The long overdue move to separate speculators from Investors in the Indian Stock markets got off to a tentative beginning during the week with the announcement that the forward trading of shares will go from July 2nd.  From this date, the “Carry forward” of “Buying” through “Badla” as well as “Borrowing of Shares” by “Short Sellers” will both be withdrawn. All purchases and sales will have to be compulsorily settled on the appointed day on a roll over basis.

The move is definitely good for Investors who always buy to take delivery and sell from their holdings, because every body else will also be trading on this principle. Those who do not want to buy for delivery and sell with stocks will have an option to use derivative products such as “Futures” and “Options”. Presently, these products are available only in the “Index” category. Soon they have to be introduced in the individual scrips as well.

We have discussed the mechanism of futures and options in this column in detail some time back. However in view of the increased interest in the product, we can make a passing mention that the essence of these products is that an investor can take a “Position” regarding a “Target Price” for the Index or share for a given future period. He will also simultaneously deposit the margin, which will set the limit of loss if the position turns adverse. The winner will walk away with the benefit while the loser will give up his margin. (Does it look very much like betting where both bidders deposit bid money with a referee?.. perhaps the hunch is not far from correct).

It is obvious that the “Futures” and “Options” is for more advanced speculative investors and not for ordinary investors.  Even though the decision of SEBI in banning segregating speculators from the investment market is welcome, we need to wait to see how the futures market will impact the cash market. It must also be said that the removal of circuit filters may introduce higher volatility during the day and investors may continue to be caught in the intra day high-lows.

It would be wise for cautious investors therefore to keep their commitments low until the markets stabilize under the new regime. Until then, funds can be parked in “defensive” shares. One of the industries worth looking at in this category is the Hotel industry. If the globalisation of economy gains momentum, this would be one industry that would gain with increased international business visitors. While the “Chinese” products may kill other traditional industries, “Hospitality” industries may continue to improve their revenues.

However, even in the Hotel industry, international tie ups and up-market business share would determine the profitability and hence it is better to be with the leaders. One of the target shares is therefore Indian hotels, the flagship company of the Tatas, which owns the  Taj group of hotels. 

The Company was incorporated way back in 1902 even though its most visible unit in Mumbai was opened in 1972 under the name and style Taj Intercontinental Hotel. Today it owns a number of the Luxury Hotels including Taj Palace Hotel (New Delhi), The Taj Mahal Hotel (New Delhi), Taj Bengal (Calcutta), The Taj West End (Bangalore) and The Taj Coromandel Hotel (Madras).
  
The financials of the Company for the last few years indicate that the profits are under pressure. The net profit, which was around Rs 131 crores in 1998, has declined to a level of about RS 100 crores. However, the increase in the gross block during this period from Rs 550 crores to RS 805 crores is indicative of a better future. The company has built up a huge reserve of Rs 913 crores against an equity base of Rs 45 crores.  
 

Financial Performance-Highlights

 

Particulars	1998	1999	2000	2001 (9 months)
Sales (Cr)	595.1	589.3	591.3	477.9
Net Profit	131.1	125.4	109.2	76.1
EPS	29.07	27.81	24.20	22.6 (annualized)
P/E	7.88	8.24	9.46	10.0

The Company has recently secured Reserve Bank of India approval for a comprehensive restructuring package for Taj Lanka Hotels and Taj Maldives by creating a new joint venture to be based in Hong Kong. It is estimated that the current year budget could bring about a saving of around Rs 4 crores in taxes.

In view of the market leadership in the industry, the company is bound to benefit more than proportionately from the flow of international business travelers. Even though spectacular gains cannot be expected from this industry, it is a good defensive buy at the current price level of Rs 229, and a P/E of around 10.

Na.Vijayashankar
May 19, 2001