How will the Greek exit from Euro impact us?

There have been many recent news items saying that if Greece left the Euro zone, it will have devastating effect on the global economy and we are not insulated enough - that set me thinking as to what would happen to India and my view is that nothing much will happen to us – we are reasonably safe.

First let us see what will happen to Greece, and then we will see what will happen to us in India.

As we all know, elections are scheduled in Greece this week and there is a 50% plus chance that the Greek will vote for the party opposed to the austerity measures imposed through agreements with IMF and ECB. If the new government goes back on its austerity agreements, the Greek government will not be supported by further infusions of credit from IMF and ECB – this will result in the Greek government running out of funds in a month or two –but before that there will be a run on the banks –Greek citizens would like to take their cash out of banks and that will trigger a banking crisis.  In order to avoid that, the Greek government will need to launch its own currency immediately and leave the Euro zone. In order to be globally competitive, the new currency will need to be pegged at an estimated 30% lower than the current Euro. This will create inflationary conditions in Greece –the interest rates will go up, cost of doing business will go up and Greek economy will be in a recessionary state for a few years – they will need to pull themselves out of this mess over time by improving their competitiveness and productivity.

Now what will happen to the rest of the world and especially to India - If Greece exits the Euro zone, there will be flight of capital away from other “high risk” countries like Spain and Italy. The cost of borrowing in these countries will go up. Investors would move to safe haven currencies and currently US is the preferred safe haven. The Dollar would strengthen against the Euro.  That would mean that the Indian Rupee would be under pressure on account of the strengthening US Dollar –Indian Rupee would depreciate a bit further – this would put further pressure on Inflation in India as imports will become costlier. It will surely put pressure on the Indian economy – but as we know, the Indian Rupee has already lost about 20% of its value in the past 12 months –so we will live to see this further slide due to Greek exit and we will survive.

India’s trade with Greece is negligible and devaluation of Greek currency will not leave us poorer. India’s trade with Europe will survive as the movement of Rupee vs the Euro will not be impacted much.

So the exit of Greece from the Euro will at best devalue our Rupee a bit more –beyond that, I do not expect much to happen in the short term.

In the long term, if this exit opens up the doors for the exit of other countries like Spain and Italy (which is highly unlikely), then it could have some impact – otherwise we are insulated reasonably well from this event.

Current directions on where to invest

After a one month break, I am back. Not that I was not watching the markets or the economic news –our smart phones ensure that we are always connected.  But I was not actively investing as I was busy elsewhere.

Warren Buffet had famously said – “Be fearful when others are greedy. Be greedy when others are fearful.”

This is the time when everyone is fearful –there is more than normal amount of bad news –my prediction in December for 2012 was a tad optimistic – I did not predict that the Indian GDP growth would fall so much so soon – I also did not predict that the EU problems will go beyond Greece and Italy – now it is at Spain’s doorstep. There is more bad news than what I predicted.

And that is good news

I believe this is the time to look at investment opportunities.

Let me quote Warren Buffet again:

“Buy a business, don’t rent stocks.”

“Buy companies with strong histories of profitability and with a dominant business franchise”

“If a business does well, the stock eventually follows”

Some may say that these sayings of Warren Buffet are more suitable for the US markets where the market is very broad and deep (there are very large number of stocks and many investors). Our stock markets are very shallow - the FII mood dictates whether our markets will go up or down.

Well Yes –there is some truth in this argument – But, when you look at long term of 3-5 years, I believe that  the basic principles given by Warren Buffet will apply for Indian stock markets as well.

So I am happy I bought the stocks in second half of 2011 (when the markets were down).  The companies that I have invested (and most of them are listed in my blogs) have high profitability and good profit growth and have been bought at a fair value. I will invest again in these companies in the next few months as opportunities arise.

Some of the companies that are in the buying range right now are:

Agrotech Foods (invest at around 450), Bharti Airtel (invest at current levels of 300), BHEL (invest at current levels  till Rs. 270), Gruh Finance (invest at around 660), LMW (invest at around 1650), Shriram Transport Finance (invest at current levels till Rs 540). 

In case you are looking fore investing in these companies, I would recommend that you wait for another 3-4 weeks - the markets may go down further and that will give you still better entry price.

Some of the companies that I am watching and am close to investing are - 3M India (will invest at Rs. 3250), Bosch ( will invest at around 7000), Exide (will invest at around 100), Hawkins (will invest at around 1130), Nestle (will invest at around 4200). I hope to get these prices sometime in the next two months and I will invest in these companies if that happens.

I am confident that over a long term of 3-5 years, these stocks will return a 20% ROI for me. The current atmosphere of fear and pessimism will open up opportunities. And I am waiting patiently.

Predicting the Rupee / Dollar conversion rate

This blog is in answer to a question from one of my school classmates (of 1979-80 vintage) who is based in the US and wanted to know where the Rupee /USD rate is headed.

Let me try to explain the mechanics in simple terms. This logic can be used to predict the long term movement of the conversion rate as well.

Two years back, in Q1 2010, the conversion rate was around Rs 44-45 to a dollar. Today, in Q2 2012, it is hovering around Rs 52 -53 to a dollar. The rupee has lost between 15 and 20% of value with respect to US dollar in the period.

In the last two years, India has had an inflation of around 10% per annum – which means over the last two years, the rupee has lost 20% of its purchasing power.

In the same period, the inflation in the US has been around 2% per annum – which means that the US dollar has lost 4% of its purchasing power in the same period.

What it means is that during the period Q1 2010 to Q1 2012, the US dollar has lost 4% of its value where as the Indian rupee has lost 20% of its value. Thus over this period, the Indian rupee has got devalued by about 16% when compared to the US dollar.

That explains the devaluation of the Indian rupee during this period.

Now my investment banker friends and students of economics may not like this simple explanation – but I believe that this logic is good enough to predict the conversion rate in the long term.

So here is the simplified formula:

The annual rupee devaluation vis a vis US dollar = (Indian inflation rate) - (US inflation rate).

This formula can be used for long term predictions (one year and above) and not for short term predictions.

I predict that the INR/ USD conversion rate should be around Rs. 55.5 to a dollar in December 2012.

Stocks that I recommend now:

Based on requests from friends who follow my stock advice, I have decided to share my stock trades as and when I do it.  I currently have invested in 37 companies since last November. On 1^st Nov 2011, the sensex was 17480 and today it is around 17200 – the sensex has not moved much but I have an overall absolute return of 10% plus on my investments.

As most of you know, I watch the market closely and have a list of appx. 150 good companies that I want to enter when their stock price is low. I have been able to find an entry price for 37 of these companies and I believe that these companies will do well when the Indian markets start going up in the next 2/3 years.

My expectations from these investments is 15% per annum plus (as it is tax free if you hold it for more than 1 year) - but I do not enter the stock till I see a 20% per annum potential - I also know that not all recommendations will make the 15% grade - overall I want to be ahead of the sensex by 3-4% annually. So if sensex is -10% and if I am -6%, I am fine.  After all when it rains, everyone gets wet – I aim at getting wet a little less.

I normally get an investment opportunity once or twice a month. As I invest, I will share it through my blog. If you want to follow me, you can just mirror my portfolio and buy the stocks in the same price range. 

I normally recommend companies that are large caps - in these companies, I invest 50K or more. Sometimes, I recommend mid caps (which are higher risk profile) - here I put only 10-20K. So you too need to pre decide some investment levels based on your ability to invest – but surely invest more in large caps and less in mid caps.

Here are some stocks that I have invested recently that are still hovering at a BUY range:

·   Infosys - the current price range of 2360 is a good price to enter. I entered at 2400 some 10 days back. They are going through a rough patch due to weak management and will hopefully resolve itself in a few quarters with Mr. Kamath, their new chairman, becoming more visible and taking more control.

·  Gruh Finance - this is a HDFC kind of story of home financing in rural areas - has Deepak Parekh on the board and is a good future story as India's rural areas are slowly getting lesser poorer and the company is well poised to benefit from this - I bought it at Rs. 680 two months back -it is currently at 670 - you can buy it at the current price. This surely is a long term solid investment opportunity.

·  Another mid cap that I recommend is LMW  -the company is a cash generator - supplies to the textile industry in India and has an export market as well - it's stock is down right now - I bought it last fortnight at 1673 - it is quoting now at 1642 - highly recommended - but invest 10-20K as it is a mid cap.

·   my last recommendation is Cox and Kings - I am investing in it right now – this company is growing and is cash rich as they have not yet utilised all the money that they generated through an IPO few years back. Currently the price is below 150 and it will grow well over the next few quarters.

So here were my current recommendations.

If you want, please write to me and I will share my calculations (one on one) for projecting the share price of the stock, based on the last 10 year financial data.

Happy Investing.

Come - Join the party

Three months back, Indian markets were one of the worst performing ones globally –and today we are one of the best performers. The market has gone up by 15% in the past two months and many people feel that they missed the opportunity to profit from the rally in Jan / Feb 2012.

This increase in market valuations was because of funds coming in from foreign institutional investors into the Indian stock markets - FII inflows in Jan and Feb 2012 were around USD 6 Billion and this was the reason why market valuations went up by 15%.

Why did the FII come into the Indian stock markets?

Well the FII’s did not just come to Indian stock markets - they went to all the emerging markets – to China, Indonesia, Brazil and to Russia - all these markets have given good returns in Jan/ Feb 2012– and this can be traced to an action of the European central bank ( ECB) towards December end.

Somewhere before Christmas 2011, the ECB gave away about 500 billion Euros to European banks at a low interest rate of 1% for 3 years. This injection of liquidity was required to support the European banking system, which was close to collapse due to the sovereign debt crisis in Greece, Italy, Spain and Portugal. However, this easing of liquidity in Europe resulted in the FII inflow to emerging markets and that in turn resulted in the 15% appreciation in our stock markets.

We had a very similiar situation just two years back - In 2010, the Indian stock markets gave a 70% plus return and that was because of infusion of liquidity by the US Fed in 2008 and 2009 ( it was then called Quantitative easing – QE, now it is called LTRO –Long term refinancing option).

So why am I giving you all this information?

Because last week, there was one more infusion of liquidity by the ECB – again ECB has loaned 530 B Euros to European banks at 1% for 3 years – just like in 2010 and in Jan/ Feb 2012, some of this cheap money will find its way to Indian stock markets and it will result in the markets again going up.

So for those who missed the Jan / Feb 2012 rally, there is one more on the opportunity in the coming three months – this is the time to enter the Indian stock markets.

So what are the stocks to buy – I recommend at present BHEL (around Rs. 280), Colgate (around Rs. 1025), Crisil (around Rs. 950), Dabur (around Rs. 100), ESAB India (around Rs. 530), Maharashtra Seamless (around Rs. 370), Mahindra Holidays (around Rs. 290), Sundaram Finance (around Rs. 620), Noida Toll (around Rs. 23) and Shriram Transport (around Rs. 535).

Each of these stocks have a potential to give 100% returns in 3-5 years (15- 25% returns per annum). The methodology of forecasting the future value of the shares has been shared by me in this blog in Sept 2010 you can refer to it ( it’s called Investing in equities –part 1 and part 2). This is a very well known methodology and is used by almost all well known long term investors in stock markets globally – the key to making money using this methodology is  to stay invested for 3-5 years.

Another way to enter this rally would be to buy an Index based mutual fund – I recommend the Goldman Sachs Nifty Bees – this tracks the Nifty and by investing in this fund, you will mirror the stock market movement.

So I would recommend that you invest in the Indian equity markets immediately and do not miss out on the party.

Millionaires portfolio – part 2

In October 2011 blog, I had recommended 5 stocks at the prices prevailing then -  all the five stocks (SBI, BHEL, Bajaj Auto, Esab Industries and Maharashtra seamless) are still hovering in the same range today and are still worth buying.

The methodology used for stock valuation is given in detail in my Sept 2010 blog - you can go back and look at it, if you wish. It is based on based on the historical earning per share growth rate (EPS CAGR) and the price earnings multiples (PE) for the company (over the past ten years) – using this past data, we can forecast the future stock prices beyond five years with a very high degree of certainty - especially for select companies that have an identifiable durable competitive advantage that cannot go away easily in the future decade.

Warren Buffet and Peter Lynch are known to follow these principles in stock picking - these are simple and straightforward methods and taught in MBA schools all over the world – the mistake that everyone makes is that they want quick results. For example mutual fund managers are measured by the investors based on their daily NAV - the fund manager has to make sure that he is giving at least as good returns as his competitors “on a daily basis” –he cannot think five years. Individual retail investors look at one year timelines for all investments as most of us have a tendency to slice our lives in yearly intervals. However, if we start looking at 5 years for equity, then there is a good chance of making good returns provided you follow some proven equity valuation and forecasting method.

So here are five more stocks that I recommend at the prices mentioned - all these stocks I have personally invested in the past 2 months and my analysis tells me that they will grow at 20% plus CAGR over 5 years:

1. COLGATE – all of us know this company - this stock is currently quoting at around 960 – I recommend this stock at even a price up to 1000 – the company has shown an EPS growth of 21.5% over the past 10 years. Looking at the performance of the company and the stock movements for the past few years - it is a good buy at this price and should give a 18-20% growth per annum over the next 5 years.
2. DABUR – this is another company known to all of us - this stock is currently quoting at around 97 – this company has shown an EPS growth rate of 24.7% in the past 10 years –at the current price of 97, it is expected to give a return of 18-20% per annum over the next 5 years – this surely is a buy at prices below 100.
3. Havells India – I am not sure if you know what they make –they are a large player in the industrial and residential electrical equipments space – they own well known brands like Sylvania, Crabtree and Standard – they make domestic appliances like irons, geysers, fans and motors , modular switches,  circuit protection components and cables and wires – the company has shown an EPS growth rate of 45% in the past 10 years – this stock is quoting at 434 now – if you get this at any price below 385 – buy it. Every stock goes up and down based on market sentiments and I do expect the stock to touch 385 at least once in the next 2 months.
4. TCS – TCS is a juggernaut that has enough momentum to take care of most external shocks – outsourcing and offshoring as a concept are here to stay and the more the pressures on the US and EU companies to cut costs, the more the opportunities for TCS – the company has shown better growth in EU this qtr than the US and the INR depreciation will make the company more profitable as it earns in USD and spends in INR – for the past 6 years, it has had an EPS growth rate of 26.65%  -I recommend this stock at any price till 1125 – currently it is quoting at 1067
5. Voltas – This company is quoting at 94 currently – I recommend this at any price till 100 – with a 10  year EPS growth rate of 38%, it surely is going to give a 5 year return of 20% plus.

 As always I want to put the rider that these are my recommendations -I have invested in these stocks in the prices mentioned above– it will do well for you to look at these stocks and read about these companies. After all it is your hard earned money – your risk and your reward.

As Peter Lynch puts it -“Spend at least as much time researching a stock as you would choosing a refrigerator."

Not that you chose a refrigerator every now and then :-)

Happy Investing.

Passive Income

Passive income as a concept is easy to understand – “it means getting a cash inflow every month without working for it” - passive income unlike active income does not depend on your effort –we all work for 8 hours or more a day - for 25 days a month and then we get a salary cheque – passive income comes every month without your working for it - a good example is rental income  - the rental cheque comes every month whether you are going to office or not.

Now imagine if your monthly living expense is Rs 50,000 and your monthly passive income is also Rs 50,000.

Wouldn’t that be an ideal situation? I am sure you’ll agree that this is a good situation to have.

So what does it take to reach this stage?

It takes a bit of planning, smart investing and about ten years of time in Indian conditions - that’s all.

Let me repeat this – In India, if you plan your finances well and invest smartly and keep at it for 10 years consistently – you will reach the stage where your passive income is equal to your monthly expenses.

There was this couple in their 40’s –they had invested smartly and bought a plot of land in a well known part of Delhi a decade earlier and over time, they had built a three floor residence. As the house was on a main road, they also built a few shops. By giving two of the floors and the shops on rent, they earned more than enough passive income to lead a comfortable life.  The story does not end there. The husband was an engineer and had a regular job - ever since this rental income started flowing in – his performance in the job shot up – he realised that he was stress free – he was more cheerful  - this was because, like most people, he was also fearful of a job loss and that created stress and performance issues which vanished once the rental income came and he was financially free.

Another friend had a great idea – he had worked for a few years in the US and had saved in USD – as he came back to India, he had savings of about 120 lacs in INR. He invested Rs 10 lacs in yearly FD @ 10%  which gave him an interest earning of 1 lac – and he figured out that after 12 months and 12 such FD’s he will get Rs 1 lac every month as interest which will easily meet his monthly expenses. All he needed was to reinvest the principle amount of Rs 10 lac every month in a FD @ 10% and use the interest earned.

How does that look?

Looks good?

Well not very good actually.

You see India has an inflation of about 8- 10% and this scheme of rotating FD’s means that his interest income will stay at Rs 1 lac per month for ever – over a few years, the purchasing power of this 1 lac would go down due to inflation and then he will need a higher passive income –or he will feel poorer.

We all know the salaries of our parents - in 1970s or 1980’s or 90’s  - the salaries in the 70’s were something like Rs 1000 per month –in the 80’s a good government job paid about Rs 2500 per month – in the 90’s a similar job came with a Rs 10,000 pay cheque – today the salaries are about Rs 40000 per month for a manager’s job – this increase is not because of living standards – it  is because of inflation.

Even government pensions are adjusted for inflation every now and then.

So in the long run, one needs to have a passive income that goes up at least as much as inflation – otherwise, we will become poorer over time.

Having enough passive income does not mean that you will retire early – it just means that you can chose to do what you want – you do not have to take up a job because of the salary – you can chose a job because you like the role. I teach as a visiting faculty and I left my high paying job – because I love to teach and because I can afford not to look at the salary difference between a corporate job and a teacher’s job –thanks to my passive income.

Now that we have understood the concept of passive income and would love to have it, you may be wondering whether it is possible.

The answer is that there are ways to achieve it – many people have achieved it – those who have achieved it may not talk about it openly– such people are all around you – just observe – you will generally find them less stressed, more cheerful, friendlier, and more helpful and generally they would contribute more than their fair share towards society.

In my forthcoming book, you will find ideas for passive income that will set you thinking. it will hopefully help you make a long term plan which will take you towards getting enough inflation proof passive income to meet your expenses through out your life.