Moneylife 20 March 2014

High DividendYield

Stocks11 with

Pers onal Finance Magazine Rs 3020 March 2014

WILL SAHARA EVER BECOME ACCOUNTABLE?

AAP GUNS FOR AMBANI; WHAT ABOUT OTHERS?

UBI EXPOSES CORPORATE GOVERNANCE HYPOCRISY

Pages 68

SUCHETA DALAL ON:

www.moneylife.in

INSURANCE 42 YOU BE THE JUDGE 49FIXED INCOME 40 HEALTH 50

These stocks are recording strong cash ows and are reasonably valued. So, a price rise would be a bonus, over and above current high dividends

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I S S U E C O N T E N T S

20 March 2014

LETTERFROM THE

EDITOR

Yield Matters

Disclaimer: Moneylife has a policy of not allowing its editorial staff to buy and sell stocks that are written about in the magazine. All personal transactions in individual stocks are subjected to internal disclosure rules.

MONEYLIFE | 20 March 2014 | 4

Current Account18 ?MONEYLIFE QUIZ

There are many ways to screen, and pick, stocks. One such way is through analysing their dividend yield. However, merely picking stocks based on high dividend yield could be risky. This strategy would work only when companies are filtered using other valuation parameters and their management history. This is where Moneylifes analysis comes in. We have not only considered a companys dividend yield, but since dividends are paid out of earnings, we have considered sales growth, earnings growth, the size of operations and so on. After factoring in all these, we provide you with a list of 11 stocks that may not only offer good income in the form of dividends but capital appreciation as well.

Mutual funds come in many forms. Many of them are designed only to garner funds from investors. Dynamic equity funds belong to this category. These are pitched at investors as products that can time the markets. However, evidence from the US (from where these strategies are borrowed) shows that such schemes have grossly underperformed. Are their Indian counterparts headed in the same direction? If so, is there a better way? Turn to our Fund Pointer section to find out.

In her Crosshairs section Sucheta writes on Subrata Roy of Sahara who has run his peculiar empire for years without any regulator asking any questionuntil his defiance of Supreme Court became bizarre. She also writes on Arvind Kejriwals strange tactic of targeting only some businessmen, leaving out people like Vijay Mallya.

In her Different Strokes section, she questions SEBIs corporate governance norms which will not apply to the entire swathe of listed public sector undertakings that have inflicted big losses on investors. The fact that neither SEBI nor the stock exchanges, who administer the corporate governance code, have uttered a word about the goings on at United Bank of India that have mauled its share prices, shows that the norms would be nothing but a sham.

Moneylife Foundation launched yet another helpline for its members; this time for those seeking legal advice. To know more about, or to avail the facilities of, the Legal Resource Centre, please visitlrc.moneylife.in. We have lined up another helpline; expect to hear about it soon.

Debashis Basu

Cover Story2811 Stocks with High Dividend YieldThese stocks are recording strong cash flows and are reasonably valued. So, a price rise would be a bonus, over and above current high dividends. Jason Monteiro explains

Different Strokes16 UBI Saga Exposes Many Warts: Why SEBIs corporate governance norms are a sham

Ambani ki dukaan Includes Congress-BJP-Media Kejriwal: What is Mr Kejriwals idea behind these barbs?

Defiant Sahara: Will Subrata Roy Finally Be Brought To Book?

AAPs Glare: Whys Mr Kejriwal silent about the massive loot of banks?

14

Chidambaram Brings Cheer to Education Loan Borrowers

SEBI Wants Pension Money in Mutual Funds SEBI Collates KYC Details of Nearly 20m Investors FIIs Scale Back Emerging Markets Exposure

Your Money21

Content.indd 2 3/1/2014 5:31:46 PM

CONTENTS

Letters ............................ 8

Book Review ....................60

Money Facts ....................63

DEPARTMENTS

STOCKS

Positive Trend: We are adding six new stocks to the portfolio

37 Long Term

38 Value PicksList To Stagnate

Valuation Matters: Is the market trying to anticipate Narendra Modi as the PM?

36 Which Way

34 Street Beat Narmada Gelatines: Steady Growth

66 Help Animals,Help HumanityBEYOND MONEY

Appalled by the way people tend to treat stray animals, Preeti Bhatt decided to set up an organisation especially for their protection at Pune. Konica Bhatt tells us how it works

Mutual Funds vs SEBI22

SMART MONEY

Another new twist to mutual fund regulationsas regressive as the previous ones

UBI CD Downgrade40

FIXED INCOME

Top-rated Corporate Bond Yields Sudden Jump in 10-Year G-Sec Yield Options for Tax-free Bonds Bank FD Rates

Shut Up, Or Put Up49

YOU BE THE JUDGE

What are some valid grounds of complaint against your neighbour?

Using Behavioural Analysis To Improve Regulations

58UKs Financial Conduct Authority is using insights from behavioural economics for consumer-focused regulation

EARNING CURVE

Health Insurance Steep Rise in Mediclaim Premiums L&T General Medisure Super Top UpLife Insurance Tata AIA Mahalife GoldFine Print

INSURANCE

42 Insurance Trends

48 Making Railways AccountableLEGALLY SPEAKING

National Consumer Commission delivers a big blow for consumers

46 AutoModeAUTO

Automatic manual transmission is the new buzz in car market

FUND POINTERS

Dynamic Equity Funds, Anyone?24

Do they work? Can we do any better than them with some other strategy?

ML FOUNDATION EVENTS

56

Moneylife Foundation launches its third free helpline, after Insurance and Railways, covering 10 areas of interest to individuals

Legal Resource Centre Launched

MoFoulaufreeafteandcovof iind

LaunchedREAL ESTATE

Impact of Maharashtra Housing Act47

Restrictions on Buying Plantation Land in Karnataka

UP To Regulate Real Estate Agents

Livinla Vida Loca52

If theres one city on earth that knows how to live the crazy life, its Madrid. Naveena Israni explores the passion and vibes of this effervescent city

TRAVEL

Science That Seeks the Truth50

Healthcare industry uses science like a dogma. We need to open our minds

Pulse Beat: Medical developments from around the world

HEALTH

Content.indd 4 3/1/2014 5:32:07 PM

FACULTY EVALUATION BY STUDENT RATING?

It is often said that what goes around comes around. Success is often ephemeral and one can never take it for granted. If success goes to your head and encourages you to treat people (read employees) badly, then retribution will not lag. A private university in Bengaluru, having a sprawling campus, started attracting students with a high-flying marketing campaign and aggressive promotion. For some time, their ploy worked. Students from the north and east flocked to this university and paid through their nose to enrol in the various programmes. The proof of the pudding lies in the eating. When these students graduated, there were not many jobs for them as per their expectations. Investment in education cant be compared to investment in a business that returns on investment will start flowing soon after. It was a different matter that the quality of the students

enrolled by this university was nothing great as the only eligibility criteria for getting admission was a bagful of cash. Once students pay astronomical sums as fees, they start behaving like customers. Any faculty, who was strict with them, was given a poor performance rating and, within no time, the university started sacking faculty members. As they were good paymasters, the faculty got attracted to the university just like bees get attracted to flowers. But soon the cat was

out of the bag. Students were ruling the roost and dictating terms.A former colleague of mine who had shifted base to Bengaluru got an opportunity to teach in this university as a visiting faculty. His son had got

a job in Mindtree Ltd and the family shifted based from Mumbai to Bengaluru. But his experience was anything but satisfactory. He said, Mind-blowing infrastructure and pathetic quality of studentsstudents who are not interested in learning anything, yet they have so much dominant power. Soon enough, his contract was terminated.This incident happened two years ago when the university was glowing and beaming with heavy rush from students for all their programmes. Two years down the line, the university is struggling to

attract students and is doing aggressive marketing to attract students. In the past two years, the university blindly chucked out many faculty members simply on the basis of performance

RNI No: MAHENG/2006/16653

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Editorial ConsultantDr Nita Mukherjee

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Editor: Debashis Basu


LettersEditor

to the

Volume 9, Issue 27 March 20 March 2014

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Total no of pages - 68, Including Covers

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LETTERS

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rating of students. But now, with a slump in the job market, many of their students are unable to get jobs. This has reflected poorly on the universitys credentials!Chandraprabha Venkatagiri, Mumbai, by email

ARE CONGLOMERATES LONG-TERM WEALTH CREATORS?

Smart Money column by R Balakrishnan is always interesting and educative. The current column (Moneylife, 20 February 2014) on 'Intelligent Capital Allocation' was no exception and it aptly gives examples of L&T and ITC, where the managements are wasting capital in some segments of the business. The most important management act is the efficient allocation of capital. This probably is the reason why conglomerates hardly find place in the list of long-term wealth creators. Warren Buffett has also emphasised this aspect of the managements and has even recommended a book The Outsiders, which I find has not been reviewed by you in your Book Review section so far. Of late, I find you have shifted your focus from reviewing books mainly relating to stocks and

investments to those on other subjects. Please re-work your focus as I feel that there are many books on these subjects which need to be reviewed for the benefit of your subscribers.Krishan K Aggarwal, by email

4TH ANNIVERSARY CELEBRATIONSHeartiest Greetings to Moneylife Foundation on its entering the fourth year of activities related to financial literacy. May Moneylife Foundation grow not just bigger, or older, but better and better and be a source of valuable information. It should transform the lives of not just your readers, but also all those who follow the newsletters, publications, and functions. It should help them to assimilate the great ideas on matters concerning our economy, finances, and it should be instrumental in shaping their thinking, which would assist in overall better appreciation of the finer nuances of clean governance. I have become a new member and the Moneylife issue dated 20 February 2014 was very impressive. Having spent a great deal of my career in the capital markets

OUR READERS WHO CLICK WITH USHeres a sample of the kind of feedback that we receive from our readers on our vibrant website, www.moneylife.in

BLOOD DONATIONS SHOULDN'T GO IN VAIN!

This is with regard to Is the blood you donate, going down the drain? by Vinita Deshmukh. Thanks Vinita, for highlighting the sad state of our blood banks that are simply wasting an extremely perishable life saving commodity. There is nothing to prevent the authorities from setting up a simple saving mechanism of proper refrigeration and storage and putting out in the public domain (possibly, similar to the Red Cross Blood Bank web site). The information should include the type and quantity of blood available at least on a weekly basis. The wastage can possibly be minimised by issuing out blood on first-in-first basis to other hospitals and banks. The donations shouldn't go in vain.Nagesh Kini

GO SLOW ON VIOLATIONS?

This is with regard to Regulators should intervene only in case of grave violation says Chidambaram. The position taken by the finance minister in his observation: "I reiterate, we must bring self-regulation, we must enforce compliance, need to heed to board of directors and shareholders and only in exceptional

cases should (the) regulator intervene to punish gross grave cases of proven criminality," is quite intriguing. This amounts to asking regulators to 'go slow' or ignore violations. As I said in my earlier comment, self-regulation is conspicuous by its absence in India.MG Warrier

BETTER FOREWARNED

This is with regard to Should India keep off shale oil & gas? by AK Ramdas. Very true! It is better to be forewarned than to repent later.Nalin Patel

MONETARY EXPERIMENTS: AT WHAT COST?

This is with regard to Japan: Is the correction temporary or something more serious? by William Gamble. This is a very informative article, especially, given the sea of confusing information on the Internet about Japan! It appears that Japan finally got out of deflation, but the bigger issue is: At what cost? There must be lessons here for other nations contemplating monetary experiments.Abhijit Gosavi

Letters.indd 4 2/27/2014 5:56:33 PM

space, I must say that the coverage of various topics, was indeed, ideal. It is doing justice to the issues headline Are You a Smart Investor. I am already eagerly looking forward to the next Moneylife issue. SK Nataraj, by email

FIRST STEP TOWARDS FINANCIAL LITERACY

Well said, Moneylife. I couldnt agree more to what has been commented by the Moneylife reader about the article Are you a smart investor? For the uninitiated, I would recommend reading the excellent book, Rich Dad Poor Dad by Robert Kiyosaki.And hats off, to all my friends at Moneylife! Now

that we are premium members at Moneylife, let us congratulate ourselves for taking the first step towards financial literacy and responsibility.Yes, we have a long way to go. The article from Moneylife couldnt have been better. I have a suggestion to Moneylifeto share insights on how investors from various international markets behave, when it comes to

applying conventional wisdom in investing. Also, what is it that sets successful investors apart from the smart investors! Rajesh Premani, by email

CONTENTIOUS CELEBRITY ENDORSEMENTS?

Celebrity endorsements have always been a contentious issue in marketing consumer goods as well as services. Major celebrity endorsements have always centred on selling FMCG (fast moving consumer goods) products. One finds it so difficult to recollect famous faces endorsing a service. Amitabh Bachchan has endorsed the services of ICICI Bank, Hema Malini has endorsed Bank of Rajasthan and Juhi Chawla has endorsed Dena Bank. But we have never seen any famous face endorsing Pizza Hut or Dominos pizza or McDonalds or Caf Coffee day. Be that as it may, Mr Bachchan recently proclaiming

that he decided to stop endorsing Pepsi, after a girl told him to do so, is in poor taste. After earning millions of rupees from the endorsement, is it fair that he now de-endorses it? At best, he should have remained silent. If his logic is that he wants to be socially

responsible, then he should also stop endorsing products like Maggi Noodles. Noodles have vanaspati (hydrogenated fat) that is not good for health. Does Mr Bachchan know about it?Organisations also pour lot of money in the drain when they hire a celebrity for endorsing a product which is not doing well in the market. No celebrity can guarantee increased sale of a sub-standard product. At the end, what matters is that the quality of the product/service must be good and the product/service must be reasonably priced. Consumers are far more intelligent. They know that when Sachin Tendulkar endorses a brand of pen or MS Dhoni endorses a brand of chappals or Virat Kohli endorses ear-buds, it goes from the consumers pocket.TTK Prestige, the south-based maker of home appliances, has used Abhishek Bachchan and Aishwarya Rai for selling their products. Barely a few days later, Aishwarya confessed that she has never entered a kitchen and doesnt know cooking at all. The company was taken aback as the entire advertisement falls on the face. Going by what Mr Bachchan says, unless you have a personal experience with a brand, how can you endorse it? When will these organisations learn?G Venkatesh, by email

HOW TO REACH US Letters to the Editor can be emailed to [email protected] or can be posted to: The Editor, Moneylife Magazine, Unit No. 315, 3rd Floor, Hind Service Industries, Off Veer Savarkar Marg, Dadar (W), Mumbai 400 028 or faxed to 022-49205022. Letters must include the writers full name, address and telephone number and may be edited for clarity or space. New Subscriptions & Customer ServiceFor new subscription requests, complaints about current sub-scription and books, write to [email protected] or to Subscription Manager, Unit No. 315, 3rd Floor, Hind Service Industries, Off Veer Savarkar Marg, Dadar (W), Mumbai 400 028 or call 022-49205000 or fax to 022-49205022.AdvertisingFor information and rates, email us at [email protected] or call 91-022-49205000.

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LETTERS

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Prof Dr BM Hegde

How Indian Overseas Bank is trying to mislead with an ad Indian Overseas Bank published an ad with a header Performing Consistently, Growing Exponenti ally while releasing its December quarter results. The only growth the Bank has shown in past fi ve quarters is in bad loans

Defaming loan defaulters: An uncivil prac ce by banks, RBI and courts? The courts need to disti nguish between o ences. For a civil o ence, the rigour of embarrassment cannot be so high as to be equated with a criminal o ence

RBIs revised 20:80 gold import scheme and added to the confusion RBI came out with the 20:80 gold import scheme noti fi cati on to curb the volume of gold import and create a more regulated domain for gold trading in India, but ended up creati ng greater confusion

Is SEBI aware of huge mutual fund upfront commissions?Mutual funds conti nue to pay huge commissions to large distributors to promote their schemes

United Banks bulging NPAs: What went wrong?

United Banks CMD opted for VRS as it reported 194% jump in its NPAs for the December quarter, bringing into focus the opaque procedures regarding appointments of statutory auditors and independent directors followed by India Inc

Crazy about corporate governance norms, SEBI is blind about Geodesic

Geodesic has defaulted in repaying its FCCB holders and loans to banks. Its accounti ng is in a mess while independent directors have fl ed. SEBI, however, sees no evil

How banks create their NPAs Handholding of a new borrower increases possibiliti es for future business. Banks can be strict as a lender at the right ti me but should be ready to act as a friend and guide of the borrower, when required

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Exclusive news, the stories behind the headlines and the truth between the lines by Sucheta Dalal


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Aam Aadmi Party (AAP) leader Arvind Kejriwals virulent attack on media houses, and their alleged connections with Mukesh Ambani of Reliance Industries, got the Editors Guild of India agitated enough to note: with concern the growing attacks and unsubstantiated charges levelled against the media by political leaders and public figures dissatisfied with the coverage of their activities or with criticism from the media. Specifically, the editors were distressed at General VK Singhs use of the term presstitutes to describe journalists and found it disquieting that Arvind Kejriwal attributed corrupt motives to the media that criticised him. While the Guild is correctly agitated about abuse and vague, unsubstantiated accusations of corrupt motives attributed to the media, it does not spare a thought for others who are in the crosshairs of these leaders and public figures.

Journalism, as it was taught to us, required charges to be backed by facts, preferably with documents. Not any more. While media houses make vague references to shoot & scoot politics, journalism today is

about reporting and relaying every allegation without any attempt to check facts even afterwards.

What is Mr Kejriwals calculation behind these allegations? As someone doing investigative work for nearly three decades, I know that crony capital, with its

lobby groups, wields plenty of clout and has a nice way cutting off access, funding and opportunities for those who dare to be impartial. On the other hand, as one senior editor told me, if one decides on a few high-profile targets and leaves others alone, there is a good chance of building a powerful support base among those who privately dislike the extraordinary influence of one business house across the corporate and political spectrum.

Mukesh Ambanis enormous

clout comes from having several close aides in both houses of parliament, in addition to funding political parties and a section of the media. Reliances Foundations and CSR (corporate social responsibility) vehicles also offer a ready berth to powerful politicians and their aides who are out of power. This makes the group appear omnipotent. A top bureaucrat once told me that, in the 1980s, when Dhirubhai Ambani headed Reliance, people used to ask, who is an Ambani person; these days, under Mukesh Ambani, the question is who isnt an Ambani person because that list may be significantly shorter.

The positive impact of Mr Kejriwals attack on Mukesh Ambani is that it has shaken the group and its acolytes from their complacency. But will it force the glitterati and chatterati to choose sides, or will they profess support to AAP, while continuing to enjoy Mr Ambanis largesse?

AAP probably calculates that Mr Kejriwals courage in taking on the Ambanis will ensure him support from all sections including the salaried middle-class working in clean information technology companies and other professionals who desire to end crony capitalism without a clear plan or strategy about how to do it.

Ambani ki dukaan Includes Congress-BJP-Media KejriwalWhat is Mr Kejriwals idea behind these charges?

Crosshair.indd 2 2/28/2014 8:33:26 PM

`Arvind Kejriwal is, without doubt, one of the sharpest minds on the political scene today. His guerrilla tactics of destabilising established power centres has won him an impressive victory in Delhi and his anarchist ways and disregard for rules has only increased his following among disenchanted Indians who want change at any cost. His followers are uninterested in facts and details. So, if one asks Mr Kejriwal why target Mukesh Ambani alone and remain silent about others, he could well argue that he will

do what he can and it is for others to take up the rest.

He has probably calculated that training his guns on public-private partnerships in bijlee and paani will

yield better political dividends than issues that do not affect the aam aadmi directly, or are less catchy. But even taking all these calculations into

account, one cannot help wondering why Mr Kejriwal is silent about the biggest source of the loot of public money and the watering hole of all dubious capitaliststhe frightening amount of bad loans run up by public sector banks.

In this context, one also wonders about the silence on the Rs7,000-crore largesse, in the guise of corporate debt restructuring, handed to pepper spray Rajagopal, the founder of the flying Lanco group, who has run up huge losses and gets bank funding with ease. There is similar silence about Vijay Mallya of Kingfisher Airways, who also owed Rs7,000 crore to Indian banks. One could list many more who are not in AAPs crosshairs. But one cant help wondering why they are not.


AAPs GlareWhys Mr Kejriwal silent about the massive loot of banks?

Will Subrata Roy, chief worker of the Sahara group have to be arrested to ensure his appearance in Supreme Court (SC) on 4th March? Will he, finally, understand the gravity of an unprecedented non-bailable warrant (NBW) issued by the SC and make an appearance without coercion? No. He has once again, employed the best legal brains in India to come up with more delaying tactics.

Most ordinary persons would not have dared to defy the SC once it had angrily rejected his plea for exemption from personal appearance, especially when he already faces restrictions on travelling abroad. However, the extraordinary Sahara saga that is being played out in multiple courts, for over three years, defies every rule in the book about fear and respect for judicial proceedings.

Even the NBW does not seem to have woken up this strange man with powerful friends among all of Indias movers and shakers. Immediately after the SC issued a

NBW, the Sahara group released a letter from Sahara Hospital claiming that Mr Roy could not leave the bedside of his ailing mother. In effect, the man who usually flies private charters or helicopters could not leave the Hospital even for a couple of hours to remain present in court! The SC also has been extraordinarily patient with Subrata Roy. Its path-breaking order asking him to refund Rs20,000 crore to investors was back in August 2012.

That trial itself was marked by Saharas audacious strategy of making defamatory and contemptuous statements against the Securities & Exchange Board of India (SEBI) through full-page advertisements. This stopped only after SEBI, finally, hit back when Sahara went too far and called it a sarkari gunda. Meanwhile, Saharas battery of lawyers kept trying to delay compliance though endless appeals.

Until the SC put Saharas claims about the funds collected, repaid and the identity of its investors under the lens, none of Indias investigative agencies, nor the Reserve Bank of India (RBI), had dared to examine the endless source

of a large gush of money. There is also no clarity on what

the group has paid in terms of service tax, income tax or to the provident fund, although it claims to employ hundreds of thousands of people. Even today, the SC is only looking at two specific companies that raised over Rs20,000 crore through a synthetic instrument called optionally fully convertible debentures (OFCDs) that were made to appear like financial paper that was under regulatory scrutiny and oversight.

As Moneylife has written earlier, nearly Rs20,000 crore raised by the two Sahara realty entities was to be managed by a tiny partnership firm of the promoters called M/S Sahara India. The documents submitted to the Supreme Court show this clearly; but it would not be a surprise if all the money, claimed to be raised by the Sahara pariwar from tiny investors, is similarly controlled.

How has Sahara avoided investigation and scrutiny by our revenue, intelligence and investigation agencies over the decades? That is a mystery that even a SC order may not solve. Maybe Arvind Kejriwal can.

Defiant SaharaWill Subrata Roy Finally Be Brought To Book?

Crosshair.indd 3 2/28/2014 8:33:52 PM

On 13th February, the Securities & Exchange

Board of India (SEBI) revised its corporate governance code, for the third time, making it

stricter. The new code, effective October 2014, expects to empower the board to ensure legal and ethical conduct of management. It also wants the board to evaluate, reward and, if necessary, remove senior management and ensure succession planning. The code, says an academics review, will create an empowered board that is always vigilant, as opposed to a passive board that usually gets active only during a crisis.

This strict code, with many laudatory provisions, will apply to all companies listed on our stock exchanges. Or will it? Look closely, and you can see that none of the new provisions will apply to the entire swathe of listed public sector undertakings (PSUs) that have inflicted big losses on investors. This is evident from the fact that neither SEBI nor the stock exchanges, who administer the corporate governance code through their listing agreement with companies, have uttered a word about the goings on at United Bank of India (UBI) that have mauled its share prices.

On 22nd February, its chairman & managing director (CMD), Archana Bhargava, suddenly opted for voluntary retirement citing health reasons. The finance ministry instantly accepted her application and allowed her to vanish from public view; she has not responded to our queries. Ms Bhargava was allowed to opt for voluntary retirement after Reserve Bank of India (RBI) governor, Dr Raghuram Rajan, formally asked the government to remove her and supersede the entire board of the Bank.

Four days after Ms Bhargavas exit, UBIs board remains paralysed and unclear about its own future; the

Bank is being jointly run by two executive directors. Anonymous sources, quoted in media reports, say that the board is unlikely to be superseded, despite the banking regulators recommendation, because it is a politically sensitive time. So, how will SEBIs new corporate governance code help UBI investors who, at the very least, are entitled to a proper disclosure of facts from the board of directors? Do PSU boards have truly independent

directors or empowered audit committees? Will they be exempt from the tough new norms and punishments prescribed by the SEBI code and the new Companies Act? The answer is: Yes.

Someone like Rajiv Takru, secretary (financial services), ministry of finance, will always call the shots at listed PSU banks. Management succession and remuneration will never be within the purview of these boards; but government appointees will continue to wield enormous influence on behalf of their political masters, crony capitalists and influence-peddlers. Investors, like those of UBI, who have lost over 70% of the value of their holdingthe share price declined from Rs85 in January to around Rs25 (at the time of writing)wont even know who to demand answers from. Their source of information will continue to be

media reports quoting anonymous sources. Consider another angle. Reliable sources in the

banking industry and the Bank say that Ms Bhargava may have exaggerated the bad loans below Rs10 lakh. For this, she blamed the core banking software (supplied by Infosys Ltd) which was unable to detect these. She is also accused of reckless lending by her own senior officers. These sources say that she was bent on declaring the entire portfolio, running into over Rs2,000 crore, as non


``

DIFFERENT STROKES SUCHETA DALAL

UBI Saga Exposes Many WartsWhy SEBIs corporate governance norms are a sham

Neither SEBI nor the stock exchanges, who administer the corporate governance code through their listing

agreement with companies, have uttered a word about

the goings on at United Bank of India that have mauled

its share prices

DIFFERENT STROKES.indd 2 2/28/2014 8:36:17 PM

performing assets (NPAs), which is a huge exaggeration. Many of these loans, they say, are likely to be written back in the coming months. If this happens, the share price may rise and investors who sold in a panic have reasons for serious complaint. Who will SEBI hold accountable? The passive board which does not even know its own fate? The government, as owner of UBI, for failing to make full and proper disclosures to shareholders? The RBI, as banking regulator, which remains secretive and does not disclose the true state of UBIs finances or respond to rumours about merging the Bank with a stronger one? Clearly, the accountability of PSU bank boards or management is a hoax on investors.

If corporate governance norms do not apply to giant PSUs, or make a difference to politically connected companies like Kingfisher Airways, LANCO (of pepper spray in parliament fame) or NDTV, what is the purpose of tinkering with the rules? Our regulators, like our investigation agencies, will nitpick on compliance and harass companies who follow the rules or are not powerful enough block action. The same regulators will maintain a studied silence over the massive rise in bad loans of public sector banks that have even caused their unions to panic. SEBI is also silent about the misuse of funds by large corporate houses that use their political clout to get bad loans restructured repeatedly.

Here is yet another aspect to the governance conundrum in PSUs. In just over a year at UBI, Ms Bhargava precipitated a crisis by antagonising her entire board of directors over declaration of higher NPAs. She wrote to RBI asking for a forensic audit of UBIs loans, since neither the RBI inspection nor the Banks external auditors had recognised the true extent of the rot in the Bank. Bad loans at the Bank trebledfrom Rs2,964 crore in March 2013 to Rs8,546 crore in December 2013. The Bank, which was profitable until the first quarter of 2013-14, reported a Rs489-crore loss in the second quarter which spiralled to Rs1,238 crore in the December quarter. Was this an accurate representation of the Banks finances? Nobody knows. The RBI governors letter, recommending Ms Bhargavas removal, suggests that it does not see her as a crusading clean-up agent. However, our sources say

that there is, indeed, a big increase in bad loans at UBI; but this is in line with those of all public sector banks. They also agree that much of her provisioning was high and, probably, exaggerated.

In fact, SEBI has allowed it to become a tradition for incoming chairmen at PSU banks (including State Bank of India) to declare higher NPAs so that their own performance shines in comparison to their predecessors. In a listed company, this would amount to a deliberate attempt to depress the stock price and ought to be investigated under price manipulation and insider trading rules. Will SEBI dare to launch such an investigation and

initiate action? Or will Archana Bhargava and the UBI board of directors be allowed to fade away without accountability for her actions or consequences?

Let us now look at another aspect of how UBI and other listed PSUs make a mockery of SEBIs corporate governance code. The universal view at RBI and UBI is that Ms Bhargava had extremely poor people skills and rode roughshod over her board of directors and senior management. However, neither shareholders nor employees have a say in the selection process.

Everybody knows that most appointments (barring rare exceptions) as bank chairmen are the result of hectic lobbying and dubious deal-making with corporate houses, brokered by notorious chartered accountants who turn up as finance ministry appointees at many banks. So

Ms Bhargava, despite her patchy track-record at Canara Bank and Punjab National Bank about the quality of loans and other transgressions, apparently managed to bag a coveted assignment.

When hundreds of listed government companies (representing the largest block of assets) have no control over the appointment of their board of directors or their chairman and managing director, how fair is it for SEBI to keep making corporate governance rules more onerous?


DIFFERENT STROKES SUCHETA DALAL

`

Sucheta Dalal is the managing editor of Moneylife. She was awarded the Padma Shri in 2006 for her outstanding contribution to journalism. She can be reached at [email protected]

When hundreds of listed government companies have no control over the

appointment of their board of directors or their

chairman and managing director, how fair is it

for SEBI to keep making corporate governance rules

more onerous?

DIFFERENT STROKES.indd 3 2/28/2014 8:36:48 PM

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1. Who is said to have given 1.2b Indians an identity?a. Subroto Bagchi b. Ramesh Ramanathanc. Harish Hande d. Nandan Nilekani

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3. Which is the nodal public sector bank managing the interest subsidy scheme on educational loans?a. State Bank of India b. State Bank of Bikaner and Jaipurc. Canara Bank d. Indian Bank

4. To which country does the regulatory body Financial Conduct Authority (FCA) belong?a. United States of America b. Indiac. Australia d. United Kingdom

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Securities and Exchange Board of India (SEBI) has pitched for a part of the money lying in employee pension funds to be invested in mutual fund schemes for investors below 40-45 years of age and earning over Rs6,500 per month. While

looking to boost to the mutual fund industry with contribution from the Rs5.5-trillion corpus being managed by the Employees Provident Fund Organisation, SEBI feels that the age restrictions would safeguard investors from unnecessary risks during the years closer to their retirement. Simultaneously, income-related restrictions will protect low-income

employees from the risks associated with capital

marketsa major roadblock in pension money being invested in high-risk assets.

MUTUAL FUNDS

SEBI Wants Pension Money in Mutual Funds

Your Money

As the government prepares to set up a central know your client (KYC) system for entire fi nancial sector, details of close to 20 million investors have been collated in a centralised database covering various segments of the capital market. In his Interim Budget speech, the fi nance minister said that the government plans to create one record for all fi nancial assets of every individual to help them as well banks, insurers, mutual funds and brokers. A centralised KYC database has already been set up under SEBI and 18.7 million investors have provided KYC details to fi ve KYC registration agencies registered with the market regulator at the end of December 2013.

With an eye on elections, fi nance minister (FM), P Chidambaram, is trying to endear himself to families that have availed educational loans from banks. He announced a moratorium for all education loans taken up to

31 March 2009 and outstanding as of 31 March 2013. The government will take over the

liability for outstanding interest as of 31 December 2013, but the borrower would have to pay interest for the period after 1 April 2014. Nearly 900,000 student-borrowers would benefi t by around Rs2,600 crore which will be transferred to Canara Bank, the nodal bank managing the interest subsidy scheme on educational loans.

The education loan portfolio of nationalised banks, as on 31 December 2013, aggregated Rs57,700 crore in 2,570,254 accounts.

BANKING

Chidambaram Brings Cheer to Education Loan Borrowers

REGULATION

Emerging market economies are most unloved ever and are now seen as the biggest risk to financial market stability, according to the latest Bank of America Merrill Lynch Fund Managers survey. The survey said that, currently, investors are the most underweight on BRIC countriesBrazil, Russia, India and China.

About 43% of respondents are of the opinion that global emerging market (GEM) equities are undervalued. This, in turn, could lead to a contrarian rally, according to the global financial services major. Almost 24% of global investors would like to remain underweight on GEM in the next 12 months, down from 28% in January 2013. Overall, 222 panellists with $591 billion of assets under management participated in the survey.

FIIs Scale Back Emerging Markets Exposure

STOCKS

57,000

Mar 2012

Dec 2012

Mar 2013

Dec 2013

45,600

34,200

22,800

11,400

0

Educational Loan Outstanding

Rs57,700 crore in 2,570,254 accounts.

nds to be mutual

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Your Money.indd 2 2/28/2014 8:53:35 PM

The mutual fund industry is once again at the receiving end of regulatory manipulation. Every few months, the Securities and Exchange Board of India (SEBI) develops an urge to mess with the fund companies. This time, it has issued two new fatwas. One, SEBI wants the asset management companies (AMCs) to have a minimum net worth of Rs50 crore, as opposed to the present minimum of Rs10 crore. Two, it also wants the AMCs to invest at least 1% of the corpus of each scheme (up to a maximum of Rs50 lakh) to demonstrate their skin in the game. Does this, in any way, make things better for the mutual fund investor?

SEBI, to my mind, seems to be aligned with the interests of the big fund houses. There are at least 10 AMCs who will be short of the Rs50 crore equity base. If they cannot raise the fund, it is logical to presume that they would have to sell out or shut shop.

Nowhere in the world does such a comical regulation exist. It is not for SEBI to promote or decide on the business strategy for a fund house. Some fund houses may not want to go retail or serve every nook and cranny and so may need less of capital. Can SEBI decide what is right?

SEBI, anyway, micro-regulates fund houses on where they can invest. And an investor is only entitled to the NAV of his investment and nothing more. An increased capital does not mean he would get a better return. I recall that, in the early days, when the net worth was raised from Rs5 crore to Rs10 crore, one of the fund houses simply bought the premises of the promoter company for Rs9 crore or so. All that the promoter did was to shift the ownership of a property from one to another. And did SEBI do anything? No. The net worth criterion was met. This time, it is unlikely that professionally-run fund houses, like Quantum, can find this Rs50 crore very easily. And pray, what is the need for this? The SEBI press release justifies the hike with

the following words of wisdom: objective is to ensure that Mutual Funds achieve a reasonable size and play an important role in achieving the objective of financial inclusion while further enhancing the transparency, so that investors can take informed decision.

A mutual fund will expand its business, if it sees a benefit in doing so. SEBI, or the government, cannot force it. And the second part of the sentence is incredible: while further enhancing the transparency A higher capital base will enhance transparency?

What SEBI does not seem not to realise or understand is that the mutual fund industrys expansion is a function of the per capita disposable incomes. If SEBI can regulate well, as they are supposed to, investors would be delighted.

Finally, what does this mean for the investor? I think this should not impact investors in any way. Either the fund house with a lower capital base will find the money or sell out the schemes or fold up the schemes. In any case, the NAV is not at any kind of risk. So, if you are happy

with the performance of the scheme, do not rush to exit.

The seed capital of the AMC investing 1% (subject to a maximum of Rs50 lakh) also means nothing to you. It does not give any increased

confidence to anyone. Funds are managed by professionals who are

not going to do any better or worse, simply because there is some money of the AMC invested in it. What impact will Rs50 lakh have on a Rs10,000 crore plus scheme like HDFC Top 200?

So, ignore this SEBI missive and carry on what you were doing. SEBI, run by an ex-IAS officer, possibly believes in financial inclusion, social justice, etc. But its actions are creating nightmares for fund houses especially the smaller ones.

SMART MONEY R BALAKRISHNAN

Mutual Funds vs SEBI


The author can be reached at [email protected]

Nowhere in the world does such a comical regulation exist. It is not

for SEBI to promote or decide on the business strategy for a fund house.

Some fund houses may not want to go retail or serve every nook and cranny and so may need less of capital. Can

SEBI decide what is right?

Another new twist to mutual fund regulationsas regressive as the previous ones

ses maye everyy need e what

ulates nvest. ed to nd d

with thedo no

TAMto aalsodo

SEBI decide whattttttttttttttttttt iis right?

column_Balakrishnan.indd 2 2/27/2014 5:51:27 PM

Mutual Fund helpline Ad.indd 1 2/25/2014 7:22:49 PM

Balanced funds or dynamic funds, also loosely known as tactical asset allocation funds, have a strong logic, at least theoretically. It goes something like this: It is not advisable to try to time the markets. Balanced schemes provide long-term capital appreciation with the cushioning of debt. If not this, then dynamic funds would be a good option as they are designed to switch easily between equity and debt, depending on the market conditions. Both categories of schemes create the notion of reduced volatility, with a dash of prudence (balanced fund) or timing skills of the fund manager (dynamic funds), something that any average saver would easily fall for.

But do these schemes truly

provide savers with what they are looking for? Balanced mutual fund schemes invest around 65%-85% in shares of listed companies and the balance 15%-35% in debt

instruments. Dynamic plans free fund managers from the constraints of having to stay fully invested at all times. They can invest the assets of the portfolio fully in equity or fully in debt, according to their market sense. Balanced schemes have limited flexibility and are suggested for a period of five to 10 years.

Moneylife has analysed these schemes in detail in the past (Fund Pointer, Moneylife 30 May 2012). We have found that most balanced schemes are no different from equity diversified schemes that invest 80% or more of their assets in equity. Well, they have to invest at least 65% in equities, to be eligible for tax-free long-term capital gains. The few schemes that have done well in this category have probably done

so because of better performing stocks in the portfolio than due to their asset allocation which has been similar to that of other schemes in the same category.

What about dynamic funds based on the (false) hypothesis that fund managers can move in and out of stock even as fund companies preach that timing the market is impossible?

While some of the schemes have done well, it was difficult to say whether these schemes would continue to perform well, based on their brief track record of performance (Fund Pointer, Moneylife, 20 March 2013). However, by investing in a dynamic scheme, you not only expect fund managers to move in and out of stocks and bonds as an asset class but you also expect them to pick the right stocks and bonds.

Lets look at what this means. Lets assume, for a moment, that fund managers skills are hard to pin down and much of the performance is attributable to luck. If so, by investing in dynamic funds, you are combining two different bets.

One, the fund manager would be skilful or lucky to move in and out of stocks and bonds; and, two, he would be skilful or lucky to pick the right bonds and stocks. If you assume that the probability of your fund manager getting it right is 50% in both cases, the joint probability of him getting both right, falls to as low as 25%.

Anecdotally, we know that doing both, together, is a difficult task, especially since market-timing calls for an enormous amount of research that fund companies dont


``

POINTERSMUTUAL FUNDS

Dynamic Equity Funds, Anyone?Do they work? Can we do any better than them with some other strategy?

SIP in Index Fund Vs Lump-sum in Dynamic & Bond Funds

12%

8%

4%

0%

-4%

We have ranked the returns of 20 balanced funds, six dynamic funds and one index fund. While the investment in the index fund was through a monthly STP from a liquid fund, a lump-sum investment was made in the remaining schemes. As the chart depicts, a SIP in an index fund would have performed better than a majority of these schemes.

Lump-sum in Balanced FundSIP in Index Fund Lum-psum in Dynamic Equity Fund

Three-year annualised returns

Fund pointer.indd 2 2/28/2014 8:54:29 PM


POINTERSMUTUAL FUNDS

do. Fund houses are coming out with newer approaches to asset allocation making guinea pigs out of us. While some work with crude tools, like the historical price-to-earnings ratio, others use a more complex approach to asset allocation. We recently covered DSP Blackrock Dynamic Fund which uses the ratio of debt market yield to equity market yield to decide the asset allocation.

Indian fund houses seem to be copying strategies from the West to make schemes look attractive and, in turn, garner more assets to lift their declining business. Tactical asset allocation strategies have been around for years in the US. They offer an algorithm that can analyse macroeconomic forecasts and valuation formulas to identify the ideal time to get in and out of stocks and bonds. In a recent paper published in January 2014 by Vanguard titled Broader Opportunities, Same Limited

Results: An Analysis of Go-Anywhere Funds, mentions that the number of such funds grew from 61 in January 1998 to 110

as of June 2013. The total assets for this group of funds increased sixfold, from about $60

billion to $356 billion over the same period. No

wonder, Indian fund houses are following the global trend and have begun to launch

similar schemes.But have these

funds, which claim superior asset allocation strategies, rewarded

investors with superior

performance? Over the period January 1998June 2013, regardless of the test used, Vanguard found no excess returns, or alpha, on average, the paper mentioned. The paper concludes that The majority of these funds underperformed from January 1, 1998, through June 30,

2013, relative not only to a 60% equity/40% bond passive allocation but to their stated benchmark and a traditional active balanced fund. The paper further mentions that Over the past 15 years, these funds have generated considerable interest and assets as investors have sought better performance. Unfortunately, however, the majority of investors in these funds appear to have been unsuccessful in their quest.

In another study conducted by Morningstar, a research firm, over the 18 months ending 28 June 2013, only 28 of the 142 funds they tracked produced a higher return than the Vanguard Balanced Index Fund which has a 60% allocation to equity and the rest in debt.

In the Indian context, the number of schemes is smaller and these do not have a significant track record to judge their performance. Yet, our analysis has shown that the returns have been inconsistent.

Is there another way? Investing the equity portion through a systematic investment plan (SIP)

and keep the rest in fixed income is one way to overcome volatility. How would a SIP, in an index fund, compare to the 26 balanced and dynamic schemes?

Over the one-year period ended 31 January 2014, a SIP would have provided an absolute return of

4.54% which would be better than the return of a lump-sum investment in 60% of the schemes. Taking a three-year period, a SIP investment would have yielded a return better than 75% of the schemes. We have taken for this analysis an index fund, because it is hard to know about top-performing funds in advance; but, if you can, the returns would be even better.

Even if you had done a SIP in balanced and dynamic schemes, your returns from the index fund SIP would have been better than nearly 60% of the schemes in both the one-year and three-year periods ending 31 January 2014.

Of course, this is merely illustrative. We may be biased in selecting a period where the closing NAV is high, since the markets have been on a rising trend, a situation when SIPs would naturally do better. Dynamic mutual fund schemes have the flexibility to time the market and, therefore, should have done better than a plain vanilla SIP. They dont, which is quite revealing.

`

SIP in All Schemes

Even if you had done a simple monthly SIP in all the schemes, a SIP in an index fund would have yielded better than majority of the schemes. The returns have been calculated over a three-year period ending 31 January 2014. *Internal Rate of Return

12%

8%

4%

0%

Lump-sum in Balanced FundSIP in Index Fund Lump-sum in Dynamic Equity Fund

Three-year yield*

Fund pointer.indd 3 2/28/2014 8:54:57 PM

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Stockletter Ad.indd 2 2/25/2014 7:27:52 PM

Some Facts about the StocklettersWhat are these stockletters? We have two stockletters, each pertaining to a different time horizon. Antelope is usually for 6 months' investment horizon and Lion is for stocks that are to be held for more than a year. Each offers a select list of outstanding stocks to buy. We hope to select not more than 30-35 stocks in the portfolio at the best of times. It improves your chances of owning those rare stocks that everyone wishes they had spotted tooearlier.

How are these stocks different from the stocks given in Moneylife magazine? The selection pattern is different for Street Beat and stockletters. Street Beat is meant for the average investor and focuses on small-caps unknown to many, while the stockletters are designed to meet investment needs of serious investors who have deeper interest and focus in the stockmarket and want to commit a substantial part of their savings for the long term. Street Beat stocks are chosen for each financial year and the summary performance of these stocks is recorded sometime in May. The profit or loss of each ongoing idea can be analysed from the stockletter itself.

Can I know the performance of the stockletters?Yes. Since January 2012, that is, over two years, Lion has given a return of 35.93% while Antelope has given a return of 35.58%. More details of the portfolio are given here: http://moneylife.in/promotion/sl_perf/index.html. This performance report is updated occasionally, usually every quarter.

What is the reason behind this success and will it continue? We believe that the reason behind this performance is our formula. We frankly do not know whether it will be as successful in future as we have been so far, but we think we can beat the returns of the majority of equity mutual fund schemes.

What is the investment strategy? Our investment strategy is to select quality stocks at a reasonable price. We identify companies that are reporting high return on capital but are available cheaper than similar high-quality stocks and then use our knowledge of managements, including corporate governance, to select stocks.

How are we different from a mutual fund and stockbroker? 1. Unlike mutual funds that hold your stock through

a sharply falling market and often end up with poor returns, we believe that the only objective of an investment is to earn positive returns. Buying scrips of good companies is not an end in itself.

2. Unlike mutual funds, we do not benchmark ourselves against arbitrary indices. We aim to earn positive returns under all market conditions.

3. Mutual funds say that you cannot time the market. This gives them an excuse to invest lazilyhold on to large, well-known companies in a declining market. We believe timing is important. The best stocks can decimate your portfolio if you dont sell them on time.

4. Unlike stockbrokers, we are not concerned with whether you buy 50 shares or 5,000; whether you buy/sell once a week or 20 times a week. Our income is not tied to your actions. We earn by selling ideas that we want to be responsible for. Our stockletters will survive only if you make money. In contrast, brokers earn their commissions irrespective of whether you make money or not.

How do subscribers get the stockletter?The stock letter is sent as a pdf file only by email

What is the frequency? You will receive your chosen stockletter every Saturday evening.

How much should one invest in each stock?You should invest equal amount in every single stock suggested. For instance, if we have selected 30 stocks, and you wish to invest Rs150,000 in all, you must invest Rs5,000 in each stock.

What if some stocks have already run up sharply? We try to help our subscribers by identifying stocks that are still worth buying at current prices and leaving out, for now, the stocks that have run up sharply.

How to interpret the ideas given in the stockletter?To enter into a transaction, wait for a new idea after you have started subscribing. We only offer buy ideas. We dont suggest a short-selling opportunity.

How do we know when to exit from the stocks recommended? Exit suggestions are spelt out clearly every week.

How much do the stockletters cost?Each stockletter costs Rs2,000. If you buy the two together, instead of Rs4,000, you pay Rs3,500. As a matter of comparison, if you have just Rs5 lakh invested in a mutual fund scheme, the fund company will take away Rs10,000 a year (at 2% a year) from your returns. That is more than 3 times you pay us for returns that are nowhere as good as ours. If you have Rs10 lakh invested, you are paying Rs20,000 a year to mutual funds.

What if I have any queries about specific stocks?Well, we would rather let our performance do the talking but if you have any serious doubts email us at [email protected].

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Stockletter Ad.indd 3 2/25/2014 7:28:19 PM

``COVER STORY

High dividend yield stocks certainly have a place in portfolio construction; but the underlying price performance and relative strength are factors as vital as

dividend. It is important to own a stock for its total return performance, not just for the dividend.

When we buy a stock, we focus on possible price appreciation, that is, capital gain. However, the most rational measure of returns must include dividends. Indeed, dividends can make a signifi cant difference to your returns over the long term. In our Cover Story (Wealth Creators, 9 January 2014), which analysed the total shareholder return of the top 500 companies, dividends, on an average, contributed 14% to the total returns. For Hawkins Cookers, which ranked fi fth on the top 500

list, dividend yield contributed 10% to the total returns. Therefore, apart from the huge price

appreciation, dividends provided a decent income as well. In companies, like EID Parry, dividend contributed 25% and, for Karnataka

Bank, dividend contributed 50% to the total returns. We tend to forget the important role of

dividend in total returns over the long term. Dividend is the income one gets, usually regularly,

for owning a stock. Companies with strong cash fl ow and commitment to investors generally pay decent dividends and steadily increase them over years. You can judge the quality of management by consistent and high dividends. In fact, the prospects of a stock are judged by estimates of high or rising dividends. Increasing, or even continued high dividends, show that the management genuinely believes that the


These stocks are recording strong cash ows and are reasonably valued. So, a price rise would be a bonus, over and above current high dividends. Jason Monteiro explains

High DividendYield

Stocks11 with

Cover Story.indd 2 3/1/2014 5:04:40 PM


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COVER STORY

company is on strong growth path. Why would it otherwise give away its earnings to shareholders? Moreover, dividends are paid by such companies, regardless of market gyrations, as long as the fundamentals are strong. In other words, if you invest in a company that has a good track record of management, healthy cash fl ows and good dividend history, and hold it over the long term, the chances are that your returns will be magnifi ed due to the dividend component. Therefore, it makes sense to pay attention to dividends.

Usually, dividends form a small part of the price we pay. For instance, if you buy a share of Nestl today, it would cost you Rs5,000. It paid a dividend of Rs48.5 per share in 2012-13, i.e., just 0.97% of the price. In fi nancial jargon, this is called the dividend yield. What if the dividend yield is high? It means that the dividend is larger for the price you pay. Unlike Nestl, take a company like Corporation Bank. It paid a dividend of Rs23.5 when the market price was Rs400. The dividend yield is 6%. So you are getting much more dividend from Corporation Bank for the price you pay, compared to the Nestl stock. Conversely, the price is low for the dividend the company is paying out. Many investors use dividend yield to shortlist low-priced stocks for investing.

Does this method make sense? Dividend yield can lead you into a trap, if youre not careful. Dividend paid is historical data, while price refl ects the future. There may be a reason for the price to be low that may come to light later, leading to still lower prices. If the price drops, and the dividend paid out remains the same, the dividend yield will be even higher. But what you gain in dividend, you lose in price. Worse, a company that has run into problems

may lower the dividend, destroying the reliability of the data that attracted you in the fi rst place.

As this example shows, the dividend yield strategy to picks stocksas, indeed, other stock-picking methodswill not work when applied mechanically. Dividend yield strategy works well when companies are fi ltered appropriately. This is where Moneylifes analysis of dividend yield comes in.

Companies with a high dividend yield may be good investments if their fundamentals do not deteriorate. Dividends are paid out from the cash which comes from earnings. Therefore, one should look at factors like sales growth, earnings growth, the size of operations and so on, to ensure that the high dividend yield you are seeing today is not a chimera. One should be careful when one indicator looks good and the rest are dubious. Thats a sure sign that not all is right with the company. After all, you dont want to be stuck with a stock that offers good dividend but no capital appreciation. The company must be running a business that is growing as well. We have factored in all these and created a method that gave us a shortlist of stocks with high dividend yields worth investing in. Of these, we

have selected 11 stocks including four public sector companies.

1. Accelya Kale Solutions (DY: 11%): Accelya Kale Solutions offers software solutions for airlines and travel industry. The company caters to over 200

airlines customers to streamline their fi nancial processes; they also ``

Yield MattersCompany Name Dividend Yield 5-qtr Sales Growth 5-qtr OP Growth OPM RoNW * RoCE **

Accelya Kale Solutions 11% 29% 94% 40% 105% 123%

Akzo Nobel India 10% 8% 5% 8% 14% 12%

Andhra Bank 9% 13% -4% 18% 8% NA

Syndicate Bank 8% 8% 2% 18% 18% NA

Infinite Computer Solutions (India) 7% -1% 6% 30% 17% 17%

Lumax Auto Technologies 6% 3% -9% 7% 16% 19%

Ador Fontech 6% -9% -30% 12% 22% 18%

Tourism Finance Corporation of India 5% 14% 19% 44% 16% NA

Cheviot Company 5% -2% -22% 12% 9% 9%

GIC Housing Finance 5% 17% 20% 21% 16% NA

Swaraj Engines 5% 15% 9% 14% 33% 37%

* - based on trailing past four quarter net profit** - based on trailing past four quarter EBITOP - Operating Profit, OPM - Operating Profit Margin, RoNW- Return on Net Worth, RoCE- Return on Capital Employed


provide them with insights on business performance, using decision support tools and data analytics. The company is a strategic partner to IATA and provides expertise in revenue accounting, audit & revenue recovery, credit card management, miscellaneous billing and decision support & analytics.

The airlines business is complex; competition from other service-providers is intense and, therefore, the focus is on innovation, increased productivity and improved quality. The company has over 1,500 employees, spread across various nationalities and geographies. In terms of revenues, 30% of its sales comes from Middle East and Africa; America contributes 29% to revenues and 25% comes from Asia-Pacifi c and India. The remaining 16% of the revenues comes from the European region.

Net profi t of Accelya Kale Solutions rose a huge 64.63%, to Rs31.33 crore, in the quarter ended December 2013 as against Rs19.03 crore during the quarter ended December 2012. Sales rose 4.10%, to Rs65.32 crore, over the same period. The companys sales growth, over the past fi ve quarters, averaged 29%, while operating profi t growth averaged 94%. The company has an average operating profi t margin of 40% over the fi ve quarters, one of the highest in the industry. The stock is reasonably priced, even after the recent run-up. Its market-cap is 3.74 times sales and 9.99 times operating profi t. The company has a fantastic RoNW (return on net worth), of 105%, and a RoCE (return on capital employed) of 123%.2. AkzoNobel India (DY: 10%): AkzoNobel India manufactures and markets a wide range of coatings and specialty chemicals. Its decorative paints business-line comprises the Dulux brand of paints for interior and exterior decoration and protection. AkzoNobel NV is headquartered in Amsterdam (the Netherlands) and is a Fortune Global 500 company. Earlier a part of Imperial

Chemical Industries (ICI), the company has been present in India for over

100 years and is a signifi cant player in the paints industry. The specialty chemicals business in India deals in more than 30 products grouped

under organic peroxides, metal alkyls and polymer additives to

pharmaceutical companies, polymer producers, composite and rubber industry. Sales rose 8.40%, to Rs643.93 crore, in the quarter ended December 2013 as against Rs594.05 crore during the quarter ended December 2012. However, net profi t declined 46.65%, to Rs27.01 crore, over the same period due to increase in other expenses for certain services received and higher raw material costs. The companys sales growth over the past

fi ve quarters averaged 8% while operating profi t growth averaged 5%. Growth is slow and valuation is expensive. The market-cap is 21 times operating profi t. The company has an RoNW of 14% and an RoCE of 12%.3. Andhra Bank (DY: 9%) Andhra Bank is a mid-sized public sector bank. The Bank has a network of over 1,880 branches, two-thirds of which are in Andhra. Total business increased to Rs2.23 lakh crore in FY12-13, from Rs1.90 lakh crore in FY11-12, registering a growth of 17.5%. Total deposits increased by 17.0%, to Rs1.23 lakh crore from Rs1.05 lakh crore, over the same period. Gross bank credit increased by 18.2% to Rs1 lakh crore as on 31 March 2013, from Rs84,684 crore as on 31 March 2012. The Bank has done considerably well in key fi nancial ratios, given the performance of the industry as a whole. Net interest margin stood at 3.21% in FY12-13 compared to 3.67% in the previous year. Cost to income ratio stood at 42.40%. Earnings per share (EPS) stood at Rs.23.04 and book value per share increased from Rs.126.36 in FY11-12 to Rs.144.67 in FY12-13.

However, the gross NPAs rose to 5.56% in Q3FY13-14 from 3.66% in Q3FY12-13 while net NPAs climbed to 3.65% from 2.29% in the same period, signalling deteriorating asset quality amid higher interest rates. The Banks sales growth over the past fi ve quarters averaged 13%, while operating profi t growth averaged -4%. Quite possibly, the worst is over for the government banking sector which is suffering from bad decisions and adverse external environment. One of the crucial measures of banks is price to book value. The rule of thumb is that a price to book value of less than 1 signifi es undervaluation. Andhra Banks price to book value is 0.36 times. 4. Syndicate Bank (DY: 8%): Syndicate Bank is a south-based, mid-sized public sector bank with 3,143 branches, mostly in the south. The Banks net profi t declined 25.20%, to Rs380 crore in Q3FY13-14 as against Rs508 crore in Q3FY12-13, while advances increased from Rs1.37 lakh crore as at Q3FY12-13 to Rs1.57 crore as at Q3FY13-14, up 15.17%. Gross NPA ratio stood at 2.80% in Q3FY13-14 as against 2.31% in Q3FY12-13 due to high slippage in the past nine months. Net interest margin was at 2.76% in Q3FY13-14 as against 3.29% in Q3FY12-13. The Bank has an RoNW of 18% and a price to book value of 0.46 times.

COVER STORY

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5. Infi nite Computer Solutions (DY: 7%): Infi nite Computer Solutions, which has 5,000 employees, is a software and IT services company offering technology solutions to telecom, healthcare, banking and fi nance industries in application management, infrastructure management and product engineering services including mobility and messaging products. It also provides niche expertise in enterprise analytics, enterprise mobility solutions and broadband networking. It caters to local as well as global clients. The telecom vertical contributes around 35% of the companys revenues; the healthcare vertical contributes 17% while the mobility business contributes 27%.

During the December 2014 quarter, Infi nite reported a 46%

decline in its net profit, to Rs15.39 crore from Rs28.74 crore, due to lower sale

Moneylife 20 March 2014

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