Cutting losses

Is the first loss the smallest? How important is it to learn to take losses quickly and cleanly? In a great book “Hedge Hogging”, the author, Barton Biggs, writes about the importance of cutting losses.

“Greg is very tough about cold-bloodedly reviewing his losses. Like many traders, he does it automatically, usually at the 10% loss level. Roy Neuberger, Gerald Loeb, Bernard Baruch, and Jesse Livermore all did it. Baruch had an ego that would have fit comfortably into the Temple of Dendur, but he was an astute investor. In his book My Own Story he tells how he learned the hard way to cut his losses by selling when a po­sition went against him. He wrote:

In the stock market the first loss is usually the smallest. One of the worst mistakes anyone can make is to hold on blindly and rifuse to ad­mit that his judgment has been wrong. Occasionally one is too close to a stock. In such cases the more one knows about a subject, the more likely one is to believe he can outwit the workings of supply and demand. Experts will step in where even fools fear to tread.

Baruch argues one should always buy on a scales-up.

Many a novice will sell something he has a profit in to protect some­thing in which he has a loss. Since the good position has usually gone down the least, or may even show a profit, it is psychologically easy to let it go. With a bad stock the loss is likely to be heavy, and the impulse is to hold on to it in order to recover what has been lost. Actually the procedure one should follow is to sell the bad position and keep the good position.

Baruch wrote that one of his most important rules of investing was to "learn how to take your losses quickly and cleanly."

In Reminiscences of a Stock Operator by Edwin Lefevre, Jesse Liver­more says over and over again that you should buy on a scale-up and sell on a scale-down. "Never make a second transaction in a stock," he writes, "unless the first shows you a profit. Always sell what shows you a loss. Only suckers buy on declines."

Livermore did not have a hard-and-fast rule on when to eliminate a losing position, arguing instead that the timing depends on the feel of the stock and the market. However, he was an unusually gifted, intuitive trader, and he was not burdened by much knowledge of the fundamentals of the positions he took. Thus Livermore was more flexible in his think­ing than most of us who probably overintellectualize our stocks, and he was a dedicated believer in owning strong stocks that were in clearly de­fined, long-term up-trends. As soon as a stock he was long faltered, he got rid of it. His rule was that when a stock that had been strong failed to rally after a reaction, that was the first sign of trouble and time to get out.

Of course, buying strength and selling weakness is pure momentum investing, and as a value investor and believer in the inherent efficacy of fundamental analysis, I disdain that style. So does Warren Buffett. He has said that he doesn't believe in stop-loss disciplines. Nevertheless, you have to be respectful of the knowledge of the market. If a position goes against you by 10%, maybe somebody has understood something you have missed. When a position declines by 10%, we force ourselves to do an extensive and systematic review of the fundamentals with both inter­nal and external resources. We have to be sure nothing has changed. After the review, if nothing has changed except the price of the stock, we have to buy more. If we lack that conviction, we have to sell at least half of the position.

A trend is a trend is a trend
But the question is, will it bend?
Will it alter its course
Through some unforeseen force
And come to a premature end. . . ?

-Sir Alec Cairncross, Chief Economic Adviser

to the British Government in the 1960s”"

Edelweiss - Banswara Syntex

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Goldman Sachs - India Downstream - Energy/Oil

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Inflation continues to rise; touches 6.73%

Inflation shows no sign of abating with the annual rate based on the wholesale price index rising to 6.73% for the week ended February 3, as compared to 6.58% for the previous week. The annual rate of inflation stood at 3.98% on February 4, 2006.

The latest data renews expectations of the Reserve Bank of India taking further monetary measures aimed at containing inflation to the targeted 5 to 5.5% for FY07. It also reinforces the view that recent supply side interventions taken by the government - to ban exports of wheat and milk powder and import duty cuts on cement, steel and edible oils – will take some time to bear results.

The latest spike has occurred due to increased prices of manufactured products and primary articles like vegetables, eggs, meat and fish, oil seeds, condiments and spices, government data said. There was a slight decline in the index of fuel, power, light and lubricants by 0.4% to 320.8 on account of lower of aviation turbine fuel (11%) and naphtha, furnace oil and electricity (1% each) prices.

Reacting to the data, Aditya Birla Group Chief Economist Ajit Ranade said we will have to wait and watch the impact of various measures taken by the Central government including the latest cut in petrol and diesel prices, and the ban on export of wheat. The monetary policy announced by the Reserve Bank on January 31, 2007 and the rise in cash reserve ratio (CRR) on February 13 will also have a positive impact on inflation in the medium term, he added.

The RBI recently increased the CRR by 50 basis points to 6% in two stages. The first hike of 25 basis points will be effective from February 17 and the second from March 3.

"Market was expecting inflation around 6.5%. The high inflation figure is due to the low base-year effect. The steps taken by the Centre and the RBI may show result in the first quarter of the next FY08 and inflation may come under control," said Arun Kaul, general manager (treasury and finance) at Punjab National Bank.

The wholesale price index for all commodities stood at 209.2 points for the week under review. The index for the food articles group rose by 0.5% to 217.1 from 216.1 for the previous week due to higher prices of beef and buffalo meat (26%), eggs (7%), mutton (4%), arhar, condiments and spices, and moong (1% each). In the non-food category, prices of niger seed rose by 25% and raw rubber by 5%, while the prices of copra and castor seed declined by 1% each.

The index for the manufactured products with weigthage of 63.75 per cent in Wholesale Price Index rose by 0.3% to 181.9. The index of wood and wood products rose by 6.7%, leather and leather products (3.9%), dry and wet batteries (4.7%). The prices of textiles rose by 0.2% due to higher prices of jute hemp and mesta textiles.

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Weekly Stock Ideas

BUY Tata Power (608)
SL 597 T 630, 636

BUY Reliance Industries (1407)
SL 1389 T 1439, 1445

BUY Bata India (190)
SL 180 T 212, 218

BUY BHEL (2385)
SL 2335 T 2490, 2500

BUY GE Ship (215)
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From Research Desk

Dishman Pharmaceuticals and Chemicals Limited

Dishman Pharmaceuticals and Chemicals Limited’s (Dishman) Q3 FY07 results were in line with expectations. Sales recorded a growth of 181% to Rs1.7bn driven by CRAMS which includes the full impact of Carbogen Amcis (CA-sales Rs820mn) for the first time. Sales for EM (Eposartan Mesylate) to Solvay are back on track after a sluggish H1 FY07 and on target to record Rs1bn for FY07. Operating profit margin (OPM) declined by 110bps to 28.2% as CA has lower margins as compared to other business segments of Dishman. Consolidation of CA which has led to higher depreciation and interest outgo restricted PAT growth to 25% to Rs244mn, translating into an annualized EPS of Rs12 on a fully diluted basis.

Post result conference call with the management has further reaffirmed our view that Dishman would be one of the best bets in the growing outsourcing space. Starting with Solvay as its only client in 2003, Dishman has made significant progress in this space, emerging as a preferred supplier for big pharma companies (GSK, Merck, Krka, AZN, Sanofi Aventis). CA business is gaining increasing momentum surpassing its own estimates for CY06. With capacity at Amcis nearing saturation, a few customers have expressed an in principle approval to shift operations to Dishman India. This we believe is a very positive sign for both Dishman and the industry at large as it shows confidence in Dishman’s IPR adherence.

Apart from CRAMS, Dishman has also made significant progress in the Electrolyte QUATs business and has signed a couple of long term contracts with global majors. One contract with Ferro Corporation worth US$6mn annually is progressing smoothly. In addition, Dishman has broadened its top management by appointing a COO and a CFO, which indicates robust growth in the years to come.

We are very positive on Dishman’s CRAMS strategy and believe Dishman will be able to leverage strongly on the relations developed with big pharma companies in CRAMS. At Rs236, the stock is trading at 22.7x FY07E EPS of Rs11 and 14.9x FY08E EPS of Rs16.8. We maintain BUY with a target price of Rs286 based on 17x FY08 earnings.

Kesoram Industries Ltd. (KIL) Q3FY07
Result Update

Kesoram Industries Ltd.'s (KIL) cement despatch for Q3FY07 increased by 10.6% to 0.84mn ton and tyre volumes increased by 19.9% to 20331 ton. Cement capacity utilization for Q3FY07 increased to 116% compared to 105% in Q3FY06 and Q2FY07. We estimate FY07 despatches to be at 3.35mn ton with new capacity expected to commence commercial production in March 2007. We expect cement volumes to be at 4.2mn ton for FY08 with staggered production for the new capacity.

KIL’s gross cement realization went up by 45.7% to Rs3285 yoy for Q3FY07 but was down sequentially by 2.7%. Cement prices are looking up in the recent months. We expect realisations for KIL to improve 3.6% in FY08 over FY07. The recent customs duty removal for cement is expected to have marginal impact on pricing front and prices are expected to rule firm till major capacities are coming in FY09.

Tyre margin for Q3FY07 has come down to 4.1% from 4.6% on yoy basis and on sequential basis the same has come down from 6.1%. Prices of key inputs like Carbon Black, NTCF and Synthetic Rubber has firmed up in the quarter and reduction in average natural rubber price to the tune of 6% has not had a major impact. Tyre producers reduced the prices of tyres also by nearly 4% in September 2006 which has reduced the EBIT margins for tyre segment. We expect natural rubber prices to continue at the present levels and possibility of increase in tyre prices by the producers if the prices exceed Rs10000 per quintal. Recent reduction in Carbon Black is a positive for the sector.

Rayon and Transparent Paper (TP) division has turned around and posted profits at EBIT level in Q3FY07. Definitive anti-dumping duty was imposed for VFY in Q2FY07 and provisional duty was imposed on TP in Q4FY06. This has improved the prospects of these segments and prices have started moving up. From negative EBIT margin in Q3FY06 and Q2FY07 the segment has recorded 4.3% EBIT margin in Q3FY07.

KIL’s share is discounting its FY07 and FY08 estimated earnings by 10.1x and 8.4x. We expect cement and tyre business margins to improve going forward with price increases. With increased cement capacity and ongoing expansion on tyre capacity, we expect KIL to be well positioned to exploit the up-cycle in these sectors. KIL is expanding its cement capacity by 1.5mn ton which is expected to come online in Q4FY09 and planning to increase its tyre capacity by putting Greenfield tyre capacity at Jharkhand. It has purchased land for new tyre capacity at Rs600mn recently. With major capacity expansions, KIL is expected to become a mid-sized player in Cement and Tyres and command better valuations going forward. We revise our target from Rs641 to Rs668 based on estimated FY08 earnings upgrade. Our target discounts FY08 by 10x. We maintain our BUY rating on the stock.

Chennai Petroleum Corporation Ltd. (CPCL) Q3FY07
Result Update

Chennai Petroleum Corporation Ltd. (CPCL) announced Q3 FY07 results, which were below expectations primarily on account of a shutdown in the month of December 2006. Net sales rose by 7.9% yoy to Rs59bn on account of higher realizations and also on back of refund of Rs1.2bn offered to oil marketing companies as discount on LPG and SKO for the period of April 2006 to September 2006. The profit growth was stunted, as GRMs for the company remained flat at US$2.7/bbl, which was on backdrop of weakness in refining margins across the globe and also on account of Rs1bn inventory loss.

Going ahead the company is the process of expanding its capacities from the current levels of 10.5mn tons to around 12.3mn tons. The expansion is through de-bottlenecking of the existing facilities. We have a positive outlook for the trend in gross refining margins going ahead as demand is likely to remain strong for petroleum products especially from developing countries such as India and China. The emission standards are getting stringent in most of the developing and developed economies leading to increased demand for low sulphur fuels. Existing refineries are spending on upgrading their facilities to process heavier varieties of crude oil and hence there are no major capacity additions coming on stream during the next couple of years. Apart from these factors, a complex refinery can also leverage upon the increasing differential between prices of heavy and light crude. CPCL's Manali refinery, which has a nelson complexity index of over 9, should be able to clock higher GRMs in Q4 and also in the couple of years going ahead.

On the above premise that the GRMs will strengthen and also for the fact that CPCL is increasing its capacity by 1.8mn tons per annum, we believe that the company can witness a CAGR of 15.2% between FY06 and FY09 in earnings. The stock at CMP of Rs204, trades at 5.1x and 4.6x FY08 and FY09 estimated EPS of Rs43.9 and Rs49.4 respectively. With high complexity index of the refinery and rising demand for lower emission products, we feel that CPCL should trade at 4.5 times FY09 EBIDTA, which yields a target of Rs282 giving an upside of 25.3%. We recommend a BUY.

CRR Hike Impact

In a surprising move RBI last evening hiked the Cash Reserve Ratio (CRR) currently at 5.5% by 50bps effective in two stages from 17th February and 3rd March 2007. This is likely to suck out Rs140bn liquidity from the market. The move seems to emanate from RBI’s concern on rising inflation and sustained high credit growth.

We expect the banking and real estate sector to be the biggest losers of this move. Hike in CRR in all likelihood will prompt for another round of PLR hikes, which would pull down consumer loan growth and especially mortgage loans. The ripple effect of this would be felt by the real estate sector, where this could form the much awaited trigger for drop in real estate prices, which have held on despite rising interest rates (small correction in some parts).

DOMESTIC NEWS & GLOBAL NEWS

Vodafone wins Hutch Essar bid


Arun Sarin, the high-profile CEO of Vodafone, managed to edge out local rivals Reliance Communications and the Hindujas in the race for acquiring Hutchison Essar. He is paying US$11.1bn for the 67% stake held by Hutchison Telecommunications International Ltd. (HTIL) in the No.4 wireless operator. Essar, which has a 33% stake in Hutch Essar and was also in the fray, welcomed the deal as did Bharti Airtel and Reliance Communications. But, the Hindujas were an aggrieved lot as they lost out despite quoting a higher price. Almost immediately, Sarin hit the ground running to ensure that the deal goes through smoothly. Vodafone said it will share its infrastructure with Bharti Airtel to slash costs. The UK-based firm also sold its 5.6% in Bharti Airtel while retaining the remaining 4.4% without a Board seat and rights. Vodafone said it will invest US$2bn in India over the next few years and was planning to capture 100mn subscribers by 2010. With the big telecom markets of the country reaching saturation point Sarin is looking at tapping the rural markets. In line with this strategy, Vodafone ties up with China's ZTE Corp. to manufacture low-cost handsets. On Essar, Sarin said he hoped it would continue in Hutch Essar, adding that the group had the option of selling its 33%. He also said that Essar doesn't have a right of first refusal. He also announced that Hutch Essar CEO Asim Ghosh will continue to lead the management post acquisition. Ghosh is one of HTIL's existing local partners who have control of 15% of Hutch Essar, while HTIL's direct stake is 52%. Another partner, Analjit Singh, said on Wednesday that he did not want to dilute his holding.

Hindalco to buy Novelis

Hindalco Industries Ltd. announced it would acquire North American aluminium sheet manufacturer Novelis Inc. for US$3.4bn in cash. The Aditya Birla Group's flagship company would also assume US$2.4bn of Novelis' debt and would complete the deal in the second quarter, Chairman Kumar Mangalam Birla said at a press conference in Mumbai. Hindalco would pay US$44.93 per share for the Atlanta-based Novelis. The Board of Novelis has recommended to the company's shareholders that they accept the Hindalco offer. The price is 17% more than the closing price on Feb. 9. But, as with Tata Steel's takeover of Corus, the stock market frowned upon the ambitious deal, citing near-term strain on the company's balance sheet. The stock lost 12.5% during the truncated week. It was down 20% in the first two days but recovered some ground in the last two sessions. Meanwhile, unconfirmed reports indicated that Russia’s aluminium giant Rusal was considering bidding for Novelis. But, Rusal denied the reports, saying that it was not interested in getting into value-added aluminium products. Credit rating agencies CRISIL and Fitch placed Hindalco's rating under 'ratings watch' due to the highly leveraged nature of the takeover.

Industrial production grows by 11.1% yoy

The Indian economy, especially the industry side, remains on firm footing despite the series of interest rate hikes by the central bank. India's industrial production grew by 11.1% in December as against 5.7% in the same month a year earlier. However, this is significantly lower than the upwardly revised growth rate of 15.4% in November versus 14.4% earlier. During the first nine months of the current fiscal year, the Index of Industrial Production (IIP) was at 10.8% compared to 8% in the corresponding period of the last financial year. The driving force behind the buoyancy in the industrial sector, manufacturing grew by 11.9% in December as against just 6.4% in the same month a year earlier.

January car sales up 24% yoy

India's domestic car sales grew by 24% to 104,488 units in January versus 84,235 units in the same month a year earlier, data released by the Society of Indian Automobile Manufacturers (SIAM) showed. Exports climbed by 26% to 77,243 in January 2007 from 61,274 in January 2006. Local sales of commercial vehicles (trucks & buses) were up 38.9% at 47,276 as against 34,043 units in the corresponding month last year. Sales of motorcycles and scooters combined stood at 677,390 units compared to 608,011 units in the year-ago month.

Apr-Jan indirect tax mop up rises 17% yoy

The Government's revenues from indirect taxes like customs and excise duties grew by 16.8% to Rs1.6 trillion in the first 10 months of the current fiscal year from Rs1.38 trillion a year earlier, the Finance Ministry said. The Centre collected Rs708bn from customs duties in the ten-month period ended January 31, 2007, up 34.3% from a year earlier. The Government raised Rs906.8bn from excise duties, or 6% more from the year-ago period. India's total indirect tax collections, including taxes from services, in the nine months ended Dec. 31 rose 22.4% to Rs1.7 trillion from Rs1.38 trillion, the Government said.

German exchange buys 5% in BSE

Deutsche Boerse AG bought a 5% stake in the Bombay Stock Exchange Ltd. (BSE) for Rs1.89bn. The Frankfurt-based company bought the stake in BSE at Rs5,200 per share, valuing Asia's oldest stock exchange at Rs37.77bn (US$854mn). At present, broker shareholders hold the entire 100% stake in BSE. This will be reduced to 49% to convert BSE into a demutualised exchange. BSE plans to reduce the stake held by its brokers by offering 26% to strategic investors and a further 25% through an IPO. According to current government rules, foreign investors can buy up to 49% equity, including 26% FDI in a local stock exchange. However, no single investor can hold beyond 5% in a stock exchange. The issue of shares to Deutsche Boerse is subject to relevant regulatory and shareholder approvals. Kotak Investment Banking advised BSE on the transaction.

TCS wins multi-million dollar deal from China

Tata Consultancy Services Ltd. (TCS) announced it had won a significant multi-million dollar contract to implement a comprehensive international trading system for China Foreign Exchange Trade System (CFETS), which is a sub-institution of the People's Bank of China. The company also announced the inauguration of TCS China at a new premises inside the Z-Park in Beijing along with its Chinese partners, supported by the National Development and Reforms Commission (NDRC). TCS Asia Pacific owns the majority of the joint venture with a 65% stake. The three Chinese partners, supported by NDRC hold 25% with Microsoft expected to take up the remaining 10%.

Sasan UMPP...Globeleq exits; Jindal Steel enters

Lanco Infratech Ltd. announced that Princestone Investments Ltd., its Mauritius based holding company, and Jindal Steel & Power Ltd. (JSPL) had acquired Globeleq Singapore Pte. Ltd., the Singapore based subsidiary of UK's Globeleq Ltd. Princestone will hold 60% while Jindal Steel will own the balance 40%. Jindal Steel is a pre-qualified bidder for the Sasan Ultra Mega Power Project (UMPP). With this acquisition, Globeleq Singapore has become an affiliate of Jindal Steel & Power. Globeleq Singapore will retain its interest in the Sasan UMPP under the new ownership structure, according to Lanco Infratech. Going forward it will execute the project with financial and technical support from Jindal Steel & Power, Lanco Infratech and its affiliates. The development comes close on the heels of Globeleq's plans to sell its power generation assets across the world and confirms media reports that it was walking out of the Sasan UMPP.

Tata Motors to make Fiat pick-up in Argentina

Tata Motors Ltd. said it had formed a joint venture with Italy's Fiat to make pick-up trucks in Argentina. Tata Motors will build the pick-up vehicle under the Fiat brand at Cordoba, Argentina. The first vehicle will roll off the Cordoba assembly lines during 2008. Annual production is slated at around 20,000 units. Total planned investment in the project is around US$80mn. Tata Motors also signed a Memorandum of Understanding (MoU) with Iveco, part of the Fiat Group to analyse the feasibility of co-operation, across markets, in the area of Commercial Vehicles. The MoU would encompass a number of potential developments in engineering, manufacturing, sourcing and distribution of products, aggregates and components. A financial daily reported that Tata motors' ambitious global truck project, all set to debut in August 2008, will be based on design specifications provided by Iveco.

ONGC and Eni swap oil blocks

Eni SpA in exchange for a stake in a deepwater exploration block in India. The two companies signed two parallel agreements in Mumbai, for the swap of participating interests in exploration blocks.
Eni acquires a 34% stake in the MN-DWN-2002/1 block, a 10,000 square kilometre area located off the coast of Eastern India and with a maximum water depth of more than 2,000 meters. This block lies in an area with high exploration potential. ONGC Videsh Ltd., the overseas arm of ONGC, has acquired from Eni a 20% participating interest in the MTPN exploration block, operated by Eni, located in the deepwater offshore of Congo Brazzaville.

Bharti, RCom cut roaming rates

In line with the order of the Telecom Regulatory Authority of India (TRAI), Bharti Airtel Ltd. on Wednesday announced a reduction in roaming tariffs that are at par with existing local call tariffs. With effect from Feb. 15, Airtel mobile users can avail significant lower roaming tariffs. All local calls while roaming will be charged at Rs 1.40 per minute, STD calls at Rs 2.40 a minute and incoming calls while roaming will be charged at Rs 1.75 per minute. While on Post-paid, Roaming rentals have been completely done away with, subscribers on Pre-paid can now enjoy upto 44% lower rates while roaming. Reliance Communications announced a matching offer. Local outgoing calls while roaming on-net mobile and on-net fixed will be Rs 1.40. The Inter circle outgoing calls while roaming on mobile and fixed have been reduced to Rs2.40. The incoming calls while roaming would be charged at Rs 1.75.

Jain Irrigation buys Aquarius Brands

Jain Irrigation Systems Ltd. said it will acquire Aquarius Brands Inc., a designer and maker of drip-irrigation systems, from Habasit Holding Inc for US$21.5mn cash. Aquarius is a debt free company. With this acquisition, the company will become second largest drip irrigation company in the world, Jain Irrigation said. The deal is expected to be closed immediately and will be done through Jain Irrigation's wholly-owned subsidiary in the US. Aquarius is a leading designer and manufacturer of micro-irrigation systems for agriculture, landscape and nursery applications. It has manufacturing facilities in Ontario and Fresno, California and Winter Haven, Florida. It has network of more than 1000 dealers for product distribution.

Gitanjali Gems acquires Tri-Star

Gitanjali Gems, India’s largest integrated diamond jewellery manufacturer and retailer, announced that it had purchased a majority interest in Tri-Star Worldwide, the New York-based proprietor and marketer of Canadia branded diamonds and diamond jewellery. TriStar is also a BHP Billiton direct customer and a licensee of CANADMARK. Along with Tri-Star founding partner Beny Sofer & Sons, Gitanjali plans to expand Tri-Star and the Canadia brand.

IPOs...MindTree, Idea shine

The Initial Public Offering (IPO) of MindTree Consulting Ltd. received a tremendous response from all category of investors despite the recent crash in the secondary market. The issue, which opened on Feb 9, was subscribed by 103 times. The issue closed for subscription on Feb 14. The QIB portion was subscribed by a whopping 157 times while the non-institutional segment was subscribed 135 times. The retail portion too received a strong response and was subscribed 30 times. The employee section was subscribed 2.78 times. The Business Associates part was the one which received a poor response.

Meanwhile, the IPO of Idea Cellular was subscribed 31 times, while that of Euro Ceramics 3 times and Mudra Lifestyle by 4.6 times. The IPO of Broadcast Initiatives was subscribed 2.7 times. Indus Fila's issue was subscribed 1.4 times. The public issue of Oriental Trimex barely scrapped through, with subscription of just over 1 time the issue size. The IPO of Evinix Accessories was undersubscribed. The issue closed for subscription on Thursday and is likely to be extended. The company may also have to slash its price band. The public issue of Vijayeswari Textiles was also extended as the company failed to get full subscription. Book Running Lead Manager to the issue informed the exchanges that the issue will close on Feb. 19 instead of the earlier closing day of Feb. 13. Further, the price band was revised from Rs115 to Rs130 per share to Rs100 to Rs115 a share.

New Listings...Redington, Cinemax rally

Shares of House of Pearl Fashions Ltd. tumbled in their stock market debut on Thursday as investors felt that the stock was priced quite aggressively in the Initial Public Offering (IPO). The stock opened at Rs500 as against the issue price of Rs550. The scrip shut shop at Rs469.4 after touching a low of Rs445 and a high of Rs580. Shares of Redington India Ltd., distributors of IT products and providers of logistics, supply chain management and other support services in India, Middle East and Africa, climbed on listing. The stock opened at Rs140 compared to the issue price of Rs113. It ended at Rs163 after hitting a high of Rs174.45 and a low of Rs125 with 26.47mn shares changing hands on BSE. Shares of Cinemax India Ltd. ended flat on listing day but jumped on the next day. The scrip closed at Rs152 on its debut as against the issue price of Rs155. But, on Thursday it surged by 20% to closed the week at Rs182.8.

Syngenta to delist Indian arm

Syngenta India Ltd. said it had received a proposal from its Switzerland-based parent to delist the equity shares of the company from the Bombay Stock Exchange (BSE). Syngenta South Asia AG (SSAAG), a subsidiary of Syngenta AG, together with its affiliate Syngenta Participations AG holds 84% in the Indian subsidiary. Institutions hold 5% in Syngenta India and the remaining 11% is owned by individuals and trusts. SSAAG requested the Board of Syngenta India to obtain consent of the shareholders for the proposed delisting. The Board of Syngenta India decided to seek the consent of the shareholders by calling an EGM on March 15. Separately, Syngenta India posted a net profit of Rs137.1mn for the quarter ended Dec. 31, 2006 compared to Rs358mn for the quarter ended Dec. 31, 2005. For the reporting quarter, total income (net of excise) is Rs2.92bn versus Rs2.63bn in the same quarter a year earlier. For the year ended Dec. 31, 2006, the company has posted a net profit of Rs631.7mn compared to Rs802.3mn for the year ended Dec. 31, 2005. Total income (net of excise) has increased to Rs8.39bn from Rs7.76bn in the previous financial year.

N Korea agrees to shut nuclear plant

North Korea said it will end its controversial nuclear weapons programme. Under an agreement reached in Beijing, North Korea will shut down its Yongbyon nuclear reactor within 60 days, during which time it will receive economic assistance the equivalent of 50,000 tons of heavy fuel oil and a further 950,000 tons if Kim Jong II's regime disables the plant. Separately, North Korea and South Korea agreed to resume talks on trade and aid this month. Ministers from the two governments will hold discussions from Feb. 27 to March 2, according to a joint statement from Gaeseong, North Korea, where officials met. The meeting may pave the way for South Korea to resume food and fertilizer aid to North Korea. The South Korean government has given 400,000 to 500,000 metric tons of rice and other food assistance to North Korea every year since 2000. It halted shipments in July last year when North Korea test-fired seven missiles and maintained the suspension when the North Koreans detonated their first nuclear bomb Oct. 9.

US trade gap hits new record

The US trade deficit set a record for a fifth straight year, and the imbalance with China soared to an all-time high as well. The gap between US exports and imports rose to a record US$763.6bn last year, up 6.5% from the previous record of US$716.7bn in 2005, the Commerce Department reported. For December, the deficit jumped a bigger-than-expected 5.3% to US$61.2bn. The new trade report showed the US deficit with China shot up 15.4% last year to US$232.5bn, the largest imbalance ever recorded with any country. Bush administration officials said the wider deficits were primarily a factor of faster growth in the US and warned against pursuing policies that would erect protectionist trade barriers in this country. The Democrats urged Bush to pursue more cases against unfair trade practices including a challenge before the WTO against currency practices of both China and Japan. Meanwhile, China's trade surplus widened to US$15.9bn in January as exports gained by the most in 17 months, adding pressure on the government to let the yuan rise faster. The gap swelled by 65% from a year earlier. It was the fifth highest on record, exceeding the US$15.5bn median estimate. Exports rose 33% from a year earlier. Imports jumped 27.5%, more than double December's gain. The surplus declined from the previous month's US$21bn.

Japan GDP accelerates

There is more pressure on Bank of Japan (BOJ) to up the ante on interest rates. The latest Government data shows that the Japanese economy grew at its fastest pace in nearly three years. In the October to December period, the GDP expanded by 1.2% from the previous quarter, much stronger than a consensus forecast of a 0.9% gain. This translated into an annualised growth rate of 4.8%, exceeding the 3.8% median estimate. The yen rose on speculation that the central bank may raise interest rates. Earlier, the yen fell to a record low against the euro after the Group of Seven (G7) industrial nations stopped short of saying its weakness is a threat to the global economy. The GDP figures also boosted Japanese stocks, sending the Nikkei 225 Stock Average towards a fresh seven-year high. The Cabinet Office also revised the third-quarter growth to 0.3% from 0.8%. The data also increased the chance that the central bank will hike rates next week. According to Credit Suisse, the chance of a rate hike rose to 54%, from 40% yesterday. BOJ Governor Toshihiko Fukui cited weak consumer spending and slow inflation for leaving borrowing costs at 0.25% at its last two meetings. The BOJ is scheduled to hold its next meeting on Feb. 20- 21. At the G7 meeting in Germany last weekend, Fukui said that recent economic reports were mixed and that the central bank needed to closely examine ensuing indicators. The central bank has said that it will raise rates if the economy and prices keep expanding gradually in line with its expectations.

Italy boosts eurozone growth

Economic growth in the countries that use the euro as common currency jumped last year and reached its highest annual rate in six years. The EU statistics office Eurostat now estimates that the GDP expanded by 2.7% in 2006. That is nearly double the 1.4% seen in 2005. The European Commission has already said it will probably raise its current forecast of 2.1% growth in 2007. Growth rebounded in the final three months of 2006 and reached 0.9%, or up 3.3% annually. That puts the European economy nearly on par with the 3.4% growth recorded in the US during the same time frame. The euro-area grew at a 2.7% annualized rate in the third quarter. Germany enjoyed 2.7% growth last year compared with 0.9% in 2005. France rose from 1.2% to 2%. The big surprise to economists was the 2.9% annual growth posted by Italy. The euro-zone's third-largest economy only grew 1.7% in the third quarter.

Chrysler on sale?

Detroit continues to bleed. After General Motors and Ford, its now the turn of Chrysler. The company announced its long-awaited restructuring, which included a 16% reduction in its workforce, shift cuts and a plant closing. The move was seen as a precursor to a possible split of DaimlerChrysler. The Chrysler plan calls for closing the company's Newark, Del., assembly plant, and reducing shifts at plants in Warren, Mich., and St. Louis. A parts distribution center near Cleveland also will be closed, and reductions could occur at other plants that make components for those facilities. Chrysler blamed the brutal restructuring on poor sales after a shift in consumer taste from SUVs and trucks to more fuel-efficient vehicles, but workers blamed management. Meanwhile, Chrysler's German parent, DaimlerChrysler AG said it was looking at all options to revive its fortunes, including partners for the troubled Chrysler. Its chairman said he wouldn't rule out a possible sale of the US operation.

BHP, Rio Tinto looking at Alcoa: report

Shares of US-based Alcoa Inc. jumped after The Times of London reported that mining giants BHP Billiton and Rio Tinto were considering separate bids for the Pittsburgh-based aluminum producer. The Times newspaper reported, citing unnamed sources, that BHP and Rio Tinto were independently considering an approach for Alcoa and had drawn up feasibility studies, but hadn't approached Alcoa's board. BHP Billiton and Rio Tinto declined to comment on the speculation. Meanwhile Australia's said today that it knew nothing about speculation of a possible takeover bid for its joint venture partner Alcoa by either Rio Tinto or BHP. Analysts said the likelihood of a bid is high and that if Alcoa is successfully taken over, Alumina will also become a target for the successful buyer. Alumina holds 40% of the Alcoa World Alumina and Chemicals joint venture with US-based Alcoa holding the remaining 60%.

SPECIAL STORY

Money managers less bullish on China, India

With concerns about overheated economic growth and monetary squeeze tightening fund managers are cutting their exposure to high-performing emerging markets like China and India, says a report by Merrill Lynch.

Money managers are instead stepping up their investments in Taiwan, Korea and Thailand, according to the latest monthly survey of Pacific Rim fund managers by the Wall Street giant.

"Within the region, the most notable shift is from China to other North Asian markets, as investors anticipate further Chinese tightening measures after the lunar New Year," says Willie Chan, a strategist at Merrill Lynch.

According to the survey, 23% of investors expect the Chinese economy to get a little weaker over the next 12 months, while 58% expect it to stay the same. On the other hand, Taiwan has become the favorite market in the region. A net 25% of fund managers say they would increase exposure to Taiwan, up from 21% in January. Taiwan and South Korea both recorded more than US $1bn in foreign net inflows last month.

Investors have reduced their exposure in Indonesia and Singapore, and have instead put US $620mn into Southeast Asia's big laggard - Thailand, says Merrill Lynch. Only 3% of managers say they would reduce exposure to Thailand, down from 21% in January.

Only 15% of investors say they would increase exposure to Singapore, down from 24% in January. Eleven percent of managers also say they would reduce exposure in Indonesia. In contrast, in January 3% of managers said they would increase exposure to the nation.

India is the only Asian market to record net foreign selling last month, says Merrill Lynch. The US investment bank expects higher inflation and more tightening in India this year. A net 5% of fund managers say they plan to increase exposure to markets like Vietnam and Pakistan, over the next 12 months.

INVESTMENT STRATEGY

F&O first, budget later

Bulls managed to stage a recovery after a disastrous start to the week. Timing the market is a tough game. The best you can do is remain extra cautious at climbs and keep your stop losses in place. It is desirable to reduce the number of stocks in your portfolio so that you can keep a closer track of the movement and development in these counters. The coming week will see more volatility as we approach the expiry of derivatives segment for the month of February. After a 300-point rally on Friday, people on the street are taking about 15k levels before the budget. With so much bullishness around, investors need to be extra cautious. Stay less leveraged so that you can weather any temporary storm in the market.

MARKET MOOD

Market breaks winning streak

I tried so hard, and got so far
But in the end, it doesn't even matter
I had to fall, to lose it all
But in the end, it doesn't even matter

Last week we mentioned about the pace at which the market could fall, and how difficult it would be for traders to survive in a volatile market. Huge intra-day gyrations made it difficult for the bulls to stand tall. The CRR hike, added salt to the wounds of the battered bulls. In a surprising move RBI increased the Cash Reserve Ratio by 50bps effective in two stages from 17th February and 3rd March 2007 on concerns of rising inflation and sustained high credit growth. Banking and real estate sectors were the biggest losers following this move.

Despite resurgence of the bulls on D-street from deep abyss in last two trading sessions, the key indices eventually managed to close lower on week on week basis, snapping its seven-week winning streak. The bulls gave there all in an effort to recoup the losses, but in the end it wasn't enough as selling was seen in counters like Banking, Real Estate, Auto, Capital Good and Metal stocks. Even the Mid-Cap stocks felt the burnt of the investors losing by nearly 1%. Finally, BSE Sensex closed 183 points lower or 1.26% after touching a weekly low of 13805.36 and a high of 14529.28 before settling at 14356 and NSE Nifty lost 41 points or 0.98% to close at 4146.

Hindalco, Maruti, SBI and Ranbaxy were the major losers among the 30 Sensex scrips. While, IT stocks outperformed the key indices and stood firm in volatile market. Wipro, Bharti Airtel, ONGC and Reliance Industries were the major gainers within the Sensex. Concerns of hardening interest rates played spoilsport over the week after impressive economic growth, prompted RBI to unexpectedly increase the amount of cash lenders must keep aside to cover deposits to curb loans growth and inflation

Real Estate stocks continued its downward journey after a hike in CRR by RBI, as the move could form the much awaited trigger for drop in real estate prices, which have held on despite rising interest rates (small correction in some parts). Property prices appear to have reached their peak, according to some analysts. Concerns that loans will become more costlier proved to be an important factor behind the fall in stock prices of Real Estate stocks. Unitech fell by over 16% to Rs392, Parsvnath Developers was down 5.3% to Rs321, Akruti Nirman dropped by over 18% to Rs452 and Bombay Dyeing declined over 5% to Rs608.

Worries over rising interest rates also pulled down the auto stocks. However, much of them rebounded from a week's low after Government lowered the prices of auto fuels by as much as 4.5% on Thursday afternoon. Maruti declined by over 7% to Rs892 after hitting a low of Rs839 over the week. Tata Motors was down 2.8% to Rs869, TVS Motors slipped 4% to Rs72 and M&M fell by 1.8% to Rs901. Hero Honda bucked the negative trend and gained by over 2% to close at Rs743.

Heavy selling was seen across the Capital Good stocks. Index heavy weight BHEL slipped 5% to Rs2386 and Punj Lloyd fell by over 8.6% to Rs971. L&T slipped by 3.4% to Rs1692 and Siemens declined 2.3% to Rs1162.

IT stocks were in momentum following appreciation of Dollar against the Rupee. Major Tech firms income is in the US market in terms of US$, contributing towards the profitability of the company. US accounts for about 6% of sales of Indian software exporters. Wipro topped the charts by gaining 6.4% to Rs676, the scrip was the top gainer among the 50-scrip's of NSE Nifty and IT bellwether Infosys was up by 0.3% to Rs2374. Among the Mid-Cap stocks, Financial Technologies zoomed by over 11% to Rs2199, Mphasis BFL advanced 4.4% to Rs306 and HCL Tech added 2.1% to Rs676.

Oil & Gas exploration stocks were in limelight led by gains in ONGC after the company signed an accord with Eni SpA to swap an oil area in the country for a location in Africa's Congo Basin to get deepwater exploration technology from the Italian company. ONGC advanced 1.3% to Rs905 and Reliance Industries gained 0.9% to Rs1406. However, oil marketing stocks took a beating on Thursday after the Government cut the fuel prices in an effort to curb the inflation. IOC fell nearly by 8% to Rs427, BPCL lost over 4.5% to Rs328 and HPCL slipped 4.8% to Rs276 over the week.

Hindalco, India's biggest aluminum manufacturer, fell by over 12% in the week the most in at least 16 years after the company announced that it would buy Atlanta based Novelis Inc for more than $3.4bn. The stock fell sharply owing to worries about the high debt component of the transaction. The scrip hit the weeks high of Rs151.9 and a low of Rs138.15.

TOP STORIES

Govt in fire fighting mode against inflation

With inflation refusing to fall from a new two-year high and a growing popular discontent becoming evident, the Government unleashed a slew of fresh measures aimed at stemming the runaway rise of essential commodities. The most potent among the steps announced this week were the surprise CRR hike by the Reserve Bank of India (RBI) and the marginal increase in petrol and diesel prices. Other measures included ban on exports of wheat, milk and milk powder and liberalised import of corn. The last couple of measures are unlikely to have a big impact on inflation as India doesn't export much of wheat, milk or milk powder. At the same time, domestic prices of corn is ruling below international prices. So, the removal of restrictions on the import of corm is also not expected to have a desired effect on prices.

But, what is likely to have a major impact is the 50 basis points increase in the CRR to 6%. The rise will be staggered, with the first installment coming in on Feb 17 and the next on March 3. This is expected to suck out about Rs140bn from the banking system. Tuesday's decision comes on top of a 0.5% increase in the CRR in December 2006 to impound Rs135bn. The central bank said that the decision to hike the CRR was taken "in view of the paramount need to contain inflation expectations and in the light of current liquidity conditions." The RBI cited the recent data such as FY07 GDP estimate of 9.2%, 10.8% growth in industrial production during April-December 2006-07 and the spike in inflation to a two-year high of 6.58% as the reason for lifting the CRR to 6%. It also reiterated that credit growth and money supply are growing at a rate well above its comfort levels.

The move spooked the stock market, with banking shares bearing the brunt of the selloff amid fears of a hit on their profitability. Several public sector banks announced a hike in their PLR though home loan and consumer loan rates were left untouched. With the latest RBI tightening measure, interest rates on a range of products such as home loans, auto loans, personal loans and even commercial loans will inch up. The one positive fallout will be that deposit rates will rise and in some cases may even cross the double digit mark. Two days after the CRR hike, the Government lowered petrol and diesel prices by Rs2 and Re1, respectively. The move may bring down the transportation cost for truck operators, which in turn could have a moderating effect on essential items. Whether these measures bear some fruit for the Government or not only time will tell. For now though, the heat is clearly on for the Congress-led UPA regime, especially considering the upcoming assembly polls in Uttar Pradesh.

Inflation climbs further


he Government and the RBI have more worries to contend with. India's inflation, based on the Wholesale Price Index (WPI), rose to 6.73% in the week ended Feb. 3, due to an increase in food and manufactured product prices, data released by the Government showed on Thursday. This was ahead of the consensus estimates of stable inflation rate and much higher than the figure of 3.98% in the comparable period last year. The WPI rose by 0.2% to 209.2 from 208.8 in the previous week. The index for the Primary Articles (weight 22%) group was up 0.5% at 216.1 as against 215.0 in the previous week. The index for Fuel, Power, Light and Lubricants (weight 14.2%) group declined by 0.4% to 320.8 from 322.1 for the previous week. The index for Manufactured Products group (weight 63.75%) rose by 0.3% to 181.9 from 181.4 in the previous week. The Government revised the inflation rate for the week ended Dec. 9 from the preliminary estimate of 5.32% to 5.63%. The final WPI for the same period stood at 208.3 as compared to a provisional estimate of 207.7.

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RESEARCH DESK says:
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15.02.2007 : 9:29:18 AM

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Sharekhan Eagle Eye (equities) & Derivatives Info Kit for February 19, 2007

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Sharekhan Investor's Eye dated February 15, 2007

SHAREKHAN BUDGET SPECIAL

Run-up to Budget 2007-08

It's that time of the year again when wish lists are drawn by all and sundry and expectations are high that at least some of the wishes will be granted in the Union Budget. Yes, in about two weeks from now, the incumbent United Progressive Alliance (UPA) government will present its last but one budget before it goes to general parliamentary elections in CY2009. Needless to say investors will be hanging on every word of P Chidambaram when he presents the budget for FY2008 on February 28, 2007. That’s because they will be eager to see if the finance minister uses the opportunity to push forward fiscal reforms and announce well-directed spending on infrastructure, education and the farm sector. With the budget around the corner, we take this opportunity to present our pre-budget report.

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STOCK UPDATE

Tata Motors
Cluster: Apple Green
Recommendation: Buy
Price target: Rs1,075
Current market price: Rs869

Deepening relationship with Fiat

Key points

• Tata Motors (TAMO) has entered into an agreement with Italy’s Fiat to provide the design and technology for manufacture of pick-ups in Argentina. Fiat will manufacture and market it under the Fiat brand name. TAMO would get a licence fee through this venture, both as a one-time fee and as sales dependent fee.
• TAMO has also signed a memorandum of understanding (MoU) with Iveco to analyse the feasibility of their co-operation, across markets, in the area of commercial vehicles.
• The joint venture agreement with Fiat for manufacture of cars, engines and transmission components has commenced trial production. The first batch of cars will roll out in early 2007. This would require an aggregate investment of Rs4,000 crore over a period of time.
• TAMO has bid for a 43.5% stake in Punjab Tractors together with the Fiat group’s CNH (New Holland Tractors India). This would mark TAMO’s entry into the tractor business and would catapult the TAMO-CNH combine to the third spot in India’s tractor market with CNH’s market share of 5.23%.
• We believe all these developments would have positive implications for TAMO in the long term. At the current market price of Rs869, the stock trades at 12.3x its consolidated earnings and at an enterprise value/earnings before interest, depreciation, tax and amortisation of 6.4x. We maintain our Buy recommendation on the stock with a price target of Rs1,075.

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SECTOR UPDATE

Cement

Dispatch growth slows down

Key points

• The industry dispatches for January 2007 have grown by 7% year on year (yoy) to 14 million tonne. The growth is much slower as compared with that in January 2006 when dispatches had grown by 16%. The growth has been slower because very few players have added capacity in the last one year and therefore been operating at full capacity.
• Amongst the regions, the north witnessed the highest dispatch growth of 14% yoy followed by the east, which grew by 9% yoy, and the western region, which grew by 8.6% yoy.
• Industry utilisation level continues to rise, breaching the 100% mark and settling at 102%, driven by the northern region where utilisation level stands at 110%.
• 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 of 10-10.5% for the next three years.
• From January 1, 2007 Tamil Nadu implemented value-added tax (VAT), reducing the sales tax rate in the state from 14.5% to 12.5%. We maintain our earlier view that the savings that the companies will enjoy on account of the reduction in the tax on the selling price will be offset by the tax that will now be payable on the freight component.
• The prices have started rising in the south post-monsoons. Andhra Pradesh and Tamil Nadu witnessed a Rs10-per-bag increase in January. In the north, Delhi and Jaipur have witnessed a Rs5-per-bag hike in the same month. Dealers expect cement prices to rise across the country in the next couple of months as the construction activity reaches its peak.
• We believe that the import duty cut on cement from 12.5% to nil will not have any impact on the cement prices, as the landed cost of bulk cement translates into a 25% premium to the current national average of Rs205 per bag.
• The government has hinted that in the upcoming budget it might take measures to reduce the input costs for cement to contain the prices. On the other hand, it has ruled out any excise duty cut on cement.
• Taking cognisance of the third quarter performance of cement companies, we have upgraded our FY2007 and FY2008 estimates for UltraTech Cement, JK Cements, and Orient Paper and Industries. We have upgraded only the FY2008 estimates for Madras Cement. We also strongly believe that the south-based cement companies, after a lacklustre third quarter performance, would bounce back with better results in the fourth quarter.
• We maintain our positive view on the 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 rising 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.

---

MUTUAL FUND: INDUSTRY UPDATE

Equity AUMs rise in line with market movement

The AUM for equity funds increased by 2.2% to Rs146,749 crore in January 2007. The rise in the equity AUM was in line with the 2.2% upward movement in the market.

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Motilal Oswal - Prime Focus

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Motilal Oswal - Cement Sector

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Run-up to Budget 2007-08: Sharekhan Budget Special dated February 15, 2007

Run-up to Budget 2007-08

It's that time of the year again when wish lists are drawn by all and sundry and expectations are high that at least some of the wishes will be granted in the Union Budget. Yes, in about two weeks from now, the incumbent United Progressive Alliance (UPA) government will present its last but one budget before it goes to general parliamentary elections in CY2009. Needless to say investors will be hanging on every word of P Chidambaram when he presents the budget for FY2008 on February 28, 2007. That's because they will be eager to see if the finance minister uses the opportunity to push forward fiscal reforms and announce well-directed spending on infrastructure, education and the farm sector. With the budget around the corner, we take this opportunity to present our pre-budget report.

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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.

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Market gears up for fresh rally

The market has recovered from its CRR blues as the Sensex added another 360 points during intra-day trades on the back of sustained buying in a majority of the counters including the heavyweights. The Sensex resumed 97 points higher at 14107 on firm international indices and fall in the crude oil prices. The market remained above 14260 for a major portion of the trading session and turned bullish towards the close as strong buying in technology, consumer durables, consumer goods and banking stocks took the index to an intra-day high of 14373. The index ended the session at 14356, gaining 346 points. The Nifty added 99 points and closed at 4146.

The market breadth was positive. Of the 2,646 stocks traded on the BSE, 2116 stocks advanced, 497 stocks declined and 33 stocks ended unchanged. All the sectoral indices were back in action and moved up sharply. The BSE CD Index was the major gainer and rose 3.88%. The BSE IT Index jumped 3.79%, the BSE Teck Index added 3.71%, the BSE CG Index gained 3.22% and the BSE Metal Index was up 3%.

Several index heavyweights notched up significant gains. Among the major gainers L&T flared up 4.80% at Rs1692, Satyam Computers zoomed 4.58% at Rs485, Cipla shot up by 4.43% at Rs255, Hero Honda flared up 4.34% at Rs744, Gujarat Ambuja Cement vaulted 4.08% at Rs137, Bharti Airtel advanced 4.05% at Rs792, Maruti Udyog scaled up 4.05% at Rs892, Infosys surged 3.96% at Rs2374, Wipro gained 3.93% at Rs676 and ICICI Bank added 3.66% at Rs948. The other front-line stocks also moved up by 2-3% each. However, Ranbaxy dropped 5.09% at Rs394 and NTPC shed 1.32% at Rs142 while Reliance Energy, ACC, Bajaj Auto and Grasim slipped around 1% each.

Consumer durable stocks were in the limelight. Gitanjali Gems at Rs244 flared up nearly 7.98%, while Titan Industries rose 5.46% at Rs1,005, Blue Star scaled up 4.87% at Rs226, Lloyd Electric jumped 3.77% at Rs179, Rajesh Exports moved up by 2.03% at Rs447 and Videocon gained marginally at Rs445. Among the IT majors, Financial Technologies shot up by 6.89% at Rs2,200 and Mphasis advanced 4.25% at Rs307 while Iflex Solutions, Tech Mahindra, TCS, HCL Technologies and Patni Computers flared up 1-3% each.

Over 63.96 lakh IDFC shares changed hands on the BSE followed by IDBI (36.58 lakh shares), Hindalco (30.84 lakh shares), Arvind Mills (24.73 lakh shares) and SAIL (19.56 lakh shares).

Value-wise Reliance Communications clocked a turnover of Rs78 crore followed by Reliance Industries (Rs67 crore), IDFC (Rs65 crore), Ranbaxy (Rs59 crore) and Suzlon (Rs57 crore).

Sensex vaults 346 points in broad rebound

The market staged a remarkable comeback, taking cue from firm Asian markets, a strong responce to the IPO of Idea Cellular and overnight gains in Indian ADRs. Short-covering in derivatives ahead of next week’s expiry of February 2007 derivative contracts also aided the surge.

The recovery was broad-based with stocks across segments - small-caps, mid-caps and large-caps - bouncing back. The market also shrugged off data showing a surge in inflation to its highest level in more than two years.

The 30-share BSE Sensex jumped 345.65 points (2.4%), to settle at 14,355.55. This is the biggest single-day gain in terms of points for the Sensex in a little over a month. The Sensex had spurted 425.82 points to 14,056.53 on 12 January 2007, at the onset of the Q3 December 2006 earnings season, as Infosys unveiled strong numbers on that day.

The S&P CNX Nifty gained 99.10 points (2.4%), to 4,146.20. Nifty February 2007 futures settled at 4,168 compared to the spot closing of 4,146.20. The market is closed on Friday (16 February 2007) for a holiday.

The market-breadth was quite strong. Against 2,121 shares rising on BSE, 525 declined. Just 33 shares were unchanged. Gainers outpaced losers by a ratio of 4:1. The BSE Small-Cap index gained 222.44 points (3.1%), to 7,290.26. The BSE Mid-Cap index advanced 152.99 points (2.64%), to close at 5,953.01.

The BSE clocked a turnover of Rs 5029 crore, compared to Wednesday’s Rs 4247 crore.

Concerns about rising interest rates and a number of IPOs lined up over the next few weeks, had triggered a sharp correction recently. The benchmark Sensex had tumbled to 14,009.90 on 14 February 2007 from a lifetime closing high of 14,652.09 on 8 February 2007. There were heavy FII sales in index-based futures during this market fall.

The near-term trend on the bourses will be driven by budget expectations. The focus of the market will be more on sectors, which are expected to benefit from the budget proposals.

There are also concerns that a short-term capital gains tax on sale of shares, which is currently at 10%, may get hiked. Another concern is that the securities transaction tax (STT) may also go up further. The previous budget had increased STT. The removal of a 10% corporate surcharge may be offset by removal of certain open ended exemption.

In today’s trade, auto shares held firm after the government announced a cut of Rs 2 per litre in petrol price and Re 1 per litre in diesel. Ashok Leyland surged 5.4% to Rs 46.20, M&M surged 5% to Rs 900, Maruti Udyog gained 4% to Rs 892 and Hero Honda gained 3.8% to Rs 740.

Tata Motors rose 1.8% to Rs 866. Tata Motors and Fiat on Wednesday unveiled a $80 million agreement to build Tata pick-up trucks under the Fiat brand at the Italian carmaker's plant in Cordoba, Argentina, with annual production projected at 20,000 trucks next year. The news triggered a 2.1% rise in the ADR on Wednesday, to $19.87.

IT shares edged higher tracking overnight gains in their ADRs. Infosys rose 4% to Rs 2382 after its ADR surged 3% on Wednesday to $59.20. Satyam Computer rose nearly 5% to Rs 486.50; its ADR rose nearly 4% to $23.48 on Wednesday. Wipro gained 5% to Rs 683. Its ADR rose 1.2% to $17.92 on Wednesday.

L&T surged nearly 5% to Rs 1693.90, on bargain-hunting after a sharp correction of late. The company has a robust order-book position.

A strong response to an IPO of the sixth largest cellular service provider, Idea Cellular, boosted telecom shares. Reliance Communications gained 3% to Rs 466. Bharti Airtel gained 3.6% to Rs 789, despite cutting roaming charges. The Idea IPO was subscribed nearly 27 times by 15:00 IST today. The IPO will close today.

Index heavyweight Reliance Industries (RIL) rose 2.3% to Rs 1410, extending a recent upmove. The upstream regulator said last Thursday that crude production from RIL’s deepwater gas block, off the country's east coast, was commercially viable.

Ranbaxy plunged 5% to Rs 392.25, following reports that criminal investigators for the US Food & Drug Administration yesterday locked the headquarters of Ranbaxy USA.

Bank shares shrugged off a rise in inflation. ICICI Bank gained nearly 4% to Rs 951. The private sector bank's ADR rose 3.2% on Wednesday to $43.61. HDFC Bank gained 3% to Rs 1048. HDFC Bank's ADR gained 0.8% to $71.83 on Wednesday.

The wholesale price index rose 6.73% in the 12 months to 3 February, higher than the previous week's annual increase of 6.58% due to an increase in food and manufactured product prices, data showed on Thursday. The annual inflation rate was 3.98% during the corresponding week of the previous year.

Indiabulls Financial Services jumped nearly 8% to Rs 420.95, after the company said on Thursday its board had approved a one-for-one share entitlement ratio for the demerger of its securities and advisory business to Indiabulls Securities. The ratio for the merger of Indiabulls Credit Services with Indiabulls Financial was also set at three shares of Indiabulls Financial of Rs 2 each for every 10 shares of Rs 10 each held in Indiabulls Credit, the company said.

South East Asia Marine Engineering & Construction rose 10% to Rs 224.85, extending Wednesday’s rally sparked by robust Q4 December 2006 results announced after trading hours on Tuesday.

Theatre chain operator Cinemax India jumped 20% to Rs 182.80. Volumes in the stock were a huge 64.3 lakh shares on BSE. The stock debuted at Rs 175 on BSE on Wednesday, compared to the IPO price of Rs 155. It had settled at Rs 152.35, on its first day, a discount over the IPO price.

Nicholas Piramal India gained nearly 4% to Rs 251.50. The company said on Thursday it planned to invest about $50 million in new drug development and manufacturing facilities in India and the UK during 2007 - 2009.

ITI surged rose 11% to Rs 50.60 following reports that Alcatel-Lucent on Thursday had won a multi-million euro contract from the state-run telecom equipment maker for supply and installation of 2 million GSM lines.

Jain Irrigation Systems gained 0.7% to Rs 431, after the company said on Thursday it had bought US-based designer and maker of drip-irrigation systems, Aquarius Brands, for $21.5 million in an all-cash deal.

Avaya Global Connect gained 4% to Rs 270. The company said on Thursday a growth fund of Reliance mutual fund bought a further 3.51% stake in the company, taking the fund's total holding to 6.13%.

Hexaware Technologies gained nearly 3% to Rs 174. The company today reported 36% growth in its consolidated net profit in the December 2006 quarter to Rs 33.75 crore. Gross revenue during the quarter surged to Rs 240.21 crore from Rs 174 crore in the year ago quarter.

Redington (India) settled at Rs 163.25. The stock debuted at Rs 140 compared to the IPO price of Rs 113.

House of Pearl Fashions settled at Rs 469.40. The stock debuted at Rs 500 versus the IPO price of Rs 550.

Asian markets were firm on Thursday. Key benchmark indices in Hong Kong, Japan, Singapore and South Korea were up between 0.5 - 2.2%.

US stocks and bonds surged on Wednesday, with the Dow climbing to an intraday record, after Federal Reserve Chairman Ben Bernanke said the economy was growing and inflation pressures were starting to ease.

The Dow Jones industrial average rose 87.01 points, or 0.69%, to end at 12,741.86. The Standard & Poor's 500 Index gained 11.04 points, or 0.76%, to finish at 1,455.30. The Nasdaq Composite Index advanced 28.50 points, or 1.16%, to close at 2,488.38, off the session's high at 2,494.51.

Nymex crude was up slightly by 14 cents, at $58.14.