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Saturday, December 16, 2006
Business Today - Real Estate And Reforms
If you thought real estate was catching the high tide in terms of fund flows, then think again. Were it not for a few snags, the industry could be attracting far more capital. Topping the list of impediments is the opaque nature of the business in India. "The challenges of investing in Indian real estate relate to transparency, limited market history and forecasting difficulties, as well as title complexities and imperfections," says Kurt Roeloffs, Head, RREEF Asia Pacific. Ownership records and land titles are one of the biggest blind spots in property valuations. Further, there is no title insurance in the country. Title insurance, as the name suggests, guarantees against massive losses in case of a faulty title. While domestic funds are able to negotiate these issues, foreign funds too are learning to handle them.
One interesting fall-out of such intense scrutiny by global and domestic funds is that transparency in the market is increasing. According to a global transparency index evolved by realty consultant, Jones Lang LaSalle (JLL), India stood at #41 this year in a list comprising 56 countries-its rank unchanged since 2004. On a scale of 1-5, with a score of 1 showing highest transparency, India's transparency score was a low 3.46. However, as India was among the top 10 countries (the 10th though) in showing the largest improvements, it moved from "low transparency" status to the band that includes "semi-transparent" countries. A flood of major retailers and other MNCs looking to capitalise on India's recent exceptional economic growth, plus an increasing presence of international property consultancies, have significantly improved the quality and availability of market information across all sectors," the JLL report says.
As more transactions between foreign firms and local developers get done, the general accounting and reporting processes are expected to improve, since the local firms will need to start matching global reporting benchmarks. The public offers by real estate developers and the attendant disclosure norms will also lead to more information about real estate assets being released into the market. Similarly, the introduction of real estate mutual funds will aid the process further.
The opaqueness is evident in customer sales as well, where the rampant malpractices are significant enough to inhibit demand. Issues such as cost of property related to built-up, super built-up areas or carpet area have created a lot of confusion in the market. Land use issues, as evidenced in the sealing drive in Delhi, are pointers to an overall lack of urban planning. Stamp duties and archaic laws such as Urban Land Ceiling Act and Rent Control Act need to be rationalised or scrapped. However, as with many other institutional reforms, much of the initiative rests with the state governments.
Even as the government talks of a real estate regulator, many in the industry are wondering what will be its terms of reference. "Considering its importance in economic growth, foreign direct investment and employment generation, it is high time to have a federal regulator for the sector," says Cushman & Wakefield's Verma. Fortunately, he won't have to wait for too long.
Up Again
The euphoria of the past few months vanished in just a day. One sharp correction sent the bulls running for cover.
The RBI hiked the CRR by 50 basis points causing a liquidity crisis which triggered the market fall.
On Monday (November 11), the Sensex fell by about 400 points to close at 13,399.43 while the Nifty at 3,850. Banking stocks were badly hit with ICICI Bank and SBI being the major losers. On the NSE just 98 advanced while 865 declined. On the BSE, 400 advanced while 1,392 declined. FIIs and mutual funds were net sellers to the extent of Rs 153 crore and Rs 602 crore, respectively.
Tuesday brought no relief for the bulls. Heavyweights ABB, ACC, SBI, BHEL, RIL and ONGC led the fall. Capital goods sector was the major loser with L&T, Siemens, ABB and Punj Lloyd beaten down.
The Sensex closed lower at 12,995 and Nifty at 3,717. Mid-cap stocks continued to take a beating and the CNX Mid Cap, which closed at 4940.6 on Monday closed at 4,723.8 on Tuesday.
Turnover on the BSE rose from Rs 4,920.29 crore to Rs 4930.56 crore today. Ditto on the NSE. It rose from Rs 9,344.45 crore on Monday to Rs 11,085.28 crore on Tuesday.
On the NSE, 70 stocks advanced while 900 declined. On the BSE, 277 advanced while 1,518 declined.
Mutual funds continued as net sellers to the tune of Rs 517.51 crore while FIIs were net buyers worth Rs 422.3 crore.
Wednesday was a little better than Tuesday. Banking and Capital Goods were back in demand with RIL, ACC, SBI, Satyam Computer and L&T causing the indices to rise.
The Sensex closed at 13,181.34 (higher than Tuesday but lower than Monday) and the Nifty at 3,765.
Turnover on the BSE was Rs 4421.32 crore and on the NSE, Rs 9635.82 crore.
The number of scrips that advanced (706) on the NSE (245) was higher than those that declined and also on the BSE with 1171 advances and 564 declines.
FIIs were net buyers only to the extent of Rs 95.2 crore.
The bulls managed to get a grip on the market on Thursday. The Nifty closed at 3,843 and the Sensex at 13,487.16. The CNX Mid Cap closed at 4,959.8. Banking and technology stocks led from the front. Turnover was low on the BSE (Rs 4415.47 crore) and NSE (Rs 8086.76 crore). On the NSE as many as 851 stocks advanced while just 109 declined. On the BSE, 1,462 advanced while just 307 declined.
This was despite FIIs being net sellers to the tune of Rs 96.9 crore.
The week ended on a better note than it began with the Nifty closing at 3,889 and the Sensex at 13,614.52. The turnover rose to Rs 4,174.5 crore on the BSE and Rs 8,727.03 crore on the NSE. On the BSE, 1,003 advanced while a substantial 657 declined. The CNX Mid Cap closed at 5,011.45.
SBI, NTPC, ITC, BHEL, Tata Steel and ACC were the top losers this week while Satyam and Reliance Communications were the biggest gainers. Tata Steel, which had lost almost 10 per cent in the beginning of the week, recorded a robust 5 per cent gain on Friday to close at Rs 459.25 on the talks that the steel giant might back out of Corus bid.
Weekly Ideas
BUY Maruti (905.9)
SL 887 T 938, 944
BUY BHEL (2500)
SL 2459 T 2577, 2587
BUY Godrej Industries (181)
SL 166 T 215, 221
BUY Satyam Comp (476)
SL 461 T 508, 514
BUY GTC Inds (246.5)
SL 233 T 271, 277
From Research Desk - Consildated
Nagarjuna Construction Company Ltd
CMP: Rs209 BUY
Nagarjuna Construction Company Ltd (NCC) to benefit from the high investment in road and water verticals, expected to together account for 35.6% of revenues in FY07 and 19.5% in FY08. The current order book at 3.4x FY06 turnover is healthy, given NCC’s average execution period of 27 months. With order intake during FY06 at 2x turnover, NCC is set for high growth in the next two years, with an expected topline increase of 54.5% and 43.5% during FY07 and FY08 respectively.
NCC was one of the early entrants into the BOT space and enjoys a good mix with two annuity road projects, two toll based ones and two projects in the power vertical. The company plans to bid for new BOTs on its own having raised the finances. At the book value of NCC’s equity, these six projects translate into Rs15.8 per share of NCC, which is 9% of the CMP.
NCC will sell 88% of the 50 acres land, in lieu of 12% of the developed area to be given to the government, post the National Games 2007. NCC also has 89% equity stake in the AP Housing project for development of 85 acres. We value these two projects at Rs9.1 per share of NCC at 2x book value of equity infused, comprising 5.2% of the CMP.
We also assign a value of Rs10.9 per share to the 130 acres land bank, over and above the two projects above, with a current market value of Rs3bn, post a 25% haircut. We foresee enormous value unlocking on the development and sale of these properties in future.
Prajay Engineers Syndicate Ltd
CMP: Rs280 BUY
IT offshoring and the resultant boom in hospitality business and premium residential segment has given a fillip to the Hyderabad real estate market. The expected new international airport at Shamshabad should give further increase to the commercial potential of the city. PESL being one of the leaders in the Hyderabad market is well placed to capture this high growth phase. We expect the company to report revenue and profit CAGR of 139% and 128% respectively over FY06-09. We value the stock at Rs307per share implying an upside potential of 49% from the current levels.
The ongoing IT outsourcing boom in the Hyderabad market, has led to a sharp rise in real estate demand for hotels and premium residential. This is corroborated in the sharp growth of more than 50% in property prices over the past 12 months. PESL with planned 15.8mn sq ft development offers a strong play on the growing Hyderabad real estate market.
PESL has a good mix of residential and hotel development over the next few years capturing both the booming segments. The company has altered its mass housing strategy to include luxury residential, citing increased demand from the IT/ITES sector. PESL also plans to develop two 5-star (one in Goa), two 3-star and expand its existing three star hotel.
PESL currently has 8 on hand projects and expects to take the tally to 31 over the next 4 years with a planned space addition of 15.8mn sq ft. we expect these projects to turn a revenue CAGR of 139% and a profit CAGR of 128% over the next 3 years. Hospitality business would start contributing meaningfully from FY10.
PESL’s ambitious plans can run into rough weather, if there is a sharp drop in property prices in the Hyderabad market. Also with many projects expected to start in a short span, delay in execution or launch could push back cash flows impacting valuations.
IVRCL Infrastructures & Projects Ltd. BUY CMP: Rs399
IVRCL is the biggest player in the water management vertical in India, accounting for 46% of the company’s revenues in FY06. With continued focus on this vertical by certain states, we expect this vertical to contribute to 50.5% of IVRCL’s turnover in FY07 and 53.1% in FY08. The award of India’s first desalination project to be constructed in Chennai, is testimony of IVRCL’s strong position in the segment. We assign a value of Rs6 per share to this project.
IVRCL’s 51.4% controlling stake in Hindustan Dorr-Oliver (HDO) enables access to HDO’s expertise to be leveraged for EPC projects in the water segment, completing the value chain in this segment. We include this investment in our target price calculations at the present market value of IVRCL’s equity of Rs1,640mn, translating into Rs13.7 per share.
IVRCL has a well diversified portfolio with an order backlog of Rs67bn at present, translating into 4.5x its FY06 sales, which is among the highest in the construction space. The order intake/execution is at a healthy 2.5x, signifying high growth in FY07 and FY08.
With three toll based road BOTs valued at Rs10.8bn, either having achieved or nearing financial closure, IVRCL plans to bid for some more and foray in BOTs in power T&D as well. We foresee IVRCL as a major player in the BOT space in future and value these three projects at Rs15.6 per share of IVRCL.
The sale of the balance 25% residential land in Hyderabad is expected to fetch Rs1.65bn in FY07. Around 40% of the 11.83 acres commercial portion is expected to be sold in FY08 and the balance in FY09. We value the commercial portion at the market price of unsold land post 25% discount, giving Rs29.7 per share of IVRCL.
Arihant Foundation and Housing Ltd. BUY CMP: Rs489
Chennai and its suburbs are fast turning into a hot spot for the IT/ITES sector. Skilled labour along with quality Grade A & B space is driving demand for real estate. Arihant Foundation and Housing Ltd (AFHL) with 2 IT Park projects and 15 residential projects in hand is well poised to benefit from the pick up in Chennai real estate demand. We expect the company to report 76% revenue and a 116% profit CAGR over F9/05-08 period respectively. We initiate coverage with a BUY rating and price target of Rs602.
Most IT companies have started setting up shop in tier II cities due to the dwindling cost competitiveness in tier I cities. Chennai offers them with quality grade A & B real estate with abundant skilled manpower. We expect Chennai to fast grow into the next outsourcing destination in line with Hyderabad and Pune.
With 17 in hand projects, AFHL is well poised to benefit from the growth in the property boom in the Chennai market. 15 of the 17 projects are residential in and around the Central Business District (CBD) and Old Mahabalipuram road (OMR), while the remaining 2 are IT parks in the upcoming Ambattur and OMR area.
The company is fast adding size and has planned two townships, one out of which is a 50:50 JV with a national developer. We view the company’s slow evolvement in bringing bigger projects in its fold as a positive sign towards revenue sustainability. We estimate revenue CAGR of 76% over F9/05-F9/08.
Most old projects with low gross margins (GM) are expected to get completed in F9/06. New projects would improve GMs by 500bps in F6/07 to 37%, which is still 5-7% lower than current prevalent. This would aid a profit CAGR of 116% over F9/05-F9/08.
A major portion of the future revenues, 27% in F9/07 and 65% in F9/08 are expected to come from new projects, which are either recently commenced or would be launched in the next 8-12 months. Delays in launch and execution, could impact profitability and there by valuations.
Patel Engineering Ltd.
CMP: Rs458 Market Performer
Patel Engineering Ltd (PEL), with a dominance in the hydropower segment (40.3% of its order book and 61.7% of revenues), commands a 22% share in this vertical. We estimate spend of Rs500bn on hydropower during the 10th and 11th plan. Maintaining its share would mean Rs10bn order flow (simple average) to PEL from this vertical each year, ensuring a comfortable position for the next 6-7 years.
PEL’s OPM at 12.9%, is one of the highest among peers on account of complexity of work in this vertical and capabilities that only a handful of players possess. We expect an increased share of hydropower in PEL’s order book (43.2%) in FY07, helping sustain margins.
PEL’s initiative, to move up the value chain by bidding for independent power projects in hydropower and lumpsum turnkey projects in the irrigation segment, is a value accretive one. PEL is awarded its maiden annuity project valued at Rs4.1bn, wherein its share is 60%. We assign a value of Rs8.2 per equity share of PEL to this annuity project, expecting an IRR of 12-14%.
PEL’s order book at Rs4.3bn translates into 4.2x FY06 turnover, offering visibility for a 3-year period. Order intake at 2.5x its FY06 consolidated revenues and the expected increase of 35% in order book in FY07 to drive growth.
PEL is fairly diversified and expected to witness a CAGR of 36.3% in turnover between FY06 and FY08. Its overseas subsidiaries and the recent acquisition in the urban infrastructure segment to add value going forward.
With an order book of 2.4x its current market capitalization, valuations appear attractive. We assign a MARKET PERFORMER ratingDOMESTIC NEWS & GLOBAL NEWS
Infosys Technologies Ltd. will be added to the NASDAQ-100 index, effective December 18. The NASDAQ-100 Index is composed of the 100 largest non-financial stocks on the NASDAQ Stock Market in terms of market capitalization. Infosys is the first Indian company to be added to the NASDAQ-100 index and is the only Indian company to be part of any of the major global indices.
S&P seeks further improvement in public finances
The Government's efforts in improving its finances is yielding some results, and it would do well to continue in the same vein if it wants to attract higher FDI. That's the message from Standard & Poor's (S&P), the global credit rating agency. In its Asia Pacific Market Outlook for 2007, S&P said that it can upgrade India's credit rating to "investment grade" if Asia's fourth-largest economy continues to improve its public finances. "The outlook on the sovereign credit rating on India is revised to positive from stable in 2006, highlighting that if current credit improvements continue, especially on the fiscal front, India could achieve investment grade ratings," S&P said. Fitch Ratings and Moody's Investors Service both rate India's foreign debt at investment grade, but S&P assigns a rating just below that at "BB+". The Government cut the fiscal deficit to 4.1% of GDP in the fiscal year ended March 31, 2006 from 5.9% in 2002-03. The deficit is expected to fall further to 3.8% of GDP in the current fiscal year, and the Government wants to cut it to 3% of GDP by 2008-09. But, there is a risk to this outlook from the proposed review of salaries for all government employees by the sixth pay commission, which is due to submit its report in 18 months, the S&P said. The international credit rating agency said that while the macroeconomic view was favourable for Indian stocks, the fiscal deficit could pose a risk. "Some potential risk lies in the government deficit which has thus far been offset by a positive capital account, through foreign investment inflows," S&P said.
Corus takeover saga continues
Even as India's Tata Steel Ltd. and Brazil's Companhia Siderurgica Nacional (CSN) fight for the control of Corus Group Plc, the Anglo-Dutch steel major sought to postpone the Dec. 20 EGM and court convened meeting till further notice. The move is aimed at giving Corus shareholders to consider both the bids. The latest on the Corus takeover saga comes in the backdrop of revised offers from Tata Steel and CSN. On Dec. 10, Tata Steel increased its initial offer by 10% to 500 pence per share. The next day, CSN lifted its bid to 515 pence a share. The battle for Corus started on Oct. 20, when the leading British steelmaker accepted an offer from Tata Steel at 455 pence per share. Then on Nov 17 CSN approached Corus with a cash offer of 475 pence a share. CSN is yet to make a formal offer to Corus shareholders, pending due diligence. In light of the approach from CSN regarding a possible offer, the Corus board adjourned the original EGM and Court Meeting planned for Dec. 4 to Dec 20. Tata Steel is now formulating a strategy to improve its offer for Corus after CSN announced a higher bid. Though Tata Steel has refused to comment on the issue, analysts believe it might increase its bid for Corus up to 550 pence a share. According to reports, Tata Steel has also started discussions with the major shareholders of Corus, including Standard Life, which has a 7.8% stake. Separately, Tata Steel has reportedly appointed UK-based merchant bankers NM Rothschild & Sons as financial advisor for the proposed acquisition. ABN Amro and Deutsche Bank are already acting as the Indian company’s advisors.
Auto production tops 10mn mark
The Indian automobile industry is on a roll. Total production of cars, motorcycles and commercial vehicles reached a record 10mn mark in the first 11 months of the calendar year, according to the data released by the Society of Indian Automobile Manufacturers (SIAM). Between January and November 2006, total vehicle production stood at 10,031,886 units with the industry growing at 16.8% compared to last year. During the same period last year, the industry produced 8,587,131, vehicles. In the whole of 2005, the industry produced 9.35mn units. Of the total vehicles produced, over 77% were two wheelers with 7,741,261 units compared to 6,686,963 during the same period last year, representing an increase of 15.77%, the SIAM data showed. Passenger car production also crossed the one million mark in the 11-month period with production growing at 18.5% to 1,100,799 units, while multi-purpose vehicles grew by 9.24%. Passenger vehicles accounted for about 13.6% of the total automobile production, SIAM said. During the period under review, a total of 189,716 units of LCVs and 251,114 M&HCVs were produced and accounted for about 4.4% of vehicle production. A total of 4,85,049 three wheelers were produced in the 11 months so far, SIAM said.
ICICI Bank hikes lending, deposit rates
The largest private sector bank in the country, ICICI Bank, raised the lending rates by 0.5%, while the deposit rates are being hiked by between 0.25% and 0.75%. The move is the fallout of the recent hike in CRR with State Bank of India (SBI) and Union Bank of India also having hiked deposit rates. The bank will also increase its Benchmark Advance Rate (I-BAR) for corporates and its Floating Reference Rate (FRR) for consumer loans (including home loans) by 0.5% with effect from December 18. The revised I-BAR will be 13.75% p.a. payable monthly as against 13.25% at present. The revised FRR will be 10.75% p.a. as against 10.25% at present. For existing floating rate customers, the increase in FRR by 0.5% will be effective from January 1, 2007. The existing fixed rate customers whose loans are fully disbursed, will, however, not be impacted by the increase and their contracted rates will remain unchanged. The bank will also increase interest rates on deposits worth less than Rs10mn in the range 0.25%-0.75% across various tenors with effect from December 18.
Reliance Comm, 2 others eye Hutch Essar: reports
With relations between India's Essar Group and Hong Kong-based Hutchison Telecom International Ltd. (HTIL) souring to a point of no return, hawks have started to circle one of the most coveted telecom companies in India. The latest media reports suggest that Reliance Communications Ltd., part of the Anil Dhirubhai Ambani Group (ADAG), is among the three players in the race for India's third-largest GSM-based cellular service provider. According to reports, Reliance Communications is roping in a US-based private equity player while the other two suitors are Egypt's Orascom and Malaysia's Maxis. Earlier, newspapers had reported that Essar too could look at buying out the JV partner. Even Sunil Mittal of Bharti airtel has been quoted as saying that he may consider buying Hutch Essar if approached by the Ruias of Essar. Reliance Communication is believed to have tied up funds for its proposed bid for Hutch Essar. The company is understood to have mandated UBS as its advisor for raising debt and resources, adding that if needed, Reliance Communications may raise an additional US$4bn to US$5bn from the market. CLSA said in a research note earlier this week that it had estimated Hutch Essar at US $14.4bn. The diversified Essar group has the first right of refusal in the event that HTIL sells its stake to another company, according to terms of their agreement. Essar could hold out for a bigger valuation, or make a bid for the entire company itself, according to analysts.
Demerged Zee to start trading on Dec 18
Zee Telefilms Ltd. (ZTL) announced that from December 18, the company would start trading as the demerged entity, to be renamed Zee Entertainment Enterprises Ltd. (ZEEL). The two new companies - Wire & Wireless India Ltd. (WWIL) and Zee News Ltd. (ZNL) - would get listed independently, after relevant approvals from the stock exchanges. Listing is likely in January 2007. " Though the business of both WWIL and ZNL was earlier part of ZTL, they would be able to unlock greater shareholder value as independent companies," Subhash Chandra, Chairman, of ZTL said. The company has already received the approval from the Bombay High Court for the demerger of cable undertaking (WWIL) and news and regional undertaking (ZNL). The process of getting approval for the demerger of direct consumer undertaking (ASC Enterprises Ltd. to be renamed Dish TV India Ltd.) is underway. Shareholders of ZTL as on the relevant record date would receive 45 shares of ZNL and 50 shares of WWIL for every 100 shares held in the company. They would also get shares in the DTH business (Dish TV) as and when it is spun off from ZTL. In the meantime, the demerged ZTL (including Dish TV) would continue to trade on the stock exchanges. A separate record date would be announced for the demerger of Dish TV.
SpiceJet to raise US$118.5mn; Tatas to buy 7.5%
New Delhi-based low cost carrier SpiceJet announced that it plans to raise US$118.5mn through a preferential allotment of equity shares to a clutch of foreign and domestic investors. The potential investors include Tata Group companies, Texas Pacific Group Ventures, Istithmar PJSC and Goldman Sachs amongst others, SpiceJet said in a statement. These investors are set to pick up a 25% stake in the low cost carrier for around US$75mn (approx. Rs3.3bn) at an average price of Rs51.40 per share. Earlier, newspaper had reported that the Tata Group was planning to acquire up to 10% stake in SpiceJet as a 'financial investment'. The equity stake of the promoters, consisting of the London based Kansagra family, Ajay Singh and other investors, will fall from 48% to around 36% as a result of the equity expansion. The Tata group proposes to pick up 7.5% stake in the company for US$17.2mn. The US-based private equity firm Texas Pacific group proposes to invest US$30mn. The existing shareholders, Istithmar, the Dubai government’s private equity arm, and Goldman Sachs propose to invest US$25mn and US$5mn, respectively in the airline. In addition, Swiss Finance Corp, BNP Paribas, and IL&FS have also shown interest in investing in the airline.
Tata Motors, Fiat formally announce JV
Tata Motors and Fiat formally announced their joint venture to manufacture passenger vehicles, engines and transmissions for the Indian and overseas markets. The companies had signed a MoU in July for the creation and establishment of a joint venture in India, located at the Fiat plant at Ranjangaon, in Maharashtra. The plant will have capacities to produce more than 100,000 cars and 200,000 engines and transmissions annually. Both Fiat and Tata vehicles will be manufactured at the same facility, which will be managed equally by the two shareholder partners. A first assembly line for Fiat cars at Ranjangaon plant has already been commissioned for Fiat Palio and Fiat Adventure models and trial runs have already commenced. The first batch of cars will roll out in early 2007. Tata will distribute Fiat branded cars through the Tata-Fiat dealer network as per the arrangement already in place since March. The aggregate investments in this industrial joint venture will be made in a phased manner and may exceed Rs40bn (over €665mn). The joint venture will start production of engines and new cars progressively from the beginning of 2008. Fiat and Tata motors are also continuing discussions for industrial and commercial co-operations in Latin America, as per a joint analysis, which began in July.
BOI, L&T Infotech unveil acquisitions
Bank of India (BOI) is acquiring more than 50% stake in Indonesia's PT Bank Swadesi, Bank Indonesia's Deputy Governor Siti Chalimah Fadjriah said. Jakarta-based Bank Swadesi has a market value of US$20mn and posted a profit of 11.7bn rupiah (US$1.3mn) last year. Indonesia's 133 banks, which are being forced by the central bank to find investors or merge, are attracting buyers as the Southeast Asia's largest economy expands.
Larsen & Toubro Infotech Ltd. will acquire GDA Technologies, a privately held electronic design firm based in USA and all of its design centers in the USA and India. The company has over 350 employees in the USA and India and over 100 customers in the USA, Japan and India. AM Naik, Chairman & Managing Director of L&T Infotech, said, "GDA's electronic design capabilities are a key building block in our roadmap towards creating end-to-end solution delivery capability for our global customer base."
Maruti to hike prices from January
Come January, consumers would have to shell out more for their favorite Maruti Suzuki cars. The country's largest passenger carmaker Maruti Udyog Ltd. will increase prices by as much as Rs 12,000 to overcome higher costs of freight and components, newspapers reported. Maruti, which had last raised prices in August due to rising freight and input costs, has decided to go in for another revision. It has already informed its dealers about the same. Separately, the company would shut down its plant near New Delhi for maintenance from Dec. 24-31, papers said. The shutdown is a planned biannual exercise. Maruti, 54.2% owned by Japan's Suzuki Motor Corp., had raised prices of some of its cars in August by Rs 500 to Rs 5,000. Earlier this month, Toyota Kirloskar Motor (TKM) and Skoda Auto announced that they would be increasing prices in January owing to rising input costs. The exact quantum of the increase is yet to be finalized, it could be between 1% to 2% of the vehicle cost, TKM said on Dec. 6.
Mid-Day & Bennett, Coleman forge partnership
Mid-Day Multimedia Ltd., the publishers of Mid-Day and Bennett, Coleman & Co. Ltd., the publishers of The Times of India and The Economic Times, announced a business co-operation partnership to share their printing and distribution network. The two companies would jointly approach various markets in the country for mutual benefit. This alliance would benefit both the companies through cooperation in printing, circulation and advertising sales. Mid-Day said that it would sell 6.65% stake to an affiliate of Bennett, Coleman & Co. for Rs211.1mn. The promoters of Mid-Day would pump in an additional Rs225.6mn. After this investment, the promoters will own 51% of Mid-Day and Bennett, Coleman & Co. hold 6.67%. Mid-Day plans to expand to seven cities in two years besides expanding its FM radio operations. Mid-Day has firmed up plans to launch another edition of its flagship tabloid in about four months.
Primary market update
The mega issue of Cairn Energy was fully subscribed after several difficulties as uncertainties over the offtake, the midstream project controversy with MRPL and government cess kept investors at bay. Majority of demand for the issue came from the QIBs. The IPO of Pyramid Saimira Theatre Ltd. was subscribed by more than 2 times. The Public Offer of Tanla Solutions Ltd. was subscribed 39 times. The QIB portion was subscribed 57 times, the HNI portion was subscribed 41.56 times and the retail portion 11.10 times. The offer received over 2.45 lakh bids. The company entered the capital market on December 11 with a public issue of 15,885,000 equity shares of Rs2 each in the price band of Rs230 to Rs265 per share.
Bangalore-based IT services company MindTree Consulting Ltd. filed a Draft Red Herring Prospectus (DRHP) with the Securities & Exchange Board of India (SEBI) to enter the capital market with an IPO of equity shares. The company proposes to offer 5,593,300 shares of Rs10 each. The issue comprises of net issue of 4,940,740 shares to the public. Up to 372,900 shares will be reserved for subscription by eligible employees and up to 279,660 shares each will be reserved for subscription by Business Associates. The IPO, which is being made through the 100% book building, will constitute 15% of the post-issue capital of the company. The net issue will constitute 13.25% of the post-issue capital of the company.
Global News
As expected, the US Federal Reserve left its benchmark interest rate unchanged for the fourth time in as many meetings amid a slowdown in the world's largest economy. However, the US central bank reiterated its view that inflation remained a challenge even as the Fed policy makers acknowledged a steep fall in the housing market, and some signs of softness in the economy. The Federal Open Market Committee (FOMC) decided to keep their target for the federal funds rate, an overnight bank lending rate, at 5.25%. The FOMC called the cooling of the housing industry "substantial", one of the few changes in language from its previous statement in October. The central bank policy makers also predicted a moderate economic expansion on balance over the coming quarters, rather than simply moderate, and called recent economic indicators mixed. Fed Chairman Ben S. Bernanke still expects the US economy to withstand the downturn in housing and manufacturing. Some traders interpreted the new language as a prelude to a much-awaited reduction in rates next year. A different school of thought feels that the Fed will need more evidence that the real estate slowdown is hurting consumer spending and manufacturing before it would consider cutting rates. It is unlikely that the Fed would cut rates at its next meeting in late January.
OPEC to cut output in February
The Organisation of Petroleum Countries (OPEC) decided to put on hold another half a million barrels per day (bpd) or 2% production cut, till February, sending oil prices higher. The proposal was also ratified by the oil ministers of the 11-nation group later in the day. The cartel, which pumps over a third of the world's oil, has already curbed output this year by 1.2mn bpd to 26.3mn in October to halt a 10-week, 25% drop in prices. OPEC opted to wait until after the peak of winter demand to implement the new curbs, so that the major energy consumers like the US and China are not adversely affected. Analysts said OPEC's deal was a compromise between price hawks who feared that rising inventories could drag down prices in the second quarter and others who are worried that an immediate cut could lead to a shortage at the height of winter. Some analysts doubted OPEC's ability to support prices that remain under pressure from swelling US stockpiles and mild winter weather in the northern hemisphere. Oil prices have hovered around the US$60 a barrel mark for the past three months as OPEC's first cut helped arrest a steep 25% slide from a record-high US$78.40 a barrel in July. US light, sweet crude was unchanged at US$62.51 a barrel.
Japanese business confidence up in December
In a development that could increase the chances of an interest rate hike, a main business sentiment index of the Bank of Japan (BOJ) touched a two-year high, the central bank said. The quarterly Tankan survey, Japan's most closely watched barometer of business sentiment, showed that confidence among large manufacturers climbed to 25 points from 24 in September, the BOJ said in Tokyo. The index for big manufacturers was the highest since September 2004, when it was plus 26, and matched the market's average forecast. Among service industries, sentiment rose more than forecast. Sentiment for large non-manufacturers rose to 22, beating the consensus estimate for a reading of 20. The index was the highest since November 1991, when it was plus 33. The index for small manufacturers improved for the first time in a year to plus 10, the highest level since August 1991. Also, large manufacturers' planned capital spending was revised down by 0.3%, the first downward revision in four years for a December survey. Planned capital spending by all large firms was raised by 0.8% to a rise of 12.4% in the current financial year to March, the fastest pace since 1991. Bonds fell amid expectations that the Tankan survey may prompt the central bank to increase interest rates, the lowest among the G7 group of advanced nations, as soon as January.
WB sees global economy slowing in next 2 yrs
The global economy would slow in the next couple of years, primarily due to the downturn in the United States, the World Bank says in its annual Global Economic Prospects report. Global growth is expected to reach 5.1% this year, then fall to 4.5% in 2007, only to rise slightly to 4.6% in 2008, the Washington-based lender says in the report. The developing countries are forecast to grow by 7% in 2006, the report says. The pace of expansion would fall to 6.4% in 2007 and 6.1% in 2008, more than double the 2.6% rate of high-income countries. In comparison, developed economies would expand by 3.1% this year, slow to 2.4% in 2007 and strengthen to 2.8% in 2008. "The gap between developing countries and high income countries is widening," says World Bank economist Hans Timmer. "Developing countries are able to accelerate while high income countries are not doing that." The report says that a soft economic landing for the global economy is likely, but warned that a cooling US housing market could spark a sharper-than-expected downturn and even a recession, which could have a major impact on developing nations. The World Bank report also says that the global economy could expand to US$72 trillion by 2030 from US$35 trillion in 2005, driven largely by the developing economies.
Nasdaq launches formal offer for LSE
The Nasdaq Stock Market Inc. formally launched its 2.7bn pound (US$5.3bn) hostile bid for the London Stock Exchange Group Plc. (LSE) after Europe's largest exchange spurned a friendly offer three weeks ago. Nasdaq owns 28.75% of LSE, but needs more than 50% to succeed. The New York-based exchange is offering 1,243 pence per share (Euro18.40; US$24.26), but shares of LSE were quoting at 1,315 pence (Euro19.46; US$25.67). Nasdaq is giving investors until January 11 to accept its offer. By posting the offer document, Nasdaq is setting a deadline for LSE management to consider negotiations for a better price. Under British takeover laws, Nasdaq can raise its bid within 46 days should it get a recommended offer from LSE. Nasdaq, the second-largest US stock exchange, is increasing pressure on LSE after its offer was rejected twice in nine months. LSE, led by CEO Clara Furse, rejected Nasdaq's request to discuss its bid on Nov. 20, saying that the offer substantially undervalues the exchange. "The bid represents full and fair value for LSE shareholders, taking into account both the successes of the business, but also the new competitive threat which LSE faces in 2007 and beyond," Nasdaq CEO Robert Greifeld said.
Qantas accepts higher takeover bid
A day after spurning a A$10.9bn (US$8.6bn) bid from Macquarie Bank Ltd. and Texas Pacific Group, Qantas Airways Ltd. agreed to a sweetened offer from the same consortium. Australia's largest airline accepted a higher A$11.1bn (US$8.7bn) buyout in what would be the world's biggest aviation takeover. The offer of A$5.60 a share, 10% above Qantas's last trade, was unanimously endorsed by the Qantas Board after the bidders dropped their demand for a break fee and simplified other conditions, Qantas Chairman Margaret Jackson said. The board had rejected an offer of A$5.50 on Wednesday. "I think we've done a very good job for the shareholders," Jackson said. Qantas shares jumped to a record high A$5.37, but remained below the offer price, suggesting that investors were not expecting a higher bid. Also, the government may block the takeover as being against the national interest. The latest offer price is 29% higher than Qantas's share price before Nov. 22, when the airline first admitted that it had been approached with a buyout offer. Qantas CEO Geoff Dixon, who has run the airline since 2001, will remain in the job. Dixon said the new owners have no plans to break up the airline, send maintenance jobs overseas or cut regional services.
Indiainfoline - INVESTMENT STRATEGY
Christmas Shopping or Christmas Sale?
Christmas is still over a week away but bulls and bears are left directionless. The fall in the market this week, forced investors to be on the guard. People on the Street were getting into the habit of seeing the market go higher and higher. A short downtrend immediately has thrown up their concern list. Having said that, one can look at investing in fundamentally strong scrips for the long term. Advance tax numbers are already doing the rounds. According to reports advance tax figures paid by the companies are as follows, Grasim: Rs2bn, Hindalco:Rs3bn, Reliance Industries: Rs4.44bn and Glaxo: Rs580mn. Volumes will again play a major role this time around as at the start of the week, the markets fell sharply with huge volumes. The recovery has not be accompanied by healthy volumes. Despite the volatility on the bourses, Foreign Investors interest in India continues to remain pretty strong. They hedged their positions by buying in cash and selling in F&O. Overseas liquidity is likely to slow down. When volumes are less, expect dullness with occasional swings.
Indiainfoline - MARKET MOOD
It could have been worse
The beginning of the week wasn't as rosy as the end. All the euphoria of the past five months seemed to be gone in just two trading sessions. After being on a dream run, the markets were looking for an excuse for correction. The Reserve Bank of India's announcement of a hike in the CRR became a trigger. Also, lower-than-expected industrial production data contributed to the bulls' misery. Industrial output growth for October slowed to a 10-month low, much lower than estimated. Production at factories, utilities and mines grew by just 6.2% from a year earlier, after gaining 11.4% in September. Capital Goods stocks were the worst hit as growth in Capital Goods was sharply down from last year. The surprisingly weak data raised questions over the growth of the Indian economy. BHEL, Tata Steel, ITC and SBI were the major losers in the Sensex. While, Satyam and Dr Reddy's were among the notable gainers.
Selling was seen in Auto, Sugar, Capital Goods, Metal, Mid-cap and Oil & Gas stocks. While IT stocks bucked the negative trend and closed with gains led by Satyam. Finally, the Sensex closed the week at 13614.52, down 1.3% or 185 points after hitting a low of 12,801.65 and a high of 13,801.98. The NSE Nifty fell by 1.85% or 73 points to close at 3888.56 as the indices recorded their second consecutive weekly decline.
Banking stocks bore the brunt of the selloff after the RBI unexpectedly raised the CRR by 50 basis points. The action will drain Rs135bn from the banking system, at a time when the demand for credit is pretty strong. Index heavyweight SBI lost by over 6.5% to Rs1264, while HDFC Bank dropped 2.5% to Rs1057 and ICICI Bank edged lower by 0.7% to Rs870. Among the Mid-Cap stocks, PNB lost over 8% to Rs507 and Bank of Baroda slid 5.8% to Rs246.
Selling was also seen in FMCG stocks. Index heavy weight ITC declined 5.5% to Rs174, HLL dipped 1.5% to Rs230 and Nestle slipped by over 1.9% to Rs1063. However, Colgate bucked the negative trend and surged 2% to close at Rs381. Among the auto stocks Bajaj Auto fell by over 2.9% to Rs2571, Maruti shed 2.8% to Rs905. Hero Honda was down 1.7% to Rs730 and Tata Motors dropped 1% to Rs857.
Capital Goods stocks were on the receiving end following lower than expected growth in IIP. Companies across the sector managed to recoup some of the losses, as the long term view on the sector remains positive with increasing infrastructure activity and expansion in capacities by the companies. BHEL declined by over 5% to Rs2496, Punj Lloyd dropped by over 1% to Rs1011, Siemens was down 2.9% to Rs1132. However, L&T gained 0.5% to Rs1459.
Sugar stocks attracted interest as reports stated that the Government may lift a ban on sugar exports between December 18-21. The ban was introduced in July to curb rising prices due to tight supplies, and was due to run until the end of the financial year in March. But, given the selling across the board, most of the sugar scrips ended in red. Renuka Sugar plunged by over 10% to Rs476, Bajaj Hindusthan dropped 8.3% to Rs234, Uttam Sugar fell .6% to Rs35, Balrampur Chini was down 7.2% to Rs3 and Sakthi Sugar lost 6% to Rs105.
Among the telecom stocks, Reliance Communications performed exceptionally well and managed to close at a record high of Rs466, adding over 4%. The company is planning to acquire Hutch Essar, one of the leading GSM service providers in a bid worth up to US$14bn. However, other telecom stocks fell sharply with Bharti Airtel losing 2.7% to Rs616 and VSNL dropping 5% to Rs404. Cement stocks lost ground on the back of profit booking. ACC lost by over 4% to Rs1058, Mangalam Cement declined 4.4% to Rs197. Kakatiya Cement slipped 4.6% to Rs106, Grasim fell 1% to Rs2728 and India Cements was down 1% to Rs228.
SpiceJet zoomed by over by 5% to Rs56. New Delhi-based low cost carrier announced that it plans to raise US$118.5mn through a preferential allotment of equity shares to a clutch of foreign and domestic investors, including the Tatas. Airline stocks were also a buzz with reports that the Government may ease rules on local airlines that want to start international flights.
Aurobindo Pharma climbed by 2.5% to Rs696 after the company's Board approved a proposal to merge APL Sciences and Senor Organics, two wholly subsidiaries with itself. The company also received MEB Netherlands' approval for Simvastatin.
Indiainfoline - Top Stories
RBI hikes CRR to curtail inflation
Dr. YV Reddy, the Governor of the Reserve Bank of India (RBI) never fails to surprise the markets. In yet another instance of his penchant for catching the markets off guard, he has hiked the Cash Reserve Ratio (CRR) by 50 basis points, to 5.50%. The increase is to be implemented in two phases, first on Dec. 26 and the second one on Jan. 6. The CRR is a proportion of deposits that banks must keep with the central bank as cash. The higher the CRR, less is the money available with the banks for the purpose of lending. The CRR hike is expected to suck out Rs130-140bn from the banking system. It will increase the cost of funding for banks and eventually result in increase in interest rates across the board. A slew of banks announced a revision in their interest rates. While SBI raised only the deposit rates, ICICI Bank went ahead with an increase in both the lending rates and the deposit rates. The PSU banks are reluctant to raise lending rates on their own without getting a green signal from the Finance Minister. However, if more private banks joint the rate hike bandwagon nationalised banks won't have much of a choice. The liquidity will also get squeezed in the coming days owing to advance tax payments, fresh bond auctions and the CRR hike. The move is unlikely to have a major impact on the banks' profits. But, doing business won't be easy going ahead in an environment of rising interest rates and growing credit demand. What remains to be seen is whether the RBI goes for another tightening in January. Right now, most bets are on another hawkish policy from Governor Reddy.
October industrial output falls sharply
The unprecedented expansion in industrial growth over the last few months came to an abrupt and a rather unexpected halt in October. What's worse is that the driver of the strong growth in the first half i.e. manufacturing is the main culprit this time round. The Index of Industrial Production (IIP) grew by only 6.2% in October 2006 as against 9.8% in the same month last year. Manufacturing, with more than 75% weightage in the IIP, saw its growth decline sharply, from 10.9% last year to just 6% this year. At the same time, mining and electricity actually did better than last year, growing by 4% (-0.1%) and 9.7% (7.7%), respectively.
If one digs deep into the numbers, one finds that capital goods growth decelerated sharply, from 24.3% to 8.2%. Within the Consumer Goods space, both Consumer Durables and Non-Durables registered weaker growth of 2.4% (16.4%) and -0.4% (14%), respectively. Another thing to note is that among the 17 industries, Food Products (90.83% weight) clocked a negative growth of 9.7%. Basic Chemicals & Chemical Products (140% weight) saw its growth fell from 9.3% to 1.9%. Machinery & Equipment (6.4%) and Transport Equipment & Parts (5.4%) were the other two industries where growth was sharply down from October last year.
One reason for the steep slowdown in industrial activity could be that companies chose to dip into their inventories built up over the previous months. another factor could be that the Diwali festivities fell in October instead of November. So, the number of working hours were lower than usual. Also, the base last year was higher, especially for manufacturing at 10.9%. Lastly, key components with high weightage failed to turn up the heat. So, there is no need to lose sleep over what appears to be a blip or an aberration in an overall buoyant environment for industrial growth. One will have to wait for the data for November and December, before jumping to any conclusion.
Sharekhan Investor's Eye dated December 15, 2006
Unichem Laboratories
Cluster: Apple Green
Recommendation: Buy
Price target: Rs360
Current market price: Rs262
Niche Generics to have marginal impact
Key points
- Unichem Laboratories Ltd has acquired the balance 40% stake in its subsidiary, incorporated in the United Kingdom, Niche Generics Ltd, from a group of managers of Niche Generics.
- Prior to this acquisition, Unichem held a 60% majority stake in the said Niche Generics.
- Niche Generics, UK, is engaged in the business of product development, dossier filing and manufacturing pharmaceutical formulations for the European markets.
- Niche recorded revenues of GBP12.3 million (approximately Rs108.2 crore) in FY2006, with profits of GBP0.1 million (approximately Rs0.9 crore). The performance of the company has been poor largely due to the severe pricing pressures being witnessed in the UK generics market.
- We do not expect the acquisition to impact the profitability of Unichem significantly. However, strategically the company may exploit the strengths like product development, dossier filing and manufacturing of the wholly-owned subsidiary and may accelerate its fillings in the European region, leading to an expansion of its footprint across Europe.
- At the current market price of Rs262, the stock is trading at 9.2x its estimated FY2008E earnings. We maintain our Buy recommendation on the company with a price target of Rs360.
SECTOR UPDATE
Cement
Concrete road ahead
Key points
- Continuing with the growth momentum of the past few months, the cement dispatches for November grew by a strong 13% year on year (yoy) to 12.4 million tonne against a marginal growth of 5% in the same month last year. The cement prices followed suit, surging by 25-30% yoy to the levels of Rs205-210 per 50-kilogram bag for the month.
- The southern region witnessed the highest year-on-year (y-o-y) growth in dispatches in the month at 18%.
- With all the three demand drivers, ie the housing, industry and infrastructure sectors, showing strong signs of growth, the consumption of cement is expected to grow at a compounded annual growth rate (CAGR) of 10-10.5% for the next three years.
- In such a scenario, we expect the cement prices to sustain at the current levels for as long as beyond FY2009. That the industry shares our expectations is evident from Sanghi Industries' recently-announced plan to scale up its cement capacity by 5.7 million tonne over the next two to three years. Even the cash-rich companies including Shree Cement (which is already raising its capacity from 4.5 million metric tonne [MMT] to 10MMT) are looking to expand further and this only reinforces our view that cement prices will remain buoyant for the next two to three years.
- Tamil Nadu will implement the value-added tax (VAT) with effect from January 1, 2007, migrating to a sales tax rate of 12.5% from 14.5% currently. This will spell good news for the south-based cement companies, namely India Cements and Madras Cement.
- Recently, Holcim upped its stake in Gujarat Ambuja Cement Ltd (GACL) by 3.7% to 18.67% for a price of Rs690 crore. This translates into a mammoth enterprise value (EV) of USD270 per tonne. We believe the stake hike would provide a fresh trigger for the cement stocks that have under-performed the Sensex in the last three months.
- We maintain our positive view on the cement sector and believe that the companies that have taken a lead in announcing capacity expansions, such as Grasim Industries, Shree Cement, Jaiprakash Associates, UltraTech Cement and Madras Cement, will benefit the most in a scenario of buoyant prices. We rate Grasim Industries, UltraTech Cement and India Cements as our top large-cap picks in the sector. Among the mid-caps we like Shree Cement and Madras Cement. We also like Orient Paper and Industries and JK Cement on account of their compelling valuations, which are much less than the sector average
Sharekhan Eagle Eye (equities) for December 18, 2006
3900 in sight
The Nifty traded firm for the third consecutive day, but failed to close above the 61% retracement level of 3900 after touching an intra-day high of 3908
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Cairn India Ltd. IPO Subscription Details
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Whoever applied will GET FULL ALLOTMENT! FIIs will get their share of full allotment too. Very poor response from people who burnt their fingers in RPL
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