Sunday, July 19, 2009

Quarterly Results

Stock market investors very eagerly wait for the quarterly results and I would like to through some light in this regard why it is important for the investors. Sure, we know that companies have to perform well financially but we also need to understand that it is very difficult to announce the market beating results every time. So, quarterly results are one among the many that we need to keep watching to understand the companies.

Quarterly Result

Quarterly result is the short term financial performance of a company which helps the management as well as the retail investors to understand the progress of a company. Companies typically announce the quarterly results four times a year and the results can be found in the company website or with SEBI or in any brokerage firm’s website.

Quarterly results can often be misleading and it is very important to pay careful attention. Example: Recent Quarterly result by L & T. On the outset, the result says that the company has earned Rs.27 a share for the first quarter of 2009-10 period. But if we look at the statement carefully, we can see clearly the result includes a one time exceptional gain of Rs.1020 Crores through the Ultra Tech stake sale. Excluding the exceptional gains, per share earnings would be just Rs.10 for this quarter.

Short and Medium Term Investors

Quarterly results are very important for short and medium term investors while the magnitude of importance decreases for the long term investors. It is also very important for the investors who are thinking to stay for a long term but are just starting. For the short and medium term investors, it helps to either maximize the profit or minimize the loss as the stock price shows volatility based on the result most often than not. In the short term, stock price heavily depends on the market sentiment, external forces like budget and rainfall, and company performance like quarterly results. So, if you are a short term investors, you do not want to take the risk of investing in a company whose recent quarterly income stays in the negative.

If you are a medium term investor, quarterly results help churn the portfolio. In the medium term, if we see or anticipate a bad result, then we can sell those stocks and buy stocks that are promising and are expected to announce good results. If the company is good, and we are able to anticipate the bad result, then we can sell before the result and buy it back after the result when the stock price comes down. Sometimes, great companies fail to announce good result in one quarter and prices comedown significantly. Times like those offer very good opportunity for investors to buy them at a low price.

Long Term Investors

Quarterly result again helps in many ways for the long term investors. If you are thinking to keep invested for a long term but just starting, quarterly results help you to select good stocks and build a great portfolio. But what about the long term investors who have already invested? In fact quarterly results many times are not that important for the long term investors who already invested, had they selected good stocks in the first place. But it is not always possible to build a portfolio without some average stocks. So, quarterly results help those investors in couple of ways. They can either sell the companies that have announced bad results and are expected to decline going forward or they can rejig the portfolio by selling average stocks and then invest back the money in good companies.

But if you are a long term investor, and have selected the stocks after careful consideration and fundamentals remain very strong, then you do not need to worry about the quarterly results till you reach your target price. Because, it is not possible to announce great results all the time and companies might encounter either operational or marketing or administrative difficulties in some quarters and are bound to announce bad results. But if you are a smart investor, you have to grab that opportunity to accumulate the stock rather than panicking and selling the stocks that you currently hold.

Recent Results

Most of the Indian companies have announced good results this quarter and that has made experts all over the world to believe in the so called “India story”. Companies like Axis Bank, Infosys, TCS, L&T, Opto Circuits, Colgate, Crompton Greaves, Welspun Gujarat, PFC, HDFC Bank, Indowind Energy, and Geojit, have announced decent results if not exceptional. In fact Indian companies have been announcing decent results throughout this recession period which makes me believe that the stock market might reach new highs in the next five year period. Long term investors can buy some selective stocks even now and they would be up for a good return if they stick with it. Most of the Indian companies are managed with a conservative mindset which reduces the potential risks associated with business in general. Hence, India is poised to attract more FII investments and once they start buying, our domestic funds and institutional investors will show more interest and that would be the crazy next Bull Run.

Kumaran Seenivasan.


Thursday, July 2, 2009

Rupee Vs US Dollar: How the Exchange Rate is Determined and Its Impact

All of us have seen 20% increase in the value of dollar against rupee within a year and it is fluctuating these days within a small range. Someone has asked in the comments section about what determines the exchange rate and how it is fixed and I would like to provide some of my thoughts in relation to that.

What determines US Dollar exchange rate?

There is nothing extravagant to tell you about this as the rate is determined by market forces just like how the price of goods and commodities is fixed. The value of any currency is based on the demand for it. If the people buy more of a particular currency, value of that currency increases vice versa. The same thing holds true in case of US Dollar Vs INR as well. There are few other factors that play a role in determining the exchange rate particularly when you leave the currency value to the market forces and I will list them below.

Growth of the Economy
Strength of the Economy including Export and Import
Employment / Unemployment
Public Debt
Interest Rates
Sometimes speculation and fear.

Again all these factors either increase or decrease the demand for US Dollar or any other currency. If all the factors mentioned above are favorable, people across the world get confident about the stability of a particular country and investment climate, which in turn creates the demand for the currency.

Example: Rupee appreciated significantly in 2006 – 2007 and the first seven factors I have mentioned above were the reasons for the Rupee appreciation since India had stable government with favorable economic climate. USA and other multi-national companies started investing in India and they bought more Indian Rupees and the demand for rupee increased which in turn appreciated the rupee value.

What if a country does not have all these?

People will not have confidence in that country and the demand for the currency will come to a halt and then we will see a list of failed nations. Example: Zimbabwe. You might have read in news that a loaf of bread in Zimbabwe cost 1 million Zimbabwean dollar which means nobody values that currency in essence.

But what about the eighth factor speculation and fear? That’s what made the US Dollar appreciate 20% versus most of the international currencies in 2008 – 2009.

US Dollar Appreciation

To recap, I have mentioned that Demand for the currency increases the value of that particular currency. So, what made the people to demand for more US Dollar? That’s where speculation and fear came into play and I list out few points that were responsible for recent US Dollar appreciation.

1. During tough economic times, people get scared and they start moving all their foreign currency assets to more stable currency like US Dollar.

2. US Based Mutual Funds, Hedge Funds and stock investors played a huge role as well. US Funds invested huge amount of money in India during 2003 – 2007 period, but the funds saw a huge redemption pressure due to the fear of retail investors in US. People invested in mutual funds and hedge funds panicked and started redeeming the units and the Funds were in a huge liquidity crisis. So, they started dumping the Indian stocks and converted all the currency in to US Dollar which created so much demand in a quick time which in turn increased the value of dollar.

3. International currency traders and speculators wanted to take advantage of the rising value and they started buying more and more US Dollar.

Market Forces Vs Central Bank

While most of the countries let the market forces (Demand and Supply) to determine the currency value, some countries like China had fixed currency value for a long time before easing control over it though with a limited scope. Main reason for that was to have a stable balance of payment. Even RBI can regulate the exchange rate to an extent by adjusting the foreign exchange reserves.

Impact of Exchange Rates:

Exchange rates impact in many ways starting from reduced sales for companies to more buying power for individuals. I will explain this with couple of examples.

Exports and Imports get affected

Strong dollar reduces the export value of US Companies and likewise strong rupee reduces the export value of Indian companies. This is what happened in 2007 – 2008 with Indian companies particularly in IT and Textile sector. Example: Tirupur is the Textile Capital of India and let’s take a company called ABC Textiles which makes inners. Assume ABC had agreed to supply 10 inners to Macy’s in US @ $100 per piece in 2004 when the Rupee value against the dollar was 46. ABC would have earned Rs.46000 in 2004 by supplying 10 inners. But suddenly the Rupee value increased and in 2007 Rupee value was 40 against a US Dollar (You are able to buy 1 dollar by giving Rs.40 instead of Rs.46). ABC would now earn just Rs.40000 for supplying the same 10 inners and it gets affected by reduced revenues.

Strong currency makes the imports cheaper. Take another example where KS Oils imports 10 litre’s of oil from US Company US Oils @ $10 per litre in 2004 when the exchange rate was Rs. 46 Vs US Dollar, which means KS Oils imported 10 litre’s of oil by paying Rs.4600 (100 * 46). In 2007 rupee value has increased and the same 10 litre of oil now costs KS Oils only Rs.4000. So, exchange rates have its effect on imports and exports.

Buying Power

Assume a traveler from India visited US in 2004 with Rs. 46000. He could have bought goods worth $1000 in 2004. But assume the same traveler visited US again in 2007 with the same Rs.46000. In 2007 he could have bought goods worth $1150. Of course there could have been either increase or decrease in prices of individual items based on inflation or deflation. But the essence is, exchange rates affect buying power as well.

I have also uploaded a presentation on rupee appreciation and it would be useful if you want to know more. Readers can access the file at the following link to have additional understanding.

Impact of Exchange Rate on Stocks

As I said above strong currency will reduce the sales and it will have an impact on company earnings particularly when company operates across many geographics. Example: When rupee value appreciated in 2007 - 2008, all the Indian IT, Pharma and Textile exporters faced huge foreign exchange loses and it reduced the earnings and thus the share price. Now, the rupee value against dollar has decreased and all these companies enjoy more earnings due to better foreign exchange rate. Hope I provided a detailed account of exchange rate determination and its impact and look forward to your comments.

Kumaran Seenivasan



This is a blog about stock market investments, investment strategies, and related topics. Any statement made in this blog is merely an expression of concerned authors opinion, and in no case should it be interpreted as an investment advice to buy stocks, sell stocks, or for that matter advice for any other issues be it money related or not. By using this blog you agree to (i) not take any investment decision, or any other important decisions based on any information, opinion, suggestion or experience mentioned or presented in this blog (ii) verify any information mentioned here, independently from your own reliable sources (for e.g. a registered investment advisor) and thereby check for possible inaccuracies. This blog is to create investment wisdom among general population and the authors are not responsible for
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