A big day for currencies, ECB may hike interest rates

t is a big day for currencies because after a long hiatus, you are probably going to see a rate hike coming in from one of the Organization of Economic Co-operation and Development (OECD) Central Bank.

Here is a verbatim transcript of Latha Venkatesh’s comments on CNBC-TV18. Also watch the accompanying video.

It is a big day for currencies because after a long hiatus, you are probably going to see a rate hike coming in from one of the Organization of Economic Co-operation and Development (OECD) Central Bank.

The European Central Bank in all probability will hike its interest rates later today. That’s momentous because it has been such a long lean period for those countries that even this is faced with a lot of opposition.

There are almost comments in the press calling the ECB a German Central Bank as if the policy is only designed to suite Germany’s inflation fears and is ignoring the problems that a rate hike will bring to other countries peripherals the Portugal, Ireland, Greece and Spain (PIGS) countries where they will find it even more difficult to sell their paper or will have to give more yields.

In any case, the euro is rallying since then. We have seen a lot of Asian currencies also rallying on the back of a strong euro performance and dollar weakness has obviously helped asset classes, all risky asset classes

Kishore Biyani eyes 30-40% revenue growth in FY12

Future Group promoter Kishore Biyani is looking for a healthy growth in the current fiscal. Biyani is targeting a revenue growth of around 30-40% in FY12.

In an interview to CNBC-TV18, Biyani said that the group has seen good growth in stores sales which is driven by modern growth. “Our consumers are also maturing. The proportion of good products, which is entry point, is still 25% of our sales. Our density in stock keeping has increased because we are selling branded products as well,” he explained.

He said further that the group is planning to raise ticket sizes as it has posted double-digit growth. Biyani also added that the group’s debt equity ratio is around 1:1.1 while average maturity of debt is 3.5 years.

Despite the high inflationary pressure, Bayani said that it is not a matter of worry for the group and is confident of handling input cost pressures.

Going forward, he said that the group will be relaunching ‘new way’ of shopping by July and are in talks with strategic investors. As per media reports, retail giant Walmart is interested to pick up a stake in Future Group. Reports also suggest that senior officials of Future group and Walmart have met at least five times in the past four months.

In India, Walmart has a joint venture partnership with the Bharti group. Since the partnership is 'non-exclusive' in nature, Walmart can also forge other alliances in India.

Ican Investment Advisors expects cement prices to correct

In an interview with CNBC-TV18, Anil Singhvi, Chairman, Ican Investment Advisors says, cement prices have gone up, but the demend is still not picking up.

According to him, these prices will not sustain more than a month or two because demand is not backing up prices. “I think the price correction could be as high as Rs 20 or even more in some pockets,” he adds.

He further says, in the next couple of quarters, the cement industry will go through a bit of a margin pressure.

Below is a verbatim transcript of his exclusive interview with CNBC-TV18's Udayan Mukherjee and Mitali Mukherjee. Also watch the accompanying videos.

Q: Cement, what is happening on the pricing front because we heard about pretty sharp price escalation? Is that still flowing through or have prices subdued somewhat?

A: I think the prices have seen quite a bit of ‘yo-yo’ in last about five-six months. So, when you look at prices today, they are much better than what they were a couple of months back. But having said this, the demand side of cement is still not picking up, in fact this year we are going to end-up with around 4.5-5% and in this month also it’s going to be around same 4.5-5%. So, my concern is more that right now industry seems to have overcome this factor of low pricing which were there around August-September and come up very well in last three months. But I don’t think these prices will sustain more than a month or two because demand is not backing up prices.

Q: What about the demand-supply situation though? Supply has picked up considerably over the last few months and there is more coming. How do you see in about six month time this whole demand-supply equation?

A: To a very large extent, the country has to be divided into four parts because India is too larger country from cement demand and cement supply perspective. I think South will continue to have supply pressures, North is having a little bit of a supply pressure on account of new capacities coming up. So, on the whole, I feel that there will still be supply pressure. But the industry has to some extent been able to manage keeping prices high by having low utilisation. But it has not worked well in terms of demand. Had the demand kept the pace of about 9-10% then this would have sustained for a much longer period. But the pricing scenario will be too fragile in a month or two months time.

Q: What kind of a come off in prices are you expecting in couple of months time?

A: In the past, the tendency has been that cement prices can come off by Rs 15-20 or even more because we will have only just about two-and-a-half to three months maximum for the peak construction period before we set into monsoon. Still in many places capacity utilisation is not more than 70-75%. So, I think the price correction could be as high as Rs 20 or even more in some pockets.

Q: How much margin recovery would you expect to see though?

A: Cement is energy intensive. So, the prices of coal, power, excise duty going up, all that including transport costs and I expect again a diesel hike are going to make cost side of cement industry looking up very difficult to pass it on to the customers. Whatever price increases could have come in last two-three months on account of both busy season and more importantly industry trying to go through a low utilisation and keeping the pricing discipline, I think we are end of that. I expect cost side pressures to remain and prices to come down. So, my expectation in the next couple of quarters the industry will go through a bit of a margin pressure.

Cautious on India, valuations are high: Nomura

n an interview with CNBC-TV18, Ian Scott, Chief Global and European Strategist, Nomura says, the recent rally in emerging markets (EMs) globally is primarily a reaction to the sharp underperformance that they saw earlier in the year. “I think it has been more of a short covering rally than a start to a new bullish trend of outperformance,” he adds.

He further says, he wouldn’t switch from developed markets (DMs) to EMs. “I think the fundamentals in EMs remain somewhat uncertain. I think it’s too soon to be upgrading EMs,” he adds.

Commenting on India, he says, he would be cautious about Indian market. "The valuations are high not just relative to DMs, but relative to other EMs," he adds.

Also read: Why is RBS still not bullish on India?

Below is a verbatim transcript of his exclusive interview with CNBC-TV18's Udayan Mukherjee and Mitali Mukherjee. Also watch the accompanying videos.

Q: Your take on this big pullback we have seen across the emerging market region generally and what you have made of it?

A: Obviously there has been a strong recovery in emerging markets (EMs) globally. I think it’s primarily a reaction to the sharp underperformance that we saw earlier in the year. I am not sure that the fundamentals have really changed an awful lot. I am not sure that valuations are really compelling at these levels. So, I think it has been more of a short covering rally than a start to a new bullish trend of outperformance.

Q: It’s come with a big burst of liquidity though, how much of that is chasing momentum right now and how much is backing the fundamentals of these markets?

A: I am not sure it has been a fundamentally driven rally. When you look at some of the key drivers of EM performance, in particular oil and commodity prices generally have been rising, which is not usually a good thing for EMs, particularly some of the ones that have been the strongest outperformers.

Secondly, we haven’t seen a big reversal in fund flows. Thirdly, I think the inflationary pressures and the upward pressure on interest rates in EMs remain. So, I think this has been a short covering rally rather than something based on strong fundamentals.

Q: At the start of the year, emerging markets were underperforming developed markets quite considerably and that seems to have turned around a bit over the last 15 days. Would you now start buying or favouring emerging markets over developed markets? Do you think that trade has reversed for good?

A: Now, we wouldn’t switch from developed markets (DMs) to EMs. I think the fundamentals in EMs remain somewhat uncertain. Interest rates do need to go up, inflationary pressures remain. I think with commodity prices particularly food and energy prices rising strongly that could have a damaging impact. If you look at what’s happening to earnings revisions, they are worse in EMs than they are in DMs and the same is true for the revenue revisions at the moment as well. So, I think it’s too soon to be upgrading EMs.

Q: There has been some talk over the last few days that some of the sharp burst of money that we got in emerging markets and in India could have to do with the flows post the Japan crises, the amount of money which was thrown into the system and that found its way into emerging markets and commodities. Did you see any direct correlation?

A: I think obviously the Japanese crisis has led to some meaningful underperformance for the Japanese market. But we don’t see a big reaction in terms of fund flows and the buying that’s taking place in the last week or two in EMs is been pretty small. So, it is quite a big rally in EMs with quite a small amount of buying.

Q: So what would the picking or pecking order be within the Asian region now for you?

A: If we were going to pick any of the markets in the Asian region, I think the Chinese or Asian market is the area that we would favour over others. Chinese market trades on a substantial 30% discount to the Indian market, so that would be where we would be looking. Elsewhere in the DMs, I think the Japanese market has overreacted to the earthquake. I think particularly in the last few days we have seen the yen weakening and the stock market going down, I think that is a gross overreaction to the problems that Japanese society and economy are facing at the moment.

Nifty ends flat; BSE Midcap rises for 13 straight days

Indian equity benchmarks closed the third consecutive session on a flat note after witnessing a consolidation throughout the session. Indices were completely directionless on Thursday, could be awaiting some triggers like earnings season, change in government policies etc.

According to Dipan Mehta, Member BSE and NSE, the best strategy would be to wait and watch, and may be at higher levels if crude persistently remains at these levels and government policies is not forthcoming then one should look at booking profits and hope for a correction to then get into the stocks markets. "I think it’s a bit of a status quo at this point of time and it is very difficult to call which way the market could move from these levels."

Even the global markets were flat in trade - could be awaiting interest rate decision in the ECB meet. Analysts were expecting about 25 basis points hike in rates today.

Indices consolidated but have not seen any profit booking yet - especially after more than 1800 points rally in previous two weeks. This rally was supported by foreign money, who have bought more than USD 2 billion worth of equities.

The 50-share NSE Nifty has been stuck in a 50 points zone for the last three sessions, says Devangshu Datta, Consulting Editor, Outlook - the range was 5860-5810.

The Nifty fell 6.05 points, to close at 5,885.70 - below 5900 for the second straight day and the 30-share BSE Sensex declined 21.02 points, to settle at 19,591.18.

"For the next two-three sessions we will have 150 points move but it could be in either direction. It could drop back to 5,750, it could go up to 6,050 but this sort of very narrow trading doesn’t usually last for more than three-four sessions," Datta said.

Market is purely moving on technicals, says Piyush Garg, CIO of ICICI Securities. 5"950 is a very strong resistance and unless we can take that out on a closing basis, at least two consecutive days, market may tend to basically halt here. Otherwise, we are in sync with global markets."

HDFC was the top gainer, with rising 2.4%. Wipro, Bharti, SBI, L&T, ICICI Bank, Tata Steel and Hero Honda were the leading gainers, with gaining 0.4-1.4%.

However, ONGC, NTPC, TCS and Sesa Goa were top losers, with falling 2-3%. HDFC Bank, Reliance Industries, Sterlite, Maruti and Tata Motors were other losers.

Midcaps and smallcaps were star performers ahead of earnings and there has been rotation of sector. The broader indices hogged the limelight and outperformed the benchmarks.

In fact the BSE Midcap Index has been rallied for the 13th consecutive session today, with gaining 780 points. It closed at 7,264.29, up 70.42 points. The BSE Smallcap Index rallied more than 900 points in last seven sessions; it gained 110 points, to close at 8,897.19.

"In midcaps may be little bit more for them to rally," says Dipan Mehta.

Sanjay Dutt of Quantum Securities, "We are already seeing for the last few days that the catch up act has begun in some of the good quality midcap companies across sectors, which were down 30-50% over the last six months, and that action would continue, so the rotation would continue."

In midcap space, Blue Dart was locked at 20% upper circuit. Prestige Estate, IVRCL Assets, Chambal Fertiliser and HT Media were up 7-10%. However, KGN Industries, Wockhardt, A2Z Maintenance, OnMobile Global and Cox & Kings fell 3-5%.

In smallcap space, Zandu Realty and Minda Industries too were locked at 20% upper circuit. Goodyear, Oriental Hotels and Nucleus Software gained 14-15%. However, Hinduja Foundries, Polyplex Corp, R M Mohite, Henkel India and Shri Ganesh lost 5-6%.

About 1964 shares advanced as against 1035 shares declined on the Bombay Stock Exchange.

equity dilution

A situation in which a company makes more shares of common stock available without an increase in its assets, with the end result that each share is worth less than before

How Equity Dilution Works

Equity dilution is the curse of the startup executive. If you don't understand how equity dilution works, you can find yourself working very hard…for very little.

If you are a senior executive at a startup company and you don't understand how stock dilution works, you may be on the path to a painful lesson. 

Don't learn about equity dilution the hard way. Understand stock dilution before you sign your employment agreement and you'll be happy you did.

Let's say, for example, that you signed up to be COO of a startup company and the CEO founder offered you 5% of the company. The CEO says there's no funding in the bank yet, so you'll have to sign up for a low salary -- $50,000 per year.

But he assures you that he's had conversations with venture capitalists and there's a sense that if things go right, the company might one day sell for $100 million.

Hmmm, you think. 5% -- not bad. If we sell this thing for $100 million, I will walk away with $5 million.

WRONG!

Your math failed to take into account stock dilution. That's the effect the issuance of new equity shares has on the existing shareholders.

Let's go back to our example and see how stock dilution works in action.

You take the job and get 5% of the company.

Odds are you don't get it all at once -- it's probably subject to avesting schedule and it might only be stock options -- but that's not really relevant to our equity dilution lesson.

How much is 5% of your pre-funding company worth?

Not much. In fact, until there's a funding round you don't really know what it's worth.

A funding round is important to entrepreneurs and their employees because it's a milestone that values the underlying stock of the company.

So, let's say that a year after you've been working as the COO of the company, you and the CEO are finally able to land a funding round.

The funders says they will give you $700,000 in capital for 35% of the company.

What exactly does that mean?

It means that the total valuation of the company after they put their money in will be equal to $700,000/.35, or $2,000,000.

In VC terminology, that's the post-money valuation. The pre-moneyvaluation is therefore $1,300,000. That's the post-money valuation minus the value of the cash that is coming into the business as part of the funding round.

So, after the funding round, the valuation is $2,000,000 and you had 5% equity in the company, so now you're equity stake is worth $100,000, right?

WRONG!

Equity dilution knocks down your percentage stake in the business.

Here's how equity dilution works in this scenario.

Let's say there were 1,000,000 issued shares prior to the funding round. In order for the new investors to get a 35% equity stake, they need to be issued new shares.

How many shares?

It's a simple algebra problem. Let x be the number of new shares that need to be issued. The equation becomes:

x / (1,000,000 + x) = .35

Solving for x implies that 538,462 new shares must be issued to the investors.

The math says that it should be 538,461.5 but there's no such thing as half a share so we round up. Believe me, investors won't round down. If there's something on the table to be taken, they will likely grab it.

So, now the total number of shares in the company is 1,538,462. What your percentage equity stake in the company?

Well, you were allocated 5% of the 1,000,000 shares so you had 50,000 equity shares before the funding round.

After the funding round, you still have 50,000 shares.

So, now, your diluted equity stake in the company is 50,000/1,538,462, or 3.25%.

How much is it worth?

The answer is simply .0325 x $2,000,000. That's your percentage equity stake times the post-money valuation. As it turns out, your stake is worth $65,000, not $100,000 as you might have thought.

If the company were to sell for $100 million now, after the first round of venture funding is in the bank, you 3.25% stake would be worth $3.25 million, not the $5 million you thought you'd get before you learned about equity dilution.

Notice that there was an easier way to figure out your post-dilution equity stake. You gave away 35% of the company in the financing round, so your 5% was knocked down by a .65 dilution factor -- that's what you got to keep, in effect. So, 5% times .065 gives you the 3.25%. It's the same answer, but it's a quick way of calculating the effect of dilution on your equity stake.

Mind you, this is just your first round of dilution. If the company has to do a second round and gives away 40% of the company to new investors, then you've got to knock your 3.25% equity stake down by a .60 dilution factor. After that second round, your ownership stake will be down to 1.95%.

Is that good or bad? It depends.

If the post-money valuation on the second financing round is $1 billion, your stake is only worth $19,500,000. Not bad!

If the post-money valuation on the second round is $2,500,000, then your equity stake is only worth $40,950. Given the salary cut you took to get in on the action for this startup, this is a pretty miserable scenario.

Adding insult to injury is the fact that your equity stake's valuation is not real -- it's just a paper value. In a startup company there's usually no liquidity unless there's an exit event of some kind -- for example, maybe the company goes public or the company is sold to an acquiring company. At that time, you finally get to know what your stock is really worth.

What's the moral of the story?

Well, for starters, you can see that somebody who doesn't understand equity dilution is going to be overly optimistic about their likely take in a startup. They may be more willing to take a lower salary than they should be, or more willing to take a lower equity stake than they should be.

Now that you understand equity dilution, you won't make that mistake. You'll properly evaluate potential outcomes and likely funding scenarios and their dilutionary effect on your stake.

Based on your equity dilution analysis, we hope you'll make smart decisions. Good luck!

Party on till technicals look good

 Market is purely moving on technicals and I think 5950 is a very strong resistance and unless we can take that out on a closing basis, at least two consecutive days, market may tend to basically halt here.

 we are in sync with global markets. My sense is that if the global markets don’t fall then the chances of 5950 taking out is also high and possibly if S&P goes above 1,344 which was at 52 week high and there it has been also taking a kind of a resistance for some time now, I think possibly our market rally also beyond 5950 will coincide with S&P also breaking out above 1344 or so. So it’s purely technical at this juncture.

Q: If investors are asking you for some stock ideas with a one year horizon and asking only for relative outperformance, what would your stock list be in the midcap space?

A: I can’t comment on stocks but obviously one should do his homework well. You have to know which stocks do not have major corporate governance issues or at least stocks should pay a good dividend. From a PE perspective they should be cheap and there is no major promoter selling that happens in that stock. There is no dilution of equity that keeps happening in many of these stocks.

If all those things are pretty okay and the stock is trading at a relatively low PE, which to my mind, is something like a 6-7 PE is a good level to enter and 10 is a good level to exit. So you can have a list of those stocks and possibly buy them in this juncture.

The caveat here is that market right now is trading more on technicals. Technically, if the market again tends to look bad, I think its market which is driving flows and not the flows which is driving market. So my sense is if the market again technically looks bad then you will see selling in the market.

Till the time market is looking good technically there is buying in the market.