million. Given GMR’s 50% stake in Intergen, GMR’s InterGen stake is valued at Rs 71,773 million.

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