Investing in high PE stocks

The first criteria 95% investors look at is P/E of the stock. And higher the P/E is more expensive the stock is. So for most of the investors, a general thumb of the rule is P/E ratio for the company should not be, lets say, not more than 30. So, even if we have a great company, which has very good business, good ROE, ethical promoters, in short fulfills every other parameter you look in a company before you invest, you still won't invest in a company which has high P/E ratio.
                 Now, let me try and break this myth. Here's the calculation:

	Base Year EPS	Base Year PE		CMP
	28.25	51.5		1454.875
Default Growth Rate	30%
Year	EPS in nth year	PE in nth year	CMP in nth Year
1	36.7	50	1836
2	47.7	48	2292
3	62.1	46	2855
4	80.7	44	3550
5	104.9	42	4405
6	136.4	40	5454
7	177.3	38	6736
8	230.4	36	8296
9	299.6	34	10186
10	389.5	32	12462
11	506.3	30	15189
12	658.2	29	19087
13	855.6	28	23957
14	1112.3	27	30032
15	1446.0	26	37596
16	1879.8	25	46995
17	2443.7	24	58650
18	3176.9	23	73068
19	4129.9	22	90858
20	5368.9	21	112747
	CAGR returns	24.3%

As can be seen above in the base year, the P/E ratio of the company is 51, and we have assumed that the EPS will grow at 30%. so, even if the company goes through P/E de-rating and by the end of 20th year, the P/E ratio becomes 21, one would still get CAGR return of 24.3%.

That is effective to 77.5 times of increase in wealth i.e. if  one would invest Rs. 1 lac, in a stock which would show P/E de-rating and grow its earning at CAGR of 30%, this Rs. 1 lac will become a cool Rs. 77.5 lac. Well the initial base year figures are of Symphony Ltd.

So, hopefully one you will next see a stock, you would dig deeper in see its potential and won't discard it on the fact that it trades at high P/E ratio.

My Portfolio

Dear Readers
I would be the first one to agree that I am not of the most active  bloggers.
To remedy the situation and to continuously update  about my buying and selling, I have started a page on Facebook.

Link : Novice Investor

Also I want to share my portfolio with you all. As my portfolio is very small, hence it is also very fragmented. But still 20 companies constitute more than 80% of my portfolio, and quite a few of the stocks have just been bought to track them judiciously.

Hoping to consolidate my 80% portfolio in just stocks.

So here's my portfolio:

Stock Name	% of Portfolio
KAVERI SEED COMPANY LTD.	8.14%
RELIANCE INDUSTRIES LTD.	8.04%
EXCEL INDUSTRIES LTD.	7.58%
AJANTA PHARMA LIMITED	6.77%
CAN FIN HOMES LTD.	5.27%
Symphony Limited	4.69%
MAYUR UNIQUOTERS LTD	4.41%
MUTHOOT CAPITAL SERVICES LTD.	4.29%
PI INDUSTRIES LTD.	4.14%
R S SOFTWARE LTD.	3.67%
DHANUKA AGRITECH LTD	3.42%
SHILPA MEDICARE LTD.	3.37%
REPCO HOME FINANCE LTD	3.12%
BALKRISHNA IND. LTD.	3.01%
M M FORGINGS LTD.	2.58%
J.B. CHEM. & PHARMA. LTD.	2.49%
AVANTI FEEDS LTD.	2.45%
YES BANK LTD.	2.23%
BANCO PRODUCTS (INDIA) LTD.	2.03%
ZENSAR TECHNOLOGIES LTD	1.79%
MARKSANS PHARMA LTD.	1.50%
GALAXY ENTER.CORP.	1.46%
JMT AUTO LTD.	1.28%
IFGL REFRACTORIES LTD.	1.14%
SHARON BIO-MEDICINE LTD.	1.05%
B I LTD.	1.05%
AMTEK AUTO LTD.	1.01%
POLY MEDICURE LTD	0.95%
MPS LIMITED	0.87%
JAIN IRRIGATION SYSTEMS	0.77%
V-MART RETAIL LIMITED	0.76%
SUPERHOUSE LTD.	0.67%
DFM FOODS LTD.	0.59%
SUPRAJIT ENGINEERING LIMITED	0.46%
SINGER INDIA LTD.	0.39%
GOLDEN GOENKA FINCORP LIMITED	0.37%
GALAXY ENTER.CORP.	0.36%
AUROBINDO PHARMA LTD.	0.31%
PVR LIMITED	0.27%
COROMANDEL INTERNATIONAL LTD	0.21%
Indag Rubber	0.19%
SMS PHARMACEUTICALS LTD.	0.15%
GODREJ INDUSTRIES	0.14%
SREE SAKTHI PAPER MILLS LTD.	0.13%
MARICO LIMITED	0.11%
BAJAJ CORP LIMITED	0.10%
DABUR INDIA LTD.	0.08%
JYOTHY LABORATORIES LIMITED	0.07%
INOX LEISURE LTD.	0.06%
Total	100.00%

Please do provide your feedback on the same.

RBI Will Sell Gold in India, Buy Gold Abroad

 

 

With the large duty on Gold imports, and very large gold requirements in an inflationary economy, the issue of “how can we reduce Gold imports” has driven RBI to an interesting solution.
Economic Times reports that RBI will swap Gold it owns in India for Gold deliverable in London. The official reason is that the Gold is sought to be replaced with that of a purer variety. Gold accounts for $20.8 billion of India's $315 billion forex reserves. Most of the gold is in Nagpur and some of it is parked with Bank of England where gold was shipped in '91 to avert an economic crisis. Even though the gold lying abroad has long been freed of pledge, it was never necessary to physically ship the bullion to India.

Here's how the proposed swap scheme between RBI and banks would work: RBI will give delivery of gold from its Nagpur vault to banks in India while taking delivery of gold from banks in London.
But the gold that RBI would give to banks in India could be of a slightly inferior quality compared with the 'London deliverable' purer gold that it would receive from banks in London. The banks will deposit the gold in London in RBI's account with Bank of England.

But what does this swap really do?

Ease Gold Supply in India Without Hitting CAD

Since RBI will sell gold in India to Banks who can sell onward to jewellers, the supply issues in India will ease. Currently, Banks import Gold for jewellers, who have to pay upfront, and then they can only reimport another batch if 20% of the last batch has been exported. And then, there’s a 10% duty on imported gold.
If the RBI were to swap, for instance, 10% of it’s gold, that’s an additional 50 tons of gold (1/10th of its holding) that would be 50 tons less that was imported.
In context, that’s about a month’s requirement of imports.
Why will it not impact the CAD?

Effectively, Swaps Dollars for Rupees, Contracts Money Supply

When RBI buys gold in India it will receive rupees. The purchase in London will be paid for in Dollars. Those dollars are already owned by the RBI as forex reserves. So effectively, the RBI will sell dollars it owns and the rupees it receives will go out of circulation.
In that context, the quantum of gold sold will impact money supply, a little bit. India owns $21 billion of gold, worth about Rs. 120,000 cr. (1.2 trillion), so a 10% contraction is about Rs. 12,000 cr.
A reduction of money supply by 12,000 cr. is not a big deal, and can be replenished easily; the RBI routinely buys dollars by printing rupees anyhow, and it can do an OMO auction to buy bonds.


This is good for Gold companies, but only if the quantum is known. If the RBI does this for tiny amounts, it’s insignificant. If it swaps more than 50 tons, it will help ease supply pressure in the next 6 months.
In any case we expect a graded withdrawal of limits on gold imports and the import duty over the next year. Eighteen years after it had pledged gold, in 2009, RBI bought 200 tonnes of gold from the IMF - a development that took many by surprise. The present initiative, if it takes off, could go down as an innovative plan on forex reserve management.

 

                                                                Why I love PPF...!!!

On March 3, the Ministry of Finance announced a hike, of up to 0.2 per cent, in interest rates on fixed-deposit schemes offered by post offices. The decision to hike the rates was in line with the recommendations of the Shyamala Gopinath Committee in order to render small-savings schemes more attractive, and for returns to fall in line with those of government securities (of similar maturities). The interest rate on the popular PPF, however, was held unchanged, at 8.7 per cent per annum compounding annually.

The Public Provident Fund (PPF) still proves to be a winner when compared with any of its peers. Here's how.

At present, PPF is one of only three exempt-exempt-exempt (EEE) investment schemes available in India. The other two are the Employees' Provident Fund (EPF) and Equity-Linked Savings Schemes (ELSS). While the last carries market risks, the other two are government-backed fixed-income schemes, where the rate of interest is determined every year by the government. The EPF is offered to those employed in an organisation and comes with the employer's share in (contribution to) an employee's account. As an individual, you are eligible to open a PPF account.

Tax liability

What does EEE mean? It means your contribution to the scheme (subject to a limit of Rs 1 lakh a financial year) is exempt of tax, even as it earns interest throughout its term, as well as exempt of tax when withdrawn on maturity (including the interest earned). And the accumulated balance over time in a PPF account is exempt even from wealth tax.

Holding period

A PPF account has a lock-in of 15 years, extendable, as often as one wishes, by a block of five years. The extension period can be with or without contribution to the account.

Rate of interest

PPF is available at post offices and banks. The minimum amount to be deposited every year to keep a PPF account active is Rs 500. The rate of interest is fixed every fiscal and benchmarked against the yield of Central government securities of comparable tenures. The rate of interest at present is 8.7 per cent p.a., compounding annually. Interest is calculated on the lowest balance between the close of the fifth day and the last day of every month.

Contribution to PPF every year

The maximum amount which can be deposited in a PPF account every year is Rs 1 lakh. The interest earned on the PPF subscription is compounded annually. If the minimum amount is not deposited in the PPF account in any year, the account would be de-activated. To re-activate it, one would have to pay Rs 50 as penalty for each inactive year. Also, one needs to deposit Rs 500 as the contribution for each inactive year.

Benefits of investing in a PPF

For a self-employed individual, PPF makes much sense. For a working person, even with an EPF account, PPF makes sense if one is risk-averse. The amount in a PPF account cannot be attached under any court order with respect to any debt or liability of the account holder. Though the lock-in period is 15 years, investors are allowed premature withdrawals and are even granted the facility of a loan, subject to the prescriptions of the PPF Scheme.

Here is how PPF scores over other investments

PPF v/s a fixed deposit

With a similar investment pattern and an interest rate of 9 per cent p.a., is PPF better than a bank fixed deposit? Assume an individual deposits Rs 1 lakh on April 4 every year for 15 years. Assume s/he has an account balance of Rs 1,000 on March 31 (before the April 4 when s/he starts depositing Rs 1 lakh). As s/he deposits Rs 1 lakh, her/his contribution is exempt of income tax under Sec.80C (assuming s/he is not using any other contribution to avail of that exemption amount). If s/he is in the 30-per cent tax bracket, s/he would save Rs 30,000 in taxes yearly. For 15 years, those savings add up to Rs 4.5 lakh (assuming nil returns). And a contribution of Rs 1 lakh for 15 years would create a corpus of Rs 31.20 lakh in one's PPF account at 8.7 per cent p.a.-tax-free on withdrawal. Adding up both, one has created a corpus of approximately Rs 35.7 lakh by depositing only a little over Rs 15 lakh in 15 years.

However, if you had deposited Rs 1 lakh in a fixed deposit for 15 years at an interest rate of 9 per cent p.a., assuming your tax bracket of 30 per cent, you would have made only Rs 25.31 lakh, since the earned interest attracts tax. That's a difference of over Rs 10 lakh in 15 years.

PPF v/s National Savings Certificates (NSC)

A 10-year NSC earns interest at 8.8 per cent compounded half-yearly. The contribution amount is exempt under Sec.80C, the interest earned is re-invested in the NSC and exempt under Sec.80C. However, the final year's interest, when the NSC matures, is not tax deductable as it is not re-invested. The earned interest for the final year will be taxable according to the investor's tax slab.

PPF v/s Post Office Monthly Income Schemes.

This is a no-brainer comparison. A five-year PO time deposit would earn interest at 8.5 per cent p.a. And the earned interest is taxable.

Clearly PPF scores over both.

Investors must remember that only resident Indians can open a PPF account and a person can have only one PPF account. Non-resident Indians and foreigners cannot open a PPF account. However, if you have become an NRI after an account had been opened, according to the terms of the PPF Act you are permitted to continue with it. The funds in a PPF account are non-repatriable.

Inflation Indexed Bonds

Finally, Inflation Indexed bonds are going to be issued by Government of India on 4th June'13.
The RBI will sell inflation-indexed bonds of 10-year maturities that would realise Rs 1,000-2,000 crore each month and aggregate to Rs 12,000-15,000 crore by the end of the fiscal. The principal will be indexed to the wholesale price index (WPI) with a four-months lag, while the coupon will remain fixed. Initially, these bonds will sold through auctions, to Mutual Funds, Insurance companies, Pension funds etc, for the purpose of price discovery and Market development. This will also  help creating a secondary market for these bonds.
                 These Inflation Indexed Bonds (IIB's) are reintroduced by GOI,after a previous attempt was made in 1997. The GOI and RBI are hoping that as these bonds will provide hedge against inflation, which will help in moving people away from Gold, which  is also considered a hedge against inflation. These steps are taken by the GOI, after the Current Account Deficit (CAD) has touched record levels. 
          

IIBs will be having a fixed real coupon rate and a nominal principal value that is adjusted against inflation. Periodic coupon payments are paid on adjusted principal. At maturity, the adjusted principal or the face value, whichever is higher, will be paid. The bond would be protected from inflation through the final WPI will be used for providing inflation protection in this product.Final WPI with four months lag will be used, i.e. Sept 2012 and Oct 2012 final WPI will be used as reference WPI for Feb 1, 2013 and March 1, 2013, respectively. The reference WPI for dates between Feb 1 and March 1, 2013 will be computed through interpolation.

How does it work?

If you pay Rs. 100 for a bond that tells you it will pay 6% a year, the normal expectation is to get Rs. 6 per year, because the 6% (“coupon”) is on the Rs. 100 (“principal”).

Inflation index bonds expect to change the principal but retain the coupon at the same rate. You will get 6% but on a higher or lower principal depending on how inflation goes.Effectively the amount of interest you receive moves with inflation.

Year 1: Let’s say inflation is 10%. That means the WPI index, which was 200 at start, is now 220. The calculation is that principal goes up by this amount and so does interest.

So, principal = issue time principal * (current WPI / WPI index at issue time).

or, principal = 100 * (220/200) = 110.

The New Principal is Rs. 110. Interest paid out = Rs. 110 * 6% (constant coupon). = Rs 6.6

Effectively the new principal went up. You can’t do anything with this new principal. But like the house you live in, you can feel good that its price went up.

Year 2: Let’s say inflation is 5%. So the WPI is at (220 * 105%) = 231.

Same calculations give us:

New Principal = 100 * (231/200) = Rs. 115.5

Interest paid out = 6% of 115.5 = Rs. 6.93.

Year 3: Inflation of 12% 

WPI = 258.72

New Principal = 100 * (258.72/200) = Rs. 129.36

Interest paid out = 6% of that = Rs.7.7616

If the bond now matures (note: maturity is 10 years for these bonds, but just saying) the New Principal will be paid to you as the principal. This becomes a capital gain. However, should the bond principal fall below Rs. 100 because the WPI index hugely deflates at maturity, you will get Rs. 100.

The bonds are issued by the government of India, in Indian rupees.Hence for Indian investors they are  risk-free.

   Hence, the rate of return = Average Inflation + coupon rate. That means a 6% coupon IIB will, at 8% average inflation will give you 14% rate of return. (6% + 8% inflation). 

                But the coupon rates on these bonds might just be somewhere around 1% or so, and  not such a high figure of 6%.

 

                           

The RBI will sell inflation-indexed bonds of 10-year maturities that would realise Rs 1,000-2,000 crore each month and aggregate to Rs 12,000-15,000 crore by the end of the fiscal. The principal will be indexed to the wholesale price index (WPI) with a four-months lag, while the coupon will remain fixed - See more at: http://www.indianexpress.com/news/inflationindexed-bonds-to-be-launched-on-june-4/1116500/#sthash.8JYxY43G.dpuf

The RBI will sell inflation-indexed bonds of 10-year maturities that would realise Rs 1,000-2,000 crore each month and aggregate to Rs 12,000-15,000 crore by the end of the fiscal. The principal will be indexed to the wholesale price index (WPI) with a four-months lag, while the coupon will remain fixed - See more at: http://www.indianexpress.com/news/inflationindexed-bonds-to-be-launched-on-june-4/1116500/#sthash.8JYxY43G.dpuf

The RBI will sell inflation-indexed bonds of 10-year maturities that would realise Rs 1,000-2,000 crore each month and aggregate to Rs 12,000-15,000 crore by the end of the fiscal. The principal will be indexed to the wholesale price index (WPI) with a four-months lag, while the coupon will remain fixed - See more at: http://www.indianexpress.com/news/inflationindexed-bonds-to-be-launched-on-june-4/1116500/#sthash.8JYxY43G.dpuf

The RBI will sell inflation-indexed bonds of 10-year maturities that would realise Rs 1,000-2,000 crore each month and aggregate to Rs 12,000-15,000 crore by the end of the fiscal. The principal will be indexed to the wholesale price index (WPI) with a four-months lag, while the coupon will remain fixed - See more at: http://www.indianexpress.com/news/inflationindexed-bonds-to-be-launched-on-june-4/1116500/#sthash.8JYxY43G.dpuf

The RBI will sell inflation-indexed bonds of 10-year maturities that would realise Rs 1,000-2,000 crore each month and aggregate to Rs 12,000-15,000 crore by the end of the fiscal. The principal will be indexed to the wholesale price index (WPI) with a four-months lag, while the coupon will remain fixed - See more at: http://www.indianexpress.com/news/inflationindexed-bonds-to-be-launched-on-june-4/1116500/#sthash.8JYxY43G.dpuf