HOW TO BUILD AN INFLATION-PROOF PORTFOLIO

In times of high inflation, equity could be the only way of earning a positive return on one's investments. However, the clutches of inflation can squeeze margins of even robust companies. Ramkrishna Kashelkar presents a few themes that can potentially shield investors from the deadly fangs of inflation.

Inflation is as violent as a mugger, as frightening as an armed robber and as deadly as a hit man.
— Ronald Reagan, former president of USA
    IF THERE is one thing that consumers, investors, companies, and governments fear alike, it is inflation. As it goes out of control, it can become the greatest value destroyers of all. Inflation is the phenomenon where prices rise and money's worth declines. As inflation soars, long-term investing can end up being a fruitless exercise.
    While it is clear that in an inflationary environment, bonds do poorly, the link between inflation and equity returns is not so straightforward. A number of experts propound investing in equities as a certain way of beating inflation. When inflation rises, equities also rise because a company's revenue or asset value would go up, along with inflation.
    However, this theory is only partially true as a lot actually depends on companies' ability to pass on the cost of inflation to consumers and in ensuring that there is no demand destruction. Historical evidence is mixed with some periods of inflation showing corporate earnings growth while in others earnings suffered.
    While high inflation is not new to India, it is now becoming a more global phenomenon. In India, the Reserve Bank of India has already raised policy rates eight times in the past 12 months in its efforts to rein in inflation, which continues to stay above the central bank's comfort level. Experts expect the RBI to hike its repo and reverse repo rates by another 50-75 basis points before inflation can be tackled in the real sense.
    Looking at commodity prices, particularly crude oil, global outlook on inflation doesn't appear too benign for the near future.
    It is also argued that it is not inflation per se that impacts corporate earnings growth, but tightening of money supply that follows. India has already done it and all over the world, be it China, Europe, or the US, we see central banks talking of interest rate hikes.
    Against this background, it makes sense for retail investors to look for ways to make their portfolios inflation-proof. ET Intelligence Group presents eight key themes for equity investors that can potentially shield their assets from the deadly fangs of inflation. PRESENT AND FUTURE OPTIONS
To face the inflation woes, the intuitive reaction is always to invest in gold, which has become very easy now, thanks to gold ETFs. Silver ETFs, which are yet to be launched in domestic markets, could also be an extra option for the future. However, investments in precious metals are criticised as being unproductive and sufficient barely to compensate inflation. While a part of one's portfolio can surely be invested in gold — physical or ETF — relying solely on it to beat inflation is inadvisable.
    Mutual fund schemes designed to invest specifically in commodity companies could also be a good option to best the inflation. However, there aren't many such Indian companies and the only alternatives available are a handful of MF schemes that invest in global markets — either directly or through foreign funds (fund-of-fund) route. The performance of these funds has been superior of late, in spite of their lack of popularity. Investors can take exposure, but only after considering the currency risks involved.
BEST TO AVOID
It is not what you bought, but what you didn't buy that decides returns on your investments in turbulent times. Hence, one needs to beware of industries more susceptible to high inflation. Interest rate-sensitive industries such as banks and NBFCs, real estate and auto top the list. EPC contractors with lumpsum contracts also see their margins squeezed as commodity prices go up. Companies that don't have pricing freedom such as IOC, BPCL, HPCL are best avoided. Industries depending on discretionary spending such as aviation and hospitality also won't be favourites if inflation is high. Companies with low value-added products such as most chemical players will also face some margin pressure
ramkrishna.kashelkar@timesgroup.com 
With inputs from Bakul Chugan, Crystal Barretto, Jwalit Vyas and Ranjit Shinde
All market prices and related data as on 31st March 2011 CMP: Current Market Price, M-Cap: Market Capitalisation, OPM: Operating Profit Margin for trailing 12 months, P/E: Price to earnings ratio

CONCLUSION
    The above
    themes can serve
    as a set of guidelines for investors to select companies for their equities portfolio that have the potential to fare well even in times of high inflation. For some companies, more than one theme applies, making them more compelling for investment. Investors will, however, need to check valuations before taking an investment call.

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ED Charges Siva with Indirectly Funding S Tel

Says he bought co after it bagged 2G licences, lent 50 cr to Kalaignar TV

The Enforcement Directorate (ED) on Sunday charged prominent investor C Sivasankaran with indirectly funding mobile-phone company S Tel and then buying the telco after it had bagged licences to offer cellphone services.
The agency also alleged in a press release that the companies used by Sivasankaran to fund S Tel had provided a 50-crore loan to Kalaignar TV, owned by family members of DMK leader M Karunanidhi. The ED had also issued summons to those charged by the CBI as part of proceedings under the Prevention of Money Laundering Act, it said.
The CBI has charged nine individuals, including former telecom minister A Raja and Swan Telecom directors Shahid Usman Balwa and Vinod Goenka, under various sections of the Prevention of Corruption Act and the Indian Penal Code. This is the second instance of monetary transactions between alleged 2G beneficiaries and the Kalaignar TV coming under the scanner of investigators. The DMK chief's second wife, MK Dayalu, holds 60% in Kalaignar TV, with his daughter and Rajya Sabha MP Kanimozhi and Managing Director Sharad Kumar having the remaining stake. The ED is also investigating a 214-crore transaction between a subsidiary of DB Realty (the company that has a controlling stake in Swan Telecom) and Kalaignar TV. On Sunday, the agency said its investigations had revealed Sivasankaran used his group company Hitech Housing projects Pvt Ltd to "indirectly" fund S Tel.
Hitech Housing also provided a loan of 50 crore to Kalaignar TV in June 2007 in a two-stage transaction. In the first stage, the money was routed through what the agency claimed were "Sahara Group Companies" and an overseas entity known as Telecom Investments (Mauritius) Ltd. These funds were then routed through Vita Developers & Builders (P) Ltd and Sky City Foundation (P) Ltd, the agency said. Both are unlisted companies based in Chennai.
After allotment of mobile permits to S Tel, the Siva group had taken over the company. The two Chennai-based companies and Telecom Investments (Mauritius) Ltd were the investors, the agency added. "There are factual inaccuracies in the various matters mentioned. S Tel wouldn't like to comment in specific on any of these motivated attempts; moreover there are investigating agencies already enquiring on the issues, if any, under supervision of the highest judiciary of India," a spokesperson for S Tel said.
On Saturday, the ED said it had charged S Tel of not refunding the balance of the foreign direct investment to the investor, Bahrain Telecom, within the stipulated time, resulting in Fema violations of 96.6 lakh.
Cross-Connections in 2G Scam Probe
Charges Against Siva

• Indirectly funding S Tel and buying out telco after it had bagged 2G licences

• Cos used by him to fund S Tel provided 50-cr loan to Kalaignar TV

• ED examining if Siva continued to hold stake in Aircel after selling out to Maxis & Apollo Hospitals Group
More on ED Probe
Probe widened to Swan Telecom and if company's Mauritius-based stakeholders, Delphi Investments and Mavi Investment Fund, were acting as fronts for corporate entities
Agency alleges Swan had more than 49% foreign equity, but hid this fact by using a convoluted web of companies and transactions so that the deal did not have to be cleared by the FIPB
Special Feature
2G Scam: Story So Far
It's about 39 months late, but it's finally happening. As legal proceedings begin in what has come to be known the 2G scam, Joji Thomas Philip, Gulveen Aulakh and Kalyan Parbat outline the story so far.
•
•12 Indirect Funding by Siva
In the statement issued on Sunday, the agency further said it was probing Aircel, majority-owned by Malaysia's Maxis, on two counts. It was trying to unearth if Sivasankaran, popularly known as Siva, continued to own equity in operator Aircel after selling out to Maxis Communications and Reddys of Apollo Hospitals Group in 2005. Aircel is also being probed for Fema violations, the agency said.
An ED official said the agency had approached both the Reserve Bank of India and markets regulator Sebi to probe the transactions among the serial entrepreneur, Maxis Communications and the Reddy Family, and had sought documents related to these deals from all stakeholders.
PROBE INTO SWAN WIDENED
The ED statement, which outlined the status of its investigations into the 2G scam, said it had widened its probe into Swan Telecom and was investigating if its Mauritius-based stakeholders-Delphi Investments and Mavi Investment Fund-were acting as 'fronts' for corporate entities.
The agency alleged Swan had more than a 49% foreign equity but had "concealed" this fact by using a convoluted web of companies and transactions so that the deal did not have to be cleared by the Foreign Investment Promotion Board, the government agency that approves all major overseas investments into the country. Indian rules on the telecom sector mandate foreign holdings beyond 49% be cleared by the FIPB. In the case of Swan, the ED said the company was set up in July 2007 by Reliance ADAG, and the latter still held 9.9% of the telco when the company applied for mobile permits in 2007. Reliance ADAG then transferred its stake to Mauritius-based Delphi Investments in December 2007. Delphi, which had been set up only days before this deal, was owned by Mauritius-based Mavi Investment Fund Ltd, the agency said.
"Overseas investigation is going on to ascertain connection of Reliance group and actual persons behind these companies as Delphi is still holding 4.27% equity of Swan Telecom," the agency added in a statement. It added Swan's takeover of Allianz Infra Tech, which held mobile permits for two circles-Madhya Pradesh and Bihar-was also under probe.
The ED had already charged Swan Telecom with Fema violations to the tune of 3,608 crore. On Saturday, the agency said Swan issued shares to a foreign investor-Etisalatand an Indian investor-Genex Exim-for an 'abnormal value'. It also said equity issued to Genex Exim was an indirect foreign investment as funds were brought in from Dubai through an intermediary.
These developments come within a day of the agency filing charges against four mobile-phone companies for alleged Fema violations totalling nearly 4,300 crore. In a press release on Saturday, the agency named Swan Telecom, Loop Mobile, Loop Telecom and S Tel in a chargesheet filed before its special director.
Sivasankaran, Swan and Loop did not respond to emailed questions.
The flurry of action by the ED comes within a week of the CBI filing its first chargesheet in the 2G spectrum scam that has shaken the UPA government and led to calls for the resignation of Prime Minister Manmohan Singh.

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