Waning hopes: Earnings drought in India is just getting extended

Third quarter earnings season is now running in full swings, with results of bluechips such as TCS, Infosys and banks such as IndusInd Bank already out.

Expectations from the quarter are already low, given the prevailing concerns globally and their impact on the domestic economy. Metldown in energy prices, delays in reforms and, thus, capex cycle, and weak demand in rural India, are all weighing in on the prospects of a rapid economic revival.

But if analysts were to believe, the wait for revival may just get extended and the two-three quarters, the time investors are expecting earnings to take to revive, could easily turn to two years. Analyst though expect falling energy prices may keep lifting overall profit margins going ahead.

India Ratings and Research believes that corporates will take at least two more years to report accelerated earnings and reach the peak level achieved in 2011-12.

In a recent report brokerage firm Ambit Capital in a recent report had predicted earnings growth to remain weak during FY2016 and FY2017.

"Earnings per share (EPS) growth in FY16 and is FY17 likely to remain in single digits (just as in the post 1991 world), we expect the Sensex to generate single digit returns in FY16 and FY17," said brokerage.

Ambit Capital pointed out India has witnessed healthy GDP growth averaging 10 per cent in nominal terms over the last six quarters, but this has not resulted into higher earnings per share (EPS) growth for the Nifty companies.

The reason has to do with three profound structural changes taking place in India: The 'Modi, Rajan and Technology' resets.

"The correlation breakdown between GDP growth and corporate revenues and earnings for the Nifty 50 companies, in our view, is a reflection that a significant portion of the economic growth pick-up is no longer being exploited by listed large cap companies. This, in turn, is because India is being fundamentally changed by an inter-play of the three dominant forces at work in the country today: Modi, Rajan and Technology," said Ambit Capital in a research report.

Ambit Capital report said that Prime Minister Narendra Modi is calling time on the traditional model of subsidy funded consumption growth and crony capitalism driven capex growth in India. So, the incumbents that have thus far enjoyed high earnings growth on the back of corruption and artificial suppression of competition will face increasing pressure on their revenues and earnings.

On the other hand, The RBI Governor Raghuram Rajan is increasing competition for traditional private banks through the introduction of new banks, deepening of corporate bond markets, the resurrection of PSU banks and reducing regulatory arbitrage between banks and NBFCs, the report cited.

Technology is the third factor playing spoilsport for some sectors such as IT and retail, said the report, adding, "New innovations are weakening the traditional offering of Indian IT services firms while increasing competition for retail lenders and B2C companies," said brokerage.

Meanwhile, India rating expects ebitda growth of BSE 500 corporate to range between 12-14 per cent for FY17, under a hypothetical scenario of fiscal loosening, compared to the 5-6 per cent growth expected for FY16.

Rating agency believes investment and commodity prices linked sectors will post muted EBITDA growth in FY17. Growth in sectors such as metals and mining (including volumes) and upstream oil & gas sectors would remain muted despite the base effect.

"However, the downstream oil & gas (refining) sector is likely to exhibit positive growth driven by the higher volume offtake of petroleum products and sustained refining margins. The top five sectors including auto and automotive suppliers, power (generation, transmission and distribution) and telecom contribute 55-60 per cent to the overall EBITDA of BSE 500 corporates, and any meaningful recovery in overall corporate profits would have to be driven by these sectors," said Ind-Ra.

Sun Capital

Analyzing ConocoPhillips’ Return on Equity (COP, XOM)

ConocoPhillips (NYSE: COP) reported return on equity (ROE) of -2.04% for the 12-month period ending in September 2015. This represents a sharp drop from its 2014 ROE of 13.21% and an even bigger drop from its 2013 figure of 18.3%. The company has a trailing 12-month net loss of $1 billion, down sharply from a net income of $6.9 billion in 2014. Its shareholders' equity, which stood at $44.2 billion as of September 2015, has declined more modestly. It was $51.9 billion at year-end 2014.

ROE Analysis

ConcoPhillips' precipitous drop in ROE from 13.21% in 2014 to -2.04% for the 12-month period ending in September 2015 came as a result of a commensurately sharp decline in net income. Like all large-cap oil and gas companies, ConocoPhillips has struggled amid a crash in oil prices throughout 2015. Oil, which traded as high as $147 per barrel for a time in 2008, fell below $30 per barrel in 2015, its lowest price since the 1990s. The company's main competitors, Exxon Mobil Corporation (NYSE: XOM) and BP PLC (NYSE: BP), also saw their net incomes and ROE fall considerably from 2014 to 2015 -- though Exxon Mobil managed to keep both figures positive.

DuPont Analysis

A typical ROE analysis looks at net income and shareholders' equity separately and evaluates the effect that each has had on changes in ROE. The DuPont analysis, by contrast, breaks ROE into its constituent components of net margin, asset turnover ratio and equity multiplier and seeks to determine the influence each has on ROE.

ConocoPhillips' net margin for the 12-month period ending in September 2015 was -2.82%, down from 12.37% in 2014. A February 2016 press release from the company acknowledges that low commodity prices have squeezed its margins and, as a result, it is taking active steps to bring expenditures in line with its reduced revenue. It cut its quarterly dividend from 74 cents per share to 25 cents per share, lowered capital expenditures by $1.3 billion and reduced operating costs by $700 million.

Its competitors suffered falling margins as well, with Exxon Mobil's dropping from 7.89 to 6.73% and BP's declining from 1.05 to -3.06%. ConocoPhillips had the largest drop of the three, making it reassuring that the company has acknowledged the root of the problem and taken quick and decisive steps to address it.

ConocoPhillips' trailing 12-month asset turnover ratio is 0.32. This figure, which measures how efficiently a company generates revenue from its assets, has fallen steadily from 1.62 in 2011. Its influence on ROE appears moderate, though not as pronounced as that of net margin. Exxon Mobil and BP, both with asset turnover ratios of 0.85, have seen their asset turnovers slow down as well in the wake of the oil price collapse.

ConocoPhillips' equity multiplier for the 12-month period ending in September 2015 is 2.4. This figure has remained steady for a decade. While the company's equity position has fallen slightly, the company has also reduced its debt load, keeping the ratio between the two consistent. A silver lining for ConocoPhillips amid the oil collapse is, at least, the company is not overleveraged. Its equity multiplier sits squarely between those of Exxon Mobil (2.0) and BP (2.7).

Conclusions

ConocoPhillips' steep drop in ROE resulted from severe declines in net income and net margin, both symptoms of broader oil market malaise. On the bright side, the company has come forward with the steps it is taking to counter its declining revenue resulting from low oil prices, which involve slashing expenditures in several areas, such as dividends, capital expenditures and operating expenses. Every large-cap oil and gas company has suffered in the wake of the oil crash. Investors in ConocoPhillips should at least be comforted that the company is being proactive in responding to it.

Bonds beat bank loans

Borrowing through corporate bonds and commercial paper (CP) has exceeded loans disbursed by banks so far in FY16, reports Bhavik Nair in Mumbai. Bank loans include those to individuals and therefore, the data suggests a whole host of companies may have stayed away from banks. Typically, banks lend more in a year than is borrowed in the bond and money markets.

However, money raised via CPs and corporate bonds have touched Rs 3.55 lakh crore thus far in FY16, which is higher than the non-food credit by banks which is approximately Rs 3.03 lakh crore. Companies have tapped the bond markets primarily because it is cheaper to borrow there. The difference in borrowing rates has been anywhere between 50-100 basis points. Shashikant Rathi, EVP, capital markets, Axis Bank, points out the shift in borrowings to the corporate bond market from the banking system has been seen across sectors.

Banks are seeing subdued demand for term loans and project finance given investment activity is sluggish.

Moreover, the sharp drop in prices of commodities and lower inflation has brought down the demand for working capital too.

Moreover, their loans are priced higher than bonds and CPs prompting companies to opt for the latter.

In 2015, banks reduced their base rates close to 60-70 basis points. For example, State Bank of India brought its base rate down to 9.70% from 10% at the beginning of the 2015. However despite this their loans remained more expensive than borrowings in the bond market since yields fell more sharply. For example, immediately after the cut in the repo rate by 50 basis points on September 29, by the central bank, short-term CP rates fell by 50-75 basis points. Primarily, companies which enjoy a rating above AA- have moved to corporate bond market since, as Rathi points out, yields here are lower by 150-200 basis points.

Sun Capital

Real estate regulator now a reality

The bill aims to empower home buyers and make developers accountable.

The upper house of the parliament on Thursday passed the long-pending Real Estate (Regulation and Development) Bill 2015, paving the way for setting up of regulatory bodies to monitor projects and bring transparency and accountability in real estate transactions.

The bill aims to empower home buyers, make developers accountable toward their promises and put in place mechanism to check malpractices in the sector. The law is of immense value to home buyers who have long suffered with builders changing project plans without the consent of buyers or diverting funds from one project to another. 

 “This is a major reform that promises to bring in much-needed transparency and accountability to the rather opaque sector. It will create a much-needed consumer right protection umbrella for buyers of real estate, thereby increasing consumer confidence as well as creating lasting developer brands strong on quality and timely delivery of their projects,” said Anuj Puri, chairman and country head, JLL India.

The bill’s chief objective is to set up regulatory authority on the lines of other sectors like banking and telecom and also form appellate tribunals in states and union territories. The authority will appoint abjudicating officers to settle disputes, which will be taken up by the appellate tribunal. 

The regulator will work as a nodal agency and co-ordinate efforts regarding development of the sector with key stakeholder and the government.

Among other key features, all projects including commercial and residential starting from 500 square metres or eight apartments are to be registered with the regulator, against the earlier mandate of 1,000 square metres or 12 apartments. It will be applicable retrospectively across ongoing projects too. 

However, in a discussion on the bill in the parliament, Union Urban Development Minister Venkaiah Naidu said clarity is yet to emerge if the current framework will be applicable on ongoing projects as well. He also said state governments have the flexibility to lower the project size threshold for mandatory registration. 

All real estate agents who intend to sell plot, apartment or building also have to register with the regulator. with the regulator.

With a view to promote timely completion of projects, the bill makes it compulsory for developers to keep at least 70 per cent of customer advance, including land cost in a separate escrow account, to meet construction costs. This is up from the previous requirement of 50 per cent.  

The government has also brought in parity on interest payment in case of default. Now, builders will have to pay same interest as home buyers in case of default or delays—earlier home buyers were accountable for this. It has also increased the liability of builders from two years to five years in case of structural defects.  

In case of violation of orders of the appellate tribunal, builders will be charged with three years of imprisonment while agents and buyers will have to face one year of imprisonment or monetary penalty or both. It also advocates that disputes should be resolved within 60 days.

Impact
Anshuman Magazine, chairman and managing director, CBRE South Asia Pvt Ltd, said it will have a far reaching implication for the real estate and construction sector. “It will help regulate the sector and promote transparency. If implemented in the right spirit, it could facilitate greater volumes of domestic as well as overseas investment flows into the sector. Home buyer confidence in the property market is also likely to revive.” 

Experts believe that this will go a long way in reviving the confidence of home buyers. Sales in housing market has softened over the years as end users and investors have stayed away due to high prices and unchecked construction delays in the sector. This has taken the unsold stock to an alarming level with some cities sitting on a huge pile-up of inventory.

The bill aims to boost the confidence of home buyers with more transparency and accountability from the developers.

JC Sharma, vice chairman and managing director at Sobha Ltd, said this is a step in the right direction. But he added that the bill made no mention of time-bound approvals by various central, state and local agencies, which is critical to the sector’s growth.

It is expected that developers will also benefit once the law is implemented as they can access cheaper and wider source of financing. However, on the other side, it will also gradually weed out a lot of fly-by-night and non-serious players from the market. 

Sun Capital 

Flat-to-negative opening expected on ECB stance

Markets are likely to make a flat-to-negative opening on ECB comments. The European Central Bank (ECB) has cut interest rates on Thursday to boost the euro zone economy, surprising financial markets by dropping its main refinancing rate to zero from 0.05%.

The early indicator, SGX Nifty is trading flat at 7,487 mark. Meanwhile, the International Monetary Fund (IMF) might revise its estimate for global economic growth in its spring meeting but India is better placed than other emerging market countries, said its financial counsellor and director, José Viñals, on Thursday.

Further, the government will announce Index of Industrial Production data for January today.

Foreign portfolio investors (FPIs) bought shares worth a net Rs 1063.11 crore yesterday, as per provisional data released by the stock exchanges.

Among overseas markets, the euro held hefty gains in Asia on Friday after the European Central Bank eased aggressively but suggested it was running out of room to cut interest rates, even if other stimulus options remained.

The muddled message sent European bond yields surging and snuffed out a nascent rally in risk sentiment, leaving Asian share markets at a loss on how to react.

MSCI's broadest index of Asia-Pacific shares outside Japan was off a slight 0.08%, while Australia dipped 0.2%. Japan's Nikkei took a bigger blow from a rise in the yen and slipped 1.5%.    

CORPORATE NEWS

Real Estate stocks will be in focus as the Rajya Sabha passed the Real Estate (Regulation and Development) Bill, 2015.

Reliance Industries (RIL) declared an interim dividend of Rs 10.50 per fully paid-up equity share of Rs 10 each.

Five serving and former executives of IDBI Bank and a few executives of Kingfisher Airlines have been summoned by the Enforcement Directorate in connection with a Rs 950-crore loan the bank sanctioned to the airline in 2009.

Jindal Steel & Power (JSPL) is in the process of rescheduling its debt with foreign lenders.

HDFC Bank has chosen five start-ups it will work with to strengthen their web, mobile and payment offerings.

BSNL is in discussions with Bharti Airtel for sharing in four circles -- Rajasthan, UP (West), Bihar and Assam.

The government cancelled award of Ratna & R-Series oil and gas field to Essar Oil and Amguri oilfield in Assam to Canada's Canaro Resources and revert them back to state-run Oil and Natural Gas Corp (ONGC).

Country's largest private sector lender ICICI Bank Thursday launched a credit-linked subsidy scheme for home loans under Pradhan Mantri Awas Yojana (PMAY).

BHEL on Thursday said it has commissioned a 500 Mw unit at Anpara-D thermal power plant in Uttar Pradesh.

Sun Capital

Sebi may peg M&A ‘control’ cap at 25%

Regulator’s move is aimed at removing ambiguities that companies confront during takeovers

Mumbai: The market regulator is set to clarify what the term ‘control’ means in the context of mergers and acquisitions (M&As) by pegging the shareholding threshold of an acquirer at 25%, two persons familiar with the development said.

The move is aimed at removing ambiguities that companies currently confront during takeovers, one of the two persons said, requesting anonymity.

Currently, the definition of ‘control’ under the Substantial Acquisition of Shares and Takeovers (SAST) Regulations, 2011—popularly known as the Takeover Code—doesn’t specify a threshold for shareholding.

“The numerical threshold for determining control is a globally accepted norm and should be the prescribed criteria along with the other factors which may signify control,” said Tejesh Chitlangi, a partner at law firm IC Legal.

The current takeover code states that an acquirer is in ‘control’ only if the board of the company that’s being acquired gives the former the right to appoint a majority of the directors, and have the final say on management and policy decisions.

The control of management or policy decisions is through shareholding or management rights or shareholders’ agreement or voting agreements.

“The Securities and Exchange Board of India board will clear a discussion paper on Saturday, which proposes to peg the numeric threshold of voting rights (shareholding) at 25% and giving protective rights to the acquirer,” said the second person, who also declined to be named.

A Sebi spokesperson did not respond to an e-mail seeking comment.

According to the discussion paper, there could be a framework for protective rights with an exhaustive list of rights that do not lead to acquisition of control.

These protective rights would be granted to the acquirer if they are cleared by 51% of the minority public shareholders.

“While it will be important to have a list which considers the commercial realities of merger and acquisition transactions, it may be a practically onerous task to have an exhaustive list that captures all the exempted protective rights and Sebi may need to grant an exemption on case-to-case basis,” the second person said.

According to Lalit Kumar, partner at J. Sagar Associates, there is currently no clarity on whether or not protective (veto) rights to investors will lead to control.

“This issue came up in the matter of Subhkam Ventures where Sebi held that protective rights lead to control. However, in appeal to the Securities Appellate Tribunal (SAT), SAT held that protective rights only lead to negative control and not positive control,” Kumar said.

“The matter went in appeal to the Supreme Court, which did not pass any order on this issue but said that SAT’s order will not act as a precedent. Therefore, presently, there is no decided case on this issue although the general view is that protective rights do not lead to control,” he explained.

Kumar’s reference is to private equity investor Subhkam’s 17.9% stake in MSK Projects. In 2007, when it bought the stake, Subhkam sought and received several so-called negative rights (such as the power of veto on key decisions). In 2008, Sebi ruled that this constituted control. On appeal, SAT ruled in favour of Subhkam. Sebi appealed the case in the Supreme Court which dismissed the case. However, because it said SAT’s order would not be a precedent, private equity investors are still not sure as to whether negative rights such as the one Subhkam had constitute control (such rights are common in agreements between promoters and private equity firms).

Some in the legal fraternity say the definition of control cannot be set in stone.

“The question of control is a nuanced one primarily of fact and secondly of law… Anything set in stone on defining control would lead to false positives and negatives. Sebi should adopt a more nuanced approach and go by court rulings as precedents,” said Sandeep Parekh, founder, Finsec Law Advisors.

Sebi first started reviewing the definition of control in 2014. Finalizing a proposed framework took longer than expected, nearly 20 months, in wake of the number of suggestions.

Sebi decided to re-examine the definition of control following the 2013 acquisition of a 24% stake in Jet Airways (India) Ltd by Abu Dhabi-based Etihad Airways PJSC for Rs.2,058 crore.

In May 2014, Sebi ruled that the deal did not attract the provisions of the Takeover Code, as it found a lack of substantial controlling powers with Etihad after the transaction.

Private Equity

Ajay Piramal targets distressed Indian assets

It’s a good time to be in the market, says Anand Piramal

Mumbai: Indian billionaire Ajay Piramal is a man on a shopping mission. His firms are training their sights on distressed assets discarded by indebted businesses and banks struggling with bad loans.

His unlisted real estate unit, recently flush with cash from Warburg Pincus and Co. and Goldman Sachs Group Inc., is looking to buy land parcels from distressed developers, a month after Piramal Enterprises Ltd announced a $893 million fund to buy soured loans. The group’s investment arm is financing builders, who in turn can buy or co-develop projects with their troubled peers.

“My father says we should be like a nimble gorilla so you are able to move quickly, but at the same time you should have the capital to move,” Anand Piramal, the group’s executive director and scion who manages the real estate business, said in an interview in Mumbai. “It’s a good time to be in the market.”

Rich pickings may come through for the Piramal conglomerate as Indian developers’ cash flow from operations fall short of their finance costs and lenders, desperate to recover dues, tighten screws demanding repayment. Saddled with distressed assets at a 14-year high, banks in Asia’s third-largest economy have reported record losses amid pressure from regulators to clean up.

Piramal Realty will “look at good, prime parcels of land with a clean title” from distressed developers and is already in talks for as many as five deals, Piramal said. Disputes over land ownership are common in India, with cases dragging because of litigation for decades.

Sellers are becoming “more amenable now” toward deals to overcome financial stress, which may continue for another year at least, Piramal said. “Capital is always a source of competitive advantage.”

Goldman Sachs acquired a minority stake in the company for $150 million in August, about a month after Warburg Pincus bought into it, pumping in Rs.1,800 crore ($268 million). The company has about 10 million square feet under development in Mumbai and plans to invest 160 billion rupees in the next four years.

Big boys

Builders are selling assets as they streamline operations driven by both strategy and distress, according to Shobhit Agarwal, managing director for capital markets at property broker Jones Lang LaSalle India. “Developers are turning to these big boys because they have both the money and the market trust to make sales plus command a premium,” Agarwal said.

As smaller local builders struggle with byzantine approvals processes, high cost of financing, dwindling sales and drying cash flows, moneyed-up investors such as KKR and Co. and Piramal Realty are swooping in, lured by the prospect of acquiring property at deep discounts from down-and-out developers.

Piramal Fund Management, the family’s real-estate funding vehicle, is distributing as much as Rs.15,000 crore to about 10 developers that are in a position to buy land or collaborate with struggling competitors.

Distress fund

The listed Piramal Enterprises announced setting up aRs.6,000 crore Piramal India Resurgent Fund with the specific mandate of acquiring soured loans, according to a post-earnings presentation in February. Piramal declined to share any details about the new fund or the sectors it’ll focus on.

Shares of Piramal Enterprises, which sells medicines to financial services, have risen 0.8% in the past year, compared with a 16% decline in the S&P BSE Sensex and the 3.9% drop in the 63-member S&P BSE Heathcare index.

The total cash flow from operations for six developers tracked by Moody’s Investors Service, was at Rs.300 crore in the year ended March 2015, dwindling from Rs.3,000 crore in 2011, while total interest costs rose to Rs.3,600 crore fromRs.2,900 crore over this period, the data showed.

Lenders struggling to recover loans that have soured has weighed on credit in the country. Reserve Bank of India governor Raghuram Rajan has set banks a March 2017 deadline to tidy their balance sheets while India’s top court directed the RBI last month to share a list of the country’s largest defaulters in the past five years.

Loans to commercial real estate segment grew 5.9% to Rs.1.7 trillion in 2015, less than half of the 14.8% growth the year earlier, data compiled by RBI show.

“The squeeze is also coming in because of the banks,” Piramal said. “If banks are able to push developers to accept more reasonable valuations, then groups like us can step in. I think it’s happening.” 

Private Equity

10 Tips for the Successful Long-Term Investor

While it may be true that in the stock market there is no rule without an exception, there are some principles that are tough to dispute. Let's review 10 general principles to help investors get a better grasp of how to approach the market from a long-term view. Every point embodies some fundamental concept every investor should know.

1. Sell the Losers and Let the Winners Ride!

Time and time again, investors take profits by selling their appreciated investments, but they hold onto stocks that have declined in the hope of a rebound. If an investor doesn't know when it's time to let go of hopeless stocks, he or she can, in the worst-case scenario, see the stock sink to the point where it is almost worthless. Of course, the idea of holding onto high-quality investments while selling the poor ones is great in theory, but hard to put into practice. The following information might help:

• Riding a Winner - Peter Lynch was famous for talking about "tenbaggers", or investments that increased tenfold in value. The theory is that much of his overall success was due to a small number of stocks in his portfolio that returned big. If you have a personal policy to sell after a stock has increased by a certain multiple - say three, for instance - you may never fully ride out a winner. No one in the history of investing with a "sell-after-I-have-tripled-my-money" mentality has ever had a tenbagger. Don't underestimate a stock that is performing well by sticking to some rigid personal rule - if you don't have a good understanding of the potential of your investments, your personal rules may end up being arbitrary and too limiting.
• 
  
• Selling a Loser - There is no guarantee that a stock will bounce back after a protracted decline. While it's important not to underestimate good stocks, it's equally important to be realistic about investments that are performing badly. Recognizing your losers is hard because it's also an acknowledgment of your mistake. But it's important to be honest when you realize that a stock is not performing as well as you expected it to. Don't be afraid to swallow your pride and move on before your losses become even greater.

In both cases, the point is to judge companies on their merits according to your research. In each situation, you still have to decide whether a price justifies future potential. Just remember not to let your fears limit your returns or inflate your losses.

2. Don't Chase a "Hot Tip."

Whether the tip comes from your brother, your cousin, your neighbor or even your broker, you shouldn't accept it as law. When you make an investment, it's important you know the reasons for doing so; do your own research and analysis of any company before you even consider investing your hard-earned money. Relying on a tidbit of information from someone else is not only an attempt at taking the easy way out, it's also a type of gambling. Sure, with some luck, tips sometimes pan out. But they will never make you an informed investor, which is what you need to be to be successful in the long run.

3. Don't Sweat the Small Stuff.
As a long-term investor, you shouldn't panic when your investments experience short-term movements. When tracking the activities of your investments, you should look at the big picture. Remember to be confident in the quality of your investments rather than nervous about the inevitable volatility of the short term. Also, don't overemphasize the few cents difference you might save from using a limit versus market order.

Granted, active traders will use these day-to-day and even minute-to-minute fluctuations as a way to make gains. But the gains of a long-term investor come from a completely different market movement - the one that occurs over many years - so keep your focus on developing your overall investment philosophy by educating yourself.

4. Don't Overemphasize the P/E Ratio.

Investors often place too much importance on the price-earnings ratio (P/E ratio). Because it is one key tool among many, using only this ratio to make buy or sell decisions is dangerous and ill-advised. The P/E ratio must be interpreted within a context, and it should be used in conjunction with other analytical processes. So, a low P/E ratio doesn't necessarily mean a security is undervalued, nor does a high P/E ratio necessarily mean a company is overvalued.

5. Resist the Lure of Penny Stocks.

A common misconception is that there is less to lose in buying a low-priced stock. But whether you buy a $5 stock that plunges to $0 or a $75 stock that does the same, either way you've lost 100% of your initial investment. A lousy $5 company has just as much downside risk as a lousy $75 company. In fact, a penny stock is probably riskier than a company with a higher share price, which would have more regulations placed on it.

6. Pick a Strategy and Stick With It.

Different people use different methods to pick stocks and fulfill investing goals. There are many ways to be successful and no one strategy is inherently better than any other. However, once you find your style, stick with it. An investor who flounders between different stock-picking strategies will probably experience the worst, rather than the best, of each. Constantly switching strategies effectively makes you a market timer, and this is definitely territory most investors should avoid. Take Warren Buffett's actions during the dotcom boom of the late '90s as an example. Buffett's value-oriented strategy had worked for him for decades, and - despite criticism from the media - it prevented him from getting sucked into tech startups that had no earnings and eventually crashed.

7. Focus on the Future.

The tough part about investing is that we are trying to make informed decisions based on things that have yet to happen. It's important to keep in mind that even though we use past data as an indication of things to come, it's what happens in the future that matters most.

A quote from Peter Lynch's book "One Up on Wall Street" (1990) about his experience with Subaru demonstrates this: "If I'd bothered to ask myself, 'How can this stock go any higher?' I would have never bought Subaru after it already went up twenty-fold. But I checked the fundamentals, realized that Subaru was still cheap, bought the stock, and made seven-fold after that." The point is to base a decision on future potential rather than on what has already happened in the past.

8. Adopt a Long-Term Perspective.

Large short-term profits can often entice those who are new to the market. But adopting a long-term horizon and dismissing the "get in, get out and make a killing" mentality is a must for any investor. This doesn't mean that it's impossible to make money by actively trading in the short term. But, as we already mentioned, investing and trading are very different ways of making gains from the market. Trading involves very different risks that buy-and-hold investors don't experience. As such, active trading requires certain specialized skills.

Neither investing style is necessarily better than the other - both have their pros and cons. But active trading can be wrong for someone without the appropriate time, financial resources, education and desire.

9. Be Open-Minded.

Many great companies are household names, but many good investments are not household names. Thousands of smaller companies have the potential to turn into the large blue chips of tomorrow. In fact, historically, small-caps have had greater returns than large-caps; over the decades from 1926-2001, small-cap stocks in the U.S. returned an average of 12.27% while the Standard & Poor's 500 Index (S&P 500) returned 10.53%.

This is not to suggest that you should devote your entire portfolio to small-cap stocks. Rather, understand that there are many great companies beyond those in the Dow Jones Industrial Average (DJIA), and that by neglecting all these lesser-known companies, you could also be neglecting some of the biggest gains.

10. Be Concerned About Taxes, but Don't Worry.

Putting taxes above all else is a dangerous strategy, as it can often cause investors to make poor, misguided decisions. Yes, tax implications are important, but they are a secondary concern. The primary goals in investing are to grow and secure your money. You should always attempt to minimize the amount of tax you pay and maximize your after-tax return, but the situations are rare where you'll want to put tax considerations above all else when making an investment decision.

The Bottom Line

There are exceptions to every rule, but we hope that these solid tips for long-term investors and the common-sense principles we've discussed benefit you overall and provide some insight into how you should think about investing. If you are looking for more information about long term investing, Investopedia's Ask an Advisor tackles the topic by answering one of our user questions.

Sun Capital

Sumitomo Mitsui Banking Corp to sell stake in Kotak Mahindra Bank

Sumitomo Mitsui is looking to sell almost half of its stake in Kotak Mahindra Bank for around $300 million

Shares of Kotak Mahindra Bank closed at Rs.630.25 on the BSE, up by 2.35%, while the benchmark Sensex closed at 23,002 points, down by 0.66%, on a day the stock markets witnessed volatile trading on account of the announcement of the union budget.

Mumbai: Japan’s Sumitomo Mitsui Banking Corp. is looking to sell almost half of its stake in private sector lender Kotak Mahindra Bank Ltd, for around $300 million (approximately Rs.2,050 crore), according to two people aware of the development.

As of 31 December, Sumitomo held a 3.58% stake in the private-sector lender, data from stock exchanges show.

“The book has been launched and the sale is expected to close overnight,” said one of the two people mentioned above, requesting anonymity as he is not authorized to speak to the media.

Large domestic and foreign institutions have shown interest in buying the stake in block trade, he added.

Shares are being offered to buyers in a price range of Rs.611.34 to Rs.636.55 per share, according to Bloomberg. Citigroup Inc. is managing the share sale program, the report added. After the transaction, Sumitomo’s stake in the bank will fall to around 1.79%.

The Japanese bank firm had picked up a 4.5% stake in Kotak Mahindra Bank in 2010 through a preferential allotment for Rs.1,366 crore.

Shares of Kotak Mahindra Bank closed at Rs.630.25 on the BSE, up by 2.35%, while the benchmark Sensex closed at 23,002 points, down by 0.66%, on a day the stock markets witnessed volatile trading on account of the announcement of the Union budget.

Also, on Monday, California Public Employees’ Retirement System (CalPERS), the largest pension fund in the US, sold a stake worth around Rs.870 crore (approximately $127 million) in Axis Bank Ltd, according to data at stock exchanges.

Foreign institutional investor (FII) Genesis Indian Investment Co. Ltd bought the stake (around 0.94%) at a price of Rs.387.5 per share.

Last month Genesis bought a stake worth Rs.318 crore in Dabur India Ltd through an open market transaction, according to information on stock exchanges. The FII bought about 12.7 million shares, or a 0.72% stake, in Dabur.

In 2015, California Public Employees’ Retirement System, had assets under management of $298 billion, according to Preqin, a private equity database.

Shares of Axis Bank closed at Rs.375.25 on the BSE, down by 2.75%.

Sun Capital

JP-UltraTech Cement deal: Stressed lenders to receive about Rs 4,000 crore

MUMBAI: In what could be the biggest recovery of loans from a struggling company, Indian banks will receive about Rs 4,000 crore from the sale of Jaiprakash Associates' cement units to UltraTech Cement, said three people familiar with details of the deal. 

Lenders such as State Bank of India, IDBI Bank and ICICI Bank played an active role in the sale of the cement plants at an enterprise value of Rs 16,500 crore, said the people cited above. 

Banks have agreed to transfer about Rs 12,000 crore of Jaiprakash Associates' loans to the Kumar Mangalam Birla-owned unit, they said. Indian lenders are tightening the screws on promoters who are behind schedule in loan repayments. 
The RBI has set a deadline of March 2017 to clean up banks' books. While Jaiprakash has not been declared a defaulter in the technical sense of the term, the company has been lagging behind in payments. 

"The company was not classified as NPA (non-performing asset) but their payments were not happening on due dates which shows that they were strapped for liquidity," said BK Batra, deputy managing director of IDBI Bank. "Therefore, we exerted pressure on the company to sell its entire cement unit to reduce debt. The company has been cooperating by putting up the best of assets on block to reduce debt." 

Banks are being pressed by the Raghuram Rajan-led RBI to clean up their books after stressed loans in the system touched a high of 11.3% of the total. More loans could be classified as rotten and the demand for capital from the government could rise. Analysts estimate that more than Rs 2 lakh crore may be needed in the next three fiscal years to capitalise banks. 

There was a significant increase in bank credit to Jaiprakash Associates in the last three years. Its share in the firm's total debt of more than Rs 29,000 crore at the end of March 2015 stood at 82%, up from 58% in 2012, according to a Morgan Stanley report. 

ICICI's total exposure to the group was at Rs 6,624.2 crore, or 32.8% of the total, at the end of FY15, up from Rs 3,615.3 crore three years earlier. Under the terms of the UltraTech transaction, lenders won't be taking any haircuts even as the deal has been struck at a time when corporates can push lenders to write off a part of their loans to arrive at better valuation. 

Transferring some of their debt to Ultra-Tech means that lenders now have exposure to a business group that's regarded as being financially more sound than many others, thereby reducing the risk of defaults. They can also assign lower capital on the loans as UltraTech is a better rated company. The riskier the borrower, the higher the capital assigned on the loan. 

Among the major financially stressed conglomerates, Jaiprakash Associates has been relatively more cooperative with banks. Others have been delaying asset sales in the hope of an economic recovery and increased cash flow to service debt or, in some cases, bargain for writeoffs. 

The central bank recently identified about 150 companies that are potentially defaulters but banks were yet to declare them as such. More companies could be putting their assets on the block as lenders go after bad loans.

By Sun Capital

Why Morgan Stanley’s action on Flipkart is bad news for Indian unicorns

Given that Flipkart is expected to list its shares in the US at some point over the next few years, the valuation estimates of the mutual funds will be an important indicator of how stock market investors will value the company.

Bengaluru/New Delhi: Late last month, Flipkart India Pvt. Ltd, the country’s largest and most valuable Internet company, got a taste of the exacting standards of US stock markets, where it hopes to list.

On Friday, Morgan Stanley Institutional Fund Trust, a minority investor in Flipkart, disclosed a write-down in the value of its holdings in the company by as much as 27%. The mutual fund reported the number in a filing with the Securities and Exchange Commission (SEC), the US stock markets regulator.

Flipkart was valued at $15 billion when it received $700 million from Tiger Global Management, Qatar Investment Authority and other investors in June.

That was its fourth round of fund-raising in a year. Its valuation shot up roughly fivefold from $2.5-3 billion in May 2014.

Morgan Stanley’s latest estimate implies the mutual fund now values Flipkart at $11 billion.

The markdown is significant not only because it proves that Flipkart’s valuation had run ahead of itself, but also because mutual funds comprise one of the largest institutional buyers of shares in stock markets.

At least two other mutual funds, T. Rowe Price and Baillie Gifford, are investors in Flipkart. T. Rowe Price hasn’t yet reported the latest estimated value of its stake in the company.

Given that Flipkart is expected to list its shares in the US at some point over the next few years, the valuation estimates of the mutual funds will be an important indicator of how stock market investors will value the company. Flipkart declined to comment for this story.

Flipkart is hardly the only unicorn, a term that is used to describe start-ups that are valued at more than $1 billion, to have its value marked down by mutual fund investors.

Along with cutting the value of its stake in Flipkart, Morgan Stanley also reduced the worth of its holdings in file storage company Dropbox Inc. and data analytics company Palantir Technologies Inc. Late last year, mutual funds owned by T. Rowe Price, Fidelity and BlackRock cut the worth of their holdings in US unicorns en masse.

BlackRock is also an investor in online marketplace Snapdeal (Jasper Infotech Pvt. Ltd), which raised roughly $50 million last month at a valuation of $6.5 billion. BlackRock’s next filing on Snapdeal will be closely watched to see if other Indian unicorns will be marked down, too.

Snapdeal’s $50 million fund-raising, which was accompanied by $150 million in share sales by existing Snapdeal investors to new shareholders, took more than six months to close, primarily because there are not too many takers for India’s top e-commerce firms at their current valuations. The $50 million fund-raising was also significantly smaller than what online retailers typically seek from investors.

Mint reported on 4 February that China’s Alibaba Group is in early talks to buy a stake in Flipkart and increase its holding in Snapdeal. The talks are at a very initial stage and the likelihood of a deal is a function of Flipkart’s willingness to offer a discount on its current valuation of $15 billion, Mint had reported then.

“Our valuation has grown steadily between our last two funding rounds,” a Snapdeal spokesperson said.

There are two broad concerns about the valuations of Flipkart and Snapdeal. One, whether they will ever be able to cut their ballooning losses without sacrificing sales growth. Two, whether they will lose out to the Indian unit of Amazon.com Inc., the world’s largest online retailer.

Over the course of 2015, Amazon gained market share in India at the expense of both Flipkart and Snapdeal, according to publicly available data and several company executives.

Future estimates by mutual funds of their holdings in Flipkart and Snapdeal—and these companies’ eventual IPOs—will depend a lot on these two factors.

“Growing at negative operating margins to raise money in quick succession is a destructive style of doing business,” said Kashyap Deorah, serial entrepreneur and author of The Golden Tap, a book on India’s hyper-funded start-up ecosystem. “It kills the ecosystem... to build a thriving long-term business environment, we need to get off the addiction of global funds buying market spaces in India like territory.”

Deorah predicts Flipkart’s valuation will eventually slump to the amount it has invested. Flipkart has raised anywhere between $3 billion and $3.5 billion. “The downward trend will continue until Flipkart’s valuation equals invested capital,” he said.

To be sure, Deorah’s prediction seems extreme.

Flipkart is still the largest e-commerce firm in the last remaining big e-commerce market in the world. It has a solid brand, a strong leadership team and deep-pocketed investors, among other strengths.

“Flipkart’s valuation may look stretched at $15 billion in this current environment, but you can’t take away the fact that the company still has a solid business,” a Flipkart investor said on condition of anonymity. “In the worst-case scenario, it may take the company a year or two to grow into that valuation. But it will definitely happen. And if the market sentiment becomes better, it will happen sooner.”

By Sun Capital