Indraprastha gas ltd (IGL) is currently the sole provider of CNG and PNG in the NCR region. IGL was promoted by GAIL and BPCL ltd in 1998. It currently operates 146 CNG stations in the NCR region. In addition the company is setting up PNG infrastructure to supply Natural gas to commercial and residential consumers.
As per the Supreme Court directive all buses, commercial vehicles and Light good vehicles have to run on CNG. In addition there is a substantial cost advantage of running cars and 3 wheelers on CNG. As a result there is now a trend of private cars converting to CNG. These factors ensure a high level of demand stability for IGL and reasonable growth prospects due to continuing conversion of cars to CNG and due to growth in PNG consumers.
In addition IGL is now expanding into the adjacent areas of noida and ghaziabad. It is also doing a feasibility study in haryana.
IGL’s CNG sales is less than 50% of its compression capacity. As a result IGL has substantial operating leverage and would be able to grow revenues with low capital expenditure.
Competetive advantage
IGL is currently the sole provider of NG to the transportation sector and to commercial and residential consumers. The gas industry all over the world is characterised by local monopolies. Typically there is a single company supplying gas to the final consumers, as it is not viable to have two competing pipelines in a given geographic area. As a result IGL would likely remain a monopoly in the NCR region. In addition GAIL which can be a strong competitor is actually a promoter of the company.
The company is one of those rare cases where there is a substantial monopoly and a government/ court mandated requirement of its product. This gives the company a substantial visibility of demand.
Financials
The company has had a ROC of 25%+ since inception. In addition like other gas companies it has a very low working capital requirement. The NPM margins at 19% are twice that of other gas companies such as gujarat gas. Also the company has zero debt and a small amount of cash on the balance sheet which will grow due to strong free cash flows. The main investment of the company is mainly fixed assets which is mainly the gas infrastructure.
Valuation
The company has an EPS of around 9.5 and the FCF (free cash flow) is around the same amount. As a result at the current price it sells at around 11-12 times free cash flow. A company with such strong competitive advantage, high ROC and good growth prospects of 8-9 % per annum , can conservatively be valued at 16-18 times PE. As a result the company is selling at 30-35% discount of conservatively calculated intrinsic value
Risk
The key risk for the company is the supply risk. IGL gets 50% of gas at APM rates. On checking I found that the APM price for gas are around 40-50% lower than market rates. As the government plans to bring market based pricing for gas in due course of time, the gas cost for IGL would increase in the next few years. The net margins for the company, which are at 20%, would reduce when this happens if the company is not able to pass the complete increase to the consumer.
Additional points
The current price seems to discount the above scenario. I personally feel that IGL would be able to pass some of the price increase, although there would definitely be some impact to the net margins. This would not necessarily impact the absolute profits, but could result in slow down of the growth in net profits.
Assuming that 3-5 years later IGL starts paying market price as per govt policy, the gross and net margins will drop for IGL. Taking GGCL NPM of 11% as the base line ,IGL can have a NPM of 13-14 % due to better retail mix and higher pricing strength. Also some amount of cushioning will happen as volumes increase.
Comparitive valuation
In comparison with guj gas, IGL has higher margins and better ROC. Also IGL is 20% cheaper than Guj gas. Against a NP of 90Cr for Guj gas, IGL will have rough profit of 130 Cr. Also mcap for both companies is same. By comparitive valuation IGL should be valued same as Guj gas , if not more.
Saturday, February 24, 2007
Indraprastha Gas
Indraprastha gas ltd (IGL) is currently the sole provider of CNG and PNG in the NCR region. IGL was promoted by GAIL and BPCL ltd in 1998. It currently operates 146 CNG stations in the NCR region. In addition the company is setting up PNG infrastructure to supply Natural gas to commercial and residential consumers.
As per the Supreme Court directive all buses, commercial vehicles and Light good vehicles have to run on CNG. In addition there is a substantial cost advantage of running cars and 3 wheelers on CNG. As a result there is now a trend of private cars converting to CNG. These factors ensure a high level of demand stability for IGL and reasonable growth prospects due to continuing conversion of cars to CNG and due to growth in PNG consumers.
In addition IGL is now expanding into the adjacent areas of noida and ghaziabad. It is also doing a feasibility study in haryana.
IGL’s CNG sales is less than 50% of its compression capacity. As a result IGL has substantial operating leverage and would be able to grow revenues with low capital expenditure.
Competetive advantage
IGL is currently the sole provider of NG to the transportation sector and to commercial and residential consumers. The gas industry all over the world is characterised by local monopolies. Typically there is a single company supplying gas to the final consumers, as it is not viable to have two competing pipelines in a given geographic area. As a result IGL would likely remain a monopoly in the NCR region. In addition GAIL which can be a strong competitor is actually a promoter of the company.
The company is one of those rare cases where there is a substantial monopoly and a government/ court mandated requirement of its product. This gives the company a substantial visibility of demand.
Financials
The company has had a ROC of 25%+ since inception. In addition like other gas companies it has a very low working capital requirement. The NPM margins at 19% are twice that of other gas companies such as gujarat gas. Also the company has zero debt and a small amount of cash on the balance sheet which will grow due to strong free cash flows. The main investment of the company is mainly fixed assets which is mainly the gas infrastructure.
Valuation
The company has an EPS of around 9.5 and the FCF (free cash flow) is around the same amount. As a result at the current price it sells at around 11-12 times free cash flow. A company with such strong competitive advantage, high ROC and good growth prospects of 8-9 % per annum , can conservatively be valued at 16-18 times PE. As a result the company is selling at 30-35% discount of conservatively calculated intrinsic value
Risk
The key risk for the company is the supply risk. IGL gets 50% of gas at APM rates. On checking I found that the APM price for gas are around 40-50% lower than market rates. As the government plans to bring market based pricing for gas in due course of time, the gas cost for IGL would increase in the next few years. The net margins for the company, which are at 20%, would reduce when this happens if the company is not able to pass the complete increase to the consumer.
Additional points
The current price seems to discount the above scenario. I personally feel that IGL would be able to pass some of the price increase, although there would definitely be some impact to the net margins. This would not necessarily impact the absolute profits, but could result in slow down of the growth in net profits.
Assuming that 3-5 years later IGL starts paying market price as per govt policy, the gross and net margins will drop for IGL. Taking GGCL NPM of 11% as the base line ,IGL can have a NPM of 13-14 % due to better retail mix and higher pricing strength. Also some amount of cushioning will happen as volumes increase.
Comparitive valuation
In comparison with guj gas, IGL has higher margins and better ROC. Also IGL is 20% cheaper than Guj gas. Against a NP of 90Cr for Guj gas, IGL will have rough profit of 130 Cr. Also mcap for both companies is same. By comparitive valuation IGL should be valued same as Guj gas , if not more.
As per the Supreme Court directive all buses, commercial vehicles and Light good vehicles have to run on CNG. In addition there is a substantial cost advantage of running cars and 3 wheelers on CNG. As a result there is now a trend of private cars converting to CNG. These factors ensure a high level of demand stability for IGL and reasonable growth prospects due to continuing conversion of cars to CNG and due to growth in PNG consumers.
In addition IGL is now expanding into the adjacent areas of noida and ghaziabad. It is also doing a feasibility study in haryana.
IGL’s CNG sales is less than 50% of its compression capacity. As a result IGL has substantial operating leverage and would be able to grow revenues with low capital expenditure.
Competetive advantage
IGL is currently the sole provider of NG to the transportation sector and to commercial and residential consumers. The gas industry all over the world is characterised by local monopolies. Typically there is a single company supplying gas to the final consumers, as it is not viable to have two competing pipelines in a given geographic area. As a result IGL would likely remain a monopoly in the NCR region. In addition GAIL which can be a strong competitor is actually a promoter of the company.
The company is one of those rare cases where there is a substantial monopoly and a government/ court mandated requirement of its product. This gives the company a substantial visibility of demand.
Financials
The company has had a ROC of 25%+ since inception. In addition like other gas companies it has a very low working capital requirement. The NPM margins at 19% are twice that of other gas companies such as gujarat gas. Also the company has zero debt and a small amount of cash on the balance sheet which will grow due to strong free cash flows. The main investment of the company is mainly fixed assets which is mainly the gas infrastructure.
Valuation
The company has an EPS of around 9.5 and the FCF (free cash flow) is around the same amount. As a result at the current price it sells at around 11-12 times free cash flow. A company with such strong competitive advantage, high ROC and good growth prospects of 8-9 % per annum , can conservatively be valued at 16-18 times PE. As a result the company is selling at 30-35% discount of conservatively calculated intrinsic value
Risk
The key risk for the company is the supply risk. IGL gets 50% of gas at APM rates. On checking I found that the APM price for gas are around 40-50% lower than market rates. As the government plans to bring market based pricing for gas in due course of time, the gas cost for IGL would increase in the next few years. The net margins for the company, which are at 20%, would reduce when this happens if the company is not able to pass the complete increase to the consumer.
Additional points
The current price seems to discount the above scenario. I personally feel that IGL would be able to pass some of the price increase, although there would definitely be some impact to the net margins. This would not necessarily impact the absolute profits, but could result in slow down of the growth in net profits.
Assuming that 3-5 years later IGL starts paying market price as per govt policy, the gross and net margins will drop for IGL. Taking GGCL NPM of 11% as the base line ,IGL can have a NPM of 13-14 % due to better retail mix and higher pricing strength. Also some amount of cushioning will happen as volumes increase.
Comparitive valuation
In comparison with guj gas, IGL has higher margins and better ROC. Also IGL is 20% cheaper than Guj gas. Against a NP of 90Cr for Guj gas, IGL will have rough profit of 130 Cr. Also mcap for both companies is same. By comparitive valuation IGL should be valued same as Guj gas , if not more.
Friday, February 23, 2007
Great article on valuing a cyclical company
Found the following link on the motely fool board about USG. USG – united states gypsum, is a construction material company, manufacturing wallboards (gypsum boards) and other construction material such as tiles. The performance of this company is highly dependent on the state of the US housing market.
http://www.texashedge.com/THR021507.pdf
I would highly recommend this article to anyone interested in learing how to value and invest in cyclical companies. added note : Warren buffett holds 19% of this company's equity.
http://www.texashedge.com/THR021507.pdf
I would highly recommend this article to anyone interested in learing how to value and invest in cyclical companies. added note : Warren buffett holds 19% of this company's equity.
Great article on valuing a cyclical company
Found the following link on the motely fool board about USG. USG – united states gypsum, is a construction material company, manufacturing wallboards (gypsum boards) and other construction material such as tiles. The performance of this company is highly dependent on the state of the US housing market.
http://www.texashedge.com/THR021507.pdf
I would highly recommend this article to anyone interested in learing how to value and invest in cyclical companies. added note : Warren buffett holds 19% of this company's equity.
http://www.texashedge.com/THR021507.pdf
I would highly recommend this article to anyone interested in learing how to value and invest in cyclical companies. added note : Warren buffett holds 19% of this company's equity.
Wednesday, February 21, 2007
Risk of high stock valuation
Most of us know that a stock with a high valuation has a higher risk of loss if the company dissapoints in terms of earnings. However i think there is an additional factor to consider when investing in a stock which is fully valued. A stock which is fairly valued has already discounted a bright future. When i think of investing in such a stock, my due diligence has to be deeper. I should have a strong reason to believe that the company has an even brighter future than what the market believe. What that means is that i am looking into the future farther for the company
Let me illustrate -
Company A sells at 12 times PE. If the ROE is around 15%, then the stock is discounting a mere 3 years of growth of 10 %.
In contrast company B sells at 30 times PE. If the ROE is 15%, then the stock is already discounting a growth of 15% for 10 years.
For me to make money on stock B, i need to have the foresight that the company do better than what the market has discounted. That means the company has to grow faster than 15% or for longer. Both cases for stock B are not easy to forecast .
In contrast company A has to perform only a bit better to give me good returns.
Now all of the above is basic value investing and concept of margin of safety. however my thought is that for high PE stock i should have a deep understanding of the business , its competitive position and other factors. Also my margin of error is smaller for such stocks. If an unknown factor works against the company, then there could be a permanent loss of capital. In contrast low valuation stocks need only a few things to go right for me to come out ahead.
In a nutshell, a low valuation stock protects me from my own shortcomings and sometimes I can get away with lesser research.
Stocks in the real estate business, telecom and retail come to my mind when I think of fairly valued company. When I look at these companies, the thought which comes to my mind is whether these companies will do better than what the market expects and does my own research substantiate it?
Let me illustrate -
Company A sells at 12 times PE. If the ROE is around 15%, then the stock is discounting a mere 3 years of growth of 10 %.
In contrast company B sells at 30 times PE. If the ROE is 15%, then the stock is already discounting a growth of 15% for 10 years.
For me to make money on stock B, i need to have the foresight that the company do better than what the market has discounted. That means the company has to grow faster than 15% or for longer. Both cases for stock B are not easy to forecast .
In contrast company A has to perform only a bit better to give me good returns.
Now all of the above is basic value investing and concept of margin of safety. however my thought is that for high PE stock i should have a deep understanding of the business , its competitive position and other factors. Also my margin of error is smaller for such stocks. If an unknown factor works against the company, then there could be a permanent loss of capital. In contrast low valuation stocks need only a few things to go right for me to come out ahead.
In a nutshell, a low valuation stock protects me from my own shortcomings and sometimes I can get away with lesser research.
Stocks in the real estate business, telecom and retail come to my mind when I think of fairly valued company. When I look at these companies, the thought which comes to my mind is whether these companies will do better than what the market expects and does my own research substantiate it?
Risk of high stock valuation
Most of us know that a stock with a high valuation has a higher risk of loss if the company dissapoints in terms of earnings. However i think there is an additional factor to consider when investing in a stock which is fully valued. A stock which is fairly valued has already discounted a bright future. When i think of investing in such a stock, my due diligence has to be deeper. I should have a strong reason to believe that the company has an even brighter future than what the market believe. What that means is that i am looking into the future farther for the company
Let me illustrate -
Company A sells at 12 times PE. If the ROE is around 15%, then the stock is discounting a mere 3 years of growth of 10 %.
In contrast company B sells at 30 times PE. If the ROE is 15%, then the stock is already discounting a growth of 15% for 10 years.
For me to make money on stock B, i need to have the foresight that the company do better than what the market has discounted. That means the company has to grow faster than 15% or for longer. Both cases for stock B are not easy to forecast .
In contrast company A has to perform only a bit better to give me good returns.
Now all of the above is basic value investing and concept of margin of safety. however my thought is that for high PE stock i should have a deep understanding of the business , its competitive position and other factors. Also my margin of error is smaller for such stocks. If an unknown factor works against the company, then there could be a permanent loss of capital. In contrast low valuation stocks need only a few things to go right for me to come out ahead.
In a nutshell, a low valuation stock protects me from my own shortcomings and sometimes I can get away with lesser research.
Stocks in the real estate business, telecom and retail come to my mind when I think of fairly valued company. When I look at these companies, the thought which comes to my mind is whether these companies will do better than what the market expects and does my own research substantiate it?
Let me illustrate -
Company A sells at 12 times PE. If the ROE is around 15%, then the stock is discounting a mere 3 years of growth of 10 %.
In contrast company B sells at 30 times PE. If the ROE is 15%, then the stock is already discounting a growth of 15% for 10 years.
For me to make money on stock B, i need to have the foresight that the company do better than what the market has discounted. That means the company has to grow faster than 15% or for longer. Both cases for stock B are not easy to forecast .
In contrast company A has to perform only a bit better to give me good returns.
Now all of the above is basic value investing and concept of margin of safety. however my thought is that for high PE stock i should have a deep understanding of the business , its competitive position and other factors. Also my margin of error is smaller for such stocks. If an unknown factor works against the company, then there could be a permanent loss of capital. In contrast low valuation stocks need only a few things to go right for me to come out ahead.
In a nutshell, a low valuation stock protects me from my own shortcomings and sometimes I can get away with lesser research.
Stocks in the real estate business, telecom and retail come to my mind when I think of fairly valued company. When I look at these companies, the thought which comes to my mind is whether these companies will do better than what the market expects and does my own research substantiate it?
Monday, February 19, 2007
Asset allocation
There are a lot of tools available for doing asset allocation of your portfolio. They vary from the simple (like 90- age should your equity %) to the highly complex which try to allocate assets based on age, risk profile, asset classes etc.
I have till date never used an asset allocation tool though. I don’t say this with any pride or due to some big insight. It is just that I am not comfortable with most of these mechanical tools.
Asset allocation according to me is a highly subjective process. My thought process has been a bit different on it. I don’t look at asset allocation just from the point of view of my investments alone. For me an allocation decision depends on some of the following factors
1. amount of money saved – I had a higher equity holding earlier when my asset base was small. However as time progressed my equity holding as % of assets have come down although the absolute number has gone up
stability of my day time job – there have been times when I have felt that my primary source of income has been at risk. At such times I have tried to reduce the risk to my portfolio by not increasing equity investments
3. Experience or learning – I tend to invest in only those asset classes where I feel I have some understanding and a bit of an edge. As a result I have never dabbled in options, metals etc
4. Whims and fancy – I would like to think I am rational, but I guess I am more risk averse than an average investor. As a result my investments are smaller than what a mathematical formuale (such as kelly’s formulae) would suggest. In addition, I have an aversion to IPO’s (more in a later post), gold and in ,general commodity business.
5. Sleep test – this would seem to be the most irrational factor, but it is a very important one for me. It works this way – With the current asset allocation , can I sleep well in night if a particular asset drops by 20-30 %. I have at time liquidated assets that don’t meet this criteria.
As a result of all these factors my average equity holding fluctuates between 30-50 %, real estate 20-30% and the rest in debt holding. Not a very optimal approach, but it gives me my targeted rate of return and lets me sleep well !!
Asset allocation
There are a lot of tools available for doing asset allocation of your portfolio. They vary from the simple (like 90- age should your equity %) to the highly complex which try to allocate assets based on age, risk profile, asset classes etc.
I have till date never used an asset allocation tool though. I don’t say this with any pride or due to some big insight. It is just that I am not comfortable with most of these mechanical tools.
Asset allocation according to me is a highly subjective process. My thought process has been a bit different on it. I don’t look at asset allocation just from the point of view of my investments alone. For me an allocation decision depends on some of the following factors
1. amount of money saved – I had a higher equity holding earlier when my asset base was small. However as time progressed my equity holding as % of assets have come down although the absolute number has gone up
stability of my day time job – there have been times when I have felt that my primary source of income has been at risk. At such times I have tried to reduce the risk to my portfolio by not increasing equity investments
3. Experience or learning – I tend to invest in only those asset classes where I feel I have some understanding and a bit of an edge. As a result I have never dabbled in options, metals etc
4. Whims and fancy – I would like to think I am rational, but I guess I am more risk averse than an average investor. As a result my investments are smaller than what a mathematical formuale (such as kelly’s formulae) would suggest. In addition, I have an aversion to IPO’s (more in a later post), gold and in ,general commodity business.
5. Sleep test – this would seem to be the most irrational factor, but it is a very important one for me. It works this way – With the current asset allocation , can I sleep well in night if a particular asset drops by 20-30 %. I have at time liquidated assets that don’t meet this criteria.
As a result of all these factors my average equity holding fluctuates between 30-50 %, real estate 20-30% and the rest in debt holding. Not a very optimal approach, but it gives me my targeted rate of return and lets me sleep well !!
Wednesday, February 14, 2007
Thoughts on inflation and interest rates
The RBI has just raised the CRR by another .5 %. This with inflation at 6.5%, although I feel this inflation is understated as the government’s basket of goods really not reflect an average middle class’s consumption profile. Rentals, education and health care alone are inflating in double digits.
I have never had any specific views on interest rates or inflation. I try not to base my investment plans on any predictions of inflation or interest rates. However that does not mean I don’t to react to it. In the past I have taken the following actions
In 2000-2001, I invested in fixed income debt funds. As the rates fell, the appreciation in these funds was substantial.
In 2003 when the interest rates were at an all time low, I moved my fixed income investments into floating rate funds and went long on by housing debt (see my thoughts on it here)
With rates hovering in 9-10 %, I have started looking at the option of moving out of floating rate funds into fixed income debt funds of average maturity (4-6 years duration). I have not made up my mind yet on it. I may wait for a couple of months more as I feel that the interest rates may rise a bit further. I am not sure about it and do not have specific views on it, but would wait and watch and react opportunistically to it.
As far as the stock market is concerned, I have been finding a few interesting opportunities such as indraprastha gas which I will explore further in a future post.
Additional comments - 15-Feb
Found this article on GEF (morgan stanley 's global economic forum)
http://www.morganstanley.com/views/gef/archive/2007/20070214-Wed.html#anchor4403
Following comments are worth noting
Excess liquidity conditions in late 2003 and 2004 resulted in banks searching for yield and charging negligible risk premiums for loan assets with inherently higher risks. Just about 12 months ago, banks were making little distinction between pricing credit risk for various types of loan assets. Almost all loans were being priced in a very narrow range of around 7.5-8%, which was very similar to the 10-year bond yields then. Indeed, banks’ lending behavior implied that the risk of lending to a low-income-bracket borrower (for whom there is little credit history available) for the purchase of a two-wheeler was not meaningfully different from the risk of investing in government bonds.
If the past two months’ average credit growth of 30% and deposit growth of 22.5% are maintained, the banking sector SLR ratio will reach its maximum limit of 25% by March 2007.
I have never had any specific views on interest rates or inflation. I try not to base my investment plans on any predictions of inflation or interest rates. However that does not mean I don’t to react to it. In the past I have taken the following actions
In 2000-2001, I invested in fixed income debt funds. As the rates fell, the appreciation in these funds was substantial.
In 2003 when the interest rates were at an all time low, I moved my fixed income investments into floating rate funds and went long on by housing debt (see my thoughts on it here)
With rates hovering in 9-10 %, I have started looking at the option of moving out of floating rate funds into fixed income debt funds of average maturity (4-6 years duration). I have not made up my mind yet on it. I may wait for a couple of months more as I feel that the interest rates may rise a bit further. I am not sure about it and do not have specific views on it, but would wait and watch and react opportunistically to it.
As far as the stock market is concerned, I have been finding a few interesting opportunities such as indraprastha gas which I will explore further in a future post.
Additional comments - 15-Feb
Found this article on GEF (morgan stanley 's global economic forum)
http://www.morganstanley.com/views/gef/archive/2007/20070214-Wed.html#anchor4403
Following comments are worth noting
Excess liquidity conditions in late 2003 and 2004 resulted in banks searching for yield and charging negligible risk premiums for loan assets with inherently higher risks. Just about 12 months ago, banks were making little distinction between pricing credit risk for various types of loan assets. Almost all loans were being priced in a very narrow range of around 7.5-8%, which was very similar to the 10-year bond yields then. Indeed, banks’ lending behavior implied that the risk of lending to a low-income-bracket borrower (for whom there is little credit history available) for the purchase of a two-wheeler was not meaningfully different from the risk of investing in government bonds.
If the past two months’ average credit growth of 30% and deposit growth of 22.5% are maintained, the banking sector SLR ratio will reach its maximum limit of 25% by March 2007.
Thoughts on inflation and interest rates
The RBI has just raised the CRR by another .5 %. This with inflation at 6.5%, although I feel this inflation is understated as the government’s basket of goods really not reflect an average middle class’s consumption profile. Rentals, education and health care alone are inflating in double digits.
I have never had any specific views on interest rates or inflation. I try not to base my investment plans on any predictions of inflation or interest rates. However that does not mean I don’t to react to it. In the past I have taken the following actions
In 2000-2001, I invested in fixed income debt funds. As the rates fell, the appreciation in these funds was substantial.
In 2003 when the interest rates were at an all time low, I moved my fixed income investments into floating rate funds and went long on by housing debt (see my thoughts on it here)
With rates hovering in 9-10 %, I have started looking at the option of moving out of floating rate funds into fixed income debt funds of average maturity (4-6 years duration). I have not made up my mind yet on it. I may wait for a couple of months more as I feel that the interest rates may rise a bit further. I am not sure about it and do not have specific views on it, but would wait and watch and react opportunistically to it.
As far as the stock market is concerned, I have been finding a few interesting opportunities such as indraprastha gas which I will explore further in a future post.
Additional comments - 15-Feb
Found this article on GEF (morgan stanley 's global economic forum)
http://www.morganstanley.com/views/gef/archive/2007/20070214-Wed.html#anchor4403
Following comments are worth noting
Excess liquidity conditions in late 2003 and 2004 resulted in banks searching for yield and charging negligible risk premiums for loan assets with inherently higher risks. Just about 12 months ago, banks were making little distinction between pricing credit risk for various types of loan assets. Almost all loans were being priced in a very narrow range of around 7.5-8%, which was very similar to the 10-year bond yields then. Indeed, banks’ lending behavior implied that the risk of lending to a low-income-bracket borrower (for whom there is little credit history available) for the purchase of a two-wheeler was not meaningfully different from the risk of investing in government bonds.
If the past two months’ average credit growth of 30% and deposit growth of 22.5% are maintained, the banking sector SLR ratio will reach its maximum limit of 25% by March 2007.
I have never had any specific views on interest rates or inflation. I try not to base my investment plans on any predictions of inflation or interest rates. However that does not mean I don’t to react to it. In the past I have taken the following actions
In 2000-2001, I invested in fixed income debt funds. As the rates fell, the appreciation in these funds was substantial.
In 2003 when the interest rates were at an all time low, I moved my fixed income investments into floating rate funds and went long on by housing debt (see my thoughts on it here)
With rates hovering in 9-10 %, I have started looking at the option of moving out of floating rate funds into fixed income debt funds of average maturity (4-6 years duration). I have not made up my mind yet on it. I may wait for a couple of months more as I feel that the interest rates may rise a bit further. I am not sure about it and do not have specific views on it, but would wait and watch and react opportunistically to it.
As far as the stock market is concerned, I have been finding a few interesting opportunities such as indraprastha gas which I will explore further in a future post.
Additional comments - 15-Feb
Found this article on GEF (morgan stanley 's global economic forum)
http://www.morganstanley.com/views/gef/archive/2007/20070214-Wed.html#anchor4403
Following comments are worth noting
Excess liquidity conditions in late 2003 and 2004 resulted in banks searching for yield and charging negligible risk premiums for loan assets with inherently higher risks. Just about 12 months ago, banks were making little distinction between pricing credit risk for various types of loan assets. Almost all loans were being priced in a very narrow range of around 7.5-8%, which was very similar to the 10-year bond yields then. Indeed, banks’ lending behavior implied that the risk of lending to a low-income-bracket borrower (for whom there is little credit history available) for the purchase of a two-wheeler was not meaningfully different from the risk of investing in government bonds.
If the past two months’ average credit growth of 30% and deposit growth of 22.5% are maintained, the banking sector SLR ratio will reach its maximum limit of 25% by March 2007.
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