PULSE TRACK
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Fiscal deficit broadly in line with estimates
MARKET OUTLOOK
Setting sights on 16000
We expect the markets to reach 15500-16000 within the next twelve months. This appears a reasonable target given our expectation of a robust growth in corporate earnings, a positive Union Budget and benign global macro factors especially a possible rate cut by the US Federal Reserve (Fed) in mid-CY2007. With the global growth rate likely to moderate, inflationary pressures in the USA should ease in three to four months. India would continue to grow at a robust rate though and thus attract good foreign funds in line with the other emerging markets. This would lead to strong liquidity conditions and money supply will continue to grow at 19-20%. In this issue of Market Outlook, we have analysed the various positives and risks associated with our equity markets in the coming year. Our preferred sectors are those that are driven by domestic consumer demand and capital spending, and therefore are relatively insulated from a US slowdown. Thus sectors like automobiles, banking, capital goods and cement continue to remain our preferred bets.
STOCK UPDATE
Aban Offshore
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs2,090
Current market price: Rs1,636
Unlocking of value
Key points
- Aban Offshore (AOL) will make an open offer for an additional 60% stake in Sinvest at an estimated cost of $800 million. To fund the same, it has tied up for debt of $625 million at the subsidiary level and is making a private placement of $150 million in Aban Singapore Pte (ASPL).
- The private placement pegs the equity value of ASPL at $1.45 billion, which is much ahead of the market expectations. Consequently, the implied value of AOL's stake in ASPL works out to around Rs1,426 per share. The open offer is also positive in terms of gaining a controlling stake in Sinvest that would provide AOL access to the strong cash inflows generated by Sinvest.
- The target price is revised to Rs2,090 to factor in the higher-than-expected value of ASPL. The stand-alone business is valued at Rs664 per share, which is 12x FY2009 estimated earnings (discounted by 12% for one year).
SECTOR UPDATE
Automobiles
Good growth despite year-end
Key points
- Bajaj Auto has reported encouraging sales numbers for the month of December 2006. This month is generally a lean month being the last month of the year.
- TVS Motors has reported disappointing sales numbers for the month of December 2006. The sales in December were impacted to some extent by the impending implementation of the value-added tax (VAT) in Tamil Nadu with effect from January 1, 2007.
- Hero Honda reported a lower-than-expected growth in its two-wheeler sales in December.
Maruti has reported strong sales numbers for the month of December 2006 at 56,985 vehicles, a growth of 24% yoy. The domestic sales grew by 26%, whereas the export sales declined by 17% yoy. - M&M's utility vehicle (UV) division has reported a growth of 29.5%. Scorpio grew by 22.4% and UVs other than Scorpio grew at a faster rate of 39%.