Urgent Update on Gold and a note on Infrastruture


Dear Investor

In my last Update on Gold, I had shown two possibilities that either Gold will breach recent high of $1432 and will scale up newer highs or will drop below $1360 and that can lead to accelerated downside in Gold up to $1250.

Tracing last 2 days movements largely confirm me that the later scenario has higher possibilities to occur in next few weeks. Hence, I advise investors to take out the profits from the investment. An acute downside pressure may take gold down below $1200 for brief period.

If Gold closes above $1453 any time, I would reverse my position but that seems a faint possibility.

A note on Infrastructure

In 2010, largely stock market performed well. Nifty returned close to 18% in calender year 2010. Category wise FMCG returned 36%, followed by Banking 34.5%, Pharma 33.85%, Technology 26.83% followed by other categories.

In that least return was earned by Infrastructure category mere 6.87%. And, if I look at the funds, which posted negative returns in Worst Fund categories, there were 2 categories– Mid and Small cap category posted -2.57% worst fund return and Infrastructure category posted -5.27% worst fund return.


The problem in Infrastructure companies was never winning contracts or order books. Almost all Infra companies have healthy order books. The challenge was to convert it into profitability for companies. In 2010, companies order books increased by 30% and crossed 2,00,000 crore marks first time.

Largely all Infra companies carry huge debt loads on their balance sheets. Shortage of labour, higher wages, sharp rise in metal prices accentuates the problem. Further, the larger problem is capital availability at lower rates for longer periods.

But, some efforts have been made in this matter. In last 6 months, many state owned companies including IFCI, L&T and SBI raised sizable funds for Infrastructure project financing. That will help in solving problem.

Some help also been extended by RBI by way of allowing Infra companies in Power, Road, Port and Airport sector to refinance their domestic loans through ECB( External Commercial Borrowing). Through ECB companies can raise debt at the rate of 4-5% against domestic base rates 7.75 to 8%. This measure has also helped companies in reducing their interest part.

According to the Planning Commission, the projected investment in the sector is set to double to US $1025 billion in the 12th plan where in the private players are expected to contribute 50percent.

Initiatives by Indian government which have spurred augmentation of private players include introduction of sector specific policies, providing incentives and tax holidays, public-private partnership approach as well as permission of 100% FDI in infrastructure sector.

According to Goldman Sachs, the country would need investments of more than $1 trillion in infrastructure from 2010 to 2019, with roads entailing $427 billion, power $288 billion and railways $281 billion.

Govt is also in process to start up Multiple Infrastructure debt funds aimed to raise $1 tn to bridge the funding gap for large infra projects.
Finance Ministry has taken initiative to allow foreign venture capital funds to enter into India Infrastructure market. It has also instructed RBI and SEBI to change policies accordingly to facilitate the entry of these funds.
News Link: http://economictimes.indiatimes.com/news/economy/finance/multiple-infrastructure-debt-funds-mooted/articleshow/7142643.cms

I feel, Govt is at critical juncture and never before our inability to build infrastructure has been exposed than in recent times. Could it be hosting Common wealth games or building road at the pace of 20km/day or building power plants to meet shortage of 20,000 megawatts??

And, now, Govt has no option but to pull out all stops and do serious work on infrastructure shortage.

Our Inflation is at 9.7% vs China’s 5.10%. Why our rate of inflation is double than China? China has more population than India. China had also severe rainfall and severe floods last year and had very severe drought year before in many parts as was the situation in India.

The difference is Infrastructure. China has built roads and bridges of more length than USA with similar quality checks. China is building world’s largest ports and airports to facilitate bulk cargo handling across the nations. The list can go on and on…

Lack of infrastructure is leading to higher and persistent inflation in India— this point has been stated by many economists and think tanks in last several years.

If I quote from today’s economic times front page storyCrisil says” IF progress on Infrastructure stumbles, even maintaining 8.4% growth would be difficult”.

Pressure is also mounting from outside world. India’s large middle class is attracting slew of MNCs to start up business in India. But, our poor state of infrastructure hesitate them from taking bold business decisions.

I believe, pressures from inside and outside are now weighing high on Govt and pressing it to pull out all stops to ensure infrastructure development at rapid pace.

I recommend to invest into Infrastructure stocks along with telecoms stocks with 2 years perspective. I do not rule out possibilities of 80-100% return in both categories in next 2 years.

Best wishes

Investment Academy | Baroda | 098255 28815
Blog: Http://investmentacademy.wordpress.com


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