Prudent Financial Management!!

The Indian IT/ITES Industry has been going through a lean patch recently. The constant rupee appreciation has impacted the profit margins of firms. Several firms including TCS and Yahoo have announced job cuts. This has had a sobering impact on the expectations of employees.

In all fairness the layoffs are miniscule compared to the overall employee base. However, that is of no consolation to the employees who are getting displaced!! This post looks at a few measures employees must take to be financially prepared for any temporary challenges.


1. Build up a liquid fund – this takes top priority. While job openings are available elsewhere, often we may spend a couple of months moving between positions. We should have a fund covering three months of expenses (include personal expenses and EMI payments) along with a provision for medical emergencies. While six months is ideal at the minimum we should be able to cover three months. If you have not built this then please start now ASAP.

Investing a regular amount every month in liquid mutual funds should get us going. Do not hold cash or money in a bank savings a/c. Go for liquid plus funds. They are more tax efficient.
If you have a chance to make a short onsite trip then do so Transfer the savings from the trip to the liquid fund!!

2. Diversify Assets - If ESOP/shares of the company you work for are a major part of your assets then please look at diversifying the asset base straight away.

3. Repay Existing loans – If you have surplus cash, reduce your EMI payouts by repaying loans. This need not include Home Loans as it carries various tax benefits.

4. Personal medical insurance – Since we are covered by our company under their medical insurance plan, we typically do not take cover on a personal basis. Please do so at the soonest. A cover for the family is essential.

5. Review major purchases – If you are about to purchase a house, car or take that personal vacation, please review the same. Dont give away to impulsive buying/spending. Do not allow your EMI payments to exceed 40% of your net take home salary.

6. Discount your variable payout/bonus – This component is going to fluctuate over the next few quarters. So do not consider this to be a major portion of your earnings.

7. Be prudent in usage of your credit cards – Will save you a lot of pain in the long run.

8. Cut down on miscellaneous expenses – While the typical stereotype of IT employees being high spenders does not hold true, look to cut down non-essential expenses.

Print your own money!!

Tamil Nadu News Print Limited (TNPL) has significant market share in the printing and writing paper segment. The company is shifting its product mix from newsprint to higher margin segments like copier paper. Additional investments are being made in power, cement and real estate. At a current market price of Rs 106 the company trades at 6.5 times the FY08 EPS of Rs 16 and 4.6 times the expected FY09 EPS of 22. With a dividend yield of 4% TNPL is a safe buy in a volatile market.

The company makes paper from bagasse instead of wood. TNPL is the largest bagasse-based paper producer in the world. It was set up as a joint venture between IDBI and the Tamil Nadu state government.

TNPL is in the middle of capacity expansion at a cost of Rs 1200 crores. The increase in paper manufacturing capacity (from 2, 30,000 tpa to 2,45,000 tpa) and in power generation capacity (from 61.12 MW to 81.12 MW) will be reflected in April 2008. By 2010 the paper capacity will be expanded to 4, 00,000 tpa. The added capacity is for high value products like copier paper which will further increase the profitability. TNPL has gone in for both forward and backward integration (power, pulp).

It generates excess power which is sold externally. TNPL is also setting up a plan to generate cement using the waste product generated during paper manufacture. It is also setting up an IT park in the available surplus land in Chennai. The company is constructing 4.5 lakh square feet of office space there.

The reduction in customs duty and the rupee appreciation will make imports cheaper. Continued availability of bagasse to service the increased capacity is a must. Also the firm is run in a conservative manner adhering to government norms. The company’s debt has more than doubled from Rs 250 crores in 2005 to Rs 550 crores in 2007. This has been done in order to fund the expansion plans. The debt to equity ratio still remains at 0.8.

In the current financial year the firm has expanded their operating margins to 28% ( a rise of 400 basis points). Even with a higher interest burden the net profit margins have increased to 12%. The increased capacity will have a beneficial impact on the top line in FY09. The cement and real estate ventures will be operational in 2009-10.

The company currently trades at Rs 106 with a yearly high/low of Rs 147 /Rs 81. A combination of low business risk, steady management and aggressive expansion plans makes the stock a good buy if you are looking for a steady stock which holds its value in volatile markets.

Should we avoid Five Star Funds!!

Investing through mutual funds is inevitable now for all of us. One of the most commonly used selection tool is to go with the “Five Star” funds or “top rated” funds. Several websites (including Value Research, Mutual Fund India ), brokerage houses, mutual fund distributors extend this service of rating funds. Typically these funds would be established funds with a 3-5 year track record at least. Popular funds include HDFC Equity, Franklin India Prima, DSPML Equity, Reliance Gowth, SBI Magnum Contra, Sundaram Select Midcap etc.

However, we would like to take a contrarian view here and feel that fund selection should not be based only on ratings. For e.g. let us take a look at the top gainers as of today over a one year period.

Funds Fund Rating Nav (Date) 1 Year Return

Standard Chartered Premier Equity -- 23.18 (21 Feb) 65.56

Reliance Regular Savings Equity -- 25.24 (21 Feb) 62.69

ICICI Prudential Infrastructure -- 29.75 (21 Feb) 59.77

DWS Investment Opportunity 37.57 (21 Feb) 59.19

JM Basic -- 31.65 (21 Feb) 58.73

DBS Chola Opportunities 43.60 (21 Feb) 56.27

Magnum COMMA -- 24.11 (21 Feb) 54.85

Sundaram BNP Paribas CAPEX Opp.-D -- 20.39 (21 Feb) 52.51

Taurus Discovery Stock 24.72 (21 Feb) 52.50

(Source: Value Research)

The interesting point is that NONE of them is a five star fund!! Even given that the top funds are rated based on risk -adjusted returns, one would expect to find at least one star rated fund amongst the major gainers.

A few reasons why this might be the case

1. A track record of three & five year returns is taken into account while rating funds. This takes into account the consistency of the fund. But often funds find it difficult to sustain such returns in the long run. The original strategy adopted 2/3 years back may no longer be relevant now.
2. Safety lies in numbers - It is very difficult to criticize a distributor for having recommended popular funds like Sundaram Select Midcap. As a fund becomes successful it attracts a large set of investors. The increased asset base makes it difficult to generate high returns.
3. Fund manager turnover contributes to this though it might not always be the case. Prashant Jain (HDFC Equity) and Siva Subramaniam (Franklin India Prima) continue to manage their funds for an extended period of time. Manager fatigue and lack of motivation might come into play.

So what is the solution? One approach might be to purchase ETF’s, which follow the major indices (large cap and small cap). We will discuss different approaches going forward, but please do refrain from buying into large established funds just based on fund ratings!!

Concept of Wealth Creation!

The objective of this blog is to enable Wealth Creation for all participants.

We would try our best to provide relevant and implementable suggestions. This initial post explains our thought process behind wealth creation. Later posts will focus on specific recommendations to enhance each area listed below.

Wealth for some is due to luck or inheritance but for many is through hard work and diligence. We will help you to be diligent in your various decision-making processes across the areas of investments, insurance, real estate, equities and tax planning.

We earnestly believe that wealth creation is possible during the lifetime of an individual and this blog will feature ideas to help you do that.

Our simple definition of wealth:

Wealth Addition = (Regular Income + Investment Income + Other Income) -(Regular Expenses + Capital Expenses + Unplanned Expenses)

A brief description of these parameters is given below. We will come back to these in greater detail in the following posts.

Regular Income is the income we earn from our daily activities. It could be a fixed salary or business income. The inflow is either regular(monthly)or erratic. For our purpose we will consider the average monthly income as(yearly income/twelve).

Investment Income is the income we earn from our earlier investments. It is the most important element of wealth creation. The moment this component has grown to an extent where it covers the three expense categories, a person is on his way to financial freedom!!

The income is primarily from fixed income instruments (bank deposit, post office MIS, PPF etc), equity markets (dividends, capital gains) and real estate (rent, capital gains). Asset allocation amongst the different asset classes is the single most important factor.

Other Income - Apart from our regular income, often we can supplement our income with other activities (new businesses, consulting, short term trading gains etc). One caveat here is we should not spend too much attention here to the detriment of our regular income!!

Regular Expenses - This refers to a person’s regular expenses in the course of the month covering from rent, EMI’s, utility bills, school fees and provisions. Our objective should be to generate wealth to sustain these expenses.

Capital Expenses – These are our significant known expenses through our lifetime - Education, Wedding, Purchase of a house etc.

Unplanned Expenses - These are expenses, which are not budgeted for. They turn up both on a monthly basis and at irregular intervals (they are unplanned!!).

In the following posts, we would like to share ideas on how to optimize our income/spends in the six areas highlighted above. We need to ensure that this equation remains positive on a yearly basis. A planned approach towards revenue enhancement pays off in the long run.

To sign off now, a quick move from the abstract to the practical !! Almost all of us have mobiles now (for self and spouse). The total mobile bill is often in excess of Rs 1000/ month. Several banks nowadays offer cash back schemes for paying mobile bills through their credit card. The cash back is in the range of 2-3%. A quick calculation reveals that this amounts to at least Rs 30 per month. While this might be trivial it adds up to around Rs 400 per year (enough for that unplanned pizza!!)