Sharekhan Investor's Eye - Oct 13

UTI Bank
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs490
Current market price: Rs410

Price target revised to Rs490

Result highlight

• UTI Bank's Q2FY2007 net profit at Rs142.0 crore was in line with our expectations.
• The net interest income (NII) grew by 43% year on year (yoy) backed by a strong growth in the advances.
• Remarkably UTI Bank's net interest margins (NIMs) expanded by 12 basis points yoy and by 24 basis points quarter on quarter (qoq) as the yield on the assets expanded and there was a growth in the demand deposits at almost one and half times the growth in the overall deposits.
• The fee income too grew by a strong 66% yoy backed by a strong growth in the fee income from the cash management and retail businesses.
• The operating profit for the quarter grew by a slower 16% yoy to Rs274.5 crore. The slower growth was attributable to a steep rise in the employee and other cost. However, we believe that the rise in the cost is justifiable looking at the rapid growth expected in the bank's branch network.
• The net profit grew by a faster 30.2% due to a lower provisioning for investment depreciation and a higher loan provisioning.
• The net non-performing assets (NPAs) as a percentage of the bank's customer assets were flat at 0.74% compared with 0.73% in Q1FY2007. However, the same have come down substantially over Q2FY2006.
• UTI Bank's Tier-I capital adequacy ratio (CAR) stood at 6.71% at the end of Q2FY2007 whereas its overall CAR stood at 11.5%. The bank will have to go in for further Tier-I capital raising to sustain the growth.
• We expect UTI Bank to go in for plain equity issuance of $250 million by the end of FY2007 or early FY2008 which will raise its book value to Rs167 by the end of FY2008, up by 16% from our current estimates.
• At the current market price of Rs410, the stock is quoting at 14.1x its FY2008E EPS and 2.7x its FY2008E book value (BV). We reiterate our Buy recommendation on the bank with a revised price target of Rs490 based on our revised earnings as well as estimated increase in its book value.
  

Indian Hotels Company
Cluster: Apple Green
Recommendation: Buy
Price target: Rs1,474
Current market price: Rs1,388

Merger to be earnings accretive
The board of directors of Indian Hotels Company Ltd (IHCL) has approved the proposal for amalgamation of 4 of its subsidiary/associate companies with itself. Specifically, the proposal seeks to amalgamate Indian Resort Hotels Ltd, Gateway Hotels and Gateway Resorts Ltd, Asia Pacific Hotels Ltd and Taj Lands End Ltd into the company in terms of a scheme of amalgamation under section 391-394 of the Companies Act 1956.

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Uptrend may continue

The latest rally on the domestic bourses has been a part of the firm trend seen across global markets. Dow Jones hit a record high on 12 October 2006. The key benchmark index in Singapore hit a record high on 13 October, and Hong Kong’s Hang Seng hit a six-year peak, the same day.

The fresh rally on the domestic bourses has materialized just at the onset of the earnings season. Market men expect strong Q2 results from corporate India. Earnings have been a key driver of the bull-run that began on the bourses in 2003.

In the near term, funds and high networth individuals are likely to churn their portfolios depending on Q2 results, and outlook from company managements.

Major results scheduled next week are TCS, HCL Tech, HDFC Bank, Bajaj Auto, Grasim, Hindalco, Wipro, ACC, HDFC, L&T, Reliance Industries, Ranbaxy, ONGC, Reliance Energy, and Satyam Computer.

In recent months, lower oil price has eased inflation and interest rate worries. This has also bolstered the bourses. Crude price at current $58.25, is sharply down from a record high of $78 a barrel of mid-July 2006.

A section of the market attributes the strong performance of the Indian bourses since late-July 2006, to long-term growth drivers such as a favourable demography (large share of young population), robust domestic consumption and acceleration in infrastructure creation. Prime Minister Mahmohan Singh has promised a complete policy on infrastructure, including regulatory and institutional framework, to make it attractive for private participation in the near future.

FII inflows for October 2006, till 11 October 2006, totaled Rs 1,628.60 crore. Mutual funds sold shares worth a net Rs 34.11 crore in October 2006, till 12 October 2006.

Meanwhile, a large mop up from IPOs is expected in the next few months. Cairn India said on 12 October 2006, it will raise $2 billion through an IPO sometime in December. Another mega IPO in the pipeline is that of real estate conglomerate DLF.

Sharekhan Movers & Shakers

• Suzlon Energy rallied sharply after the company reported that its Denmark subsidiary has bagged an order in South America.
• Crest Animation Studios hit the upper circuit breaker of 10% on getting the board's nod to raise Rs41 crore via preferential share sale to DE Shaw Composite Investments of Mauritius.
• Dolphin Offshore Enterprises rose on reports that the company has signed a MoU with IMPaC Offshore engineering of Germany.
• Deccan Aviation ended higher on reports that the company has roped in European banks to fund its aircraft purchases.

Motilal Oswal - Midcap Ideas

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Thanks Ramesh

Time Warner suing Google?

GigaOM has the story

Motilal Oswal Reports

Bharti Airtel

Bharat Electronics

Shree Cement

Infosys

Thanks Ramesh

Poweryourtrade.com Trading Calls

Buy HCL Technologies with a stop loss of Rs 540 for a target of Rs 660

Buy Wipro with a stop loss of Rs 507 for a target of Rs 600

Buy Indiabulls (409.95) with a stop loss below Rs 401.50 for a target of Rs 422 – 424

Buy Action Construction (218.20) above Rs 220.75 with a stop loss below Rs 213 for a target of Rs 235

Gateway To Growth

Patrick Mange is a doctorate in Economics from Germany. During his Ph.D days he floated a company with a few university friends. Years later he sold his shares in the company and joined Deutsche Bank in Frankfurt before moving to Paris. In the beginning, he was in bond research. Afterwards, he worked for Merrill Lynch and subsequently moved to BNP Paribas as head of strategy and research. He was recently in India after BNP Paribas took a 49.9 per cent stake in Sundaram AMC. Excerpts from an interview:

What is your view on global markets? The markets across the board have fallen and now there are worries like the middle-east crisis. So where do you see the global markets heading?
That is a hundred million dollar question! We are again in a transition phase in terms of monetary policies, economic growth and profit growth, at least in the US, which remains the benchmark and thus in focus as regards global equities. Such phases are characterised by low visibility and thus high volatility, which generally last for some time. We believe that markets, equities as well as bonds, are going to be quite choppy through the summer months if not a bit longer. But we are also convinced that equities will do well in the medium run, once investors recognise that we are not facing a hard landing and that profits growth is unlikely to collapse. We are still positive on equities but have progressively reduced the risk of our portfolio since the start of the year to take on jittery times ahead. We have also come back to close to neutral on government bonds. They are still expensive, but we think that yields are not likely to increase much from here.

There are certain exogenous factors — things related to geo-political events for example — that also have to be taken into account. If the middle-east crisis spreads, then we will have some more worries in the markets, as the likelihood of a faster downturn would meaningfully increase. But we don’t expect this to happen. I believe that geo-political risk premium will remain in the markets for the next few years. But its importance in the eyes of investors will be variable as in the past. Among the global markets, we are overweight on the US after a long time. This means that we are automatically a bit more defensive since the US has a lower beta to the MSCI World. We are tactically underweight on Japan, a bet which was difficult to take because we are still positive on Japan in economic terms. But we are more positive on some other countries as regards cyclical positioning of the economy.

Among the emerging markets, we are currently underweight on India. But here again it is an alpha story not a beta story. We believe that there are some other markets in the rest of the emerging world, which are likely to outperform now.

We are tactically underweight on China too, despite strong economic growth. Growth is not everything. You make profits with volume, or you make profits with margins. And I believe that making profits with margins is better. And therefore, we would not bet upon China yet. But we would now start to bet upon South Korea, a market that has been strongly sold lately, and to some extent Taiwan. The tech news is getting in such a negative territory that it’s difficult to believe it can get bad further. The rest of Asia is more or less neutral or underweight. We are overweight on the high beta Latin American markets. Markets like Chile, Brazil and Mexico are the ones we are looking at more closely. These markets also play the role of a commodity proxy or hedge. Thanks to commodity revenues, they have built up huge financial reserves and hence, look sheltered against any deep financial crisis. Generally we remain strategically bullish on emerging markets, which undoubtedly are in a much better shape from a structural point of view. They are the markets of today, not yesterday.

Yahoo's India Internet Intentions

Back in May, a private jet ferried the top honchos of Yahoo! (YHOO) from Sunnyvale, Calif., to Bangalore. On board were company co-founder Jerry Yang, CEO Terry Semel, CFO Susan Decker, and corporate development head Toby Coppel on a whirlwind four-day, three-city Indian tour.

In Bombay, they threw a party for the top brass of India's top 12 advertising and media houses at the harbor-facing Taj Palace Hotel. The objective: to get some on-the-ground intelligence about the potential for India's small but rapidly expanding Internet market.

It looks as if they picked up a very welcoming message. "It is a superb time for Yahoo to be a significant player in India," Semel told his staff. In late September, Yahoo announced it was expanding its second biggest development center outside the U.S. in Bangalore from 800 engineers to 1,000. India already accounts for 10% of the company's global workforce. It is launching regional channels in Hindi, Tamil, Telegu, Kannada, and Malayalam.

"EXPANSION MODE." All this comes after Yahoo invested $8.65 million, together with private equity firm Canaan Partners, in an Indian matrimonial portal called Bharatmatrimony.com. And the U.S. mega-portal is hungry for more acquisitions and tie-ups. The company has introduced Yahoo Search marketing to place ads with searches and Yahoo Go!, a tie-up with Nokia (NOK) and Motorola (MOT) aimed at providing mobile phone users access to many of Yahoo's services, including messenger, e-mail, and search.

Other products are expected to be rolled out in coming months. Says George Zacharias, managing director of Yahoo India, "We are in expansion mode to provide a good experience with our range of Yahoo products and services customized for India."

If Yahoo is busy, so are the others, such as Microsoft's (MSFT) MSN, Google (GOOG), and Indian portals such as Rediff, Sify, and Indiatimes. MSN recently launched five regional channels with Messenger compatibility, and now wants to take its search and mail regional and look for opportunities in mobile telephony.

FRACTION OF ADS. Google is said to be in talks with many startups for voice and short message service, or SMS-based advertising. Rediff, launched more than a decade ago, was one of the first to go regional—just a couple of years ago. With 45 million global Indian users as of July, it launched a service called "lightning fast Rediffmail" in 11 languages and its Rediff Bol chat in Hindi recently. Indiatimes, the portal owned by publishing house Bennett & Coleman, is looking for acquisitions but will wait and watch before going regional.

With a PC penetration rate of 2%, vs. 60% in developed economies, India's Internet market is miniscule. According to the Internet and Mobile Association of India, there are 37 million Internet users, likely to go up to more than 54 million in 2008. And online advertising is a mere $25 million, just a fraction of India's total $2.5 billion advertising industry. In comparison, China's online market is said to be around $600 million.

Mobile-based services, however, are a huge opportunity with more than 200 million cell phone users in India. As Internet connectivity and broadband usage improves, Net advertising on mobiles could be big, say players. "With Indian consumers beginning to treat the Internet as a friend, reaching out to them becomes imperative," says Yahoo's Zacharias.

MULTIPLE LANGUAGES. "For us, it is both strategic and opportunity driven," says Jaspreet Bindra, country manager at MSN India. With more than 75 million Indians who speak English, the market has room to grow. Yet local language content is key, too. "We have to prepare for this and then go where our advertisers go," he adds.

Two-thirds of India's population live in villages, and today the five most-read publications are still regional. Regional television channels have higher viewership than their English counterparts. "That India is rich in language content anyway, makes it easier," says Mohit Hira, director of content and marketing at Indiatimes.

So portals are also beefing up their offerings. Having begun with pure content, they now have a range of services and are looking for more. Big on the popularity chart are airline and hotel bookings, astrology, matrimony, and e-commerce sites, which bring in cash. The players are not revealing their India revenues, but say that even as they want to grow organically, they have a war chest and M&A teams in place to grab any good buy.

Yahoo plans to bring in its Yahoo Finance and other services to reach India's huge market of youthful online readers. From all indications, it seems India is shaping up to be an interesting playground for global Net companies.

Sharekhan Investor's Eye - Oct 12

PULSE TRACK

• Strong growth in August 2006 IIP despite floods

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STOCK IDEA

South East Asia Marine Engineering & Construction
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs270
Current market price: Rs190

At a high tide

Key points

• Boom in offshore service industry: With the surge in crude prices and drop in global spare production capacity for oil, exploration activity has picked up globally. The IEA estimates that USD3.6 trillion would be spent on oil and gas exploration over 2003-30. The day rates for offshore oil and gas drilling, and support assets including MSVs are sky-rocketting as a result of this rise in the E&P spend.
• SEAMEC to benefit from rising E&P spend: With its fleet of three MSVs, SEAMEC is a direct beneficiary of this boom and the higher charter rates for the MSVs. It has recently entered into a long-term charter for its MSVs and that too at high charter rates of USD40,000-47,000 compared with USD20,000 per day for the earlier contracts.
• New vessel to further boost revenues: SEAMEC has recently acquired a vessel named Oceanic Princess, which is being converted into a diving support vessel (DSV). This DSV (expected to commence operation by Q1CY2007) and the three MSVs should help its revenues to grow at a CAGR of 70% over CY2005-07E.
• Profit to grow at a CAGR 126%: With a strong revenue growth, a debt-free status and the tonnage tax scheme, the earnings per share are expected to grow at a CAGR of 126% to Rs17.4 in CY2006 and to Rs29.2 in CY2007.
• Buy with a price target of Rs270: At the current market price of Rs190, the stock is trading at 6.5x CY2007E earnings and 4.1x CY2007E EV/EBIDTA. Compared with its global peers, SEAMEC is trading at a discount of 30%. It has the highest EBIDTA margin and RoE compared with them. We believe the discount is not justified. We recommend Buy on SEAMEC with a price target of Rs270.

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SECTOR UPDATE

Automobile

Performing against all odds
Despite the impact of floods, heavy monsoons and the inauspicious Shraadh Paksha, the automobile industry reported a strong performance for September. The car segment delivered a good performance with a 22.4% domestic growth and the two-wheeler sales too grew by 18.9% despite an average performance by the market leader, Hero Honda. The overall automobile sales volume rose by 20% with the domestic and export sales rising by 19.7% and 24.2% respectively.

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INDUSTRY UPDATE

Equity AUMs rise in line with market movement

The AUM for equity funds increased by 6.2% to Rs121,332 crore in September 2006. The rise was in line with the general upward movement seen in the equity markets.

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