Picking up stocks: Real Estate/ Construction

One of the questions to my earler post was how to pick stocks? It is allright to say that, ” You can start with identifying a list of 10-15 companies out of 3-5 sectors which you know or which interests you. You can keep a tab on their management team, financials and future outlook and over a period of time, you will be able to take a call on them.”
But I guess, it’s good in theory. How about doing an analysis of a sector and then take a look at some stocks of that sector. Let’s take a look at the Real Estate/Infrastructure sector which is so much in the news.
So when we do an industry analysis, what are the things we look at? Companies producing similar products are subset of an Industry/Sector. For example, National Hydroelectric Power Company (NHPC) Ltd., National Thermal Power Company (NTPC) Ltd., Tata Power Company (TPC) Ltd. etc. belong to the Power Sector/Industry of India. It is very important to see how the industry to which the company belongs is faring. Specifics like effect of Government policy, future demand of its products etc. need to be checked. At times prospects of an industry may change drastically by any alterations in business environment. For instance, devaluation of rupee may brighten prospects of all export oriented companies. Investment analysts call this as Industry Analysis.
To start with, let’s look at some macro facts and observations about the industry.
The Tenth Five Year Plan has estimated a shortfall of 22.4 million dwelling units in the country. According to one estimate, over the next 10 to 15 years 80 to 90 million housing units will have to be constructed.
The investment required for constructing these dwelling units and for providing related infrastructure during this period will be of the order of $666 billion to $ 888 billion at roughly $33 billion to $44 billion per year ($ 1 billion = Rs 4,400 crore).
There is a steady growth in Housing Finance sector of approx.30 % over last four years.
The rate of interest for housing finance has become reasonable and affordable which has resulted into more credit offtake and subsequent maturing of the housing industry. Even though there is an increase, the rates are still reasonable to my mind after factoring in the tax benefits.
Fiscal benefits provided by the Government of India have encouraged the end users and investors alike.
Income of the urban buyer has grown substantially.
There is tremendous scope and growth in the Infrastructure Development.
Foreign investment by way of FDI has been approved.
Emergence of professional builders in the market with proper accounting standards.Emergence of rating systems for building projects.
The high growth of the real estate sector has led a lager financial institution to launch a dedicated real estate fund. These funds are simultaneously enticing large institutional investors as well as High Net worth Individual (HNIs) to expand their portfolio.
The award of ultra mega power projects and privatisation of airports demonstrates a committment at the highest level. So the momentum to build up roads, ports and urban infrastructure is building up for sure.
The JawaharLal Nehru Mational Urban Renewal Mission (JNNURM) initiative in 63 cities and urban transport projects will also drive up Investments in Infrastructure. Water Supply projects and sewerage projects would be part of the JNNURM.
So what do you think about the future of Infrastructure stocks in India? Ready to take a call?

There are three major stocks in the Infrastructure sector which is worth talking about. 1. Nagarjuna Construction (NJCC) 2. IVRCL and 3. HCC

Remember, do not go by the order book size alone, which is what many people do without understanding the intricacies. We need to understand the execution period of the order book, and the kind of margins that the company would make, given the kind of raw material prices at which it has booked these orders.

Even though it may look daunting, a lil bit of research helps you in understanding the stocks as well as improving your general knowledge.

Derivative for Dummies: By a Dummy

Yes, it’s for Dummies and by a dummy on Derivatives. So here’s what lil’ bit of Derivatives I understand(or pretend to..). Read on….

Derivative is a product whose value is derived from the value of one or more basic variables, called underlying. The underlying asset can be equity, index, foreign exchange (forex), commodity or any other asset. Derivative products initially emerged as hedging devices against fluctuations in commodity prices.

In India, BSE created history on June 9, 2000 by launching the first Exchange traded Index Derivative Contract i.e. futures on the capital market benchmark index – the BSE Sensex. The exchange commenced trading in Index Options on Sensex on June 1, 2001. Stock options were introduced on 31 stocks on July 9, 2001 and single stock futures were launched on November 9, 2002. September 13, 2004 marked another milestone in the history of Indian Capital Markets, the day on which the Bombay Stock Exchange launched Weekly Options.

Types of Derivatives:
Forwards: A forward contract is a customized contract between two entities, where settlement takes place on a specific date in the future at today’s pre-agreed price.

Futures: A futures contract is an agreement between two parties to buy or sell an asset at a certain time in the future at a certain price. Futures contracts are special types of forward contracts in the sense that the former are standardized exchange-traded contracts, such as futures of the Nifty index.

Options: An Option is a contract which gives the right, but not an obligation, to buy or sell the underlying at a stated date and at a stated price.

Facts: The daily trade of commodities futures market is expected to rise by another Rs 5000 crores from the Rs 15000 crores being traded currently.

With increasing interest from investors, the basket of 120 commodities currently being traded is likely to touch 250 by 2007-08.

Options offer three significant benefits: Versatility; High Leverage and Risk Management. (I bet I didn’t understand this, but I’ll pretend I did)

Last Word: Warren Buffet sees derivatives as “time bombs” and a weapon of mass destruction!!

Being Covered is not sexy or cool but Smart!

Hey, I’m not into fashion designing. But could not resist a tantalising title to talk about Insurance!! If you haven’t started a family, an Insurance cover is the least of your priorities. But even though it’s not that cool to be insured, it sure is smart when there are people who depend on you.

Life insurance is a potent tool that not only offers the ability to plan for unforseen events that can affect the family’s financial situation adversely, but is also looked up to as an important tax saving cum investment tool.

One needs to do a certain amount of spade work before purchasing a policy, to ensure the best possible coverage at the right price. Here are some helpful tips to get you started:

Explore As premiums vary widely from company to company and cover to cover, it’s important to look around. One can try internet sites to get instant quotes.

Plot your value The key to purchasing the right amount of life insurance is to have just enough coverage to meet your needs. If you have more life insurance than you need, you’ll be paying unnecessarily for higher premiums. On the other hand, it’s important not to have too little coverage, resulting in you being underinsured.

Health matters the most Healthy people get better rates on life insurance. Higher premiums are quoted for anything that poses a risk for longer life expectancy (smoking, on regular medication, etc). Sooner the better As premium rise with increasing age, the younger you are when you purchase life insurance, the lower premiums you will be required to pay.

Review your cover periodically Any life change indicates the need for an overall review of the financial plans. Make sure you have enough cover for all important events of life.

Focus on annual installments You may not realize it, but you may be paying more for your life insurance if you pay your premium in monthly installments. Many insurance companies charge extra fees if you make monthly premium payments instead of paying the annual premium.

Never conceal facts Though, age and negative health related conditions attract higher premium, don’t think about lying on the insurance application. If your insurance company gets the knowledge of concealed facts they can terminate the cover.

Do you have the right Insurance?

Today I was talking to a friend who was telling me about his Insurance cover. He is a 32 year old guy and has a cover of Rs 7 lacs and pays a premium of approx. Rs 50000. When I told him that I’m covered for Rs 35 lacs with only Rs 20000 premium, he did not beleive me at the first instance.

If you haven’t started a family, an Insurance cover is the least of your priorities. But even though it’s not that cool to be insured, it sure is smart when there are people who depend on you.

A very simple way of looking at your economic value towards your family is as follows. Imagine a monthly income of Rs 20000 and the net income provided to the family is Rs 18000 after deducting Rs 2000 for personal expenses. Thus the annual income provided to yr family is Rs 226000. The amount of money which will earn Rs 226000 pa at 8% interest rate is Rs 28,25,000. This is only a representation of the value of HLV. It is not the exact way of calculating yr HLV.

Right now you can go to this page to calculate your HLV, The future income growth, your income generating assets, liabilities, spouse income, children’seducation, etc are also to be factored in.

Ask your agents about the term assurance plans and he would definitely discourage you from taking one. After all there’s little commission he’s getting there since the premium is so low.

The point is that Insurance is NOT Investment.

What is Human Life Value?

Putting a finger on the value of yr life is crazy. Isn’t yr life invaluable and priceless?

Indian consumers have bought life insurance for reasons of tax saving rather than the core need of providing for one’s family in case of death of breadwinner.

Secondly, Indian consumers have been unaware that insurance too needs change with every change in one’s life stage (e.g., if one gets married or has children, one’s need for insurance goes up).

As a result the average insurance size is less than Rs 1,00,000. This is less than the price of a car yet to be made. And every car has to be insured by thr rule of the land. This implies that people who think they are insured are also heavily under-insured.

Heard of this yaksha question: What is the greatest mystery on earth? Yudhisthir answers, Every one has to die. But no one thinks that for himself. This is the greatest mystery.”

In a broad economic sense, insurance transfers risk from individuals to a larger group, this is
better able to pay for losses.

So how do you calculate yr Insurance need? Start with calculating yr Human Life Value (HLV). A very simple way of looking at it is as follows. Imagine a monthly income of Rs 10000 and the net income provided to the family is Rs 8000 after deducting Rs 2000 for personal expenses. Thus the annual income provided to yr family is Rs 96000. The amount of money which will earn Rs 96000 pa at 8% interest rate is Rs 12,00,000. This is only a representation of the value of HLV. It is not the exact way of calculating yr HLV.

The future income growth, yr income generating assets, liabilities, spouse income, children’s
education, etc are also to be factored in.

Tips on Financial Planning and Budgeting

Getting rich is in your hands, nobody else’s . So get started with working hard or smart (depends on you again), adding to your finance knowledge and generally taking responsibility for yourself. Get Rich Or Die Trying.

If Financial decisions look like rocket science to you and Investing is even more daunting, here are some baby steps for you.

This one is from Deborah Fowles, Guide to Financial Planning in About.com Seems very elementary but I doubt how many people are scoring more than 5/10. Here it goes, the top ten:

1. Get Paid What You’re Worth and Spend Less Than You Earn : Hey, I get less than what I deserve and so do you!! And I’ve not done any budgeting so that I may be sure of the second part.

2. Stick to a Budget : I’m ashamed, no budgeting exercise for myself, not to speak of sticking to one.

3. Pay Off Credit Card Debt: Thank God, I finally get a score on this one. I’ve managed to stay clear though I’ve had to suffer with the agonising interest calculations earlier.

4. Contribute to a Retirement Plan: I do have a pension plan but I’ve never cared to figure out whether it is sufficient! Will give 1/2 for that one to me.

5. Have a Savings Plan: Yeah ,I’ll be partial to myself and give some score here too! I do save about 15% of my income though it’s a recent phenomena. Better late than never!

6. Invest! : Pretty straight forward. But few people manage to find an hour for that in a week. They’ll rather watch TV(Big Boss is on these days!)

7. Maximize Your Employment Benefits : A meeting with your HR guy!! Brace yourself. I have no hope with my guys.

8. Review Your Insurance Coverages: Putting a finger on that is important from the family point of view. Those of you without that responsibility can breathe easy on that count. But I get full marks here!

9. Update Your Will: Never thought about that up till now. Bless Ms Fowles.

10. Keep Good Records: I will, as part of my New Year resolutions. But I’ve yet to get started on that. Next Monday, I promise.

Phew!, I score about 4/10!! So much potential to improve!!

But before I sign off, for guys who suddenly want to get started with their budgeting exercise, here are percentages of major spending categories from the US Bureau of Labor Statistics (2003) Consumer Expenditure Survey. May not apply to you and me but it’s an interesting statistic anyway. Gives you an idea where you stand and where you can increase/decrease your expenses.

Food at home 7.7%
Food away from home 5.4%
Alcoholic beverages 1.0%
Total food and drink 14.1%
Housing 32.9%
Apparel and services 4.0%
Vehicles 9.1%
Gasoline and motor oil 3.3%
Other transportation 6.7%
Healthcare 5.9%
Entertainment 5.0%
Personal care products and services 1.3%
Reading .3%
Education 1.9%
Tobacco products and smoking supplies .7%
Miscellaneous 1.5%
Cash contributions 3.4%
Personal insurance and pensions 9.9%

Work on your Budget sheet for two hours and it’ll tell you a lot about yourself. Look at it as a personality test!!

And yes, Taxquery wonders how any financial planning can be successful without tax planning. He’s dead right. Go to his wonderful blog for tons of info on Taxes

Work the Magic of Compounding

I spent an hour working in calculating the future values of my investments and worked on MS Excel for that. I found out the “Power of Compounding” and the benefit of “Starting Early”.

If I started at age 20 and invested Rs 2000 every month (Rs 24000 annually), my corpus at age 55 would have amounted to Rs 65 lacs. With similar amount and rate of return, if I started at 40, the corpus would be a miserly Rs 7.62 lacs. I invest less by Rs 4.80 lacs and the corpus difference is Rs 57.42 lacs (1196%)!

To match the returns I would have to invest more. How much? Instead of Rs 24000 every year, I will have to invest Rs 205000!! Rs 1.80 lacs more!

Confounded? Want to see the calculations. Download it here You can toggle around with the age, rate of return, retirement age and the amount to be invested. The parts highlighted by blue color are formulas and should not be changed. As you can see, it is nothing of a rocket science. Simple functions on Excel help you in this analysis.