Stock Shastra

Back in the 1980s people got an impressive return of over 12% on their deposits. The equation was simple: “Paanch saal mein paise double”. However, times have changed today. Now, the interest rate stands at a miserly 8% compared to the 12% seen earlier.
Our economy has evolved a lot since those days; we are currently one of the fastest growing economies in the world. But the earlier time seemed so much better as you got higher returns! So, what is the real deal? Was the high interest rate in 1980s a better situation than today? What is the relation between the growth of an economy and interest rates? How does the interest rate affect the stock markets? And above all what should your action plan be considering the impact of interest rate on stocks?

After the huge success of Coal India Ltd.’s IPO, the Government of India has put up another offer in the stock market. This time it has come up with a Follow-On Public Offer (FPO) of another Navratna company Power Grid Corporation of India Ltd. (PGCIL) which made a phenomenal debut in the capital market 3 years back. The price band for the follow-on public offering has been fixed at Rs. 85-Rs. 90. A further discount of 5% on the final issue price will be given to retail investors and Power Grid’s employees.

PGCIL is one of the largest transmission utilities in the world. It is responsible for planning, executing, owning, operating and maintaining the high voltage transmission systems in the country. Its core operational area includes development of inter-state transmission systems and grid management.

So, can the Power Grid FPO power your portfolio?

Sudha, a housewife had just returned from her weekly kitty party session. She immediately turned on her computer at home and went to one of the trading websites. She was impatient. Mrs. Kumar at the kitty party had just mentioned how she had tried her luck at stock investing. She explained the thumb rule of of finding stocks at low P/E’ s being a good bet and went on bragging about how she had a earned a good Rs. 10000 in one month. As soon as Sudha heard this her thoughts were only on getting home early & finding stocks with low P/E s to invest in. She immediately logged on to one of the financial trading websites & looked for stocks that traded at price to earnings ratio less than 10 (a ratio Mrs. Kumar had mentioned as being a good buy.) She was excited to find some 50 [...]

Retained Earnings V/S Dividends????
Which one do you choose? A company that declares dividend or a company that retains the profit???
This is always a tricky question & there are always different views on this topic.
Let’s see what they are:
The general perception people have is that by not paying dividends or not increasing the dividend policy the company is doing no good for the investors. This may or may not be true.
The good side about retaining the money is that the company may be investing the money in a fruitful project which may give you better returns a little later. The company may have intentions of launching a new product/service or building a new plant or probably is going in for expansion.
And the bad side??
There a few cases when a company does not benefit from the retained earnings. When does that happen?

When the management piles up cash far beyond its present or [...]

The Debt Factor – ROIC
Why should you look at a company’s ROIC?
Let s start with first answering what is ROIC?
ROIC is a financial measure that quantifies how well a company generates cash flows relative to the capital it has invested in the business. Here, the investment represents pool of funds supplied by its shareholders & the lenders.
ROIC – Earnings before Interest & Depreciation/ Total Capital
Let’s see what does Total Capital mean??
Total Capital = Equity Capital + Debt Capital
Equity Capital:
Equity Capital is the money contributed by the promoters and the other shareholders. Equity holders are basically the owners of the company.
Debt Capital:
Debt Capital is the money borrowed from banks/ other lenders carrying an interest charge on it.
Hence, the total capital of the firm is the sum of this equity capital + debt capital.
Now, why are we stressing on ROIC here??
ROIC is a true measure of the company’s returns and gives [...]