Mutual fund houses tie with co-operative banks

After a slew of tie-ups with commercial banks, domestic mutual fund houses are increasingly looking at joining hands with co-operative banks as part of their attempts to push the product sales in smaller towns and rural areas.

Industry officials attribute this trend to fierce competition in the Tier-I and urban areas, where mutual funds (MF) are fighting for the same pie. India’s rapidly growing MF industry now manages a little over Rs 3,00,000 crore between 30-odd asset management companies.

With equity markets doing well, an increasing number of retail investors are looking to tap the equity market through the MF route. “Revenues from main cities are showing signs of saturation and the industry is sensing the need to tap new areas. Co-operative banks seem to be next best option because of their large and loyal customer base,” said Jimmy Patel, CEO and COO of JM Financial Asset Management, which recently tied up with Saraswat Cooperative Bank for distribution of MF products.

While Franklin Templeton is believed to have tied up with Saraswat Bank for such an arrangement, Prudential ICICI Asset Management is also scouting for a partner for this purpose. Saraswat, which is Asia’s largest urban co-operative bank, has tie-ups with seven MFs including Kotak Mutual Fund, Reliance Mutual Fund, Franklin Templeton Mutual Fund, and ING Mutual Fund, UTI Mutual Fund.

Some argue that penetration through co-operative banks, barring the top few, could be difficult. “Most of the tie-ups that have happened are through a few top ones (co-operative banks), rather than a wide base. This is because most of the co-operative banks still need to grow in terms of technology and expertise,” said an official with a foreign mutual fund.

While industry officials feel opportunities with private sector and foreign banks for MF distribution are relatively saturating because of their pre-dominant presence in larger cities, they believe public sector banks have still a lot to offer.

“Though reach is extremely important for the industry, however, distribution has always been a major concern for this industry. New set of distributors will help to get new customers, which in turn will help the industry grow. PSU banks have advantage of reach and customer base.” said Bharat Ghia, vice-president & head — alternate banking channel, Prudential ICICI.

In recent months, domestic mutual funds have entered into partnerships with a number of public sector and old private sector banks to leverage products. Banks, especially with retail focus, also gain from such tie-ups, as fee-based income via selling of MF and other products boosts their bottomlines.

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ETs review on mutual fund schemes this quarter

 After a dismal June ’06 quarter, the new height scaled by the domestic stock market has benefited equity fund investors. ET’s Platinum funds among equity-linked savings schemes (ELSS) — Sundaram Tax Saver and Principal Punjab National Bank (PNB) Tax Savings Fund — held on to their prime positions in the ET Quarterly MF Tracker for July-September ’06, delivering around 14% each. Anoop Bhaskar (Sundaram Tax Saver) and R Srinivasan (Principal Tax Savings) are the fund managers for ET’s Platinum funds in the ELSS category.

During the September ’06 quarter, not many changes occurred in the fund classifications compared to the previous quarter. Birla Sun Life Tax Relief 96 moved up the ladder, bagging a Gold rating, while HDFC LTP Advantage was down with Silver.

ELSS, on an average, gave a return of 13.8% during the quarter, while ET 100 gave a return of 17.9%. Over a one-year period, ET 100 gave a return of 39.1% and surprisingly, none of the funds classified by ET outperformed ET 100 returns. However, ELSS funds performed better over the three-year period. Around 65% of the funds managed to outperform ET 100 by giving a return of 212.2%, while ET 100 gave a return of 183% over the three-year period.

In terms of absolute returns, Prudential ICICI Tax Plan was the top performer, giving 23.4% returns, followed by Birla Sun Life Tax Relief 96, which delivered a return of 21.8%. The latter has been promoted to the Gold category from Silver in the previous quarter.

The fund was overweight on telecom, banking, transportation, cement, auto and auto ancillary stocks, and underweight on metals, commodities and oil & gas.

Jayesh Gandhi, former fund manager, Birla Sun Life MF, says, “We create a diversified portfolio spread across sectors and avoid large stocks and sector-specific concentration. The fund focuses on quality companies with scaleable businesses and sustainable earnings with strong visibility.”

The assets under management (AUM) of ELSS touched Rs 2,643 crore at the end of the June quarter, and grew to Rs 3,331 crore at the end of the September quarter. The growth in AUM in the ELSS category has been almost entirely on account of appreciation rather than fresh flows. ELSS typically witnesses inflows towards the end of the financial year as investors flock to these funds for tax-planning.

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Getting most of Equity Mutual Funds

The Sensex is at a new all time high after breaching 13,000 level. The stock market has had a remarkable run since touching its low of 8900. Needless to say, the last five months or so have been quite eventful for investors in equity funds.

If one were to analyse the behaviour of investors during this period, there are lessons to be learnt for existing investors as well as for those who intend to make equity funds an integral part of their portfolio.

Market ups & downs

When the market was going through the correction phase, some of the investors panicked and exited from equity funds. Needless to say, not many of them could re-enter and surely must be ruing their decision.

On the other hand, seasoned as well as those investors who believed that the best course of action was to hold until the markets made up the lost ground, did not react at all and held on to their investments in mutual funds.

However, the key here is that both the classes of investors failed to recognize the lower market values as buying opportunities. That's why, it is often said that the best way to benefit from equities is by having a long- term view as well as by refraining from timing the market.

Now, let us talk about those investors who were investing regularly through a Systematic Investment Plan during this period. Needless to say, they were best equipped to not only handle the downside but also benefit from lower market values.

Invest regularly

Though a lot has been written about SIPs, it is often perceived as an option only for small investors. The fact of the matter is that systematic investing has nothing to do with the size of the investment. It is a way of disciplined investing that allows investors to invest in the stock market at different levels without having to worry about the market levels and the market movements in the short-term. Remember.

When you opt for regular investing, you abandon any strategy that might control timing of your investments. In other words, you continue to invest irrespective of market conditions. This strategy works very well partly because of "averaging" and partly because in the long run markets move upwards, in spite of short-term falls.

It is not to say that one should not invest a lump sum amount in equity funds. For a long-term investors, making a lump sum investment is not an issue, however, a lump sum investment should not be the end of the story.

Instead, it should be taken as a beginning of an investment programme to build wealth over time and needs to be followed by regular investments as and when investible surplus is available. Either which way, the key to successful equity investing is making investments on a regular basis.

Don't try to time the markets

One often comes across investors who wait for months in anticipation of a correction in the markets. However, more often than not, they end up investing in a panic as the markets scale newer heights. At times, a small correction in the market seems like a great opportunity to them and as result they end up investing at much higher levels compared to the level prevalent at the time when they had originally planned to invest.

I am sure there are many investors who must be wondering whether they should be investing in the markets at the current levels or not. Though, the prospects of the markets look promising from the long-term point of view, it may be prudent for a new investor to adopt a strategy whereby a part is invested as a lump sum and the balance by way of systematic investing.

The exact proportion of the lump sum and systematic investment would depend on one's risk profile and time horizon. This way, if the market drops right away, one would suffer a smaller loss and can buy more units each month at the lower prices.

Take help of a professional to determine the right levels for you. For systematic investments, you can opt for a Systematic Transfer Plan. Under STP, you can invest the lump sum in a Floating Rate or a Liquid Fund. From there, you can instruct the fund to transfer a fixed sum at a pre-determined interval to an equity fund.

There are many investors who do not find regular investing very exciting. They also find the whole process a little cumbersome. It is important for investors to realize that investing in equity funds is not about excitement but a sensible way to build wealth through healthy real rate of returns. However, the key is to concentrate on selection and maintaining the disciplined way of investing.

It is often said that 90 per cent of the investment success depends on the quality of the portfolio and the right mix of funds investing in different market caps and the remaining 10 per cent on timing the investments. In reality, many investors spend 90 per cent of their time "timing" their investments.

Now, a few words on the selection process. It is important to select the funds after careful deliberations especially keeping your risk profile, time horizon and investment objectives in mind. You will find some brokers constantly approaching you with new products.

You need to learn to say 'No' to products you don't really want or need. In other words, be wary of 'buy now while the stocks last' sales pitch and always keep your long- term investment objectives in mind while building your portfolio.

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Biggest impact of returns

Measuring the impact of the following charges on overall returns

• Loading Charges

• Admin Charges

• Fund Management Charges

Used the following three plans in the comparision.

• Bajaj Allianz Unit Gain Plus

• HDFC UnitLinked Endowment Plus

• ICICI Lifetime Plus

Loading Charges
HDFC - 60% first year
Bajaj- 24% first year
ICICI- 25% first year

Admin Charges
HDFC - Rs.240 per annum
Bajaj- Rs.240 per annum
ICICI- Rs.720 per annum

Fund Management Charge
HDFC - 0.80%
BAJAJ- 1.75%
ICICI- 1.50%

For an Investment amount of Rs.24,000 per annum assuming an annual return on investment of 10%, the following is how the returns look like

Investment Time Frame - 5 Years
Best Returns - BAJAJ (7% more than ICICI)
Second Best - HDFC (2% more than ICICI)
Last - ICICI

Investment Time Frame - 10 Years
Best Returns - HDFC (5% more than ICICI)
Second Best - BAJAJ (3% more than ICICI)
Last - ICICI

Investment Time Frame - 15 Years
Best Returns - HDFC (8% more than ICICI)
Second Best - BAJAJ (1% more than ICICI)
Last - ICICI

Investment Time Frame - 20 Years
Best Returns - HDFC (12% more than BAJAJ)
Second Best - ICICI (0.5% more than BAJAJ)
Last - BAJAJ

Investment Time Frame - 25 Years
Best Returns - HDFC (16% more than BAJAJ)
Second Best - ICICI (2% more than BAJAJ)
Last - BAJAJ

For an investment time frame of 5 years, Bajaj Allianz Unit Gain Plus seems to offer the best returns. For any investment time frame of 10 years to 25 years, HDFC seems to offer the best returns.

Regarding charges, on the long run, Fund Management Charges have the most significant impact on performance. You will notice the gap in returns between HDFC and other widening as time passes(inspite of 60% loading charge). This is because it has the least FMC. Even ICICI which offer slightly better fund FMC than Bajaj has been able to surpass the returns of Bajaj Allianz Unit gain plus on the long run.

CONCLUSION
Fund Management charges are the most important charges for long term investments. Chose a ULIP product that has the least fund management charge to maximize your returns.

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Allocate funds to equity and debt

Many of you might have wondered how much exposure to equity is safe at any point of time. Raj Gopal suggesting two methods, one based on weighted average PE Ratio of Nifty or Sensex, and the second based on term of the policy.

Fund Allocation Based on Nifty/Sensex PE Ratio
In this approach, I decide my allocations to equity and debt based on weighted average PE Ratio of Nifty or Sensex. At higher PE Ratio levels, I advise reducing your exposure to equity. Similarly at lower PE Ratio levels increase your exposure to equity. You will be able to find weighted average PE Ratio Nifty or Sensex at bseindia.com or nseindia.com.

If weighted average PE ratio of NSE or Sensex falls in this band

PE Ratio    Equity     Debt
below 13   90 - 100   0 - 10
13 - 16    70 - 90   10 - 30
16 - 20    50 - 70   30 - 50
20 - 24    20 - 50   50 - 80
above 24    0 - 10   90 - 100

Most ULIPS give you free switches to transfer your investment across funds. You can use these free switches to re-adjust your allocation to equity and debt.

Fund Allocation based on the Term of the policy
In this approach, I would divide the term of the policy into two stages. The first being the aggressive wealth building stage and the second being a conservative wealth preserving stage. I would recommend maintaining a high exposure to equity for 50 to 65% of the term after which one would gradually reduce your exposure to equity. Let me try to clarify this with an example. If the term of your insurance policy is 15 years, I would suggest maintaining a high exposure to equity for 8 to 10 years. I would gradually reduce my exposure to equity for the balance of the term.

Term in Years     Equity       Debt
Upto 8 Years     70 - 100    0  - 30
8 - 10 Years     50 - 80     20 - 50
10 - 12 Years    25 - 50     50 - 75
12 - 14 Years    10 - 25     75 - 90
15th Year        0  - 10     90 - 100

In this case you are gradually reducing your downside risk by reducing your exposure to equity with time.

Best Investment Indian blogs

As improbable as it may seem, you'll want to read more than my not-so-humble opinion on Personal Investment in India. Here's a list of places you can go to:

Journey to wealth by Amit
An interesting take on investments, though not updated very regularly (I know, people with glass houses...). Amit writes refreshingly well on subjects close to my heart, like real estate, stock market investing and the like.

Person finance in India - the not so obvious stuff
Vivek Venugopalan talks about taxes, banking, stock market investments etc. His take on "How to get financiall organised" is a good refresher - heck, I need to do some of them things!

Investment Guru by Rajesh Soni
Largely about stocks and IPOs, Rajesh dwells on company information, general stock news, and IPO updates. An interesting take for value investors.

Value Stock Plus by "Toughiee"
A well maintained, constantly updated blog about investments, largely links to articles elsewhere. The author works quite hard at updating posts and consolidating sites you, as an investor, should visit.

Arpit Ranka
Arpit provides an analysis of the behaviour behind investing, and lets your mind wander as he talks about intuition, reasoning, prediction, luck and so on. Interesting reading, and a financial perspective keeps material in scope.

Value Investing by Rohit Chauhan.
A well written blog on the fundas of value investing. Professing to be a Buffet fan, and quoting Ben Graham, Paul Fisher and so on, Rohit writes lucidly about value investing in India. Yes, there are some long paragraphs that stem more from his inability to induce correct formatting by blogger than from a fear of line breaks. But the site's well worth your time, and will hopefully continue to be as good!

ULIPs and MFs by Raj Gopal Vuppala.
A more recent blog about investing in Unit Linked Insurance Plans (ULIPs) and Mutual Funds. I personally don't like ULIPs but Raj comes across with strategies to invest if you're still hooked to the idea. He asks that you avoid endowment plans (a financial trap) and evaluate charges before you buy; something every investor must drill into herself to do.

Rupee Manager by Umesh Ladha
Umesh writes about Personal Finance for the young reader - the early twenties, I would imagine. Some of the concepts in there like TWINVEST and the like are quite interesting...it's a fairly new site, but I think it'll evolve. That's it for now. Post me more links if you like some other blogs!

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Comparisons of ULIP NAV

Plan	Oct 6, 2005	Oct 6, 2006	Growth
SBI: Horizon	15.590	24.420	56.64%
Sensex	8,528.700	12,372.810	45.07%
Kotak aggressive	14.745	21.192	43.72%
Reliance Life (Equity)	14.724	21.105	43.34%
HDFC-Standard: All ULIPs	35.043	50.143	43.09%
ICICI-Prudential: LifeTime Plus	16.440	22.990	39.84%
ICICI-Prudential: LifeTime Super	30.860	42.790	38.66%
Nifty	2,579.150	3,569.700	38.41%
Bajaj Allianz: Unitgain plus	17.621	24.188	37.27%
Metlife Multiplier	12.474	16.646	33.45%
Kotak dynamic	18.795	24.699	31.41%
aviva Saveguard growth	18.970	23.988	26.45%
Max New York Growth	13.920	17.420	25.14%
TATA AIG Growth	14.218	17.660	24.21%
ING Vysya Growth	12.204	14.712	20.56%
Aviva Lifelong	24.459	28.375	16.01%
Birla Sun Life - Enhancer	19.427	22.384	15.22%

 

Mutual funds Growth and Dividend option explained in detail

 Most mutual funds have multiple options for investment, for the same fund:
1) Growth option
2) Dividend option
(with either automatic reinvestment or as a payout)

The "funda" behind Dividend is that the fund gives you "cash" regularly, and this can be either paid to you or reinvested in the fund (more units are purchased on the day of the dividend disbursement, at the NAV of that day). Note here that dividends are paid out of the assets of the fund, therefore the Dividend option's NAV will go down when dividend is paid.

Dividend payout is usually taken by people who want some cash return on their investments, which supplements their income.

The dividend re-investment and growth options are similar, in the sense that your dividend adds on to your investment and compounds itself. So why two different options?

That's based on history. Earlier, your capital gains were taxed at 20% (long term) and 30%(short term). Dividends were taxed at 10% and later, not taxed at all. Growth option funds only had capital gains (since there was no dividend) and when you wanted cash you would pay a HIGHER amount of tax. Dividend reinvestment ensured that your dividends paid lesser tax and the re-investment, being usually at a higher NAV since the fund is growing, will attract less capital gains tax.

But now the equation has changed. Currently, Dividends are not taxed in your hands. (and equity mutual funds aren't charged a dividend distribution tax) Also, with the Securities Transaction Tax regime, you pay a 0.25% STT on the sale of your fund units, and therefore the law says that short term capital gains tax is 10% and long term capital gains are not taxed!

So what's the difference now? One factor to consider is that some funds must pay dividend distribution tax at 12.24% - this does not apply to equity funds. Obviously this affects the dividend options but not growth options of funds.

Further, there's capital gains. Let's say you invested in a fund 5 years ago, in "dividend reinvestment" and now you want money urgently. Some of the units you got as part of the dividend reinvestment were perhaps given to you in the last one year; selling those will mean a short term capital gains tax of 10%! If you had chosen the growth option, you would pay no capital gains tax (as all gains are long term = greater than one year of holding).

Always choose the Growth option. If you need cash regularly, choose the Dividend payout option. Don't really bother with Dividend reinvestment (unless tax laws change).

Disclosure: I have, unfortunately, invested in the "dividend reinvestment" option myself also. I will slowly change over and further investments will go into growth options only.

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Sell your mutual funds at right time

"Our favourite holding period is forever." This comes from the world's most successful investor, Warren Buffet. This also answers the question that forms the title of this article.

Therefore, before addressing the issue of when to sell your mutual fund, let us for a brief while dwell upon when not to sell it.

Most investors sell or at least reduce their stock exposure when valuations start falling. The market fell from 12,612 all the way to 8,929, a fall of almost 30%. How many investors refrained from selling during the interim? And how many investors actually made additional purchases?

And who amongst us knew that within four months the market would actually catch up with and even surpass the previous peak?

The answers lie in the questions themselves and therein emerges a lesson that we can all learn. And this lesson is best summarized by the following quote by Bernstein William in this book, The Intelligent Asset Allocator:

"There are two kinds of investors -- those who don't know where the market is headed, and those who don't know that they don't know. Then again, there is a third type -- the investment professional, who indeed knows that he or she doesn't know, but whose livelihood depends upon appearing to know."

History has repeatedly proven that it is impossible to 'time' the markets. The Bombay Stock Exchange's Sensex is flirting with the 13,000-mark even as I write this. But no human being is capable of knowing for sure when the milestone would be reached. And when it does, nobody can tell for how long will it be able to sustain that level.

So, if you invest or divest based on market movements or expected market movements, it amounts to pure speculation. And know this much -- you can either speculate or accumulate, but never both.

Which brings us back to where we started from. Just when do you sell your mutual fund?

Under Performance?

Yes, investing is all about long term. However, it has to be the right investment in the first place. Study the performance of your funds against their peer group and also the benchmark returns. Say, your fund has gained by 10%. While you may be happy, this doesn't actually tell you much.

To put the fund's performance in perspective, you have to compare and contrast it against its peer group as also to the benchmark returns. Be careful in selecting the correct peer group. One should not compare an equity diversified fund against a sectoral fund or a large cap fund against a mid cap aggressive fund.

Also, take care that you gauge performance over a reasonable period of time. Most information sources publish three month figures of fund performance. Three months is too short a time to come to any conclusion.

Moving on, another reason that you sell your investment is if it doesn't remain the same investment.

Change in the fund composition

For instance, balanced funds earlier qualified with a 50% exposure to equity. Now, as per the new tax laws, at least 65% ought to be invested to equity. Most fund managers, in an effort to spike the return, even take a higher exposure. Therefore if the investment has become riskier than what you would be comfortable with, it is time to sell.

Change of fund manager

Mutual fund companies will argue themselves hoarse that fund management is a process driven activity and the individual doesn't matter. However, successful stock selection is a matter of experience, perspective and instinct. These are human qualities that cannot be completely reduced to a process.

The fund manager's exit does raise a red flag. However, it could also be possible that the new guy is better than the earlier one. So keep the fund under your radar. A discernible blip in the performance may mean it is time for you to desert the ship too along with its erstwhile captain.

Realigning Asset Allocation

Every investor has his or her own risk tolerance. Say, you are comfortable with 50% of your funds invested in equity. Time to time, you need to check the asset allocation. With a substantial run up in equities, chances are that your total portfolio has become distorted towards equity. To bring it back, you would need to sell.

Here take care of the fiscal side. While selling, it makes more sense to sell funds over one-year old for the associated tax break in capital gains.

We have established so far that amongst all the reasons for selling your funds, falling or rising markets should in no way influence your decision. If anything, if the markets start falling, please buy additional units -- the cheaper deal will hold you in good stead eventually.

However, what if you need the money?

This then forms the foremost reason to sell any investment.

Apart from must spends like for medical emergencies or, say, escalating education costs, do once in a while indulge yourself. Take that foreign trip that you so wanted. Buy that new mobile. . .

You live only once and what is the point of all this if you can't pamper yourself once in a while? The other day, I bought myself an iPod, which might be a necessity for some. But a limited edition version with more gigabytes than I'll ever have time to listen to was perhaps overdoing it. But, hey, if you have to do something wrong, at least do it right!

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Billionaire club members in india

 The collective net worth of India's billionaires (those with assets of more than Rs 1 billion, or Rs 100 crore) has gone up by an unprecedented 74 per cent to Rs 6,33,457 crore (Rs 6334.57 billion), from Rs 3,64,000 crore (Rs 3640 billion) last year.

Membership of the Billionaire Club has also swelled, with 89 new businessmen crossing the billion rupee threshold, taking the total membership of the club to 391. There were only 99 people in the club when this listing began in 1999.

The Billionaire Club

Rank	Name	Wealth creation (Rs/cr)
1	Mukesh Ambani	76,509.22
2	Azim Premji	59,557.01
3	Sunil Mittal	33,034.24
4	Anil Agarwal	31,901.87
5	Anil Ambani	23,721.16
6	Tulsi R Tanti	23,664.84
7	Ramesh Chandra	12,670.49
8	Kumar Mangalam Birla	11,981.71
9	Dilip S Sanghvi	11,294.71
10	Shiv Nadar	11,146.84

Business Standard's annual magazine, The Billionaire Club ranks the wealth of India's billionaires.

The wealth is computed on the basis of the market value of direct holdings in listed companies and any share in cross-holding, with the valuation being done at the end of August 2006.

Of the 89 new billionaires this year, no fewer than 45 people have qualified by riding on the 4,000-point surge in the Sensex over the past year, while 35 new members are there by virtue of taking their companies public in the last 12 months.

Behind both events lie not just stock market swings but also solid work put in by the billionaires to add value to their companies.

Reliance Industries chairman Mukesh Ambani is the country's richest billionaire this year, replacing Wipro Chairman Azim Premji, who comes in second.

Ambani's personal wealth was Rs 76,509 crore, based on stock prices at the end of August. Premji is a distant second with Rs 59,557 crore (Rs 595.57 billion).

Mukesh Ambani's wealth has gone up by two-thirds in the last one year, partly because of restructuring in the wake of the split with his brother and fresh stock market listing. His younger brother Anil Ambani comes in fifth on the list with a wealth of Rs 23,721 crore (Rs 237.21 billion), but has done better in terms of percentage increase in wealth - 140 per cent. Between them, the Ambani brothers now have marginally more than Rs 100,000 crore (RS 1000 billion) of wealth.

Bharti Airtel Chairman and Managing Director Sunil Bharti Mittal comes third in the list (Rs 35,034 crore), followed by Anil Agarwal of Sterlite Industries (Rs 31,902 crore).

Tulsi R Tanti of Suzlon Energy is like Anil Ambani, a new entrant in the billionaires list, and ranking up there in the sixth position.

He is followed by Unitech chairman Ramesh Chandra, who has jumped from 114th position in 2005 to the seventh slot this year, with Rs 12,671 crore (Rs 126.71 billion) of wealth, courtesy a steep 2,100 per cent increase in Unitech's stock price over the last one year.

Kumar Mangalam Birla, Dilip Shanghvi and Shiv Nadar are the other three billionaires in the top ten.

There are now 23 Indians with wealth of over Rs 4,500 crore (Rs 45 billion), making them dollar billionaires. In 1999, there were only three dollar billionaires in the country.

The extraordinarily optimistic message that the list of 391 billionaires throws up is a simple one - with the opening up of the Indian economy, there has been no shortage of business opportunities, and entrepreneurs have grabbed their chances with both hands.

It is no wonder that over two-thirds of the promoters, who are now members of the Billionaire Club, are from small and medium firms. They added over Rs 1,89,800 crore (Rs 1898 billion) to their wealth last year, taking their aggregate to Rs 2,41,000 crore (Rs 2410 billion).

Which are the sectors that generate the greatest wealth at the top? While many of India's richest moguls continue to be from software and other service sectors (a total of 44 billionaires this year), pharmaceuticals, steel, automobiles and diversified businesses have spawned a large number of billionaires too.

But this is not just a story about winners, for there are also those who saw their wealth shrink, especially if their companies hit an air pocket. Jet Airways chairman Naresh Goyal is the most prominent among the losers.

The promoter of India's largest airline, who listed Jet last year to become the wealthiest new billionaire, has lost about Rs 4,500 crore (Rs 45 billion) on account of the Jet-Sahara episode and the downturn in airline fortunes.

The other major losers in what has been a bull market are the promoters of Ranbaxy, who lost Rs 1,560 crore (Rs 15.6 billion), and Habil Khorakiwala of Wockhardt, who lost Rs 1,066 crore (Rs 10.66 billion).

The Billionaire Club magazine also focuses on the highest-paid executives in corporate India, the cut-off being a minimum annual salary of Rs 1 crore. The noteworthy feature here is that salaries at the top have been going up faster (22 per cent) than the average increase in companies' salaries.

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Analysis and performance of IT stocks

Taking a cue from the staggering September 2006 quarter performance, many information technology stocks, especially the frontline ones, seem to have cheered investors.

The BSE IT index has leapfrogged by 59 per cent zipping past the Sensex, which gained 43 per cent since June, when the markets were at a trough.

Having said this, would you bet on a sector whose valuations of 30 times its trailing 12 month earnings far exceeds that of the Sensex, which trades at 21.73 times?

Analysts have a mixed opinion at the moment. While some continue to be bullish on the sector, all of them emphasise that the future is going to be stock-specific.

They agree that most of the leading stocks have posted a stellar performance in the September 2006 quarter and their guidance for the next few quarters is positive. But there are concerns that valuations are stretched.

Though analysts expect robust demand growth, they are looking for better pricing and margin expansion despite the wage pressure, which is likely to continue as companies scramble for skilled manpower, and that too in large numbers, while attrition rates remain high.

Analysts are biased towards the larger IT companies like Infosys, TCS, Wipro and Satyam, as they will be able to deal with any possible shock better than their smaller counterparts. Most domestic and foreign brokerage firms maintain a 'Buy' on the sector.

Says Manoj Shroff, analyst Parag Parikh Financial Advisory Services, "While large caps are expected to continue their robust growth trend, which is to an extent built in the price on FY07 basis, however they look fairly attractive on FY08 basis."

So far, so good

Almost all the companies, big or small, that have announced their results, have exceeded analysts' expectations.

While robust volume growth of around 10 per cent, modest price rise of about 1 per cent and rupee depreciation in the September 2006 quarter (2 per cent, 5 per cent and about 4 per cent against the dollar, pound and euro respectively) have led to the strong rise in the top line, higher operating expenses, especially employee costs, has led to margin crunch for most of them.

Infosys undoubtedly has led the pack outperforming its peers on all parameters followed by TCS. However, how sustainable are these growth rates?

As far as demand growth is concerned, there is a clear visibility for top line growth of Indian companies not only in case of the traditional business of IT services, but also in business like BPO and package implementation. A rise in the US corporate profits in the first half of 2006 suggests that IT spending will continue to rise.

According to IDC estimates, global IT services spend will grow at a 5.7 per cent CAGR in 2005-10 to $589 billion with offshore IT services growing faster. NASSCOM-Mckinsey forecasts that Indian IT-BPO exports will grow at 25 per cent in the same period, with India leading with a 50 per cent share.

Thus, volumes are expected to continue growing. Staffing these volumes too is not likely to be a problem in the near-term. Software companies have recruited large numbers in the past year or so, and utilisation rates, which had declined to 72 per cent in the December 2005 quarter, can go up to 400-500 basis points, say analysts.

However analysts feel that the volume growth seems to have been factored into the stock prices. Going forward, what could positively impact the movement of stocks is the price increase and improvement in operating profit margins.

As the large Indian tech companies get larger, the order size is also becoming big. Companies are looking to large multi-year, multi-million-dollar contracts to improve growth.

While these orders are large, there will be pricing pressure on such deals. As a result, some foreign brokerage firms expect limited pricing power due to large deals. Another sign to watch for is the slowdown in the US.

But the guidance from tech companies suggests that they are witnessing better pricing negotiability. They expect a 3-5 per cent rise from new contracts, although these form a very small share (around 10 per cent) of overall revenues.

Also, as more work moves offshore, average billing rates will improve. A higher proportion of value-added services will also improve pricing. Does all this mean that margins will better?

Margins to be flat or decline a bit

Analysts expect operating profit margins of companies to decline gradually over time as international majors like IBM Global, Accenture and EDS will increase their size, resulting in wage pressure for software professionals.

Analysts are unanimous in their expectation that despite better pricing and cost efficiencies, margins will reduce. Salaries form 80-85 per cent of costs and about 50 per cent of revenues of Indian IT companies on an average. And they have been steadily on the rise year on year.

Also, higher tax rates is also going to be an additional burden on the bottom line of companies going ahead. The industry will lose tax benefits under Section 10A/10B on 31st March 2009. So companies will gradually move to 33 per cent effective tax rates from the current 13-16 per cent.

However, with most of the incremental expansion in the sector coming through Special Economic Zones, which have full tax benefits until 2014, the effective tax rate would move up only marginally over the next few years.

In order to protect margins, companies are adopting various measures like cost efficiencies, change in the employee mix tilted towards more fresh graduates or lesser experienced people and even acquisitions to enter new businesses or new geographies, increase scale of business and be globally competitive. In a nutshell, price and margins will be the key driver for future stock price movements.

Impact of US slowdown

Since almost 70 per cent of Indian IT services exports are to the US, which is showing signs of slowing down, will the breakneck speed of IT companies' growth come to a screeching halt?

Most analysts rule out fears of the impact of slowdown in the US given India's cost competitiveness (Costs in India are one-sixth of that of US), value addition and diversification in new services like consulting, testing and infrastructure.

Says Anurag Purohit, analyst, BRICS PCG, "Companies in the developed market would look at outsourcing more work to cost competitive countries like India to leverage on costs and maintain the return on investment in case of a US slowdown."

However, leading foreign brokerage firms feel that the slowdown in the US cannot be ignored and will pull down the overall IT spending. The risk becomes large only in case of a hard landing of the US economy, though the probability of such an eventuality appears low right now.

Moreover, companies are increasingly reducing dependence on US as demand from other regions, mainly Europe, has been gathering pace. European business, though a small portion of the total revenues, is rising faster than the total revenues for most IT companies.

In terms of stocks, analysts prefer large companies because of their geographical reach, pricing power, employee management and ability to sustain margins.

Infosys: This stock has gained the most in terms of price appreciation. With the highest top line and operating profit growth followed with an improvement in operating margins, most analysts feel that it is the best stock despite stretched valuations.

"Infosys is a total organic growth story and hence the safest bet," says Purohit. The company raised its EPS guidance for this fiscal once again by about 6 per cent to Rs 66 in September 2006 quarter translating to a growth of 47 per cent y-o-y.

TCS: TCS is trading at a lower valuation relative to Infosys, despite being India's largest IT services player. This is partially due to lower growth rate and operating margins as compared with Infosys. However, the company makes a sound investment for its robust business model and management quality.

Wipro: In September 2006 quarter, though the company reported strong top line growth, operating margins were a tad lower on a sequential basis.

Analsyts see limited upside in the stock price saying that larger players with much higher growth rates are quoting at similar valuations.

However, the company cannot be ignored just on the basis on valuations as it has the third largest Indian IT services operations, the largest third-party BPO operation in India and is also the largest third-party R&D services provider globally.

Satyam: Satyam posted subdued September 2006 quarter performance as it witnessed pricing pressure marginally and its margins declined thanks to an aggressive salary hike.

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