Why Long Term Investing Pays you Back !!!

This morning has been unusually busy……for TV anchors of Blue & Red business channels. There’s a news report from a leading international institutional brokerage known for its bearish views on India which predicts that BSE SENSEX could hit 11,000. And TV anchors are doing their best to whip up panic based on it. Just ignore all this ‘noise’…….

Stock market will rise and fall – This is a given fact. But what matters to you as an Long Term Investor is where the stock markets will be in say next 3 years or 10 years for that matter. And when it comes to that, things does not look better at least this is what the picture drawn (0r made seen) by the reports from FII’s saying that index could touch 11,000 or so….

Most of us would be out of markets and would be asking questions that why should one invest? – I will argue to that report and will Strongly advocate LONG TERM INVESTING. Just look down at the history and you will find that markets have always given returns in long term, the only thing  one needs is to have patience and selection of stocks. If you buy a strong fundamental stock with good Return on Equity (ROE) and with good management which you hold it over years, will surely give you the best returns over the period of time. The present stock market crisis has thrown up exciting money making opportunities and in particular select the Stocks which commands good fundamentals & which are available at their best valuations –

But, First read the tables below -

NIFTY	1 Yr Return	3 Yr Return	5 Yr Return	10 Yr Return
No. of Occurrences	15	13	11	6
(-)ve return observed	5	2	1	0
Probability of Loss	33.33 %	15.38 %	9.09 %	0.00 %

SENSEX	1 Yr Return	3 Yr Return	5 Yr Return	10 Yr Return	20 Yr Return
No. of Occurrences	32	30	28	23	13
(-)ve return observed	11	6	3	1	0
Probability of Loss	34.38 %	20.00 %	10.71 %	4.35 %	0.00 %

The above tables clearly show that the probability of losing capital is highest if the holding period is around 1 year and lowest or nil if the holding period is increased to 10 or more years.

It means your capital is safest if invested for long term. It also depends on what  kind of stock you hold on, if you hold stocks with good fundamentals, the probability of losing capital nearly vanishes...

Here, down below, I have tried to give a list of stocks which commands RETURN ON EQUITY of 15 % or more which may have potential of money making opportunity - 

*ROE as on 31st March 2011

Stock Name	EPS (Rs.)	Book Value (Rs.)	*ROE (%)	PAT Margin (% )
AXIS BANK	91.51	505.87	19.34	2.78
BAJAJ AUTO	121.10	219.34	85.21	19.72
BERGER PAIN	4.57	23.26	22.03	6.48
BHARTI AIR	16.92	122.63	19.20	20.30
CRISIL	25.60	70.24	50.53	37.02
COAL INDIA	7.43	39.67	25.73	30.33
CONT.CORP	68.26	418.07	18.86	22.95
CIPLA	12.57	89.25	15.36	15.53
GAIL	30.19	168.17	19.76	10.82
HERO MOTOR	104.77	206.20	60.05	9.33
HDFC BANK	19.18	118.26	16.75	4.05
HDFC	26.12	129.86	21.74	27.50
HUL	11.67	18.26	82.66	10.60
IDFC	10.32	75.55	15.03	28.09
INFOSYS	119.24	487.23	27.69	25.38
INDRAP.GAS	20.97	82.94	28.40	13.21
ITC	7.09	24.11	33.35	16.30
ILFS TRANSP	13.32	98.20	17.14	17.83
JINDAL STEEL	21.58	102.20	26.80	16.98
JSW STEEL	86.07	764.35	15.65	8.00
L & T	66.54	375.93	19.71	8.78
M & M	43.71	189.32	29.46	10.40
MARUTI SUZU	69.73	507.32	17.81	5.64
MOIL	35.00	139.18	30.90	51.34
MUNDRAPORT	5.45	24.05	25.36	52.31
NMDC	18.62	57.92	38.85	57.13
ONGC	26.43	127.92	20.67	28.61
PETRO.LNG	11.92	42.63	25.21	4.70
POWER FIN	17.96	148.55	18.42	25.47
REC	26.83	142.52	21.53	31.12
RUPA & COMP	4.68	23.12	21.09	5.01
SESA GOA	31.24	140.95	36.52	41.38
SUN PHARMA	15.22	72.82	22.32	43.83
TALWALKARS	7.33	55.76	18.34	17.60
TATA STEEL	72.31	526.27	16.4	21.52
TCS	48.29	126.35	43.89	25.86
TITAN IND	5.78	15.33	49.20	6.55
TECH MAHIN	51.54	286.81	22.32	14.03
ULTRATECHCEM	73.26	424.11	18.39	9.45
WIPRO	19.66	95.88	24.96	18.35

*The list is just for explanation and should not be taken as stock recommendation

This, by now, would have cleared your doubts, fears and worries of investing in the stock market.

Happy Investing!!! 

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MUNDRA PORT & SEZ : A Value Pick !!!

Scrip Code: 532921 / MUNDRAPORT

CMP:  Rs. 129.00; Buy at Rs. 120 - 125 levels. Short term Target: Rs. 140, Medium term Target – Rs. 181; STOP LOSS – Rs. 118.70; Market Cap: Rs. 25,843.78 Cr; 52 Week High/Low: Rs. 170.45 / Rs. 110.00
Total Shares: 200,33,94,100 shares; Promoters : 155,25,38,715 shares –77.50 %; Total Public holding : 45,08,55,385 shares – 22.50 %; Book Value: Rs. 21.42; Face Value: Rs. 2.00; EPS: Rs. 5.45; Div: 45.00 % ; P/E: 23.66 times; Ind. P/E: 19.43; EV/EBITDA: 19.95.

Total Debt: Rs. 3303.01 cr; Enterprise Value: Rs. 29,146.79 Cr.

Mundra Port and Special Economic Zone LTD: The Company was incorporated in 1998 as Gujarat Adani Port Limited and renamed as Mundra Port and Special Economic Zone Ltd in July 2006, based in Ahmedabad, India. Mundra Port & SEZ Ltd engages in the development, operations and maintenance of Mundra port & port based related infrastructure facilities – including multi product special economic zone in India. The company’s port related services include cargo handling and other value added port services. It handles bulk, liquid and containerized cargo, single point mooring, storage, and transportation of cargo by road, rail and pipeline. MPSEZL is in process of setting up coal cargo terminals at Murmugao Port, Goa. The company is also developing a non- LNG multi-user, multi-cargo port facilities at Hazira under the sub-concession route The company also operates container trains on specific railways routes; and provides multi-model cargo storage and logistics services through the development of inland container depots at various locations. It operates a fleet of approximately 2517 vessels. Mundra Port and SEZ ltd is compared with Rizhao Port Co. ltd; Shenzhen Chiwan Wharf Holdings Ltd. Mundra Port and Special Economic Zone Ltd is a subsidiary of Adani Enterprises Limited from September 2010.    

Investment Rationale:

MPSEZ has approved the change in name of the Company from 'Mundra Port and Special Economic Zone Limited' to 'Adani Port and Special Economic Zone Limited' which would be changed at some later date subject to approval by the Registrar of Companies -Gujarat and subject to the approval of Shareholders of the company. India's port capacity lags behind from rapidly rising demand. This comes at a time when traffic for coal, crude oil/POL, and container is set for a sustained period of high growth. It is expected that MPSEZ to benefit from the supply shortage due to its surplus capacity and advantageous location. Mundra Port is among the largest beneficiaries of an increasing demand-supply mismatch in India’s port capacity. MPSEZ’s competitive advantages and attractive location plus connectivity provides a strong visibility of traffic for MPSEZ. It is noted that 90 % of MPSEZ’s estimated traffic comprises of coal, crude oil, and container. Of this, coal and crude oil are not likely to see any impact from global macro concerns, while container traffic should continue to benefit from the shortage of capacity on India’s west coast. Adani Group has ambitious plans for its three key business verticals – power, coal and logistics and with the inter-linkages between them will drive MPSEZ’s future investment and growth plan. MPSEZ has started handling coal for Tata power’s Ultra Mega Power Project in Q2FY12 (2 million tonnes handled in the current quarter). This has led to the coal volumes surging to 5.13 million tonnes growing more than 60 % YoY. MPSEZ has entered into port service agreements with Adani Power (for 4,620 MW) and Tata Power (for 4,000 MW) for transporting imported coal from Indonesia and Australia to their respective power plants. These power plants, when fully operational would require about 30 metric per annum of coal cargo to be handled at Mundra port (peak estimated by FY15E of 35 million tonnes). It is estimate that MPSEZ to handle 11 million tonnes of coal in FY12 at the new coal terminal for both Adani Power and Tata Power. While coal is already used as a firing fuel at more than 100GW of all power plants in India, the cumulative capacity of all-India’s power plants is set to rise by another 125GW+ over FY11 to FY17, such demand for power has led to rapid reforms in the power sector, the coal industry has not had equally big reforms, it is expected that the demand for coal will rise rapidly, though the supply will not rise as fast as demand will lead to demand for imported coal. Levy of MAT in the beginning of FY12 will lead to additional cash outflow in tax. However, the company is claiming MAT credit for the same such that the P&L impact will be neutralised. Mundra port currently has a theoretical cargo handling capacity of 165mn tonnes, though the actual usage might be limited to 135mn tonnes. Theoretically, the two single point mooring systems (SPMs) at Mundra can handle 50mn tonnes in total, but the respective refinery capacity itself limits overall requirement to 20mn tonnes pa. Hence, whenever the IOC and HP-Mittal refineries at Panipat and Bhatinda, respectively, are expanded, the SPM capacity should be able to handle the incremental volumes up to a maximum of 50mn tonnes in total. It is learned that the port’s capacity is set to expand to >200mn tonnes by FY15. Mundra port would be generating more than enough free cash flow from FY12F, which it could deploy for green field port opportunities both in and out of India. MPSEZ has already ventured for a few projects within India as well as acquired a coal-handling terminal in Australia. The slowdown in global trade has already hit container traffic throughout ports sharply. It is expected that EXIM container traffic across all ports to rebound at a CAGR of around 12.4% over FY10-12F and look for container traffic to reach 10.4mn TEU by FY12F. Given the limited options available elsewhere on India’s west coast, a 25 % - 30 % CAGR in container traffic at Mundra over the next 3-4 years is expected.

Outlook and Valuation:

Despite been in a capital intensive business, the debt situation for MPSEZ is very comfortable. The stable cash flows from assured cargo and minimum working capital investment would be very important for the company to make more capex in the future for growth. It is believed that MPSEZ to generate around Rs. 1360 Cr of Free Cash Flow p.a. from FY12F, and MPSEZ is one of the few infrastructure companies in the country to do so. This allows MPSEZ to benefit from rising port opportunities both in and outside of India without too much of balance-sheet risk. While newer opportunities will likely to be ROE-dilutive. Mundra Port and SEZ has fallen by 21 % in last one month versus the fall of 8 % in the broader market Nifty, despite of strong operational performance of the company. Now the stock trades at attractive valuation of Price to Earnings of 16.29 x FY13E and RoE of over 20 %. Three year average historical one year forward P/E for MPSEZ is 22. In case of EV/EBIDTA multiple, it trades at 11.90 times FY13E, which seems to me undervalued in context of the healthy operating margin of 65 % with strong operational & free cash flows. Average historical one year forward EV/EBIDTA for MPSEZ for the last 3 years is 15. The valuation of the stock on SOTP (sum‐of‐the‐parts) basis, with the Mundra Port business comes at Rs. 181. In my view Mundra Port could report EPS in FY13E of Rs. 7.70 / sh. I would buy Mundra Port & SEZ LTD for the medium term with a price target of Rs. 181 and for the SHORT TERM PLAYERS it could be Rs. 140.00

Business Subsidiary FY13E	Value Per Share (in Rs.)
Mundra Port	136.00
Value of SEZ	19.00
Adani Petronet Dahej Pvt Ltd	7.10
Mormugao Port	1.20
Abbot Point Coal Terminal	4.00
Hazira Port	6.60
Vizag Port	2.00
Adani Logistics Ltd	5.00
TOTAL	180.90

KEY FINANCIALS	FY11	FY12E	FY13E
SALES (Rs. Crs)	2,000.10	2,581.80	3,391.60
NET PROFIT (Rs. Crs)	893.00	1,083.30	1,549.30
EPS (Rs.)	4.50	5.40	7.70
PE (x)	26.90	22.20	15.50
P/BV (x)	5.50	4.60	3.70
EV/EBITDA (x)	19.40	15.50	11.90
ROCE (%)	13.90	16.30	20.20
RONW (%)	22.30	22.50	26.60

I would buy MUNDRA PORT AND SEZ LTD with a price target of Rs. 140 for the Short term and Rs. 181 for the medium term target. As I always say, I am a long term believer in markets & I do respect the markets and will keep a strict stop loss of 8 % or Rs. 118.70 on every purchase.

 *As the author of this blog I disclose that I do hold MUNDRA PORT AND SEZ LTD in my investment portfolio.

HINDUSTAN UNILEVER LTD : Stock of the Decade !!!

Scrip Code: 500696 / HINDUNILVR

CMP:  Rs. 395.00; Buy at Rs. 375 - 385 levels. Medium term Target – Rs. 420; STOP LOSS – Rs. 353.00; Market Cap: Rs. 85,357.90 cr; 52 Week High/Low: Rs. 403.35 / Rs. 264.45

Total Shares: 216,09,59,717 shares; Promoters: 113,48,49,460 shares –52.52 %; Total Public holding: 102,61,10,257 shares – 47.48 %; Book Value: Rs. 12.19; Face Value: Rs. 1.00; EPS: Rs. 11.67; Div: 650 %; P/E: 33.84 times; Ind. P/E: 34.70; EV/EBITDA: 27.41

Total Debt: Rs. NIL cr; Enterprise Value: Rs. 85,770.65 cr.

HINDUSTAN UNILEVER LTD: The Company was founded in 1931 and is based in Mumbai, India. The company was formerly known as Hindustan Lever Limited and changed its name to Hindustan Unilever Limited in 2007.  Hindustan Unilever Limited, is a Fast Moving Consumer Goods (FMCG) company – it provides home and personal care products; foods and beverages in India and internationally. The company operates in 7 business segments. The company offers soaps and detergents, including soaps, detergent bars, detergent powders, detergent liquids, and scourers; and personal products - such as oral care, skin care, hair care, deodorant, talcum powder, and color cosmetic products, as well as Ayush services. It also provides beverages - including tea and coffee; foods, such as atta (flour), salt, and bread; culinary products comprising tomato and fruit based products, and soups; and ice creams, such as ice creams and frozen desserts. In addition, the company offers chemicals, such as glycerin and fine chemicals; agri commodities; and water purifiers, as well as exports marine and leather products. HUL has over 35 brands spanning 20 distinct categories. Its portfolio of brands includes the brand names like - 3 Roses, Annapurna, Brooke Bond, Taaza, Bru, Kissan, Knorr, Kwality Wall’s, Lipton, Modern, Red Label, and Taj Mahal brand names; personal products under the Aviance, Axe, Breeze, Clear, Clinic Plus, Closeup, Dove, Fair & Lovely, Hamam, LEVER Ayush Therapy, Lakme, Lifebuoy, Liril 2000, Lux, Pears, Pepsodent, Pond's, Rexona Soap, Sunsilk, and Vaseline brand names; and home care products under the Active Wheel, Cif, Comfort, Domex, Rin, Sunlight, Surf Excel, and Vim brand names and water purifiers under the brand name Pureit.

Investment Rationale:

Management indicated that there has been no down-trending witnessed in the market despite strong inflationary environment. Rural demand continues to remain strong and is likely to improve on back of good monsoon. Despite uncertain scenario and high inflation, management is confident of sustained growth in FMCG. Raw material cost coupled with rupee depreciation continues to remain a concern. However, the focus will be on maintaining consumer value proposition as against price hike to pass on the cost push. Further, it would continue to focus on cost saving programs. During the quarter, Soaps and Detergent witnessed some reduction in advertising spending. In Personal care, Packaged Foods and Beverages advertising spends were increased. Management clarified that lower ad-spend in Soap and Detergent does not indicate that the competitive intensity has reduced in the category.

Soaps and Detergent segment grew by 21.8 % driven largely by price increases. Detergent also posted a higher than industry growth. Premium portfolio in the soap segment continues to grow in double digit. Vim and Lux were relaunched during the quarter which also led to sharp growth. In the detergent portfolio, Surf, Rin and Wheel reported a double digit growth while in the soap portfolio Lux and Lifebouy grew in double digit.

Personal Products revenue grew by 18.2 % on back of strong double digit growth in Fair & Lovely, Vaseline and Ponds. Dove brand was expanded into face wash and nourishing oil care. It’s believed that Vaseline and Ponds would be the key growth driver in future in spite of their differentiated product strategy. HUL launched new products including Dove face wash; low unit SKUs in Dove oil care range helped the growth momentum. Packaged foods registered 21 % YOY revenue growth to Rs. 330 Cr due to relaunch of Kissan range and low unit pack of Kissan Soupy Noodles.

Bru World Café -

Hindustan Unilever in competition with US giants Starbucks (in collaboration with Tata Coffee) and Dunkin’ Donuts (in collaboration with Jubilant Foods) in coffee shop market segment has quietly opened a 'Bru World Café' outlet on pilot basis at JUHU - an up market western suburb of Mumbai. HUL wants to tap into increasing out – of - home consumption of coffee in the country. Bru World CafA will be bringing various coffee experiences across the globe to the Indian palette. With rising affluence in the country with the fact that consumers now spends more time at out of home point is the high potential of coffee retailing business. The organised coffee market in India is around Rs. 600 Cr or 20 % of the total domestic coffee consumption of Rs. 3,000 Cr and the coffee chain business is growing by 40 % in India. BRU was launched in 1962, which is Unilever’s only coffee brand sold in India. It’s believed that once this cafe is scaled up - HUL’s coffee shops can be served as point of purchases & which will help to create brand recall for in house consumption of its Bru brand to its customers. HUL faces competition from Nestle which has similar format called Café Nescafe; Café Coffee Day (a subsidiary of Bangalore based Amalgamated Bean Coffee Trading Company which runs 1,180 Café Coffe Day outlets ); Lavazza – Barista and Costa Coffee and Di Bella (Australia's premium coffee company planning to open 50 outlets in next 3 years by investing $441 million in this segment). HUL is the market leader in the overall coffee segment with a range of products in conventional coffee, ice & hot cappuccino & out of home vending space. It has roped in actors Shahid Kapoor & Priyanka Chopra as their brand ambassadors for BRU brand. Surely, with Macro – economic factors like higher per capita and disposable income which are the key sales trigger for coffee chains in the country. The per capita consumption of coffee in India is just 82 grams compare that with 4 kilos in US. There is a great opportunity for all players, given that collectively all the players have gone only to 200 cities in country of the potential 400 -500 cities that can offer growth. This will definitely help HUL in this segment. 

Outlook and Valuation:

HUL presented a fantastic Q2FY11 results with net sales at Rs. 5,610 Cr up by 17.8 % YoY. Domestic FMCG business grew by 19.8 % YoY due to strong growth in Soaps and Detergents. Everyone was surprised by a strong volume growth of 14 %. EBITDA margins expanded by 1.16 % to 14.7 % due to lower ad-spend and overheads. EBITDA was at Rs. 830 Cr up by 28 % YoY. Adjusted PAT at Rs. 650 Cr up by 22.2 %. Advertising spending remained at Rs. 650 Cr down by 1.96 % YoY. Though gross margins declined by 3.47 % YoY due to higher raw material price. HUL management indicated that cost pressures were managed through aggressive saving programs and price increase. Soaps & Detergent revenue grew by 21.8 % to Rs. 2,590 Cr and EBIT to Rs. 320 Cr. These margins are highest in the last six quarters. HUL re-launched its most famous soap brand LUX during the quarter and a strong double digit growth was witnessed in Laundry business. Personal Products reported a revenue growth of 18.2 % to Rs. 1,610 Cr and EBIT at Rs. 390 Cr up by 25.5 % YoY as margin expanded by 1.43 % to 24.4 %. Factoring higher volume growth and lower ad spend ratio, it is believed that in coming quarters the growth rates will improve on account of lower base (H2FY11 PAT grew by 6.5% YoY). While operating performance will continue to show improvement in the coming quarters, the sharp run-up in the stock price leaves little upside. But since the stock has broken its 15 years long consolidation, it will be the best performer for the forth coming decade. At the current market price of Rs. 395, the stock is trading at 32.91 x FY12E and 27.88 x FY13E respectively. Earnings per share (EPS) of company for FY12E and FY13E are seen at Rs. 12.00 and Rs. 14.20 respectively. One can buy HUL with a target price of Rs. 420.00 for Medium to Long term investment.

KEY FINANCIALS	FY10	FY11	FY12E	FY13E
SALES (Rs. Crs)	17,725.30	19,735.20	23,121.80	25,933.00
NET PROFIT (Rs. Crs)	2,058.70	2,156.30	2,600.50	3,070.10
EPS (Rs.)	9.40	10.00	12.00	14.20
PE (x)	41.10	38.90	32.20	27.30
P/BV (x)	32.80	31.80	25.10	19.70
EV/EBITDA (x)	29.70	30.00	23.80	19.80
ROCE (%)	131.10	128.60	134.10	121.20
RONW (%)	88.60	82.70	87.10	80.80

I would buy HINDUSTAN UNILEVER LTD with a price target of Rs. 420 for Medium to Long term. As I always say, I am a long term believer in markets & I do respect the markets and will keep a strict stop loss of 8 % or Rs. 353.00 on every purchase.
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*As the author of this blog I disclose that I do hold HINDUSTAN UNILEVER LIMITED in my investment portfolio.

THE DOLLAR RUPEE STORY !!!

On 22nd November 2011 Rupee touched its year high of Rs. 52.73/1$, making RBI governor to give public statements. If US dollar weakens importers are benefited and exporters are at loss. Whenever Dollar weakens against Indian Re exporters blasts their feelings & so RBI have to step forward for their help. But have you ever imagine that once our 1 INR was equal to 1$ but eventually $ become strong against INR, how read on to know this -

When India got independence in the year 1947, there were no loans or external Debts on Indian government. The exchange rate as on 15 August 1947 was 1US$ equal to 1.00 INR. With the introduction of 5 year plans Indian government needed foreign borrowing and started devaluing INR. Which was further influenced by Indo- China war in 1962 and Indo- Pak war in 1965 which devalued INR more as India needed large funds for buying weapons.

In the year 1966, 6 June at the time of  Mrs. Indira Gandhi as the prime minister, inflation was increasing at a tremendous rate and also to keep on the aids given by US to India, USA government demanded and pressurised Mrs. Gandhi to devalue INR against US$. And kept the rate of 1US$= 7.50 INR. The then ministers Mr.Krismachari & Mr.Kamraj opposed these policy but it was of no use as Mrs. Gandhi was interested in getting help from US and kept INR weak against US$.

US$ grew stronger after 1971 –

After the year 1970, US$ grew stronger against INR due to incompetence of Indian politicians and bully of US. The exchange rate in 1970 was 1US$= 7.47 INR, which rise to 1US$= 8.40 INR in 1975, after the assassination of Mrs. Gandhi in the year 1984, and due to Boffors scandal tumbling Rajiv Gandhi’s government made the INR weaker and the rate was 1US$= 12.36 INR in the year 1985. In the year 1990 1US$ was equal to 17.50 INR.

Drastic drop in 1991 –

Whenever India faced economic or political problem, US made India to devalue INR against US$ by offering funds or trade benefits. In the year 1991 under the Narshima Roa government, India faced a drastic drop in INR against US$. At that time the Indian Forex reserve dropped to its bottom and there was a time where the balance of Forex reserve was such that India would be able to pay just 3months of Import bills. To fill in this gap India borrowed huge amounts from International Monetary Fund’s (IMF) with the condition that INR will be devalued against US$ and due to this 1US$ became 24.58 INR from Rs.16.31/1$. During this period exporters flourished as their exported products gained them more value in Rupee term.

History of Rates slowdowns -

In the year 1992 1US$ was equal to 28.97 INR; in 1995 1US$ was equal to 34.96 INR; in 2000 1US$ was equal to 46.78 INR; In the year 2002 June 1US$ was equal to 48.98 INR; After June 2002 INR became stronger against US$. In the year 2002 of December 1US$ was equal to 48.14 INR; in 2003 1US$ was equal to 45.57 INR; in 2004 1US$ was equal to 43.84 INR.

During the year 2004-06 RBI started buying $ and Indian Forex reserve raised to $200 cr, RBI stopped buying $ from January 2007 when 1US$ was equal to 44.25 INR; On 16^th May 2007 1US$ was equal to 40.79; on 27^th October 07 1US$ was equal to 39.21 INR it’s all time high when FII’s were flowing in tones of money in Indian capital markets; on 3^rd march 2009 1US$ was equal to 52.16 INR which was all time low of Indian Rupee. Which is now broken.

What can be the real value of US$?

Today $ is high against Re. But to determine the real value of any currency we have to see its Purchasing Power. This is known as Purchasing Power Parity (PPP).

The purchase rate of any product in US is compared with the rate to be given in Indian currency to buy that same good. For example to buy 1 dozen of fruit will costs 1$ in US, that same fruit would cost Rs.15 in India per dozen(of course inflation & other factors are not considered). This was just an example but to know real effective rate of any currency REER or Real Effective Exchange Rate index is referred to.

What Real Effective Exchange Rate (REER) index?

REER index measures a domestic currency’s competitiveness against other major currencies and is an indicator of currencies relative value versus foreign currencies. REER index is the 6 currency basket which uses 3 year moving averages for calculating weights of the index taking 2004 -05 as base year. The 6 currency REER index in India is calculated using Euro, US Dollar, Yen, Pound Sterling, Hong Kong Dollar & Renminbi. REER relates to purchasing power parity hypothesis. It's the invoicing currency that has more weightage and since 80 % of our trade is done in US$ it is assigned more weightage in REER INDEX.

It is believed that RBI intervenes currency market to suppress Rupee if REER index approaches 105 & props Rupee up if REER gets close to 95. REER above 100 indicates relative strength of the currency. REER levels as on 25 Aug 2011 was at 117.01 implies that rupee is weaker compared with the base year of 2004-05.

There is also a 36-currency REER index, which is also used to measure competiveness of currency. However, this index is not used too frequently since CPI data for many nations comes with a 3-month lag. On an average basis, the 6-currency real effective exchange rate (REER) appreciated by 12.7 per cent in 2010-11, the 30-currency REER by 4.5 per cent and the 36-currency REER by 7.7 per cent.

REER Trends:

The 6-currency REER index rose to 112.76 in the period leading up to the economic crisis in 2007-08. During the crisis, REER weakened as rupee depreciated due to fall in capital flows. In one of the sharpest fall during the period, it fell to 93 levels in March 2008. REER stood near 100 for almost two years in 2008 and 2009. As the economy gathered pace, REER started appreciating and scaled to 116 by April 2010. From April 2010, REER has stayed around 115 for 17 months. REER strength and weakness before and after the crisis have been due to demand and supply factors led by capital flows. However, recent slide in rupee has been triggered by euro-zone problems.


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