The bull is on a rampage. And on its way to greater heights, it has spurned many predictions. In November 2006, MONEY TODAY estimated the Nifty (the bellwether stock index of National Stock Exchange) to range between 4980 and 7115 over the next five years. Seems way too conservative now. On 10 October, the Nifty crossed 5400 level.
Never has the market rallied so brazenly, yet so consistently. But amidst all the confetti, the ordinary investor, you, are overwhelmed and unsure. What should be your strategy? Is it time to sell your holdings and book profits? Will it be absurd to enter the markets now? There is one way out of this confusion: getting back to the fundamentals of investing. In the long term, the greatest impact on a stock’s price is the company’s performance, especially profits. This logic holds true at all times, no matter how high or low is the market index.
We had used company price-earnings ratios (PE), the past trends in earnings growth and minimum-maximum valuations to generate estimates of likely Nifty levels in 2011. In the eight-year period from 1999 to 2007, the earnings per share (EPS) of Nifty companies rose by an annual compounded rate of 16.6%, while the annual price gains were 24%.
Based on the average earnings growth rate across 1999-2006 of 15.5%, we suggested that systematic investment plans (SIPs) in Nifty index funds would offer a fiveyear return of 11-19%. What happens when we include 2006-7 in our calculations? Estimates surge as key variables have improved sharply in the past year.
In the past five years, the Nifty has delivered an EPS growth of 29%. It has also shown a year-on-year price gain of 41%. In calendar year 2007 itself, the PE has never dropped below 17. If the Nifty can generate EPS growth at 29% for the next five years and maintain a valuation of between PE 14 and 20, it will range between a highlow of 11000 and 15700 in 2012! An SIP index fund investor at current values could then expect an annual return of 19-28%. But 2006-7 was a bumper year. And one swallow doesn’t make a summer.
If we assume the Nifty will continue to deliver 16.5% EPS growth per year and the PE will move in a band of 14-20, then projections suggest that the Nifty will range between 6450 and 9250 in 2012. An SIP investor will then get returns of around 15.5% if he holds through all the ups and downs of the next five years. On the maximum, it can touch 28%. Both ways, the markets are still worth betting on!
Devangshu Datta
What's your score?
Want a better interest rate on your home loan? Or a faster disbursement of your loan amount? Make sure you have a good credit score.
For the first time lending institutions would differentiate their prospective borrowers on the basis of their individual credit scores. Credit Information Bureau (India) Limited (Cibil) is soon launching a credit scoring system in India, similar to the one followed in the US.
It would assign scores to borrowers on the scale of 100 and 1000. The scores would be arrived at after taking into account their credit information reports, including past performance record and the current loan status. A higher score would give one greater bargaining power.
However, those with a score of 100 or close to it would have to dole out higher down payment and pay steeper interest rates vis a vis a high score holder.
The RBI too is working towards the same end. The central bank has already called for applications for registration from companies keen on tracking credit information.
From your utility bill payment history to whether or not you own a voter I-card, everything will be collected by these companies once RBI grants them a licence. Short of thumbprints and DNA, anything that can be used to determine a person’s financial worth will be used to assign the credit scores.
Priya Kapoor
Cut rates, Milord
The National Consumer Disputes Redressal Commission (NCDRC) is all set to take up cudgels on behalf of the common man. NCDRC is considering a judgement reducing the annual percentage rate (APR) on credit cards. Though the exact cut it is considering is not known, it is likely to be a drastic reduction which could bring the effective rate down to no more that 20-25%. The rationale it is working on is the earlier Bombay Money Lenders Act (1946), which imposes a limit on what moneylenders can charge.
Interest rates charged annually by card issuers in India is among the highest in the world. In America, the interest rate ranges between 7% and 36% depending on several factors. But the NCDRC has a hard battle on its hands. Banks, for one, are not going to just willingly fall in line. Says B Madhiavanan, senior general manager, ICICI Bank, “The APR may seem high on paper but in our books, given that pricing varies from person to person, the average APR is about 18%.”
| Interest rate on credit cards range between 1.99% and 3.4% per month |
| This translates to an annual rate of anything between 23.88% and over 40% |
| National consumer court believes this rate is too high |
| It’s considering a ruling to cut rates significantly |
| RBI too wants greater transparency in determining interest rates on cards |
According to him, only those with poor credit history pay higher APRs. Concurs Parag Rao, head, products, HDFC Bank, “The basic principal here is risk-weighted. So this system is more equitable than having lower standard pricing because then the good customers end up paying for bad ones too”.
Madhiavanan claims that the annual average usage of a credit card in the country is Rs 22,000-25,000 and only 20% of cardholders revolve credit so there is no killing being made by the banks. At the same time, card issuers have their own set of reasons justifying the current APRs.
Some say that since a card is an unsecured loan, offered for a period of just one month, the APR cannot be compared with other loans. Others say that the APR shoots up because it has to include the cost of write-offs—and the industry suffers over 7.5% delinquency rates annually.
Adds Madhiavanan, “This is a very operation-intensive product—banks don’t make any money for the first three years of launching a card. Then there is the cost of developing merchant terminals.”
Says HR Khan, regional director, RBI, “We are living in an age of interest rate deregulation. Banks set their own rate after factoring in costs incurred.” While he professes no knowledge about NCDRC’s plans, Khan says that “it may be a step to create transparency”. The RBI is keen to see banks make an effort to explain the nitty-gritties of APRs to card applicants so they can make a more informed choice. But that still does not explain why rates in India are among the highest in the world. One big reason could be the lack of credit information in the country. With credit scores soon likely to come to India, the best of times for card holders is on its way.
Sushmita Choudhury
Added SIP
The benefits of systematic investment in mutual funds is lore today. Now here is SIP Plus, offering an added cushion of critical illness cover by HSBC. Says Sanjay Prakash, CEO, HSBC Asset Management, “We offer six critical illness covers to our SIP investors at no additional cost.”
The scheme is open to fresh investments till 31 December 2008 with the upper limit capped at Rs 16,000. There is no additional charge for the health cover that comes as a top-up from ICICI Lombard covering cancer, major organ transplants, stroke and more. It also covers accidental death and permanent total disability. “The value of the cover is the SIP value times the tenure for which the SIP is committed,” informs Prakash.
Narayan Krishnamurthy
Hot property
Indian realty’s dream run is likely to continue. A survey of 50 private equity investor firms conducted by Federation of Indian Chambers of Commerce and Industry and Ernst & Young has revealed that 100% of the respondents thought Indian real estate as an “attractive” investment destination, with 5% saying it is “extremely attractive”. Compared to emerging markets in South-east Asia, 79% of the respondents rated India as “very good” or “excellent” investment destination.
Returns from the real estate sector are also likely to be on the higher side, with 72% betting on a 25-30% yield for the next 2-3 years. The current growth momentum is likely to be sustained with 63% of the respondents forecasting a 25% year-on-year growth for the next five years. This buoyant feeling is fuelled by expectations (from 27% of those surveyed) of $10 billion inflows in the sector in the next three years, with a majority 68% opting for a more modest target of $5-10 billion.
For retail investors what this means is that real estate should continue to be the bedrock of their investment portfolios, not only for the tax breaks but also for the projected returns.
Yusuf Begg
