Weekly Close: Recovery after Inflation Fall..But ?

Holiday shortered week witnessing Investors putting thier thumbs down for market on back of inflation and major acquisitions. The inflation touched alarming two years high of 6.58% crating panic among investors. The Numbers for the week too came out high at 6.73%. Inflation is really a big worry and good excuse for the market trading which is at its all time high, had its impact on market in big way. Banks were hit majorly. Market witnessed sharp fall as the week began and continued for three days. Major acquisitions where accomplished during the week but investor response was not heartwarming. $19 bn Hutch acquisition by Vodafone smashed the Telecom majors particularly Reliance Communication. Novelis, the another major acquisition by Hindalco was unsolicited by investors. To tame the inflation pressure RBI increase CRR overnight by 50 bps. However, by the end of the week most of the inflation concerns was priced in and led to sharp recovery in market along with positive global cues.

Sensex was down by 35 points or 1.2% for the week. Gains were largely led by Wipro up 6.35%, Satyam up 3.84%, Bharti up 4.81%. While Maruti (-5.24%), Hindalco down (-12.32%), HDFC Bank (-5.57%), BHEL (-4.77%), SBI (-6.14%), Grasim (-6.26%), Ranbaxy (-5.89%) shed gains.

Global markets were strong with US markets trading at the all time high as investors cheered soothing words from Federal Reserve Chairman Ben Bernanke on inflation. Bernanke spoke of inflation moderating, said that unemployment won't be a problem and that there are tentative signs of housing stabilising. He said "the incoming data have supported the view that the current stance of policy is likely to foster sustainable economic growth and a gradual ebbing of core inflation" Further comments are expected on. Metals too recovered for the weak. Crude traded below $60 a barrel.

In an attempt to cap inflation, Reserve Bank of India announced to hike the Cash Reserve Ratio (CRR) by 50 basis points to 6 per cent in two stages. The first hike of 25 basis points will be effective from February 17 and the second from March 3. The CRR increase will drain Rs 14,000 crore of liquidity from the banking system. Rs 13,500 crore drained in the last week of December and the first week of January which the bank implemented the first round of hikes. Some relief can be expected with CRR hike. However, there are two issues which are of concern. Coming within 2 weeks from the credit policy where this could have been done. It leaves a taste that the RBIs feel on the economy was not right. Secondly the extent of the hike at 50 basis points really implies that a panic button has been pressed.

Other than CRR hike Govt. also banned wheat exports with an intention to ease if wheat prices. But, India imported wheat in 2006 to meet the demand..at such situation banning export really don't have any impact. Government has also announced to cut the prices of Diesel, Petrol Rs.1 and 2 per Lt with immediate effect from 15/02/2007 mid night. However, we believe that such measure will not have any specific impact unless and until Govt. take measure to increase production and ease supply side concern especially for primary article which have 22% weight age in WPI. topnew.gif (1104 bytes)

Investors! thumbs down on acquisition; Banks see the dent

Vodafone emerged as the top bidder for majority stake in India's fourth largest mobile player Hutch-Essar, pipping Anil Ambani group's Reliance Communications, Essar and Hinduja Group. Vodafone apparently had bid at $18-19 billion. Essar, has a Right of First Refusal on account of its 33 % holding in the venture has also bid. Valuation were certainly high. However, such bids normally include the control premium and should not be used as benchmarks for valuing other companies. Rel com and Bharti lost the ground on back of this. R com would have gained direct entry in GSM via this bid and entry period would have reduced. Bharti recovered later on as Vodafone announced to use Bharti's services for NLD etc. Now one needs to see how Rcom manages to get entry in GSM.

Hindalco, announced that it was set to buy US-based aluminum products company Novelis in an all-cash transaction which values Novelis at approximately $6 billion, including approximately $2.4 billion of debt. This is a loss making company. Any acquisition in commodity at its peak is considered as overvalued. As per few reports Hindalco is effectively making an investment worth 80% of its market cap in an asset that is likely to yield negative/low returns in near to medium term. Expect pressure to prevail here.

This weak saw all banks increasing their Prime lending rates followed by CRR. Over the past three years, interest rates have gone up on five occasions. From 7% in 2004, the rates hit 10% by January 2007 and now this would be another 50-100 basis point increase. Borrowers are now paying nearly 25% higher equated monthly instalments (EMIs). 75% of the home loan market lies with private sector banks and housing finance institutions. ICICI Bank is a leading home loan lender of the country. Home loan lending is about 50 per cent of its retail portfolio which is 70% of the total Portfolio. Home loans had grown by over 54% on June 30, 2006, from a year earlier. Home loans have been selling like hot cakes with increasing disposable incomes and the change in psyche of the Indian consumer towards loan. More than that it has been the easier access to such loans with much less paperwork. However, the eligibility of the loan amount comes down dramatically with higher interest rates and high real estate prices. It also needs bigger upfront payment from the home loan seeker. We believe that the growth will be slower than the 30% we have seen but really the effect of the economy boom continues to trickle. The house loans are more taken by actual users. An interesting observation by an HDFC executive was very enlightening. House Prices were about 22 times annual salaries about 15 years ago. In the golden period of 20033-2005 then became 3-4 times annual salaries and now they have moved up to 5-6 times. In essense they are still not unaffordable, just that the growth will be slower and with confidence in the Indian economy being high there is little reason to worry. Our opinion is that the euphoria for the realty stocks is likely to wane for now because the low hanging fruits are getting fewer and the base is higher and valuations stretched.

Denim prices have moved up and that's some positive for the Denim Manufacturers. This movement has been largely on the back of higher cotton prices. Cotton prices have moved up by 5% pushing up yarn and Denim prices. The companies which would benefit from the same are spinners who would have contracted cotton already. Arvind has cotton contracted till March so would see benefits so also Ambika Cotton which is a compact yarn maker. The other players in this Spentex, Super spinning which have large capacities. Some are trading upsides... but tough call to say whether they will enjoy sustained higher margins and this also depends on how much cotton has been contracted.


Technically Speaking: If Sensex holds above 14500 by expiry, we might see new high and the next target will be 15000.