Investment Process

Any investor who sincerely works towards making the most of the current market trend will never underestimate the importance of having an investment strategy predefined before he starts investing. Investment environment is increasingly becoming complex and encompass various kinds of marketable securities. Nevertheless, importance of a well-defined and suitable investment strategy cannot be underestimated.

An investment strategy defines how an investor should go about choosing securities to invest in. It is a basic guide for where to invest, when to invest and how much to invest. There are five important steps in an investment process which should not be neglected. They are:

1. Defining an Investment strategy/policy
2. Analyzing securities
3. Constructing a portfolio to minimize risk
4. Evaluating the performance of the portfolio, and
5. Revising the portfolio

An investor cannot define his investment strategy unless he defines his investment objective and investment surplus to his disposal. Objective of making more money is very vague. Of course everyone wants to make more money! Objectives have to be clearly defined in terms of risk and return. Understanding the relationship between risk and return will go a long way while building a portfolio that can provide optimum returns for the amount of risk an investor can take.

A commonly neglected aspect while choosing a venue of investment is the individual tax status. It does not make sense for a tax-exempt investor to invest in government securities or other tax-exempt investment options.

The second step of analyzing securities enables the investor to distinguish between underpriced and overpriced stock. Return can be maximized by investing in stocks which are currently underpriced but have the potential to increase (remember buy low sell high). There are two approaches used for analyzing securities; Technical analysis and Fundamental analysis.

Technical analysis involves studying the trends of stock prices movements. Technical analysts claim that by studying recurring trends and patterns in price movements it is possible to predict near term price movements. This is based on the assumption that price trends and pattern repeat themselves.

On the other hand, fundamental analysts believe that intrinsic value is equal to the present value of all the cash flows that a firm expects to gain in the future. Present value is therefore computed by forecasting the timing and amount of future cash flows and discounting these by applying an appropriate discount rate. A stock is considered undervalued and worth investing in only if this intrinsic value is reasonably less than the stock’s current market price. This is based on the belief that mispriced stocks will be corrected by the market at some point of time in the future, and that underpriced stocks will appreciate and overpriced stocks will depreciate.

Get credit news to remain apace with changes in credit card policies

To stay current on what is happening in the financial markets and in the different sectors of the economy around you, its very important to be aware of recent credit news and information. This is more important in case of new developments that take place in the credit card industry. Changes in the financial markets do not affect all because you may not be having an investment portfolio consisting of stocks, bonds etc. But credit card is one thing that is common among all Americans.


It is unfortunate to learn that ignorance is one of the reasons why credit cardholders fell behind on payments. Due to the credit crunch there were many credit card issuers that changed their payment policies and reduced credit limits. However, many consumers were not aware of the same and continued using their credit cards as per older terms of their cards. This led to the increase in the number of delinquencies associated with credit cards.


In order to do away with the anomalies, the government introduced the new credit card regulations that were supposed to come into effect in February 2010. However, it is anticipated that these changes in the credit card policies will come into effect by 2009 end. These changes have been made keeping in mind the needs of the consumers. Consumers have been complaining about the changes in the policies and the irregularities that prevail in the mortgage market.


So, it is important to stay abreast with the latest developments that are taking place around you. If you get credit news about the mortgage market, you can prevent your property from being taken away by fraudsters. How is this possible?
There are many scammers in the mortgage market that take you for a ride. Instances of mortgage fraud are not uncommon and in the majority if the cases, it is found that borrowers that are ignorant are the victims of mortgage fraud like property flipping, appraisal fraud, etc.

Organized Indian Retail: Challenges ahead for Organized Retail

Booming economy, favorable demographic patterns, increasing per capita income and urbanization gave rise to a new sector in India: Organized Retail. Opening up of retail sector for FDI can be considered as the prime reason behind the blooming organized retail sector. Sensing this opportunity several companies ventured into this sector, including Reliance, Bharti and Pantaloons.

Despite the Government allowing only 51% of FDI in single format retail segment, global retail giants like Tesco, Wal-Mart and Metro AG are making inroads indirectly through franchise agreements and cash and carry wholesale trading, thus giving some serious competition to domestic retailers. Nevertheless, growth opportunity in this sector can be judged by the fact that only 3% of the total retail sector is organized and 97% of the sector still consists of local mom and pop stores.

Unfortunately, the growth strategy used by all organized retail players of increasing their number of stores backfired when rentals dramatically shot up following the global economic melt down. Profitability is seriously hampered and almost all major retailers are now struggling to maintain their bottom line. Average operating profit margin declined from 9.5% in 2007 to 7.9% in 2008. The worst part is that such a drastic growth in the number of stores was backed by significant leverage which is expected to further hurt these organized retailers’ liquidity and profitability levels.

Retailers are correcting their over enthusiastic strategies of the past and focusing on improving their business model. This section will review some of the challenges these organized retailers are facing on both macro as well as local levels.

Aggressive Expansion

Over the last few years Indian retailers most preferred mode of expansion was to increase their number of outlets across metros. Outlets were built wherever real estate was available and not where they were actually required, which led to ‘Clustering’. Following credit crunch in 2008, several outlets were cast strapped and had to be closed down simply because they were operating in unviable locations.

Poor Supply Chain Management

One of the major challenges for retailers is to reduce shrinkage which includes short-weighing, pilferage and poor product handling. While the average shrinking percentage of inventory in developed countries is 1% to 2% of Cost of Goods Sold, it is estimated to be much higher for Indian retailers, primarily due to the lack of focus on supply chain management. The existing supply chain is not devoid of inherent weakness of India’s infrastructure, besides being corrupted along the entire chain. Tracing shrinkage is a Hercules task as almost all the transactions still continue to be based on paper system. This gives rise to the need of third party logistics organizations that can provide services at competitive prices. Third party logistics is a concept still absent from the Indian retailers’ value chain.

A large part of shrinkage takes place within the retailer by its employees. Moreover, tracking an employee’s track record and background checks is difficult. Retailers are now joining hands to fight this battle by creating a database of employees and share it amongst themselves to avoid shrinkage from within.

Employee training and retention

The most common strategy applied by retailers to keep labor cost at minimum was to employ fresh graduates with no experience in retail sector. They have now realized that in difficult market situations, experienced and talented employees that have sound understanding of ground realities could give retailers a competitive advantage. Despite a downturn, need for skilled manpower still continues to be a major concern across the sector.

Managing working capital

One of the most important factors affecting a retailer’s profitability is the way it handles its working capital. Lower footfalls, resulting into lower sales has directly impacted Indian retailers’ working capital position. Discounting is now the most common technique used to turn slow moving inventory.

Besides lower footfalls another factor which is hurting retailers’ liquidity position is the significant amount of leverage they are carrying which was used earlier for aggressive expansion. Banks are now reluctant to finance retailers given the falling demand and plummeting profitability. Retailers are therefore finding it difficult to finance their working capital requirements.

Diversifying into untapped rural areas

Experts believe that the next phase of growth for organized retail sector will come from rural areas that account for half of the $300 billion domestic retail market. Retailers will have to focus on the previously untapped lower income strata by providing them access to credit facilities. On the back of souring commodity prices and improving productivity, rural economy is set to boom in the next decade.

Backward Integration

One way to improve efficiency and profitability is to remove unwanted intermediaries which eat into the already stressed margins. To improve rural economy, Indian Government approved Contract farming and Leasing. According to KPMG, this will bring about technology transfer, increase capital inflow and assure market for crop production, besides eliminating intermediaries. Pepsico and ITC’s e-chaupal are already benefitting from contract farming in Northern India.

Despite the above mentioned challenges, long term prospects of organized retailers are still very attractive. Important consolidations and partnerships can be expected soon for improving operating and cost efficiency. Focusing on supply chain management and partnering seem to be the need for an hour for organized retailers so as to leverage their expertise and financial muscle.

Indian Telecom Industry: Sharing Telecom Infrastructure

De-licensing, implementation of open-market policy and other liberal economic policies has helped the Indian Telecom sector register a remarkable growth during the last 5 years. Indian Telecom sector today is the second largest and the fastest growing telecom market in the world only after China. Competition is intense with 4 out of the top 10 telecom players accounting for two third of the entire mobile market.

While all major telecom companies like BSNL, Bharti, MTNL, Reliance and Tata Infocomm have experienced a drastic increase in their subscriber base over the last few years, Average Revenue per Unit (ARPU) continues to be a major concern as price competition shows no sign of boiling down. According to TRAI, as of December 2008, the total subscriber base stood at 346.9 million, growing from 0.9 million as on March 1998. Despite growing subscriber based, mobile penetration still continues to remain at a low 27% compared to 94% in the US. Moreover, growth has been primarily from metros and Class A circles.

Due to growing competition and declining ARPU, large telecom players including Bharti, BSNL and Reliance are now increasingly focusing on rural and Class B and C circles to capture the untapped subscriber base. Since growth will be coming from lower income strata, it can safely be assumed that APRU will continue to slide further.

ARPU and MoUs (Minutes of Usage) are two critical factors for a telecom company as it directly impacts its EBITDA (earnings before interest tax depreciation and amortization) margins and IRR (internal rate of return). In the past, telecom companies were able to improve their EBITDA figures by amortizing cost over large and growing subscriber base. However, cut-throat competition and declining ARPU is increasing the pressure on these companies’ EBITDA an IRR.

Sharing of telecom infrastructure seemed to be the most logical step towards improving capital efficiency and reducing the cost of maintaining passive telecom infrastructure, besides enabling them to focus on their core operations. Return on Capital Employed (RoCE) and Profits are also positively impacted when telecom operators prefer to lease towers instead of owning them.

A tower infrastructure company provides passive telecom infrastructure on a sharing basis to telecom operators by entering into Master Service Agreements (MSAs) with them. While sharing of telecom infrastructure is now the order of the day across the world, the extent to which they are shared depends on the competition and regulatory climate in each country.

In order to improve operational and capital efficiencies, large telecom companies including Bharti Airtel, Reliance Communications and Tata Teleservices, hived off their tower divisions as separate companies. This benefitted them not only in the form of reduced operating cost and capital requirement, but also unlocking of significant value. Tower infrastructure subsidiaries always have the advantage of an assured occupant. As per ICRA, telecom infrastructure can generate good returns after achieving an average occupancy ratio of 1.7.

Besides hived off telecom infrastructure subsidiaries, there are several Independent Telecom Infrastructure Companies (ITIC) that build passive and active telecom infrastructure on anticipatory basis and rent it out to operators. For example, Essar Telecom Infrastructure Limited, Xcel Telecom Private Limited, GTL Infrastructure Limited, Quippo Telecom Infrastructure Limited, Vision India Private Limited, Aster Infrastructure Private Limited and TVS Interconnect Systems Limited.

ITICs are at a disadvantage against other telecom infrastructure subsidiaries as they have no assured occupants. Moreover, large telecom operators have their own infrastructure subsidiaries. As such, ITICs focus on regional and new operators. Unitech, Swan Telecom and S Tel Limited are some of the new entrants that will bank on such ITICs to optimize their investment.

Mobile tariffs are currently so low that any further reduction in tariffs will be impossible. The only distinguishing factor will be the quality of service provided by telecom operators. Given the scarce spectrum coupled with ever increasing number of subscriber base, providing good quality of service will demand additional passive and active telecom infrastructure thus increasing the demand for ITICs. Introduction of mobile number portability with limited switching costs is seen to be another important factor that will drive the ITIC sector.

Driven by intensifying price competition, mobile tariffs are now the lowest in the world. Consolidation is now expected to be the strategic and most logical step in the future, which will be supported by the rapidly increasing number of ITICs.

IPO: Risks involved for Retail Investors

Markets seem to be improving. With some minor corrections happening on the way, medium and long term prospects of capital markets look bright. Taking a clue of this, several companies are planning to launch their much awaited, rather postponed IPOs soon. Around 20 companies will be raising about Rs.20,000 crores from the market in the next 6 months.


QIPs and High Networth Individuals are carrying huge surplus liquidity which will be diverted into such IPOs. However, if retail subscription numbers of recent IPOs is anything to go by, it has proven that retail investor seem to lack confidence. The 10 IPOs launched this year where undersubscribed by retail investors. For example, QIP subscription of the largest public IPO this year, NHPC was oversubscribed 29 times, but its retail portion was subscribed only 3.1 times.


While underwriters to the issue claim that the IPO is significantly underpriced, retails investors need to bear in mind that there are certain risks involved in investing at the time of an IPO which cannot be easily measured. Measuring risk profile of an IPO is difficult compared to the risk of a seasoned issue. Various models of IPO pricing behaviour also fail to explain the behaviour of IPO returns. They have their own risk profile which is different from the risk in investing in trading stocks.


Those times are long gone when small investors could blindly throw in money at IPOs and expect to gain big return in no time. While IPOs still are a good investment option, the focus has shifted to long term return potential. Here we will brief on some of the points which retail investors should know before they plan to invest their hard earned money into IPOs.


The most important point to be kept in mind is that several companies that launch their IPOs are new ventures and do not have a track record of profitability. This in itself is a big risk as there is no parameter against which an investor can compare the valuation. The prospectus issued by such companies at time of filling for an IPO may be overblown and overoptimistic about their future prospects. Nevertheless, it is advisable to read through the prospectus as it does indicate risk and opportunities related to the company. It is a healthy sign, if the Company plans to use the amount raised towards expansion or research and development. Contrary to this, if the amount will be used to pay off existing debts and liabilities, it is a bad sign as it indicates that the company is unable to generate cash to pay off its debt.


The other important point worth mentioning here is that these are the companies which are not extensively covered by other analyst to uncover hidden risks. Moreover, investment banks and brokerage firms that do provide information have their own interest in pushing their clients’ IPOs to ensure their own future business with them. Similarly, opinion of magazines and newspapers may be biased because of their vested interests.


It has always been observed that retail investors are last to enter when signs of economic direction becomes clear. With the picture of economic recovery getting clearer, confidence and appetite of retail investors will improve and they will be inclined to invest in IPOs.