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Artistic revival

Not even the blue-chip painters have been spared by the art market crunch.

Those were the days; a Souza or Husain commanded a price for which you could buy a sea-facing apartment in the swanky neighbourhood of Worli in Mumbai. Today, you may have to toss in a small painting by Ram Kumar to clinch the deal. This is because not even the blue-chip painters have been spared by the art market crunch. “If a painting was bought in June-September 2006 and sold in the same months of 2009, the fall in prices of modern masters like V.S. Gaitonde, Tyeb Mehta, Akbar Padamsee, J. Swaminathan, S.H. Raza, M.F. Husain and F.N. Souza would be about 35-40% on an average,” says Neville Tuli, founder chairman of Osian’s. Does this mean that you can now lay your hands on the works of these masters?

Not really, unless you are sitting on extra cash (over and above your regular expenses and investments) of more than Rs 10 lakh. The good news is that even though a Raza may be out of reach, works of young and contemporary artists are available for a steal. According to Tuli, in the past one year, their valuations have gone down by as much as 70-80%. Surely a great buy, but doesn’t the extent of correction ring a warning bell about their prospects?

Mukesh Panika, director of Religare Art Initiative, doesn’t think so. “This is a fantastic time to buy, especially for first-time buyers or those looking to invest Rs 1-2 lakh. Not only are prices low, but buyers have greater negotiating power now.” However, he adds a cautionary note: “One of the biggest lessons from the slowdown is that the discerning ability is still low among both buyers and sellers. So art enthusiasts must exercise due diligence before following the advice of galleries. Many galleries have been forced to shut shop in recent times when volumes have dropped by about 60%.”

This is much like the stocks that disappear from the bourses. So similar to an equity investment, Panika advises serious research such as visiting the galleries, following the works of the artist, evaluating the infrastructure of the gallery, etc. Currently, Religare Art Initiative is aggressively promoting the works of emerging artists like Daina Mohapatra, Jyoti Ranjan Jena and Avishek Sen, whose works cost Rs 2-5 lakh (see photographs). “But the investment horizon should be at least three years, so that, if required, a turnaround of the risk is possible,” says Panika.

Tuli is more circumspect about emerging artists. He suggests buying them primarily for the “love of art” as they would take almost 20 years to significantly appreciate in value, if at all. However, those who had bought the A-listers four to five years ago have nothing to worry. “If the work by a master was bought in 2004, the returns would still be 20-25% per annum,” says Tuli.

Obviously, the bursting of the art bubble has resulted in opportunities galore. Already, galleries like Saffronart are reporting that the collectors are returning to pick up Indian modernists that are available for a bargain. Newbies aren’t far behind. In the second edition of the Indian Art Summit held in August this year, about 30-40% of the sales were to first-time buyers. So if you are feeling arty, go and invest. Just remember the slowdown lesson summarised by Andes Petterson, managing director of Arttactic: “Focus on quality, rarity and artists who will stand the test of time. Then you won’t go wrong.”

Credibility meter for research reports
– By R. Sree Ram

How many times have you been told to conduct research before buying stocks? To minimise the chances of wrong bets, one must carry out self-study and not depend on tips. The question is, how dependable is your source of research? Invariably, it involves going through myriad reports released by research units of brokerage houses. If the main objective is to generate trading volumes and business, the reliability of the recommendations comes under the scanner. Thankfully, the accuracy of these reports can be assessed over time by following the performance of the stocks that are analysed.

The research arm of ICICI Securities has conducted an interesting study along these lines. It screened the BSE 100 companies to find out the most and the least preferred stocks by analysts across research houses.

To qualify, a stock had to be covered by at least 10 analysts. The most preferred stocks were those that received the maximum buy ratings, whereas the stocks with the most sell ratings made it to the list of the least preferred stocks.

The study, which was conducted in August, discovered that Tata Communications is the least preferred stock as 90% of the 21 brokerage houses covering it had a sell rating. United Phosphorus attracted the maximum positive ratings, with all the 13 broking houses covering it recommending a buy. Nalco, Ranbaxy and Hindalco are the other names that figured in the most hated list. In the most preferred category, banks grabbed the lion’s share with stocks like Axis Bank, Bank of Baroda and Punjab National Bank.

Not only does this study help to identify the stocks with consensus recommendations, it also reveals some contrarian bets. As most of the stocks in the least preferred category are going through troubled times, a revival in the business might lead to sharp upgrades. For example, Ranbaxy Laboratories is being upgraded by some analysts who foresee a turnaround.

Significantly, the study reveals that most of these reports are credible. The majority of the stocks in the most hated list have underperformed the Sensex. For example, Nalco, Ranbaxy and ABB, which were among the least preferred stocks, underperformed the Sensex by over 21% each in one year. Similarly, the most loved stocks like Dr Reddy’s, M&M, Power Finance Corporation and Bank of Baroda have outperformed the Sensex by over 35% each. The only caveat: these recommendations work best only in the long term, that is, not less than 12 months. The trend is not conclusive in the short term of one or three months as even the most loved stocks are underperforming.

Insurer, guarantor in the line of fire
– By Rakesh Rai

They don’t have the luxury of a lawyer on their payrolls, which is why individuals run out of resources while taking on corporate behemoths. On the other hand, companies use their financial clout to drag the cases from the consumer court to the high court, and so on. Thankfully, the judiciary is not blind to this exploitation. Recently, the Supreme Court slammed the tendency of insurance companies to avoid paying compensation to the insured on one pretext or the other and prolonging cases unnecessarily.

This reprimand came when the court dismissed an appeal filed by the Oriental Insurance Company, challenging an order passed by the National Consumer Disputes Redressal Commission (NCDRC), directing it to pay Rs 21.5 lakh as compensation to Ozma Shipping. The court said that “the insurance companies, in genuine and bona fide claims of the insured, should not adopt the attitude of avoiding payments on one pretext or the other. This attitude puts a serious question mark on their credibility and trustworthiness. Incidentally, by adopting an honest approach and attitude, the insurance companies would be able to save enormous litigation costs and interest liability”.

The compensation was awarded by NCDRC after a vessel owned by the shipping company sank with the cargo on 23 April 1988.

However, in a separate case, the court also said about accident claims, “If the insurance company has no liability to pay at all, then, in our opinion, it cannot be compelled by the order of the court in exercise of its jurisdiction under Article 142 of the Constitution of India to pay the compensation amount and later on recover it from the owner.” The judgement is significant as it counters the rulings according to which insurance companies had to first pay the compensation to the victim/dependants of an accident claim and later recover the amount from the vehicle owners responsible for the accidents. Such directions had been passed because insurance companies refused to pay compensation on the ground that the vehicle drivers/owners did not have valid driving licences.

In another case, the Supreme Court reversed a Calcutta High Court judgement by allowing an appeal filed by IDBI against a guarantor. Biswnath Jhunjhunwala, director of Modern Malleables, had stood guarantor for a loan of Rs 3 crore taken by the company in 1994. A second loan of an equal amount was taken by the company on identical terms in 1995.

The company defaulted in repayment of the principal amount, interest and other collateral dues. In 1997, IDBI issued a notice to Jhunjhunwala, invoking his personal guarantee and asked him to pay Rs 5.4 crore with interest and liquidated damages from 1 January 1997. Though the high court had appointed a receiver for taking possession of the sick company’s assets, it stayed the proceedings initiated against Jhunjhunwala.

Allowing the bank to recover money from Jhunjhunwala, the Supreme Court observed that the liability of the guarantor and principal debtor was “co-extensive and not alternative”. Justice Bhandari said, “...the high court under its power of superintendence under Article 227 of the Constitution of India was not justified to stay the recovery proceedings against Jhunjhunwala.” The apex court further clarified that the proceedings against the guarantor were not contingent to the failure of getting the principal debtor to pay the loan.

So think of less risky ways to help out a financially weak friend than acting as a guarantor for his loan amount. You may end up paying it.

An expensive brew
— By R. Sree Ram

First, it was sugar: low domestic acreage and a fall in global production pushed up the prices by 54% this year. Now, it is the turn of your morning cuppa to become expensive. Massive crop failure in key exporting countries is sending tea prices higher every day. Kenya and Sri Lanka, which contribute 40% to the global tea exports, have so far reported an 11% and 24% decline in production, respectively, this year. Global tea production in January-April declined by 16.1% compared with the past year. This has led to a 30% rise in the Indian tea prices to Rs 130 per kg, the highest since 2000. Analysts do not foresee any fall in the near future.

This is because a host of problems like the steady decline in tea prices in 2001-5, low yields and high investment required in replantation have impeded the growth of the tea industry. This has adversely affected the plantation activity even as the domestic tea consumption is growing steadily at around 3% every year. In fact, in 2005-8, tea production in India grew by only 5%, whereas the consumption spiked by 9%. The trend continued in the period between January and June this year as production dropped by 3.4% compared with the same months last year. According to analysts at ICICI Direct, this has resulted in a shrinkage of tea inventories from 305 million kg in 2006 to 220 million kg in 2009. It is likely to further reduce to 206 million kg in 2010.

“The shortage in tea production has resulted in a 15-20% rise in tea prices in north India. The lost production will be difficult to recover in 2009-10. We expect at least 20 million kg lesser tea production in addition to a loss of 23 million kg shortage in 2008. This will keep the Indian tea prices firm with an upward bias,” says a Merrill Lynch research report.

However, there is a positive side to the story. The rising prices are a boon for plantation companies like Harrison Malayalam, Jayshree Tea and McLeod Russel. They are expected to benefit from high prices as it will improve revenues and ease the cash flow. Of these, McLeod Russel is the most preferred due to its large scale. According to the ICICI Direct report, its realisations are almost 30% higher than the industry as most of its tea estates are located in Assam, known for high quality tea. Analysts at Merrill Lynch have valued the stock at Rs 200 per share.

Regulator Watch
A look at the recent rulings which can affect you.

MARKETS
To improve transparency in the grievance redressal process, Sebi has asked stock exchanges to disclose on their Websites the details of complaints lodged by investors against trading members and companies listed on the exchange, including arbitration and penal action against the trading members.

BANKING
The RBI has directed banks to calculate interest on balances in savings bank accounts on a daily product basis from 2010. At present, banks calculate interest on the minimum balance between the tenth and the last day of each calendar month.

The central bank has asked banks to obtain a request letter from the customer for renewal of frozen term deposits and also give him the option to choose the term for renewal. In case the depositor does not exercise his option, banks can renew it for a term equal to the original term.

INSURANCE
Irda has instructed all general insurers to give a 15-day freelook period for health insurance policies of three years or more.

Irda has said that insurers cannot charge fees on the surrender of a Ulip after five years. Insurance companies sometimes charge a nominal fee to withdraw their Ulips once the lock-in period ends.

Gains from volatility in interest rates
– By Tanvi Varma

The liquidity crisis during the recent economic slowdown was a nightmare that the mutual fund industry won’t forget in a hurry. As investors scrambled to withdraw money, many debt funds either found no buyers in the market or had to sell their underlying bonds at throwaway prices. Hopefully, the situation won’t repeat itself soon, but if it does, mutual funds have a new weapon in their armoury to fight such a freeze: interest rate futures, popularly known as IRFs.

“With interest rate futures, at least you have another option— instead of selling your bonds when there are no takers, you can hedge your position by selling the same in the futures market,” says Shobit Gupta, head, fixed income, Principal PNB AMC.

What exactly is an IRF? Like any other derivative product linked to an underlying asset, IRF is a contract to buy or sell a debt instrument— currently a 10-year government bond bearing a notional interest rate of 7% payable halfyearly, at a price decided in advance for delivery at a future date. IRFs were recently launched on the National Stock Exchange with a minimum tradeable lot size of Rs 2 lakh. Previously launched in 2003, the IRF did not perform satisfactorily primarily due to two reasons: product design and the fact that banks could only hedge it on their investment portfolio and couldn’t take a trading position, according to Shyamala Gopinath, deputy governor, Reserve Bank of India.

Not just funds, interest rate risk affects savers and borrowers too. For instance, while taking a home loan you face the risk of the rates moving up. When you invest, the fear is that the interest earned could go down. As a borrower, if you foresee a rise in interest rates, you can go short in the market, that is, sell futures. However, this is a complex instrument and you may never be able to get a perfect hedge, says Gupta. This is because the futures price is related to a 10-year government bond, whereas your loan is related to the bank’s prime lending rate. If the RBI cuts interest rates by 4%, banks may cut their PLR by only 2%, so the movement in the futures price may not be in sync with the movement in your loan rate.

It’s raining jobs for everyone
– By Priya Kapoor

Good news for freshers, unemployed and all those looking for a career switch. Putting the dreaded job drought behind it, India Inc is set to be on a hiring spree till the end of this year. The global employment outlook survey conducted by Manpower reveals that out of 35 countries, India is the most optimistic labour market, with the seasonally adjusted employment outlook of the country (the percentage of employers anticipating total employment to increase after subtracting those expecting to see a drop) at a healthy 25% in the fourth quarter. This is an improvement of six percentage points from the previous quarter. “The trend that was deteriorating earlier has now reversed,” says Dr Naresh Malhan, managing director, Manpower India.

Compared to the third quarter of 2009, all sectors have shown an improvement, except public administration, transport and utilities. While the former reported a stable outlook, the latter has declined by 2% vis-à-vis the previous quarter. However, compared to 2008, the outlook is weaker by 14%. The IT sector, one of the worst hit in the global meltdown, is also looking to hire freshers.

“Indian employers have absorbed the layoffs from the third quarter. They will begin hiring again at a conservative pace. Most intend to keep their workforces intact through the end of the year. Hiring is expected to occur at all levels with the exception of very senior levels,” adds Malhan.