How do high taxes effect an economy?

We would think that the higher the taxes the government levies on corporations and individuals, the richer the government gets. You would be surprised to know that the government gets poorer. Let us see how?

Take the example of India. India is a developing economy and a net importer i.e it imports more and exports less. Therefore, the treasury runs into a deficit. An efficient government has the capability to run the economy with minimum taxes. But the Indian government's pyramid structure makes it difficult for it to run the economy in the same way as a business man would run his enterprise. Moreover due to the absence of transparency and a proper revenue collecting system, a lot of people end up not paying taxes. Therefore, the government ends up taxing the corporations and individuals more.

Let us see with the help of a simple diagram, the effect high taxes have on an economy.

What is the difference between a Primary and Secondary market?

A market is a place where trades take place. A stock market is a place where stocks are traded between people. Some people sell and some people buy. A person cannot sell if there are no buyers and vice versa. A stock market can further be broken down into Primary markets and Secondary Markets.

Primary Markets

If you read newspapers and watch business news channels, you would have probably heard of an IPO. An IPO is an initial public offering, through which a company raises capital to run its business. Think about a situation, where in you need to raise money for starting or doing a business. Either you could go to a bank or go to the people. When people lend, they buy shares in your company and become owners i.e equity(equal) shareholders in your company.

A company can do an IPO in the market with the help of a merchant or an investment bank. The investment bank has the expertise of architecting the IPO for a company. After an IPO the company gets listed in the stock market, and the company gets the required capital.

Secondary Markets

Once the company is listed in the market, the shares can be actively traded in the markets. If the company is doing well and has a bright future more and more people will be interested in owning the shares of the company(stock price goes up), and if the company is not doing well people will sell(price goes down). All this activity is done in the secondary market.

Example.

The most recent popular listing in the market was SKS Microfinance. The company already had a running business and needed more capital to expand its business. Thereofore, the company took the equity route to raise capital. Kotak Mahindra Bank, which is an investment bank helped the company list in the market. Now since the company has made a successful listing, the shares are actively traded in the market(secondary market).

Disappointing FY11 June results for Kaveri

Kaveri Telecom declared the June quarter results on Aug 14, and in my opinion the results were disappointing. The company registered marginal growth in sales and practically no growth in profits. The company also deducted 18 crores for the increase in stock from the expenses side. This, along with a no growth in the profits has made me sell the shares in the short term. I am expecting some selling to be made in this counter in the coming weeks, after which I will be covering my position.

The long term story of the stock still holds good. Please note, the growth for companies in India during the first quarter of a financial year is usually slow compared to the other quarters.

Delhi to Kolkata: A journey worth remembering!!!

Last month I had to travel to Calcutta. I had the option of either flying or travel by rail. For a normal Indian who has time constraints, flying is the best option. But this time I could afford to be different since I had the luxury of time. But the thought of crowded railway stations and the not so hygienic toilets in the coaches makes me uncomfortable. But Indian railways can surprise you with the luxury of an AC First. I had travelled in AC first before during childhood, and the pleasant experience made me book the tickets again. This time was an even better and efficient experience.


The coolie positioned us at the exact place on the platform, where the AC first coach would halt. We were travelling from Delhi on the Kolkata Rajdhani. Since the AC first coach is positioned right after the engine, we had to walk to the extreme end of the platform, which was not at all crowded. The strange thing was that I felt rich as I was surrounded by people who looked rich. The Train arrived on schedule and we boarded the coach. A Totally hassle free experience contrary to what you would experience when boarding an AC 2 tier coach. AC first has private coupes or rooms and we were allocated coupe C. Each coupe has a capacity of four or two.

What is a demat account and how to choose one?

Long ago when most of us were in liquid form, shares were traded in hard form i.e. when one bought some shares from the market, certificates were issued. Think about a portfolio with hundreds of shares of hundreds of company. You probably would have to buy a small office space to store all the certificates :-). In a nutshell shares in hard form were an headache. To expedite share trading and enhance the storage quality of information, SEBI and the stock exchanges decided to issue the shares in electronic form. What a relief?

In order to buy and sell shares electronically, one needs to have a demat account. Demat stands for de materialization of shares.

Breakout seen in Indian Bank

Today, Indian bank closed 6% up. Is this a breakout in the counter? This bank had secured rank 1 in the valuation data that I had published last week.

In the private banking space I like Karur vysya and JK Bank. Both these banks have shown aggressive growth in the past three years and are undervalued when compared to say a Yes Bank.

How to get started?

An earnest request, from one of my buddies, has inspired me to write an article on how to start investing? Treat this as a journey from the i to g of investing. I would probably narrate my story on how I got started and in the process formulate the do's and dont's in investing.

Dummies, please hard code these golden words into your brain "no knowledge - no investing". If you can strategize your investments along the lines of the above phrase, you will always make money in the markets. How much you make depends on your foresight, knowledge and risk appetite.

For starters please start reading economic times. This is the bible of the Indian economy. This is how I got started. Initially you will bump across a lot of jargon's. Please get each and every jargon clarified. How? Mail me, call me, sms me!!! Else, read the web or ask an expert.

Along with reading the economic times, start watching CNBC. A very good business channel, but I can rationalize with a very select analyst's on this channel.

When I started reading about the markets, I used to read the tutorials in sharekhan's website. For beginners this is a good read. Very simple and straight forward. bseindia.com is also a wonderful wonderful website.

Give yourself a months time, reading and watching. Once you start understanding the markets and the economy, you are ready to take the next step. The step to open a demat account.

I am reiterating again "an aware investor is a successful investor".

Kaveri Telecom - Promoter stake to go over 35%

The promoters in the board meet have decided to raise capital by alloting preferrence shares. Who will buy the shares? Well, the promoter's themselves!!!

After the purchase the promoter's stake will get raised to over 35%, which is a kind of assurance to an investor like me. The results for Q1 2011 are supposed to be announced on Aug 14, 2010. If the results beat expectations, the stock will rally again.

The elephant delivers: the way forward

The sensex is trading at 18000 levels, and we can best say that the sensex is currently consolidating. There are thousands of investors, not very sure whether the markets are heading upwards or a correction is due. Any bad news from the USA or Europe might cause a major correction. I see this as an opportunity. Why? Simply because the domestic growth story is very robust.

Today the elephant(SBI) announced its FY11 Q1 results, which beat the expectations on the street. The bank posted a jump of over 25% in net profit's over the previous(year) quarter. Net Interest Income(NII, which is Interest earned minus Interest expended) grew a robust 45.36% to 7304 crore. Net NPA stood at 1.7% as compared to 1.55% for the previous quarter(this is a concern but quiet acceptable since the bank has witnessed tremendous credit growth). These numbers( specially the NII) clearly indicate that corporate India is on a clear growth path, because SBI has the maximum penetration into the economy when compared to the other banks. Healthy credit growth is a testimony to the fact that the economy is growing.

PSU banks valuation data as on March 31, 2010

As, promised I am sharing the spreadsheet, where I have tried to value the different PSU banks with an asset base of over 20,000 crore(with some exceptions). This spreadsheet is the first draft. There is still some work that needs to be done on this. Once I complete the valuation of the PSU banks I will turn over to the smaller private banks(since they are undervalued and have the potential to become the next HDFC).

Please note the following before you open the sheet:

1. As mentioned before this is not a fool proof method, as I am not assigning weights to the ranks.
2. I have not included the June, 2010 results, as I was more inclined on valuing the bank on their performance for the whole financial year.
3. I have not included the growth of the banks for the last few years. Therefore even though the sheet might show Indian Bank to be the winner, there is a very high probability that a PNB has been growing more aggressively.

Please find the link below
Relative Valuation - PSU Banks.

Who is the winner amongst PSU banks?

As promised, I have been researching PSU banks(large cap) for one week now. I am almost done with the research, and couldn't wait to share the results with you. Seems like Indian Bank and PNB have emerged as the top contenders. This is based on their financial position as on March 31, 2010. I have not included the June 2010 results in my analysis. Will do so in the coming weeks.

Let me explain how I have conducted my research.

1. Made a list of all the large cap banks, with an asset base of more than 20,000 crores(with some exceptions though).
2. Retrieved each banks annual report from the Internet.
3. Collated the data and calculated the respective ratios.
4. Assigned ranks based on the numbers.

I must admit that this approach has an inefficiency of not assigning weights to each ratio. But we will discuss the pros and cons in the coming weeks. I will also be sharing the complete data by next week.

Started Valuing PSU banks

As promised, I have started the process of valuing the PSU banks in India. Listed below is the strategy that I am going to adopt. This time I will be sticking to the process of relative valuation.

1. I will be selecting around 8 banks based on their market cap and asset base. I wont be selecting very small banks.

How to value a company?

Valuation of a company can be done in either of the following ways:

1. Valuation using cash flows.
2. Relative Valuation.

Valuing a Bank

I have always believed that if an economy grows, the banking system has to grow. Or you can say that a prospering banking system implies a prospering economy. The housing burst in the USA, which propelled the world to a slowdown is a testimony to the importance of a prudent banking system. As far as India is concerned, we have world class banks in HDFC and ICICI along with Axis and Yes Bank, which have the potential to be right at the top. But, the major financing to the country comes from the PSU banks, which are not as structured and efficient as the private players mentioned above. As far as the PSU banks are concerned, the picture today is much better than what it was in the begining of the millennium. Reforms from RBI, such as maintaining a 10% CAR(capital adequacy ratio) and maintaining a provision for the NPA's, along with the operational efficiency demonstrated by the PSU's have paved the way for these banks to be the best in the world.

Energy Deregulation - The Irony

I was reading an article, written by a professor from Columbia University, today in economic times. I was fascinated by what I read and wanted to share it here. The professor talked about the history of the role the government has been playing in energy regulation. The most recent Bharat bandh was a testimony to the fact that freeing up energy prices is a very socio sensitive issue in India.

Kaveri Telecom

Kaveri Telecom is one company, which is my personal favourite. Unless and until something really goes wrong with the sector or the management messes things up, this counter will not find a way out of my portfolio. Like a father, in love with his child, I am in love with this stock. Probably because I have seen this stock grow since 2006, when it was a teenager in puberty. And today the company is a man ready to face the world.

More thoughts on the sweeping open offer norm

Until now to make an open offer, the acquirer had to have 15% stake in the target company. This threshold has been increased to 25%(which bestows the acquirer with the power to pass resolutions within the board). This makes sense because a company, wanting to build up a strategic position in the target company, would go to the open market.

Moreover, the time period for making the open offer has been considerable reduced to 57 days. This will help in expediting the whole process.

Is India ready for a 100% open offer norm?

Today, SEBI has laid down new guidelines tweeking the way open offers are made in India by an acquirer. Until today an acquirer, who already owned 15% of a company, could increase the stake by making a 20% open offer to the general public. This didn't provide 100% exit option to the general public. To provide the retail shareholder an equitable opportunity to exit the company, the SEBI panel is planning to make it mandatory for the acquirer to make an 100% open offer to the general public.