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Wealth creators over the decade: A few myths busted

As usual, Moneylife’s annual study of wealth creators throws up many surprises. It stresses the need to buy cheap & avoid falling into the trap of purchasing ‘popular’ stocks and points out the role of excessive speculation in pushing up obscure stocks

Moneylife’s annual study of wealth creators of 1999-2009, rubbishes myths about value creation, stresses the need to buy cheap & avoid falling into the trap of purchasing ‘popular’ stocks and points out the role of excessive speculation in pushing up obscure stocks.

The study also emphasises the misplaced notion of buying and holding indefinitely. It points out that the much hyped technology stocks that caught everybody’s fancy in 1999, have actually yielded insipid returns over the 10-year period. Software giants like Wipro and Infosys are nowhere to be found among the top 500 wealth creators, a clear indication that management quality and earnings growth have little to do with wealth creation if stocks have already run up and have turned into market favourites. The simple fact is that if you had bought software services companies in 1999, you would have bought them high and regretted. The wealth creation study appears in the current issue of Moneylife which has hit the stands.

Moneylife’s study also points out that real-estate companies have now already captured the potential for growth, and are slowly on the decline in the wealth creation charts. This is despite the fact that four such companies stand out among the top 10 wealth creators. Their performance has more to do with the lunatic, frenzied spike in realty prices in 2007-08, than management efficiency or company fundamentals over the last decade. Prices shot up too high too quickly, without a foundation to support the upsurge.

Despite the lacklustre show from the pharmaceutical industry, certain pharma companies have made their mark on the charts. Sun Pharmaceutical has done very well with an extremely high compounded return of 76%. Among the smaller stocks, Alchemist recorded a huge return of 84% and Vimta Labs returned 52%.
However, the most notable performance was from the steel, steel products and related sub-sectors. From this sector, 13 companies have emerged among the top 100 wealth creators on our list. Sesa Goa has reaped the benefit of China’s insatiable demand for iron ore which accounted for more than 84% of its volumes in the previous fiscal. Among others, Orissa Sponge Iron & Steel (20th) and Nava Bharat Ventures (12th) have also made much of the boom in the entire steel chain and related products like ferro-alloys.

Engineering companies have gained in the past few years from capacity creations in core sectors like power, infrastructure, mining, telecom and oil & gas. Indeed, 17 engineering and allied sector companies have found their way to the top 100 wealth creators. Kirloskar Brothers (72%), Praj Industries (72%) and Bharat Bijlee (69%) emerged among the top 20 wealth creators.

This year’s list is also witness to the emergence of small- and micro-cap companies, which have trumped some of their larger counterparts. Companies like Shanthi Gears, Orient Abrasives and Electrotherm India have given shareholders a lot to cheer about. On the other hand, many blue-chips are languishing at the bottom of the wealth-creators’ list. India Cements, Tata Tea, Zee Entertainment Enterprises and GTL have provided disappointing returns. Several multinationals have also emerged among the notable value destroyers.

Among these smaller, obscure companies are names that have caught us by surprise. These companies don’t boast great earnings growth, superior management quality or productivity efficiency. Their presence among the top wealth creators is only driven by one thing—intense speculation. Many among these are little known penny stocks that have emerged in the frenzied bull market a couple of years ago. Companies like Ashirwad Capital, Poddar Developers and Master Trust have created robust shareholder returns despite the fact that their sales haven’t even touched Rs1 crore.

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    Trading hours extended, what about settlement?

    Indian bourses started trading an hour earlier from Monday. The real problem, however, is unavailability of a settlement system for brokers and banks before the stipulated time

    Both the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE) on Monday started trading at 9am, about an hour earlier than previous days. This move is expected to increase trading volumes. However, a majority of brokers are still unhappy over this move.

    Speaking about increased volumes in Monday's trade, a broker said that usually volumes peak at the beginning and closing of the trading session. Today, the treasury share sale by Reliance Industries led to an increase in volumes.

    "Volumes were low when the Sensex was at 8,000 levels, then why was the move (to extend trading hours) not envisaged at that time?" asked the broker.

    Stockbroker associations like the BSE Brokers Forum and the Association of National Exchange Members of India (ANMI) have asked bourses to maintain the status quo in trading hours until adequate infrastructure is in place.

    ANMI, which claims the support of 850 members, had approached stock exchanges, regulators and the government to look into the extension of trading hours until adequate banking infrastructure was in place.

    "The Association is of the view that it is necessary to maintain status quo on the timing, till adequate infrastructure is in place. There should not be any hurry to extend the market timing," ANMI's president EMC Palaniappan had said.

    The Association has urged the Reserve Bank of India (RBI) to improve the banking infrastructure, as most of the banks across the country do not have real time gross settlement (RTGS) facility, which is necessary for high-value transactions, Mr Palaniappan had said.

    Reflecting the intense rivalry between the BSE and the NSE, both exchanges, earlier this month, had said that trading would start at 9am from 4th January, nearly one hour before the current opening time, inviting protests from brokers and investors.

    Typically, banks open their RTGS platform at 9am and bourses used to open for trading at 9.55am. Brokers were using the crucial time of 55 minutes to settle their margin payments. With the advancement of trading hours, this window is now closed for brokers and its effects would be known only after a few trading sessions.

    "I don't think transactions with the banking system would be an issue. I believe retail investors, traders and arbitragers are not quite happy with markets opening early," said Prakash Kacholia, managing director, Emkay Global Financial Services Ltd.

    According to a survey, nearly 80% of the trading members of the BSE Brokers Forum were against the extension of trading hours while 62% of the members of ANMI felt that extending trading hours could put additional load on the system.

    Reacting on the issue, banker PV Maiya said, “Both exchanges are a bit childish. Why should they assume that the banking system or any other agency should bend to accommodate their whimsical game? Any change must involve due consultation with all the parties and not for display of one-upmanship, this is not their private affair."

    In October, market regulator Securities and Exchange Board of India (SEBI) allowed bourses to set their trading hours between 9am and 5pm on condition that appropriate risk management systems and infrastructure are put in place.

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    1 decade ago

    if SEBI/NSE/BSE authority think that our volume goes to SGX then first they have to delist the SGX niffty from SGX. so many inidan co .script listed in US mkt. and other mkt. but they never change their time because our volume clinch by other exchanges.and still they want to open early then they should open mkt at 6.30 when SGX start...and every body knows it well that intrested person are trading in SGX. where normal quote is 10/40 point diffrent. and one sigle share trade will decide entire indian mkt. that every body volume/open intrest position of SGX niffty is maximum 100000 at the end of month that means 4000/5000 shares a day gov. official have prove that they will not hear any majority voice because we have a power to spoil life of lakhs of investor and mkt related employee...that is call beurocacy...

    GMR’s Orissa coal block still in the clearance phase

    The block was allotted to GMR Energy along with other major power companies in January 2008. Company officials had said that the joint venture had been formed, and the other clearance processes were on

    Huge capacities have been planned by Indian power companies. However, coal supply to fuel these huge expansions still remains a concern with years spent only on clearances. In yet another example of delayed decisions, mining activities have not started in the block allotted to GMR Energy along with the other power companies in 2008.

    “The joint venture company has been formed. Pre-development activities take around two to three years’ time. Forest clearances, exploration clearances and environmental clearances are required. The process is going on,” said Raaj Kumar, chief executive for energy sector, GMR Energy Ltd. The coal block was allotted to GMR Energy by the Indian government in January 2008.

    GMR has a planned capacity of 4,200 mega watts (MW) to be completed by 2012. However, the company does not expect coal supply to be a problem in achieving these targets.

    The Rampia and dip Rampia block in the IB Valley of Orissa was allotted to GMR Energy along with Sterlite Energy Ltd, Arcelor Mittal India Ltd, Lanco Group Ltd, Navbharat Power Ltd and Reliance Energy Ltd.

    The Indian government had decided to allot 15 coal blocks reserved for the power sector in mid-2007. The coal blocks where then allotted in January 2008. GMR Energy was among the 31 power companies shortlisted for allotment of coal blocks for captive use.

    Eight of the 15 coal blocks were allotted on a sharing basis, the Orissa block being one of these 15 blocks. These coal blocks were allotted with a view to accelerate coal production in the country to meet the huge demand from the power sector. However, the Orissa block, one of the 15 blocks allotted in this phase, is an example of how domestic coal supply in India suffers due to time lost in various clearances.

    While this Orissa block awaits clearance, last year Adani Power was denied environmental clearance for two Lohara coal blocks in Maharashtra. The coal block was expected to fuel Adani’s power project at Gondia to start by 2011.

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