Dead Presidents! - India Equity Research: 09/01/2007

Sunday, September 30, 2007

The stock markets are brimming with optimism. Money is pouring into the market like never before. The index has embraced unimaginably new highs. For now, it appears that the bull-run is at the horizon. For a true bull market, at least 20-25 per cent of the stocks must be on an increase and that too for a sustained period say two years. An upswing market is considered a good time for the investor.

What sort of a strategy must investors adopt to make it rich in a bull run? It is not unusual to find some stocks faring poorly in a bull market and some doing exceptionally well in a bear market. A bull run implies a booming economy, low unemployment rate, high production of goods, and low inflation.
The market ups and downs follow cyclic patterns.

For now, it is the time of rising index and increasing volatility. In a bull run, investors follow the formula 'buy low and sell high'. It is now time for investors to sell their stocks and book profits. Investors need to make well-educated and investigated investments in the markets.

Mere speculation can prove costly. Suppose in a bear market one stock fares poorly. An investor who has done enough research will know the reason for its fall. There may be something fundamentally wrong with the stock and the company policies.

Or the slide in the stock's price will be a reflection of general pessimism pervading a bear market. If an investor knows that it is the latter, he will stay calm and may be even add more stocks of the company to his portfolio. On the other hand, if he believes that something is fundamentally wrong with the stock, he may decide to sell it and stop further loss.

The scenario holds much the same in a bull market. Some stocks may become highly overpriced. An overpriced stock in a heated market is sure to burst when the bull run ends. Some investors prefer to sell all their shares and make profits. Another strategy is to sell some of the shares and buy back the stock when the price falls back to reasonably low levels.

The value of equities tends to rise fast in a bull run. Predictably, the equity investments in your portfolio will become disproportionately higher. Depending upon your age, objectives and financial obligations, you would have arrived at an asset allocation plan.

In order to stick to the asset allocation, make a judicious down-sizing of the equity component. This will provide ample cushion in case the bubble bursts and markets fall. In a bull run, investigate the real value or worth of the stocks. Do not invest in overpriced stocks. It is advisable to sell overvalued stocks. Exit immediately if you feel the prices have gone up adequately.

Invest regularly. The power of compounding and systematic investment plans goes a long way in wealth accumulation. Finally, bear in mind that there are no permanent bull and bear markets. Disciplined investing and avoiding speculation will help investors.

Weekly Technicals

Weekly Technical Analysis

The amazing bull-run continued for yet another week, with the benchmark BSE index, Sensex, gaining over 727 points last week. During the week, the index logged its fastest-ever 1,000-point gain, that is, in five trading days, the index moved up from 16,000 to 17,000.

The index touched a new all-time intra-day high of 17,361 on Friday. The Sensex was up 727 points at 17,291 for the week, and nearly 13% (1,973 points) up for the month.

The Sensex has gained a whopping 22.3% (3,150 points) in the last six weeks. While Reliance and select banking counters continued to lead the rally, beaten-down technology stocks, too, surged in the latter half of the week.

Currently, the Sensex is in unchartered territory and the upmove will continue as long as the index stays above the 15,800-16,000 band.

However, the index is now in overbought zone and hence the chances of a short-term pause or decline are on the higher side. The 14-day RSI (Relative Strength Index) is at 73, a RSI of above 70 is overbought, while a RSI of less than 30 is oversold.

This week, the index may face resistance around 17,580-17,670-17,760, while on the downside the index is likely to find support around 17,000-16,820-16,820. The NSE Nifty, too, was not to be left far behind. The index crossed a major landmark of 5000 during the week.

The Nifty touched a life-time high of 5056, and finally ended the week with a gain of 184 points at 5021. The index gained 12.5% (557 points) in September.

The Nifty is likely to face resistance around 5105-5130-5155, while on the downside the index may find support around 4935-4910-4885.

Illegal VoIP

Internet telephony is great. Download free software, like Skype, get a headset and you can talk to anyone in the world from your PC.

However, internet telephony, estimated at 200 million minutes a month, has become a battle ground between Internet Service Providers (ISPs) and internet companies backed by India’s two largest internet associations. The Internet Service Providers Associations of India (ISPAI) — on one side and the Internet and Mobile Association of India (IAMAI), on the other. The issue is unlicensed use of net telephony — estimated at 100 million minutes a month.

ISPAI with its members like Worldphone, Webtel, Sify, Net4India is alleging that large MNC players like Skype, Vonage have eaten into their market share by offering unlicenced net telephony illegally. ISPs also allege that voice chat through Google, MSN and Yahoo is resulting in revenue leak for the government and posing grave security concern.

MSN and Yahoo, however, denies such claims. IAMAI, the association supporting Yahoo, MSN and others, says, that since these companies offer free service there is no question of levying a service tax through licencing.

"We will abide by whatever the government asks us to do. On the service tax front, we don’t accrue any revenue as our PC to PC telephony service is free. We offer PC to phone service globally, but not in India as it’s not permitted,” said Microsoft India country manager (online services business) Jaspreet Bindra.

Internet companies offering chat services also say that security checks are random and they cooperate whenever government ask them to do so. But ISPAI disagrees, saying that it’s a grave security risk as call data records under voice chats are not saved by unlicenced providers.

“Apart from the revenue leakage, these sites pose a threat to security as they don’t provide surveillance or monitoring. In India, companies like Skype, Vonage, Packet 8, Go2call, Lingo, Impetus, Dialpad and Net2Phone have been offering unlicenced net telephony services, which is mostly illegal. If they don’t opt for a licence the government should block them,” said ISPAI president Rajesh Chharia.

Vonage refutes these claims. “We have zero revenues from India. Nevertheless, we applied for a licence in March 2006. Moreover, only US and Canada credit cards work on our site so their claims are baseless,” said Vonage’s India representative Janki Raman. Internet companies claim that since no calls are terminated in India, there is no illegal play.

Meanwhile, ISPs like Worldphone who have taken a licence and pay about 18.36 per cent in taxes alone, say that they are being disadvantaged as more than half of the net telephony market has been captured by illegal players as it’s cheaper.

The net telephony market is estimated to be about 200 million minutes per month, at present. Almost half of which is estimated to be captured by unlicenced players. There are an estimated 10 lakh users of which only about two lakh are legal users of net telephony.

"We pay about 12.5 per cent service tax alongwith a 6 per cent tax on our gross revenues. Add to it the cost of maintaining call data records (CDRs), overheads, marketing, reseller/retailer’s share and the difference between our and their price becomes 25 per cent. We want a level-playing field,” said Worldphone chairman Aditya Ahluwalia.

Eveninger - Sep 28 2007

YES Bank Ltd

Sun Direct to increase rates

After last week’s launch of direct-to-home (DTH) service for Rs75 in Tamil Nadu, Sun Direct might hike its monthly subscription, facing pressure from cable television operators.
Sun Direct officials have given an assurance that they will increase the price of subscription by two-thirds to Rs125 per month after the current offer ends this month, said D.G.V.P Sekar, coordinator of the Federation of Cable TV Associations (TFCTA).
Sun Direct is an 80:20 joint venture of Sun TV Networks promoter Kalanithi Maran and Malaysian company Astro All Asia Networks Plc.
When implemented, this would address the concerns of the cable TV operators, Sekar said. Sun TV Network and Sun Direct officials declined to comment.
Cable operators in Tamil Nadu, united in protest against the introduction of the low-priced DTH service by Sun Direct, appeared to have split over the issue of setting up their own facilities to distribute satellite TV channels.
All the associations have expressed willingness to work with the government’s proposed distribution arm, Arasu Cable TV Corp. Ltd. They are demanding that Sun should either offer cable TV or DTH, and should not be permitted to offer both.
At present, Sumangali Cable Vision (SCV), a cable TV distribution arm of Sun Group enjoys a near monopoly position in most parts of Tamil Nadu.
Thamizhaga Cable TV Operators General Welfare Association and Tamil Nadu Cable TV Urimayalargal Sangam (Tancus) have decided to set up their own control room to receive and distribute channels in the state.
“We want to protect our interests and don’t want to depend on Sun for signals to run our operations,” said Kayal R.S. Elavarasu, president of Tancus.
However, TFCTA objects to this move, claiming assets worth Rs50 lakh were destroyed in Nagercoil, a southern district of Tamil Nadu, and a member-run control room was forcibly taken over in Madurai. “We too oppose Sun’s entry into DTH service. But, setting up operations through violence is condemnable,” said Sekar.
Elavarasu of Tancus rejected these charges, saying infrastructure was set up through voluntary collection from individual cable TV operators.
He added it would close operations when Arasu begins operations, and termed its current strategy a temporary move to protect its interest.

Centurion Bank of Punjab: Buy

Among mid-size private sector banks, Centurion Bank of Punjab (CboP) presents a good investment opportunity for investors with both short and long holding time horizons.

The stock is currently quoting around Rs 45 (face value of Re 1) and at these levels, the valuation is out of tune with multiples for banks in this or other categories.

The latest per share earnings, for instance, is around 85 paise and the book value per share is around Rs 8.

Therefore, the valuation multiples (price-earnings multiple of 60 and price-book value of 6) based on historic earnings are stiff indeed.

But by entering the stock now, investors could be well placed to reap the rewards of all the efforts of the past four years in first stabilising the bank’s business and then rendering it fit for growth.

After the almost headlong rush into impaired assets in the second half of the 1990s and consequently the stabilisation/recapitalisation in the first years of the new decade,

CBoP appears quite well positioned now to capitalise on the large and rapidly growing business opportunities.

Vote of confidence

The fact that the Reserve Bank of India has approved the merger of the loss-making (but well-networked in a particular region) Lord Krishna Bank with CBoP can be taken as a strong vote of confidence in the strength and growth prospects of CBoP’s underlying business.

It is proof that the bank’s balance sheet is now strong enough to absorb a loss-making bank and also that its business model is robust enough to make good use of the merging bank’s branch network for further expanding geographical and business reach.

Lord Krishna Bank will add about 120 branches with more than 80 per cent of them in Kerala/other southern states where business prospects traditionally have been good.

The earlier merger of Bank of Punjab with Centurion Bank in October 2005 also appears to have been successful, if the growth in key parameters such as deposits, advances in the past two years is any indication. Long-term investment prospects, therefore, look good.

The strong foundation, the return to sustainable profitability and the scalable business model also mean that a bank such as Centurion could be a key takeover target when the banking sector is opened up for more foreign participation in 2009.

Investors in the Centurion Bank stock may benefit from such a development, even in the short/medium term.

Business operations

The bank seems to have developed a niche in retail lending/distribution of financial products and at the same time has substantially stepped up corporate lending. This overall balancing could stand it in good stead as it seeks to scale up business.

Retail loans (two-wheeler loans, commercial vehicle financing, personal loans, housing loans, etc), which formed as much as 90 per cent of total advances in 2005, have declined to around 70 per cent currently. Corporate loans have increased their share of total advances from 8 per cent to around 30 per cent in the same period.

While the wholesale/corporate/SME relationships provide stability to the revenue stream though margins could be lower, some retail segments generate higher margins.

The bank has a relatively high net interest margin of around 4.6 per cent. The non-lending activities — distribution of financial products such as mutual funds, insurance — provide a platform for capturing income flows from high growth financial services activities.

Non-interest income accounts for around 25 per cent of the bank’s total income, which is high for a bank of Centurion’s size. It is notable that only ICICI Bank, with its much bigger scale of operations, has such a high share of non-interest income.

While such high non-interest income is welcome in one sense, it could also add volatility to the overall earnings in a business downturn.

Also, such fee-generating activities imply a higher operating leverage generally for banks — evidenced by higher employee costs.

Centurion’s employee costs, for instance, are relatively much higher at 16 per cent of total expenses against around 10 per cent for comparable banks.

Business growth, Risks

Advances have grown at an annual average rate of 125 per cent in the past two years. Deposits also have largely kept pace growing at around 105 per cent.

The bank appears to have contained growth in NPAs despite such rapid asset build up with net NPAs at around 1.3 per cent in March 2007 down from 2.5 per cent in March 2005.

Provisioning coverage for NPAs has come down from 65 per cent in March 2005 to 55 per cent in March 2007.

The increased focus on corporate lending has probably helped in lowering net NPAs despite lower provisioning coverage.

Nevertheless, net NPAs remaining above 1 per cent is a cause for concern. A higher CASA share in total deposits (around 30 per cent now) also would provide more comfort.

Kalindee Rail Nirman: Buy

Investors with a high-risk appetite and a three-four year investment horizon can consider buying the stock of Kalindee Rail Nirman, a leading turnkey project execution company in the railway sector.

Involved in the field of signalling, telecommunications, gauge conversion and track-laying for the Railways, Kalindee is likely to emerge as a leading beneficiary of the increasing capex by the Railways in recent years.

For the financial year 2008, the Railway Ministry has proposed the largest-ever Annual Plan of Rs 31,000 crore dedicated to modernisation, development and investment in new railway lines.

The company’s solid earnings growth, growing order-book and robust business outlook inspire confidence. At the current market price of Rs 298, the stock trades at about 17 times its likely FY-09 per share earnings.

However, given the volatility in the broader markets, investors can consider buying the stock in lots.

Investment rationale

The increased focus on improving railway infrastructure is likely to have a direct impact on the growth prospects for Kalindee, which derives most of its revenues from projects executed for the Railways.

One, given Kalindee’s expertise in laying rail tracks, it is likely to reap significant benefits from the proposed expansion in network by the Railways.

Two, the introduction of metro rail projects in cities such as Mumbai, Chennai and Bangalore could open up new sources of revenue.

Notably, Kalindee had, with the help of technology from its foreign partner, laid the tracks for the Delhi Metro Rail project. Kalindee’s established market presence backed by its execution skills could give it an edge in bagging orders.

The recently-won repeat order from Delhi Metro Rail for the construction of 33 km of track in Phase-II of its expansion, could also serve as a reference point for future orders.

In terms of order flow, the government’s decision to convert most of the existing metre gauge rail lines to broad gauge by the end of the Eleventh Plan could also translate into a healthy order book for this company, as it has experience in already completing about 450 km of gauge conversion

Besides, revenues could benefit from incremental business due to the setting up of the eastern and western dedicated freight corridors. Notably, the Government has allocated a sum of Rs 30,000 crore for this project.

Foray into rail sidings

While Kalindee’s foray into building rail sidings for steel and cement plants may not contribute to revenues in a big way now, it has the potential to be scaled up, given the ongoing capex investments undertaken by leading companies in these sectors.

Kalindee has already undertaken projects for companies such as Vedanta and Dalmia Cement, and is in talks with other players to get more such business.

For the quarter-ended June 2007, Kalindee reported a three-fold growth in earnings backed by a 148 per cent growth in revenues. Operating margins dipped marginally to 11.55 per cent. Its order-book, pegged at Rs 500 crore, is about 2.6 times its FY-07 revenues.

However, the management expects a chunk of the orders to be executed by 2008, with the rest spread over 2009.

Any delay in the rollout of the expansion plans charted out by the Railways could pose a risk to our recommendation. Also, since Kalindee is a small-cap stock, it enjoys limited liquidity. Purchases must be carefully timed and made in lots to obtain better prices.

Hanung Toys: Buy

An investment can be considered in the stock of Hanung Toys and Textiles (Hanung). The company t continues to record strong order flows amid an uncertain export environment. It has so far handled the rupee appreciation well, with its realisations actually improving in recent times. Hanung’s toy export business may also benefit from the possible backlash on Chinese toy manufacturing following Mattel Inc’s recall of 18 million defective products. At the current market price of about Rs 160, the stock trades at about 10 times its likely 2007-08 earnings per share.

Long-term contracts

Entering into a long-term contract with buyers is not a standard practice in the textile industry, as international retailers tend to alter their sourcing plans based on changing fashions. Hanung has managed to enter into two-three year contracts with its clients. It recently bagged a Rs 600-crore order from IKEA, Sweden, with whom it has a long- standing relationship, for exporting soft toys/children’s furnishing. This order is likely to deliver a steady revenue flow over the next four years. It also received a Rs 200-crore order from a US buyer for exporting home furnishings, which is to be completed by December 2009.

In the backdrop of concerns of a slowdown in US imports and an appreciating rupee that might render Indian textile exports uncompetitive, the long-term nature of the contracts provides greater visibility to Hanung’s revenue stream.

Hanung is also well-placed now to cater to these orders. With the help of the proceeds from its IPO in late 2006, it has integrated backward into fabric manufacturing. The new facility has come on stream in July.

Rupee rise

The sharp appreciation of the rupee in the early part of 2007 did not have a significant impact on Hanung’s operating margins on the back of improving volumes. Operating margins in 2006- 07 were up 2 percentage points at 17 per cent.

In the first quarter of the current fiscal as well, margins have improved on the back of improving utilisation levels. Rising contribution from domestic operations and raw material imports, which have provided a natural hedge against the rising rupee, have helped limit the impact of currency appreciation on margins. Imports account for about 30 per cent of revenues.

Hanung has been able to negotiate with its buyers for better prices. About 20-25 per cent of its order from IKEA has been priced in rupee terms.

Higher domestic share

Besides, Hanung’s domestic operations may begin to take up a greater share of revenues from the current 25 per cent. Hanung sells soft toys to retailers such as Lifestyle, Shoppers’ Stop and other departmental “lifestyle” stores. These stores are on a rapid expansion path and are increasingly targeting the children’s segment.

Revenues from domestic operations jumped eight-fold in 2006-07 and increased by 50 per cent in the first quarter of 2007-08.

With the licence to use Disney characters for the manufacture of its toys and home furnishings, Hanung hopes to capitalise on the growing spends in the children’s segment.

Risks

A slowdown in the import of home furnishings following any decline in housing activity in the US or Europe is a key risk to our recommendation. The company has a high client concentration, with IKEA contributing a chunk of its revenues.

Finally, while the recent product recalls from China may have a beneficial impact on Hanung in the near term, toy manufacturers and retailers in the US are under pressure to raise safety standards.

Complying with stiffer norms may come with higher costs for Hanung, which also imports a significant amount of its materials for manufacturing of soft toys from China and Taiwan.

NDTV: Buy

An investment can be considered in the stock of leading news broadcaster NDTV with a three-year perspective. The stock trades at a valuation discount to rivals such as Global Broadcast News, which operates the competing English news channel CNN-IBN. There is also potential for unlocking of value in the company’s subsidiaries, which are set to launch a network of channels over the next year or two.

Admittedly, NDTV has disappointed on the earnings front in recent quarters, as the company invested heavily in talent, with one-time bonuses and salary increments, significantly increasing personnel costs. There have also been signs of pressure on advertising revenues as rival channels CNN-IBN and Times NOW dent its market share. To maintain its market share, NDTV has had to step up marketing and promotional spends.

However, performance is likely to improve as NDTV launches new channels targeted at the entertainment and lifestyle genres. Over the medium term, these forays could reduce its dependence on flagship channel NDTV 24X7 and on the news segment, where competitive pressures from new channels continue to build up. Advertisers may also seek out niche channels as viewership gets increasingly fragmented.

The company recently launched NDTV Good Times, targeting lifestyle and consumption trends, with programmes on travel, food, fashion, technology and luxury. The format is still relatively unexplored in India and could attract high value advertisers targeting the premium segment. The channel has a co-branding arrangement with Vijay Mallya’s Kingfisher group; the latter has already taken up some of the commercial slots. Good Times’ shows on cooking, fitness and fashion do appear to have appeal and are likely to find favour with the women’s segment, a key target audience for advertisers.

NDTV also has plans to launch city specific channels and has made a start with MetroNation in Delhi. It plans to launch four other channels in the metros of Mumbai, Kolkata, Bangalore and Chennai. The focus on metros may also prove lucrative from an advertising revenues perspective, as these cities are more mature retail markets.

While the company is likely to face competition from entrants such as INX Media and Viacom 18, NDTV has networked with the big names in the entertainment business. As the talent crunch builds, NDTV’s investments in personnel might finally pay off.

Saturday, September 29, 2007

Mayawati - why not Reliance ?

The shutting of Reliance Retail within 24 hours of its launch in Uttar Pradesh has led industry leaders to ask why the company was singled out by Chief Minister Mayawati, who has openly given the nod for similar other ventures, including Spencer's of the RPG group.

Representatives of the industry, intellectuals and common consumers all have been making wild guesses about why Reliance outlets were closed down, which has dealt a big blow to the world's richest Indian Mukesh Ambani's first foray into Uttar Pradesh, which was projected as India's biggest market.

But the worst hit by the order are around 900 of the 2,000 employees who have been retrenched, while thousands of those who were looking up to the retail sector in general and Reliance in particular as a major source of employment see major disappointment in store.

Reliance Retail alone had projected a potential for providing direct and indirect employment to nearly 50,000 people, according to a highly placed company source. An investment of Rs.80 billion was also projected in the state by Reliance over a three-year span.

What seems to puzzle all is the "discriminatory attitude" of the government towards Reliance.

"If the government were to be believed that the decision was taken in the larger interest of vegetable growers and small time vendors, then the same should have been applied on Spencer's and Big Bazar, whose operations are no different from Reliance," a company official sought to point out.

"After all, the others too have vegetables and fruits as a component," he said.

"More than 90 percent of our trade at the proposed 300 Reliance Retail stores was non-agri, and vegetables and fruits formed only 8 percent of the retail business," he pointed out.

Meanwhile, Spencer's, Subhiksha and Vishal Mega Mart are already running 56 retail stores across the state, while 21 new ones are in the pipeline.

Industry and commerce representatives feel that if the government really felt that giant retail stores would adversely affect vegetable and fruit vendors then Reliance could have been asked to go ahead with other goods.

They also wondered why the present government, which believed in dealing firmly with all unlawful activity, had chosen to give in to a minor protest and that too by activists of its rival, the Samajwadi Party.

They were apprehensive that such an attitude of the government would discourage other prospective investors who otherwise see UP as a major potential state.

Referring to the protests, Punjab Haryana Delhi Chamber of Commerce state spokesman Anil Shukla said: "We have already said in a letter to the government that resistance is a natural response to every change."

Terming the protestors as protagonists of "middlemen", the letter states: "In case of the retail business too we understand the resistance has come from a handful of people, largely middlemen who account for less than one percent of the society."

It added: "Uttar Pradesh has abundant capacity to expand in the field of organized retail. This is the time to welcome businessmen in Uttar Pradesh. The benefits to state and public could be phenomenal and the state could witness new economic growth without having to make any investment; better price for the farmer for his produce, besides throwing open a vast new avenue for employment."

A similar letter has been sent to the government by the Confederation of Indian Industry (CII) state chief Deepak Malik, who sought to draw the government's attention to the fact that retail business "could ultimately bring investment to the tune of Rs.40,000 crore (Rs.400 billion) in Uttar Pradesh".

While no government official is willing to make a comment, there is also none to either lend an ear to their pleas, they lament.

A well known Kanpur based industrialist told IANS on the condition of anonymity, "by shutting Reliance, the government has killed the golden goose".

The state government shut Reliance Fresh outlets in the state in August following protests by the opposition Samajwadi Party.

IFCI soars after short-listing 8 bidders

Shares of IFCI shot up by more than 10% on Friday after a financial daily reported that the public sector term lender has shortlisted eight bidders for the proposed sale of a 26% stake.

The newspaper report says that the list of shortlisted bidders includes the consortiums led by Wilbur L Ross and Shinsei Bank. However, the names of those bidders who have been left out have not been disclosed.

At 12:56 p.m., IFCI was quoting at Rs98, up Rs5.20 or 5.6% over the previous close. The stock earlier touched an intra-day high of Rs102.45 and a low of Rs94.15. The stock has gained over 18% in the past one week and a whopping 58% in the past one month.

As many as 10 bidders had submitted bids for acquiring a 26% stake in IFCI. Other members of the consortium led by Wilbur Ross include Standard Chartered Bank, HDFC and Goldman Sachs. Punjab National Bank (PNB) and JC Flowers are part of the consortium led by Shinsei Bank.

Others who had submitted EoIs included Blackstone, IDFC, Kotak Mahindra Bank, GE Capital, Cargill, Newbridge Asia, Natixis and a consortium between Sterlite and Morgan Stanley.

IFCI sources have been quoted as saying that, at this stage, it would not make sense to reduce the number significantly and therefore impact the competitive pricing of the valuation.

The shortlisted bidders would be informed latest by October 1. A pre-bid conference is scheduled for October 3. Thereafter, the shortlisted suitors would be asked to undertake due diligence.

Requests for Proposal (RFP) would be issued a week later. By November, financial bids would be submitted. The Board would then finalise the name of the strategic investor.

There is a lock-in period of three years for the entity or the consortium that would be selected. In addition, the bidders should be in the business of financial services with a long-term interest in the institution.

Surya Pharma, Marico, SEAMAC, Banking

Educomp Solutions, Central Bank

Rupee and the IT sector

The hardening rupee has been one of the major focal points of the IT industry of late. A 10% appreciation in the last one year has made a serious dent on the global competitiveness of the Indian IT sector.

Apprehensions that some segments of the IT/BPO business may be flying out of India has made the industry bigwigs somewhat nervous.

In a bid to combat their growing concerns about the rupee appreciation, some of the industry leaders have even called for slowing down the rate of salary hike in the sector, and of course as expected, others have reiterated their right to peg the salaries wherever they wish. Free market, etc. Thus increasingly, there is a tacit expectation, if not a strident demand, from the sector that the government should manage the appreciation of the rupee better. Never mind its impact on inflation and interest rates.

Well, no harm in having one’s expectations and hopes and sending some gentle signals along those lines. But even as those gentle signals are finding their audience, there are certain aspects of the issue everybody connected should take note of.

From a mere 5% of a $33 billion total Indian exports in 1996-97, today (2006-07) the IT sector accounts for a hefty 25% of the $120 billion total exports from India. This represents a compounded annual growth of 35% for the IT sector over a 10-year period, making IT the fastest growing and the biggest export-oriented sector in the country. Clearly then, if the rupee is getting steadily stronger, the Indian IT sector has had a strong hand in making it so! In short, the IT sector has become a victim of its own success.

After all, if the IT exports rode on a historically weak rupee, it is only natural that in due course, the forces of international markets will bring about a correction. That’s international territory in the financial markets.

That is how industries and nations grow up and learn to cope, as well as find, develop or invent other strengths to stay afloat in a competitive market. And the Indian IT sector can be no exception to this standard rule. It only stands to reason that after decades of reigning strong, the hardest currencies of yesteryears like the US dollar, the Deutsche mark, the pound sterling, the yen or the French franc give way to currencies of the emerging economies.

There was a time when the Japanese automakers faced the same problem as the Indian IT sector today, only much worse — namely that of a super hard yen. Their companies would struggle to spend millions in R&D for devising a superior carburettor design that would bring the cost of a car down by $85, only to see a strong yen push the car price up by $300 the next morning. But the Japanese auto industry learnt to cope. That’s when they unleashed their Lexuses, Accuras and Infinities into the western world.

Clearly, our IT sector needs to find similar market solutions, rather than seriously expect or hope for a government handholding. You either have a free market or you do not. The sector will have to reduce its dependence on conventional export markets; tap hitherto untapped markets, say, among the rapidly emerging east European countries; negotiate their contracts in rupee rather than dollars; get a lot more India-centric; move up the value chain; draw in work-force from the fringe states to bring about superior wage arbitrage and do a whole lot of other things so that the sector is driven more by quality and value than by the softness of the rupee.

To illustrate one of the above points, let us see how our IT sector can become more India-centric. Take Cambodia. For tourists visiting Cambodia, the visa is on arrival. And the software and the system installed at the beautiful Siem Reap airport is so advanced that visas for an entire plane load of tourists is cleared in 15 minutes flat. IT is on its best display here, including the computers on the immigration desk taking your picture on the spot. The same is true of the passes issued as you enter Angkor Vat. The column of vehicles at the entry gate moves faster than our vehicles do at most of our Toll Gates.

During the few seconds a car stops at the entry to Angkor Vat, the tourist’s picture is taken and the laminated pass issued for one or three days as required, complete with his or her picture and other details, such as, name, date, time, etc. Don’t we have enough and more scope in our own country for our IT sector to address, without worrying excessively about exports? We are a big enough country to do much of our ‘exports’ out of Bangalore and Hyderabad to a couple of dozen of states within the country.

Monthly Technicals, Weekly Track Report

Punj LLoyd

BPL Communications licence application under scrutiny

BPL Communication’s (the Mumbai-based operator which was bought out by Essar Group) application for a pan India telecom licence has come under the scrutiny of the Department of Telecom for a possible violation of the cross holding norms with Essar’s equity in Vodafone Essar Ltd.

BPL’s applications were made in the name of Shipping Stop Dot Com in which BPL Communications holds about 74 per cent stake while the Ruias directly own 9.9 per cent stake through an Essar Group subsidiary. At the same time, the Ruias promoted Essar Group also holds 33 per cent stake in Vodafone Essar, which has presence in all the 22 circles for which BPL has also applied.

As per the cross holding norms stipulated in the unified access licence conditions, a single company or an individual cannot hold more than 10 per cent equity stake in two different companies in the same circle. The norms also say that promoter company or an individual may not hold even a single share in more than one company in the same circle. “Clause 1.4 (ii) of the unified access licence states that no single company/legal person, either directly or through its associates, shall have substantial equity holding in more than one licensee company in the same service area. Substantial equity means an equity of 10 per cent or more. Also a promoter company/legal person cannot have stakes in more than one licensee company for the same service area. We are going to scrutinize all applications including that of BPL to check if they are consistent with these norms,” said a senior DoT official.

When contacted an Essar Group spokesperson said, “The applications are fully compliant with the DoT norms.” Sources in Essar Group added that DoT norms did not apply to BPL since the Ruias had reduced their stake to less than 10 per cent stake in BPL. They also said that there was no common promoter company between Essar Vodafone and BPL and therefore there was no question of any violation.

However DoT officials said that they would ask the company to give details of the equity structure of Shipping Stop Dot Com including those held by BPL Communications and Capital Global before taking a decision on the application. Earlier a similar controversy had arisen when the Birla Group had alleged that Tata Group was violating cross holding norms by holding more than 33 per cent stake in Idea Cellular even as Tata Teleservices had rolled out a pan India mobile service.

Reliance Power plans $3.5 bn IPO

Reliance Power Ltd, a company of the Reliance-Anil Dhirubhai Ambani Group or R-ADAG, is planning an initial public offering (IPO) aiming to raise $3.5 billion, or nearly Rs14,000 crore, selling shares equivalent to around 30% stake, two persons close to the plan said.
If the share sale goes through, it could be India’s biggest IPO ever, ahead of a float by realty firm DLF Ltd earlier this year.
Reliance Power, a unit of the Bombay Stock Exchange-listed Reliance Energy Ltd, has been valued at $11 billion, an investment banker said, asking not to be named.
Shares of Reliance Energy rose 7.89% to end Friday’s trading at Rs1,205.50 each—close to its highest traded price of Rs1,220—with a market capitalization of about Rs27,550 crore. BSE’s 30-share indicative Sensex expanded 0.8% to 17,291.10 points.
Reliance Energy, led by billionaire businessman Anil Ambani, declined comment. “We do not wish to comment on market speculation,” a spokesman said.
Reliance Power is expected to file the prospectus with market regulator Securities and Exchange Board of India or Sebi next week. Kotak Mahindra Capital Co. and the local unit of JPMorgan Chase & Co. are among the investment banks with a mandate for the sale.
Reliance Power, earlier known as Reliance Energy Generation Co. Ltd, won the mandate to develop a 4,000MW ultra mega power project at Sasan in eastern Madhya Pradesh this June. The so-called ultra mega power project is estimated to cost around Rs20,000 crore.
It could not be immediately ascertained which of Reliance Energy’s other power projects and assets would be farmed off to its unit Reliance Power. About 60% of Reliance Energy’s Rs6,500 crore revenues in fiscal 2007 came from its power business. Stock broking firm Prabhudas Liladhar had estimated the enterprise value of the power business at Rs1.02 trillion in a recent report.
The parent company had stated in the past that it has plans of setting up 20,000MW capacity by 2015. Some among the new projects could be handled by Reliance Power, an R-ADAG official said, preferring to remain unnamed.
Apart from Sasan, Reliance Energy is building a 1,200MW power plant at Rosa in Uttar Pradesh that it bought from the Aditya Birla Group last year and is also developing a 4,000MW project at Shahapur in Maharashtra. Other projects include the 7,800MW Dadri power project that has been mired in controversy over the supply of fuel from Reliance Industries Ltd, which is run by Anil Ambani’s elder brother, Mukesh.
The capacity of Reliance Energy’s Dahanu power station is being raised to 1,700MW from the current 500MW. The Anil Ambani firm also distributes electricity in parts of Mumbai city.
The share sale in Reliance Power is part of a plan to restructure Reliance Energy into three distinct businesses in power, real estate and infrastructure, sectors in which the Mumbai firm is consolidating its presence. Each of these businesses could be listed at a later date, the R-ADAG executive said. Reliance Energy’s engineering and construction business accounts for two-fifths of its revenues and the company has a small presence in real estate, with an 80-acre development near Hyderabad’s upcoming airport.
A sector expert said the proposed share sale and restructuring could be driven by easing finances for the mega projects. “It looks like they are putting their generation projects into one company, which would make it easier for them to raise money for these capital-intensive projects,” said Arvind Mahajan, executive director and head (energy, government and infrastructure) at the local unit of consulting firm KPMG International.
It is not yet clear whether Reliance Energy would finally emerge as the holding company for all the power projects, Mahajan added. “As of now, it looks like it could be a three-tier structure: with individual projects being held by special purpose vehicles, which in turn is held by the company (Reliance Power) and in turn the group holding company (Reliance Energy),” he said.

Mphasis

YES Bank

Stock Picks

Sobha Developers
CMP: Rs 914.50
Target Price: Rs 870

Kotak Securities has downgraded its rating on Sobha Developers from ‘outperform’ to ‘in-line’, citing a cautious view on the real estate sector as a whole. “We believe current expectations of high volume growth and high price of real estate are unlikely to pan out. We expect residential property prices to see a 10% correction over the next few months,” said Kotak Securities in a note to clients. “We rework our net asset value estimate for Sobha for a 10% reduction in selling price in the next 12 months. Our new fair price for the company, based on March 2009 NAV, is Rs 870 per share,” the note added.

HLL
CMP: Rs 219.35
Target Price: NA

CLSA Securities has downgraded its rating on Hindustan Unilever to ‘outperformer’ from ‘buy’, citing ITC’s impending entry into the personal care segment as one of the triggers. “HUL’s market share trend is improving in certain categories, detergents in particular. While the input prices remain high, price hikes have helped HUL’s margins,” the CLSA note to clients said. “However, the going may get tough with the entry of ITC into personal care segment. While competition is nothing new for HUL, and ITC is not known to compete on price, ITC’s financial muscle and ability to withstand losses for a longer period of time could potentially hurt HUL’s bottomline,” the note added.

Maruti Suzuki
CMP: Rs 999.55
Target Price: Rs 820

Deutsche Equities has retained its ‘sell’ recommendation on Maruti Suzuki with a price target of Rs 820. The brokerage has cited four factors for its negative view -- stretched valuations, rising capex, intense competition, and less scope for further cost cutting. “Rapid strides in indigenisation in the past five years have helped the company improve margins in the past, but this trend is unlikely to continue further. Further, we expect Maruti Suzuki to trade market share for margins with rising competitive intensity,” the Deutsche Equities note to clients said. “Overall, we estimate operating margins to fall by 100 basis points to 13.3% by FY10 (estimated),” the note added. The brokerage has lowered its forecast earning per share for the company for 2008-09 to Rs 58.55 from Rs 60.78 earlier.

Vaibhav Gems
CMP: Rs 204.45
Target Price: NA

SSKI Securities has assigned an ‘outperformer’ rating to Vaibhav Gems, citing upside from new ventures as one of the key triggers. “From being a key jewellery supplier to global retailers, Vaibhav now reaches the end customer directly via TV and direct retailing. The TV channel business has witnessed a quick ramp-up to three geographies within a span of two years,” the SSKI note to clients said. “While a cloud of uncertainty still hangs over the wholesale business, we see immense value being created in the ‘direct sales’ business. Though profitability would remain muted in the near term with large one-off expenses related to start-up cost in new ventures, operating leverage would drive up profits (Rs 70.7 crore in FY09E) as businesses scale up,” the note added.

Petronet LNG
CMP: Rs 80.50
Target Price: NA

MF Global Sify Securities has downgraded its rating on Petronet LNG to ‘underperformer’ from ‘buy’, citing stretched valuations. “We believe that the stock price is running ahead of its fair value,” the MF Global note to clients said. The brokerage has forecast the company’s EPS for 2007-08 and 2008-09 at Rs 5.9 and Rs 6.3, respectively. “Sourcing of LNG at competitive rates would be critical for the viability of Petronet LNG’s expansion plan. The company is likely to face few hurdles as global LNG prices are moving upwards in tandem with the strength in crude oil prices. We expect the financial performance beyond H1FY08 to be tepid as the de-bottlenecked capacity would be utilised to the hilt, limiting any upside until new capacities go on stream,” the note added.

Pantaloon Retail

Grey Market - Consolidated, Dhanus, Saamya, Maytas

Power Grid Corporation 44 to 52 24.5 to 25

Dhanus Tech. 280 to 295 55 to 60 (IMPORTANT - See our note)

Koutons Retail 370 to 415 80 to 85

Consolidated Construction 460 to 510 165 to 170

Supreme Infra 95 to 108 55 to 60

Saamya Biotech 10 4 to 5

MAYTAS Infra 320 to 370 165 to 170

Circuit Systems (India) Ltd. 35 3.5 to 4

Kaveri Seeds 150 to 170 22 to 24

Market may undergo correction

In the near term, profit taking cannot be ruled out given that the market has witnessed sharp and swift surge over the past few days.

Q2 September 2007 results is the next major trigger for the market. Figures of advance tax suggest that earnings will be decent to strong. Stock specific activity may take place in the near term on the bourses ahead of the earnings-reporting season, based on result expectations. IT bellwether Infosys Technologies kickstarts reporting season on 11 October 2007.

FII inflow remains robust and inflow may continue in the backdrop of ample global liquidity. A sharp correction, if any, will attract bargain hunters given that domestic liquidity, too, remains strong. Domestic private insurance firms have been channelising money raised through unit linked insurance plans (with a high weightage for equities).

The market will be keenly watching developments on the political front as the government wants the Indo-US nuclear deal to go through. While the operationaslisation of the Indo-US deal has been put on hold by the government pending the findings of a committee, it cannot be stalled forever. A flashpoint may come sooner or later. The four Communist parties have 60 members of parliament (MPs) in the 545-member lower house of parliament. Prime Minister Manmohan Singh's government could fall or be reduced to a minority if the Left withdraws support.

Yet, analysts reckon that political turmoil arising from nuke deal will not impact India’s basic economic fundamentals though some infrastructure projects may get delayed. India’s economy is expected to post strong growth for a long period of time mainly due to favourable demographics.

India Strategy

GSK Pharma

Omax Auto

Friday, September 28, 2007

Monthly Investment Picks - October 2007

Dhanus Technologies Allotment Status

This is to inform you that an article was published in a local Tamil magazine - "Junior Vikatan" in its edition dated 29.08.2007 in which it has raised certain allegations against the Company / its promoters and its employees. In this regard, the Company is publishing a public notice in the prominent newspapers on 27.09.2007, giving details of the allegations & the Company's clarifications on the same. The Company is also giving an option to the applicants to withdraw their applications, if they wish to do so, within a period of 10 days from the date of publication of the public notice, viz., 06.10.2007. A separate letter to all the applicants/investors has also been sent in this regard. The further course of action regarding basis of allotment / despatch of refund orders etc., will be organised subsequently.

Download Public Notice here

Letter to Investors

Alston Power, Dabur India, Saamya Biotech, Wipro, Kotak Mahindra, Reliance Communications, Circuit Systems, Maytas Infra, Ambuja Cements

Chidambaram - Outlook positive

"There are of course some risks. Many of them arebeyond our control and, hence, we are compelled to take precautionary measures",says P. Chidambaram

Following is the text of the address of Finance Minister, Shri P. Chidambaram on India: Economic Growth and Outlook delivered at the Peterson Institute for International Economics in Washington, United States:-

1. “I am grateful for the invitation to deliver a talk at the Peterson Institute for International Economics. I understand that one of the objects of the Institute is to promote informed dialogue on international issues. The world is still divided in many ways – developed versus developing, North versus South, and rich versus poor. It is necessary to bridge this divide, and dialogue can do so. Dialogue can promote better appreciation of the issues; dialogue can also anticipate emerging trends.

2. Let me share with you our recent experience in managing the Indian economy and the outlook for the medium term. The India story is now rather well known, but some aspects bear repetition. In the most recent four year period – 2003-04 to 2006-07 – India’s GDP has grown at an average rate of 8.6% a year. In particular, 2006-07 was a splendid year turning out a growth rate of 9.4%. All the indicators are positive. Gross Domestic Capital Formation (GDFC) – that is investment – in relation to GDP is estimated at a little over 35%. Inflation measured by the wholesale price index (WPI) is 3.3%. Foreign exchange reserves stand at over US$230bn. All sectors of the economy are contributing to the growth rate, although we are not entirely satisfied with the performance of the agriculture sector.

3. It is now three years and four months since the present Government assumed office. The Government has brought greater stability and clarity to the policy environment. In many cases, the policy is backed by law or regulation. In key sectors, Government has ceded authority to independent regulatory bodies.

4. Government has also remained steadfast on the path of fiscal prudence and discipline. Within weeks of assuming office and before presenting the first budget, we notified the Fiscal Responsibility and Budget Management Act (the FRBM Act). Despite pressure on resources, we have complied with the obligations under the Act. The fiscal deficit for the current year has been budgeted at 3.3 per cent and the revenue deficit at 1.5 per cent, and we believe we are on course to achieve the targets set by the FRBM Act.

5. What are the factors that are driving economic growth in India?

6. Firstly, it is domestic consumption. The annual growth in real consumption expenditure over the past four years has been, on average, 6.3%. With easy liquidity conditions spurring demand for personal loans, and adequate capacity in the manufacturing sector, there has been a consumption boom.

7. Secondly, rise of investment. The consumption boom that started at the beginning of this decade has triggered an investment boom. Real investment has grown at a robust rate since 2002-03, averaging 17% a year in the past four years. During this period, the contribution of investment to growth has exceeded the contribution of final consumption expenditure. The current investment rate, as a proportion of GDP, is 35.1%, and it is expected to increase in the medium term.

8. Thirdly, increase in employment. The rate of growth in the labour force that was 1.60% in the previous period of six years accelerated to 2.54 per cent during the period 1999-00 to 2004-05. Thankfully, the rate of growth of employment too accelerated from 1.57% in the first period to 2.48% in the second period. We have, therefore, more persons employed and contributing to the national output. Paradoxically, we also have, in absolute number, more persons unemployed.

9. Fourthly, increase in productivity of both capital and labour. Rodrick and Subramanian, in an IMF working paper of 2004, pointed out that India seems to have large amount of productivity growth from relatively modest reforms. A more recent paper by Barry Bosworth, Susan Collins and Arvind Virmani (2006) has confirmed this. They have concluded that output per worker grew at 1.3% annually during 1960-80 and total factor productivity (TFP) was barely above zero. In contrast, growth in output per worker nearly tripled to 3.8% during 1980-2004, while TFP increased tenfold to 2%.

10. The outlook for the medium term is extremely positive. We believe it is possible to sustain the factors that are driving economic growth and consolidate the gains.

11. There are, of course, some risks. Many of them are beyond our control and, hence, we are compelled to take precautionary measures that will minimise the adverse effects of these risks. The two annual monsoons are always uncertain factors. By and large, the monsoons determine the area under cultivation and the output of food grains and other food articles. As a precautionary measure, we had to import some quantities of wheat last year and again this year. The price of crude oil is an enormous external risk. Since these outrageous prices cannot be fully passed through to the consumers in India, the burden falls largely on the domestic budget and constrains our capacity for investment. The depreciation of the value of the dollar vis-a-vis the rupee has thrown up an unexpected downside risk: it has challenged our exports and our tax revenues, and we may find ourselves in a situation where we need to provide for the consequences of an appreciating currency.

12. Ladies and Gentlemen! Let me not give you the impression that our work is done. Far from the work being completed, the road ahead is long and difficult. Governing India is, at the best of times, a complex task. During a period of high growth, the task does not become easier, as one may be wont to think. While sustaining high growth is one kind of challenge, the more difficult challenge is spreading the benefits of growth and making it more inclusive.

13. Despite a marked reduction in poverty, about 26% of the population of India lives in extreme poverty. A larger proportion of the population is affected because of the inadequacy or absence of many public goods and services such as clean drinking water, sanitation, schools, basic healthcare, electricity and roads. Democracy – especially a vibrant and noisy one – offers many seemingly attractive alternative models for the elimination of poverty. We know that many of those have not worked in the past and we shall not repeat those mistakes. We believe that growth is the best antidote to poverty, provided that the growth is broad based and inclusive.

14. Our government believes that in a developing country growth is an imperative and nothing should be done to affect the process of growth. At the same time, our government believes that it is the duty of the government to provide a measure of economic and social security to the very poor who are, at present, beyond the pale of the market economy. We have, therefore, adopted an ambitious social and economic agenda that extends to matters such as guaranteed wage employment, affirmative action in education, death and disability insurance, health insurance, old age pension, scholarships and education loans, empowerment of women and right to information.

15. I am aware of the oft-repeated criticism that the growth process has benefited only a small section of the people and, therefore, we must change course. I reject that criticism. It is based on a superficial and ill-informed view of the transformation that is taking place in India. More people are discovering that there are opportunities at the bottom of the pyramid and more people at the bottom of the pyramid are demanding their share of the economic opportunities thrown up by the growth process. For instance, in the last three years, banks have more than doubled the amount advanced as farm loans: the volume has increased from Rs844bn in 2003-04 to Rs2050bn in 2006-07. Who gets these loans? It is farmers who have an average land holding of one hectare, and every year over 5mn new borrowers have been added to the portfolio of banks and given farm loans. In 2006-07, 8.35mn new farmers were brought under the bank credit system.

16. Take another example. India runs the largest programme of micro credit – a fact that is not widely known. At the end of March 2007, 2.6mn self help groups – nearly all of them ‘women only’ groups – were credit-linked to the banks. Beginning with consumption credit, an overwhelming majority among them has graduated to production credit. These groups borrow amounts up to Rs200,000 for purposes such as land development, rearing cattle or sheep, poultry, garment making, food processing, manufacture of toys and retail shops. The amount of credit advanced to SHGs at the end of March 2007 was Rs180bn.

17. More than anything else, it is growth that has allowed the Government to increase public expenditure in sectors such as health and education. In 2003-04, the Central government’s budget had allocated Rs70bn for the health sector and Rs70bn for the education sector. In 2007-08, those allocations had grown manifold to Rs143bn for health and Rs286bn for education.

18. However, outlays do not mean outcomes, and this is our prime concern. There is not yet in place a mechanism that will ensure that the deliverables are indeed delivered or that the public goods and services are of acceptable quality and have reached the intended beneficiaries. Some of the problems are due to poor design of the programme. Besides, there is still too much dependence on the government machinery and an unwillingness to experiment with alternative models like food stamps or school vouchers. There is also, regrettably, a considerable degree of waste and pilferage.

19. Our best chance lies in encouraging more openness and more competition. An open society and an open polity will eventually embrace an open economy. A revolutionary change has been wrought in the sectors where monopolies were dismantled and the sector was thrown open to competition. Two examples would suffice: one, telecommunications and the other, aviation. Not too long ago, a customer had to register for a landline telephone and wait for many years to be given one. She would have to “book” a long distance call and hope that she could get through within a few hours. And she would have to pay exorbitant rates depending on the “distance” between the caller and the called person. Mobility was a dream; the telephone itself was a nightmare. Mobile telephony is growing at over 5mn new connections every month, and in August this year 7 million new connections were added .

20. The air transport sector has witnessed a similar revolution. The entry of private airlines has democratised flying. Many second and third tier towns are now connected by air. Domestic passenger traffic has grown, on average, by 30.5% a year over the last two years. Two green field airports are being built. Two metro airports are being modernised and upgraded, and before that task is over, plans are being drawn up for a second airport in these two metros. Two more metro airports and 35 non-metro airports have been taken up for modernisation and expansion.

21. Competition is driving growth in many other sectors: steel, textiles, pharmaceuticals, automobiles, home appliances, packaged food, computer hardware and software, banking and insurance. It is axiomatic that more openness and more competition will benefit the sectors that remain closed or restricted as a matter of policy, and that is the direction in which we would like to move.

22. The competition is not among domestic players alone. India’s manufacturing and services sectors face increasing competition from overseas manufacturers and service providers. Many foreign companies have entered the Indian market through imports or local production. Far from being overawed or vanquished, Indian business has boldly ventured into other countries and has opened offices abroad, acquired factories and established new facilities. Foreign direct investment has become a two way street. In 2006-07, while foreign direct investment flows into India were US$19.5bn, the outflow of capital amounted to US$11.9bn.

23. On August 15, 2007, India turned 60. It is, compared to the United States or many other countries, a young nation. It is also a young nation in another sense. One-third of the population is below the age of 15 years. India is the only large country in the world where the size of the working age population will grow – and will exceed the number of dependent children and old persons -- until 2025, the year up to which projections of population have been made, and perhaps even beyond till 2045. The size of the work force will grow, incomes will grow, savings will grow and investments will also grow. The challenge is to seize the opportunity and turn India into an economic powerhouse.

24. We are happy that the world is taking note of India and other emerging economies. If the developed countries of the world are serious in their intention to achieve the Millennium Development Goals, they must realize that the goals will not be achieved until they are achieved in India and China. We recognize that as we take our place in the world we have to assume our share of responsibility, consistent with our need and capacity, to make the world a better and safer place.

25. In the past – and now too – India has accepted responsibilities. For example, though we are an energy deficient country, we have accepted the principle of common and differentiated responsibilities in the area of climate change. At Heiligendamm, the Prime Minister of India made an important statement when he offered that India’s per capita CHG emissions would never be allowed to exceed the per capita CHG emissions of developed countries. That statement has been strongly endorsed by Chancellor Angela Merkel. That statement opens the way to find a just and fair agreement on the complex issues concerning climate change.

26. In the area of non-proliferation, though we are not a signatory to the NPT, we have put substance over form and maintained an impeccable record of non-proliferation. The India-United States agreement on civil nuclear cooperation is premised on that record.

27. On the economic front, we acknowledge that we share responsibility for ensuring the stability of the global economy. We have maintained fiscal prudence and discipline. We have taken precautionary measures to avoid high-risk financial transactions. We have contained inflation and will always be on alert. We have in place necessary regulations to ensure that capital flows – inward and outward – are orderly.

28. Much of what has been accomplished – or adopted – in India is not unique to India. Many other countries have done the same and, in this behalf, I can cite the cases of Argentina, Brazil, China, Egypt, Mexico and South Africa. As I said at the beginning of my speech, the world is still divided in many ways. A new division (or is it rivalry?) appears to be on the horizon – between the G 7 countries and the fast growing, emerging economies. Just as we are willing to share responsibility with the developed countries, the G 7 countries must also share responsibility with the emerging economies. That, indeed, would be the most wise and prudent course to make the world a better and safer place.”

Weekly Newsletter

Record week for Sensex, Nifty

It's something unpredictable, but in the end it's right.
I hope you had the time of your life.

Good time s just keep rolling for the bulls. All the talk of a possible correction has gone for a six, as relentless inflows from FIIs coupled with firm global markets propelled the key indices into new orbits. The Sensex traveled from 16k to 17k in a matter of just six days, recording the fastest 1000-point run ever. The Nifty too crossed the landmark of 5,000 during the week. Buoyed by huge buying by overseas investors and the aggressive Fed rate cuts has boosted the sentiment. FII inflows have crossed US$2bn in the past seven days, topping the US $11bn mark for the year.

Bulls were in total control during the week led by gains in Reliance stocks, Tata Steel, SBI and HDFC. Some action was also seen in mid-cap and small cap counters. A smooth rollover of positions into the October F&O series also helped the bulls. The cues from the F&O market continue to be encouraging, indicating that shorts have been squared off and fresh longs have been created.

Among the sectors, Auto, Banking, Real Estate, Fertilizers, Capital Goods, Cement and Telecom were the top gainers. The Sensex closed the week at an all time high of 17,291, adding 726 points or 4.4% over the previous week's close. The NSE Nifty recorded impressive gains of 184 points or 3.8% over the week to close at 5021.3.

Reliance Energy was by far the pick of the week. The scrip was the top gainer in the Sensex, adding over 19% to Rs1205, a 52-week high. Reports stated that the company won a Rs16-18bn order and plans to sell shares in its power generating unit. The scrip hit the week’s high Rs1220 and low of Rs1010.

Sugar stocks declined this week amid a grim outlook for the sector. Balrampur Chini dropped 4.5% to Rs75, Sakhti Sugar slipped 3.5% to Rs85 and Bajaj Hindustan lost 2.3% to Rs171. However, Shree Renuka Sugar bucked the trend and added 3% to Rs706.

Metal stocks continued their impressive rally on the back of strong metal prices on the LME and bullish outlook for the sector. JSW Steel rallied over 17% to Rs853, Tata Steel surged by over 15% to Rs850. SAIL rose over 7% to Rs207 and Jindal Stainless added 5.6% to Rs169

For a change, IT stocks had a good week on speculation that recent measures taken by the RBI to increase dollar outflows could help curb the rise in the local currency. Index heavyweights led from the front. Satyam advanced nearly 6% to Rs443, Wipro gained over 4.5% to Rs459. TCS was up by 4.1% at Rs1056 and Infosys added 4% to Rs1896.

Gains were also seen across the banking stocks, as speculation increased about a possible easing of the RBI's monetary policy stance. ICICI Bank rose 10% to Rs1063, HDFC Bank advanced 8.7% to Rs1439 and SBI added 7.8% to Rs1950.

The bulls had an enjoyable time scaling Mount 17K. They seemed to be more or less in control throughout the week. With lower inflation rates and speculation about a cut in interest rates by RBI, the bulls had most things coming their way. However, after such a rally, we expect markets to consolidate at these levels before making a fresh upmove. The advance tax numbers announced so far point towards another robust earnings season. The big worry, however is the valuations, which don't look cheap by any means. Also, the rally may have already factored in the expectations of strong numbers. If the results fail to spring any surprise, we may see market taking a short-term u-turn from here. Hence, it pays to remain alert. A shortened weekend keeps many bulls on the sidelines. Usually loud bullish voices are getting softer. A directionless week is what we could expect.

The primary driver for the M&As has been the outbound cross border deals. In the first 8 months of 2007, there were 237 cross border deals valued at about US$45.95bn

Notwithstanding the slowdown in deals over the past couple of months due to the global market turmoil, the Merger & Acquisition (M&A) and private equity deals in India in the current year to date has been considerable, says the latest data from Grant Thornton. The M&A deals have touched nearly US$50bn and Private Equity (PE) deals have exceeded US$10bn. The primary driver for the M&A deals has been the outbound cross border deals. In the first eight months of 2007, there were 237 cross border M&A deals valued at about US$45.95bn.

The number of acquisitions made by Indian companies abroad (164 outbound deals) has been more than double the number of acquisitions made by international companies in India (73 inbound deals), according to Grant Thornton. The value of outbound acquisitions has been double the inbound acquisition value. "Indian companies are constantly making overseas acquisitions exhibiting their higher risk appetite, ability to acquire and in the process enhancing the foothold in international markets," says Grant Thornton.

Outbound deals have grown from US$9.9bn in 2006 to US$30.8bn plus this year so far. Inbound deals have grown from US$5.4bn in 2006 to US$15.15bn in 2007 year to date. Domestic deals have grown in volume from 214 in 2006 to 223 so far this year. But the deal values have significantly declined, from US$4.5bn (2006) and to US$2.45bn in the first eight months of 2007.

The major acquisitions by Indian companies abroad in the year (January-August 2007) are: Tata Steel’s acquisition of Corus for US $ 12.2bn; Hindalco’s acquisition of Novelis Inc for US $ 6bn; Suzlon Energy’s purchase of 33.85% stake in RE Power for US$1.7bn; Essar Steel's acquisition of Algoma Steel Inc for US$1.58bn; United Spirit’s acquisition of Whyte & Mackay for US$1.11bn; Tata Power acquisition of 30% stake in PT Kaltim Prima Coal for US$1.1bn.

The major acquisitions by foreign companies in India in the year (January-August 2007) are listed below: Vodafone’s acquisition of 67% in Hutchison Essar for US$10.83bn; Vedanta Resources purchase of 51% stake in Sesa Goa for US$0.98bn; Mittal Investment’s acquisition of 49% in Guru Gobind Singh Refineries for US$0.71bn. Vodafone-Hutchison deal accounted for 71% of the total inbound deal value during first eight months of 2007.

There were 121 M&A deals with a total value of about US$4.3bn in July and August 2007. Of these, the number of domestic deals has been 56 with a value of US$0.84bn. The number of inbound cross border deals has been 22 with a value of US$0.64bn and the number of outbound cross border deals was 43 with a value of US$2.82bn.

There have been some significant outbound acquisitions by Indian companies in the last two months, the largest being JSW Steel's acquisition of three USA companies (Jindal United Steel Corp, Saw Pipes and Jindal Enterprises LLC) and Wipro Technology’s acquisition of Infocrossing and its subsidiaries. FirstSource Solution’s acquisition of Medassist Holding and Reliance Communication’s acquisition of Yipes Holding Inc were the other significant outbound deals.

The most significant inbound deal during the last two months have been Holcim’s acquisition of 3.9% stake from Ambuja Cements, Imerys' acquisition of majority stake in Ace Refractories and Novozymes acquisition of Enzymes business of Biocon.

There have been 67 private equity deals during the last two months with an announced value of US$4bn.

Weekly Stock Ideas

Buy IDEA

Buy Grasim

Buy Tech M

Buy ICICI Bank

Buy RNRL

Where have the bears gone?

The rollover in the F&O segment indicates fresh optimism is in. Shorts have been squared off and fresh longs created. The sentiment is definitely upbeat.
One issue that was on everyone's mind was the whether the credit crisis in the developed economies would affect liquidity inflows into the emerging markets. Once the US-Federal Reserve came to the rescue, that issue was settled. Money has kept pouring in. Overseas investors have already invested around $11 billion this year. The earlier annual record was $10.7 billion in 2005.

There is an increased perception among foreign investors that India is safer than other fast growing economies, as the growth here is more sustainable.

In fact, this was the fastest 1,000 point rally. And even though concerns remain that the market is expensive at current levels, the liquidity factor will sustain these levels, at least in the short term.

In retrospect, one remembers the slowest 1,000 point rally. It took place during 1992 and 1999 when the index crawled from 4,000 to 5,000.

Value goes up
Cashing in on the popularity of Team 20, Dhoni's brand value, which was pegged at Rs 1 crore is now probably Rs 3 crore.

But the euphoria was not restricted to the field. RIL Chairman, Mukesh Ambani, became the richest Indian with a net worth of Rs 2 trillion as the booming stock market pushed the value of his shareholding in various group firms. Ambani's net worth has soared past $50 billion, making him the first Indian and only the fourth person in the world to have a wealth higher than this amount.

RBI blues
Meanwhile, the influx of money has sent the rupee to a 9-year high of Rs 39.62 against the dollar. Exporters are feeling the pinch and certainly not joining the celebrations.

The RBI meanwhile is trying its best to keep the rupee from appreciating further and came out with various measures easing overseas investment and loan repayment.

On the other fronts….
India, the world's fastest growing cell phone market, ended August with 201.3 million wireless users after 8.31 million accounts were added in August. The earlier additions were 7.34 million (June) and 8.06 million (July).

India's fuel consumption grew 3.5% in August and crude imports soared 9.7% as refiners imported more crude to export processed products. Import of petroleum products dipped 5.6% while exports saw a 7.8% growth.

Still needs work on this front
A World Bank report on the ease of doing business in various countries has ranked India higher than earlier. In a ranking of 178 countries, India moved up to 120 (up 12 notches). Among the 10 areas tracked are regulations involved in starting businesses, obtaining licenses, registering property, getting credit, paying taxes and closing businesses. Despite getting a higher ranking than last year, India needs to do better on this front.

On the corruption front, India did not do too well. The Corruption Perception Index (CPI) released globally ranks countries on a scale of 0 (highest level of corruption) to 10 (no corruption). Last year, India scored 3.3 and this year, 3.5.

Guess some things don't change easily, despite India shining on certain fronts

Post Market Commentary

The Sensex opened almost flat at 17,152 - up one point. Unabated buying in the market saw the index rally to a fresh all-time intra-day high of 17,361 - up 210 points from the previous close.

The index finally ended with a gain of 140 points at 17,291.

The market breadth was almost flat - out of 2,838 stocks traded, 1,377 advanced, 1,397 declined and 64 were unchanged today.

INDEX MOVERS...

Reliance Energy zoomed nearly 8% to Rs 1,206. Tata Steel soared 7% to Rs 850.

Hindalco surged nearly 5% to Rs 172. Tata Motors, Cipla and SBI rallied around 3.5% each to Rs 778, Rs 182 and Rs 1,951, respectively.

Ranbaxy and ICICI Bank gained 3.3% each at Rs 434 and Rs 1,063, respectively.

ITC, Grasim and Maruti moved up around 2.5% each to Rs 190, Rs 3,513 and Rs 1,000, respectively.

HDFC is up over 1% at Rs 2,527.

...AND THE SHAKERS

Bharti Airtel dropped 2% to Rs 941, and ONGC shed 1.4% to Rs 958.

Reliance and Ambuja Cements were down 1% each at Rs 2,296 and Rs 144, respectively.

VALUE & VOLUME TOPPERS

Sintex Industries topped the value chart with a turnover of Rs 501.50 crore followed by Reliance Energy (Rs 416.70 crore), Reliance Natural Resources (Rs 370 crore), Tata Steel (Rs 273 crore) and Reliance (Rs 215.25 crore).

Reliance Natural Resources led the volume chart with trades of around 4.33 crore followed by IKF Technologies (3.02 crore), Himachal Futuristic (2.92 crore), Nagarjuna Fertilisers (2.80 crore) and Ispat Industries (2.34 crore).

2008 - tough for capital markets

The US sub-prime crisis was on everyone`s mind at the 38th Annual General Meeting of the Indo-American Chamber of Commerce (IACC). At the panel discussion, `Recent Global Developments - Impact on Indian Capital Markets`, industry experts were certain that, the sub-prime crisis will stunt the global economy in the short run, and Indian capital markets had to be watchful. Dr. Rakesh Mohan, Deputy Director of Reserve Bank of India, sounded a note of caution and exhorted Indian capital markets to be on their guard to protect themselves from the recent mortgage crisis.

The panel comprised of renowned entrepreneur, Rakesh Jhunjhunwala - partner, Rare Enterprise, Vallabh Bhansali - chairman, Enam Securities, Andrew Holland- Chief administrative officer, EVP DSP Merrill Lynch, Michael Newbill - Chief of political section, US Consulate. SK Mitra - Executive committee member of IACC chaired the discussion.

Rakesh Jhunjhunwala predicted a slowdown in the Indian software industry and a cut in software spends as a result of slump in the US economy. But the upside, according to him, was a decline in commodity prices in India. He said, ``The US economy was growing at an unsustainable level. The poor are feeding the rich, and the heroin credit supplied to the US consumers has its limit. The world is underestimating the sub-prime crisis. I foresee the problem in the housing market to get worse. The resultant slowdown of the American economy will worsen the crisis.``

However, the panelists were optimistic that the crisis can be tided over as the US enjoys the advantages of sound capital markets, rising wages and low inflation. They said that ``India was on a steady wicket`` and the quality of private enterprise is better than in China. The US elections and the forthcoming Olympic Games in China will also be factors that need to be watched out for, to chart a roadmap for Indian capital markets.

Chief Guest and keynote speaker, Dr. Rakesh Mohan, Deputy Governor, RBI said, ``There has been a sustained attention on the sub-prime crisis in the last two months. We really don`t know what will transpire. Given the speed at which the market corrections are taking place, we have to be watchful. We will need to gather more information and knowledge to see what will actually happen in the future.``

Terming the crisis as a symptom rather than a cause, Dr. Mohan explained the reason behind the phenomenon. He said, ``The accommodative monetary policies resulted in sustained low interest rates, lower inflation levels and volatility encouraging more risk-taking. Many banks set-up Special Investment Vehicles off their balance sheets, and hence had to face liquidity problems when the crisis erupted. But they have to make adjustments now.`` Dr. Mohan emphasised

Michael Owen, Consul General, Consulate General of USA, too, was optimistic that, increasing wages, sustainable inflation and innovative financial and credit instruments will enable the world economy to post strong growth in the long term.
Overall, the Indian as well as global capital markets will see a tough year ahead, but the long-term should see sustained growth.

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