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Monday, February 19, 2007

Karvy - Jubliant Organosys

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Emkay & Motilal Oswal - Hexaware Tech

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Sharekhan Highnoon dated February 19, 2007

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Kotak - Weekly Tech Update

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Sharekhan Commodities Buzz dated February 19, 2007

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Market Close: Cautious steps ahead of Expiry

ood start for the week..!. Indices opened strong on the back of global cues. Markets lost some gains during the mid session of trade as investors choose to book profits at higher levels. Selective Buying iwas seen in Banking, Software and Engineering stocks while selling intensified in Power, FMCG and metal stocks. However, we are near the FNO expiry for the month. Investors are cautious in market as Uniion Budget is closing near. Asian markets ended mixed while European markets trading strong.

Sensex closed up by 47 points at 14402.9. It was helped up by gains in ICICI Bk (977.9,+3 percent), Maruti (914.1,+2 percent), TCS (1309.9,+2 percent), RIL (1418.25,+1 percent) and Bharti Tele (797.6,+1 percent). Restricting the gains were Hero Honda (717.2,-4 percent), Guj Ambuja (132.45,-3 percent), Hindalco (148.6,-2 percent), Rel Energy (535.7,-1 percent) and HDFC Bk (1032.8,-1 percent).

A leading business daily reported that Parsvnath Developers Ltd signed a MoU with Government of Gujarat for developing various projects at an investment of Rs 1600 cr over a period of 2-3 years. The company will develop townships, group housing, commercial complexes, IT Parks amongst others at Ahmedabad, Bhavnagar, Rajkot, Vadodra, Surat, Jamnagar and other districts in Gujarat. With this, Parsvnath Developers Ltd becomes a key player in committing large investments in Gujarat by way of real estate projects. Some projects are being implemented with immediate effect. Stock ended up by 2.2% with peers like Ansal Properties and Madhocon Project both closing up by 1.2%.

Power T&D equipment and services major, ABB India reported strong results for the fourth quarter and full year ended December 2006. For CY06, the company has reported a topline growth of 44% YoY. Also, EBDITA margins expanded by 50 basis points due to stock related adjustments and lower staff and other costs. Lower interest layout was spurt in the bottom-line which grew by 56% YoY. Strong growth from all segments was due to completion of project in time. The stock closed up 3% along with its peers Voltas (up 3%) and L&T (up 1%).

Technically Speaking: Market traded ranged in a narrow channel for the day. Sensex touched intraday high of 14479 and low of 14355. Market Volume was good at Rs 4204 cr. Overall breadth was in favor of advances as there were 1340 advances against 1300 declines. Nifty Futures is trading very near its crucial level of 4185. If it fails to cross this level then we might see much lower levels for the current expiry. Sensex Resistance lies at 14458-14522 levels while Support lies at 14350-14307 levels.

Sensex's gains modest; banks rebound

Shares from the banking sector were in demand, after suffering a sharp decline in the past few sessions following the surprise hike in the cash reserve ratio (CRR) by the Reserve Bank of India last week.

The 30-shares BSE Sensex settled 47.35 points, at 14,402.90. It had opened higher, at 14,436.18, tracking the 345-point surge of Friday (16 February 2007). The BSE benchmark had surged to a fresh high of 14,479.18, and also stooped to a low of 14,372.07.

After staying firm throughout the day, the market looked appeared to tire in the late-afternoon session. Profit-booking in index pivotals capped gains.

The S&P CNX Nifty settled up 16.45 points, at 4,162.65.

The total turnover on BSE amounted to Rs 4204 crore. The market-breadth, a measure of the overall market strength, was just about positive, although not as much as it was earlier in the session. Broad-based participation from small-cap as well as mid-cap stocks was the add-on feature of today's trade. Against 1,340 shares advancing, 1,303 declined on BSE. As many as 56 scrips remained unchanged.

Among the 30-Sensex pack, 16 declined while the rest advanced.

Private sector ICICI Bank was the top gainer, up 3.12% to Rs 978, on a volume of 3.18 lakh shares. The scrip had surged from a low of Rs 943.30, its high being Rs 986.50.

Maruti Udyog advanced 2.56% to Rs 914.70, following a cut in petrol and diesel prices last week.

IT major TCS gained 1.53% to Rs 1310, as buying continued after the software exporter bagged an overseas order last week.

Tata Steel (up 1.11% to Rs 447), ITC (up 0.66% to Rs 175), and SBI (up 0.52% to Rs 1129) were the other gainers.

Index heavyweight Reliance Industries (RIL) advanced 0.72% to Rs 1417, on a volume of 5.77 lakh shares. Reliance Industries said on Thursday, its board will meet on 24 February 2007 to review plans to raise $2 billion, and consider possibilities for generating more funds to finance its interests. The private sector oil refiner had also struck a high of Rs 1430.

Ranbaxy Laboratories was down 0.64% to Rs 391, after it said federal officials conducted a search of the Indian drugmaker's US corporate offices in Princeton, New Jersey, on Wednesday. Ranbaxy, in a statement issued on Thursday, said the search came "as a surprise," and the company was not aware of any wrongdoing.

Hero Honda was the top loser, down 3.71% to Rs 716, on a volume of 38201 shares. It had slipped from a high of Rs 753.95.

Gujarat Ambuja Cements (down 3% to Rs 132.40), Hindalco (down 2.31% to Rs 148), and Reliance Communications (down 1.37% to Rs 460.10) were the other big losers.

L&T declined 0.12% to Rs 1690, after striking a high of Rs 1717.90. The engineering and construction company said on Monday it had secured a $ 250 million contract to set up offshore platforms and related amenities.

The banking sector was on fire. The BSE Bankex advanced 1.48%, and was the top gainer among BSE's sectoral indices. Centurion Bank of Punjab (up 3.49% to Rs 37.10), Oriental Bank of Commerce (up 2.75% to Rs 228.80), Kotak Mahindra Bank (up 2.21% to Rs 493), Federal Bank (up 1.69% to Rs 240), Canara Bank (up 0.79% to Rs 218), and SBI (up 0.52% to Rs 1129), were the other gainers from the banking space.

Metal shares saw renewed buying, tracking a rally in Japanese steel shares, which advanced on expectations of a further consolidation within the metal sector. The steel sector had undergone global mergers & acquisitions, which should help support global steel prices. In January 2007, Tata Steel won the bid for Anglo-Dutch steel major, Corus and Hindalco’s acquisition of US-based Novelis.

State-run Steel Authority of India (Sail) surged 5% to Rs 119.30. Ispat Industries (up 4.14% to Rs 15.10), Jindal Steel & Power (up 3.33% to Rs 2450), Sterlite Industries (up 1.10% to Rs 502), and Hindustan Zinc (up 1.05% to Rs 673) were the other gainers.

ABB gained 2.61% to Rs 3900, but was down from a high of Rs 4000. The company announced 42.6% growth in net profit in the December 2006 quarter along with a 5-for-1 stock-split. ABB has reported 42.6% growth in net profit in the December 2006 quarter to Rs 134.95 crore from Rs 94.61 crore in the December 2005 quarter. Income from operations surged 44.6% to Rs 1426.31 crore (Rs 985.72 crore).

ABB India had a record order intake during the year (year ended 31 December 2006), up 50%, at Rs 5,623.60 crore compared to Rs 3,764.50 crore last year. The record growth in order intake helped ABB India to increase its order backlog to Rs 3,372.30 crore, nearly 60% higher than the order backlog of Rs 2,103.20 crore at the beginning of the year.

ABB India plans to invest Rs 250 crore over the next two years to set up new factories, augment existing capacities and foray into new areas. The company will set up factories in Delhi, Baroda, Nasik, Mumbai and parts of Karnataka.

Aban Offshore, the largest private offshore oil drilling company, surged nearly 8% to Rs 1941, after its unit completed an open offer for Norwegian peer, Sinvest. Post the open offer, Aban Offshore group's stake in Sinvest has moved up to 97%.

Bajaj Electricals surged 16.74% to Rs 501, after the company said it is in advanced stage of negotiations to acquire an electrical firm based in western India. The acquisition will be finalised in the next one-and-a-half months. Bajaj Electricals is eyeing companies with weak financials but strong manufacturing, and product lines. The deal size could be up to Rs 100 crore, Chairman and Managing Director, Bajaj Electricals, Shekhar Bajaj, told newspersons at a meeting in Kolkata on Friday (16 February 2007).

Lokesh Machines gained 10% to Rs 148.30, after it informed it had received an order worth Rs 20 crore from Germany's Wenig Wemas. Lokesh Machines has designed and manufactured prototypes of CNC Lathe and CNC Vertical Machining Centre as per specifications of German machine tools giant, Wenig Wemas (Wenig), and its associates in Europe.

Telecom networking and systems integrator Spanco Telesystems surged 4.4% to Rs 220.15, after deciding to raise Rs 125 crore by issuing shares and warrants to ChrysCapital and UTI Investment Advisory. The price for the preferential allotment has been fixed at Rs 214.91 a piece, which includes a premium of Rs 204.91. The stock shrugged off worries of equity dilution following the issue. Assuming full conversion of warrants, the preferential allotment will lead to a substantial 35.8% dilution of equity.

The order from Wenig is initially for supplying 100 machines, dispatches scheduled to begin in April. The off-take could increase to 300 machines a year in the next three years.

Biocon surged 5.77% to Rs 464, on news that the firm plans to invest Rs 1000 crore in setting up a bio-pharma plant in Andhra. The bio-pharma plant will come up at the special economic zone (SEZ) near the port city of Visakhapatnam. Andhra Pradesh Chief Minister, Y S Rajasekhara Reddy, on Friday (16 February 2007), handed over the land needed for the plant to Biocon Chairman, Kiran Mazumdar Shaw.

Avaya GlobalConnect jumped 20% to Rs 322.20 on a volume of 5.13 lakh shares. It said on Thursday (15 February 2007) that a growth fund of Reliance mutual fund purchased a further 3.51% stake in the company, taking the fund's total holding to 6.13%. The stock had risen 3.7% on that day itself, boosted by the announcement, to Rs 268.50. The stock is up 32.1% from a recent low of Rs 210.65 on 10 January 2007.

Drugmaker Krebs Biochemicals & Industries rose by 5%, the maximum daily limit, to Rs 85.70, after the firm said its board will meet on 22 February 2007 to consider issuing 10.5 lakh shares to Ranbaxy Laboratories.

Power utility company, CESC, surged 7% to Rs 366.85 on renewed buying at the lower level after a recent correction. CESC is currently in the process of screening bids to kickstart the scrap sale of its idle plant and machinery assets at its locked Mulajore generating station at Kolkata. CESC has just received a set of bids from companies keen to take over the Mulajore assets. CESC's vintage Mulajore power station was shut down on 15 May 2004. Following the sale of the Mulajore plant and machinery, the 43-odd acres of land will be used to set up an industrial-cum-residential township venture to be executed by CESC Properties, a wholly-owned CESC subsidiary.

Most global markets were trading strong. The Nikkei average rose 0.24% on Monday, to trade at its highest in nearly seven years as retail stocks jumped on expectations of industry consolidation after Daimaru said it was considering a tie-up with Matsuzakaya Holdings Co. The Nikkei average rose 42.59 points to 17,918.24 on Monday, its highest since May 2000. It rose as high as 17,931.70 earlier in the day.

The Hang Seng index was up 29.49 points (0.14%), at 20,567.91.

Volatility, however, may accentuate this week ahead of the expiry of this month's derivative contracts on 22 February 2007. As per the latest data, NSE's total F&O open interest increased by Rs 1,939 crore to Rs 61,745 crore, of which futures open interest has gone up by Rs 1,136 crore, while the options open interest rose by Rs 803 crore. Marketwide rollover was at 18%, while the Nifty rollover was 28%.

FIIs have resumed buying. Foreign funds were net buyers to the tune of Rs 210.50 crore on 14 February 2007. FIIs had stepped up buying since February 2007 before the inflow slowed down. They turned net sellers on 13 February 2007. FII inflow was a robust Rs 2909.90 crore between 2 February and 8 February.

The strong inflow was triggered by an upgrade in India's sovereign rating to investment grade by global ratings agency, Standard & Poor's, on 30 January 2007.

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.

Most Asian markets are closed for the Lunar New Year holidays. Taiwan and China are closed for the entire week, while Hong Kong and Singapore are shut on Monday and Tuesday. South Korea, Malaysia, and the US markets are also closed on Monday.

The blue-chip Dow Jones industrial average edged up on Friday (16 February) to end at yet another record before a three-day holiday weekend. The Dow Jones industrial average rose 2.56 points, or 0.02%, to end at a record 12,767.57. The Standard & Poor's 500 Index slipped 1.27 points, or 0.09%, to finish at 1,455.54. The Nasdaq Composite Index dipped 0.79 of a point, or 0.03%, to close at 2,496.31.

In New York, on Friday, oil futures prices jumped more than $1 to end above $59 a barrel as traders covered some short positions before the President's Day holiday (Monday), when NYMEX and US financial markets remain closed. More unrest in OPEC member, Nigeria, also lifted oil prices.

Market closes on a positive note

After witnessing range-bound moves through the day, the market settled in positive territory. The Sensex, which touched an intra-day high of 14479, finally ended the trading session with gains of 47 points at 14403. The Nifty gained 18 points to close at 4165.

The breadth of the market was marginally positive. Of the 2,674 stocks traded on the BSE, 1,326 stocks advanced, 1,297 stocks declined and 54 stocks ended unchanged. The BSE Bankex led the sectoral indices chart with gains of 1.48% followed by the BSE Oil & Gas index (up 0.42%). The BSE IT index and the BSE CG index also closed in positive territory. However, the BSE CD index shed 1.49%, the BSE Auto index lost 0.26% and the BSE FMCG index ended marginally in negative territory.

Leading the rally, ICICI Bank surged 3.11% at Rs978. Maruti Udyog gained 2.47% at Rs914, TCS added 1.52% at Rs1,310, Reliance Industries advanced 0.81% at Rs1,418 and Bharti was up 0.74% at Rs798. Among the other gainers CESC surged 7.17 at Rs367, Tata Elxsi soared 5.63% at Rs294, SAIL advanced 5.11% at Rs119 and GIPCL and Ispat Industries rose 4% each at Rs62 & Rs15 respectively. SKF India, Essel Propack, Corporation Bank, Siemens and ABB advanced 3% each.

Banking stocks had a good run on the bourses. Oriental Bank of Commerce vaulted 2.99% at Rs229, Federal Bank gained 1.69% at Rs240, Kotak Bank added 1.48% at Rs490, Canara Bank advanced 1.04% at Rs219 and SBI was up 0.67% at Rs1,131. However, Allahabad Bank declined 2.69% at Rs83 and Bank of Baroda dropped 2.13% at Rs227.

ZEE News was the most actively traded counter on the BSE with trades of over 2 crore shares followed by IFCI (1.02 crore shares), Redington (92.27 lakh shares), Pochiraju (76.56 lakh shares) and Cinemax (73.95 lakh shares).

Kotak - JBF Industries

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Informed Investor

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PowerYourTrade Trading Calls

Ashwani Gujral
Buy Wipro with a stop loss of Rs 640 for target of Rs 825
Buy Nalco with a stop loss of Rs 225 for target of Rs 285

Deepak Mohoni
Buy Infosys below Rs 2415 with stop loss of Rs 2375. This is a day-trading recommendation
Buy Financial Technologies below Rs 2210 with stop loss of Rs 2170; This is a day-trading recommendation.

Rajat K Bose
Buy Moser Baer around the last close with a stop loss below Rs 347 for target of Rs 370
Buy Hitachi Home around the last close with a stop loss below Rs 96.85 for target of Rs 112.

Citigroup Reports

Mahindra & Mahindra (MAHM.BO): Maintain Buy: Raising Target Price

* Raising estimates, target price — Raising target price to Rs1,032 (from Rs702) as we are raising cash earnings by 9-10% over FY07E/09E, and factoring in higher subsidiary valuations (run up in Tech Mahindra's share price). We value M&M on a sum–of–parts methodology, core value at Rs543/sh (11x FY08E cash EPS) and Rs489/sh (for subsidiaries and the auto component initiatives).
* Continued dominance in tractor market — M&M has consolidated on its dominant presence in the domestic tractor market – current market share is around 30%, through greater focus on the sub 30hp segment (traditionally a weaker segment for M&M). We contend that M&M might further consolidate its leading position in the tractor industry through inorganic initiatives.
* Recouping market share in core UV business — M&M has recently recouped nearly 9% market share in the UV segment (market share currently at 53%), due to performance of the Maxx pick-up variant it launched in Sept 06. We expect M&M's core auto volumes to post a 10% CAGR over FY07E-09E. Operating leverage benefits should continue, mitigating material cost pressures.
* New initiatives gain momentum — M&M's Renault JV will launch the Logan in 1QFY08; JV with Navistar should be operational in mid CY08E. Both JVs have enhanced scope and scale of operations. M&M's auto components initiative (Systech) is ahead of its schedule of attaining its USD1bn revenue target (given recent acquisitions in Germany, with more on the anvil).

National Aluminum (NALU.BO): Changing Forecasts: Commodity Price Revisions, Duty Cut

* Changing forecasts — Following the recent duty cuts and the upward revision to our near-term global price forecasts, we have adjusted our EPS estimates for FY07E by +5%, FY09E by -4% and FY08E is unchanged. Target price unchanged at 8x FY08E EPS – at the top end of the 6-year P/E band of 6-8x.
* Global commodity team raises near-term forecasts — Our global commodity analyst, Alan Heap, has raised 1HCY07 price forecasts by 9-10% for alumina and aluminium. This is on the back of strong Chinese demand, and a large speculative long position (expected to last until April).
* Import duty cut for aluminium — The impact of the increase in our near-term international prices has been offset by the recent reduction in import duty rates, especially for FY09E. Import duty on aluminium was reduced from 7.5% to 5%. Producers responded with a price cut of about 2% taking prices to about Rs135,500/t. The current landed price is higher at Rs139,000/t.
* Spike in spot alumina helps FY07E — Our FY07 forecasts incorporate the results for 9MFY07. We have also accounted for the jump in spot alumina prices from US$200/t to around US$350/t due to the general strike and subsequent martial law declared in Guinea, the world’s second-largest bauxite producer, which will likely help support spot alumina prices in the near term.
* Reiterate Sell — Based on our global outlook of falling international prices for alumina and aluminium, we expect a yoy fall in margins and earnings in FY08 and expect Nalco to underperform. Sell/Medium Risk with Rs206 target price.

Flash: ABB(India) (ABB.BO): Buy: Another Strong Quarter, PAT Up 43% YoY

* PAT up 43% YoY — ABB (India) 4QCY06 PAT at Rs1.35bn (up 43% YoY) was 7% ahead of CIR estimate of Rs1.26bn on faster execution of orders leading to net sales of Rs14.3bn, which was 5% ahead of CIR estimates. CY06 PAT of Rs3.4bn (up 56% YoY) was 3% ahead of CIR estimate of Rs3.3bn.
* Strong order inflow momentum — ABB (India) booked Rs14.1bn (up 40% YoY) of fresh orders in 4QCY06, ending the year with an order backlog of Rs33.7bn (up 60% YoY). In CY06, the company booked orders worth Rs56.2bn (up 50% YoY). Strong industrial growth and power capex imply future order inflows.
* Power capex: stronger for longer — The power capex cycle will be stronger for longer as the first concrete numbers of the Ministry of Power’s (MoP) generation targets for the XIIth Plan (FY12-17E) at 86.5GW has started trickling in, implying that capacity addition targets in the 10 years from FY07E-FY17E is likely to be 153.5GW, up 89% vis-à-vis that in FY97A-FY07E
* Peak utilizations drive corporate capex — India’s industrial capex is set to take off driven by (1) a strong macroeconomic tail-wind, (2) peak industry utilizations and (3) strong corporate balance sheets. According to CRISINFAC, industrial capex is set grow 181% in FY06-10, up 181% over that in FY99-FY05.
* Maintain Buy/Low Risk rating —Our target price of Rs4,400 is based on a P/E of 34.7x FY08E which is a ~50% premium to BHEL, in line with the premium over the last 3 years.

Hindalco Industries (HALC.BO): Sell: Cutting Back Our Target Price

* Worse position; weaker earnings — We are lowering our target price to Rs137 based on: 1) lower FY08E P/E of 7x given its higher risk profile, high gearing and lower margins from the Novelis acquisition; and (2) lower forecast earnings due to the recent import duty cut. This negates our upward aluminium price revision, higher profits from Aditya Birla Minerals, and higher investment value.
* Novelis: strong markets but low margins — Hindalco’s proposed acquisition of Novelis gives it a 19% share of the global sheet market (~3mn tpa of capacity), and high-end technology. However, Novelis reported a 9mCY06 net loss of US$170m due to the inability to pass on higher metal prices (price ceiling on can sheet sales in North America) and higher energy and transport costs.
* High acquisition cost — Novelis has been valued at US$6bn, including US$2.4bn of debt. The acquisition is at a significant premium to Hindalco’s valuations. Also the additional debt and sale of investments (US$450m) will raise consolidated interest costs substantially and reduce other income.
* Raising commodity forecasts — We are raising our 1HCY07 alumina and aluminium price forecasts by 9-10%. This is on the back of strong Chinese demand, and a large speculative long position (expected to last until April).
* Higher profits forecasted at ABML — We incorporate newly released forecasts for Aditya Birla Minerals (51% subsidiary), suggesting a 10x jump in FY08 PAT.
* Reiterate Sell — Based on this and our global outlook of declining aluminium prices and copper TC/RC margins, we maintain Sell.

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Market may resume Positive

The market is expected to remain positive with a sideways movement during intra-day trades. Among the key domestic indices, the Nifty will face resistance around 4200 levels and on breaking and sustaining above this level, it should test its all-time high of 4245. On the downside, support for Nifty is 4126. The Sensex has a likely support at 14220 and may face resistance at 14440. While the Asian indices are exhibiting a positive trend in the ongoing trades.

US indices with the marginal loss on Friday following worries of slowing growth. While the Dow Jones gained 3 points at 12768, the Nasdaq dropped a points to close at 2496.

Majority of the Indian floats ended with steady gains on the US bourses. DR reddy advanced 1.72% while VSNL gained 1.04% and Rediff moved up 1.03%, Infosys, Satyam, wipro, Tata Motors, HDFC Bank,ICICI Bank, and MTNL were up nearly 1% each. However, Only patni Computers was on the negative side.

Crude oil prices moved up, with the Nymex light crude oil for March series rising by $1.40 at $59.39 a barrel and In the commodity space, the Comex gold for April delivery flared up by $1.40 to settle at $672.80 a troy ounce.

Hutch gone, Anil dusts up GSM plan

Reliance Communications (RCom) has put the process for expanding its GSM (global systems for mobile communications) services back on the frontburner. The company had halted the process some time back, waiting for the outcome of the Hutchison Essar stake bidding war.

Telecom equipment vendors, including Ericsson, Nokia, Motorola, Huawei and ZTE, are believed to have already responded to the Reliance GSM tender for a total of 75 million 2G lines and 25 million 3G lines. The value of the tender is estimated in the range of $6 billion to $7 billion.

Chinese vendor ZTE is already in an agreement with Vodafone to supply ‘budget’ handsets across Vodafone markets, including in India. “RCom is about to start evaluation of the offers for its GSM tender,” an industry source said. Technical aspects of the bids will be evaluated first.

But an industry analyst said RCom may not be able to proceed with the GSM expansion process unless there’s adequate spectrum allocation.

Indications that a group of ministers (GoM) set up to look into vacation of defence spectrum for use in telecom may have a meeting soon to deliberate on the matter.

The GoM is headed by external affairs minister Pranab Mukherjee, who was earlier the defence minister.

Currently, Reliance Communications has over 27 million CDMA users across all the 23 circles in India, while group firm Reliance Telecom has 3.8 million GSM subscribers. Market leader Bharti has 33.7 million mobile subscribers and Hutchison Essar 24.35 million.

Vodafone, which has bought control in Hutchison Essar, said it is targeting a 20-25% market share, or 125 million users, in the next four to five years.

The total GSM base in the country is currently 110.5 million, and CDMA 45.8 million (including fixed wireless).

While the total telecom base (fixed and mobile) in the country was over 196 million as of January 31, 2007, it’s expected to cross 200 million by the end of this month.


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Anagram - Daily Call

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Intra-day Stock Ideas

SL 147 T 159, 161

SL 185 T 200, 202

SL 204 T 216, 219

BUY CEAT (142.45)
SL 138 T 150, 152

@ 330 SL 334 T 321, 319


SL 1392 T 1425


Nothing stays stable

Remember that there is nothing stable in human affairs; therefore avoid undue elation in prosperity, or undue depression in adversity. - Socrates

Hope the extended weekend would have done you a world of good, especially after the roller-coaster ride last week. If you thought Thursday's bounce has brought some stability, think again. The market will remain volatile this week owing to the F&O expiry on Feb. 22. Having said that, the derivative segment is pointing to a better situation. The February futures are now trading at a premium to the Spot Nifty and the Put-to-Call ratio is also down sharply. There was a huge short-covering on the last trading day of last week. Some more unwinding/short covering could be in the pipeline. This may happen as we approach the derivative settlement.

Next week the Railway Budget and Union Budget will be unveiled by the Government. Historically, the market rises ahead of the budget and cools off thereafter. This time it's been a bit different. In any case, the budget is no longer seen as having a big impact on the stock market. What is going to have a big say on future market movement is FII inflows, which have been pretty volatile so far this year. Though corporate earnings growth is strong valuations are not cheap by any means. So, one has to adopt a stock centric approach. Plus, inflation is at a two-year peak and interest rates are also rising across the board. If this trend sustains for long, it could spoil the party for the bulls.

We see a cautious to higher opening today followed by intra-day gyrations. The suspected terrorist strike on the Samjhauta Express at Panipat in Haryana may be just another headline. When everything looks stable, be extra cautious for unexpected corrections. And it need not happen today.

ABB and GSK Pharma could do well on the back of their strong results. Bajaj Electricals is also likely to gain amid reports that it is scouting for an acquisition in western India. One might look at JMT Auto for medium to long term as the auto ancillary company is expected to do well following the completion of an expansion. One should also watch out for the capital goods and power equipment space, as the Government may announce some sops for this sector. Sesa Goa will remain in the thick of things as Mitsui & Co. will select two bidders for the last round of bidding later today. According to a financial daily, Arcelor Mittal and Rio Tinto are tipped to be the front-runners in the race so far.

Global cues are mixed. US stocks closed flat on Friday. The Dow was up 2.56 at 12,767.57. It managed to close a few points higher, ending at a fresh all-time high for the second session in a row. The S&P 500 shut shop nearly unchanged at 1,455.54, after ending the previous session at a 6-1/2 year high. The Nasdaq too ended static at 2,496.31. The major gauges rose for three straight sessions this week. US financial markets will be closed on Monday for the President's Day holiday.

US light crude oil for March delivery rose $1.40 to settle at $59.39 a barrel on the New York Mercantile Exchange. The front-month contract was 16 cents up $59.23 a barrel in extended trading in Asia.

COMEX gold for April delivery rose $1.40 to settle at $672.80 an ounce. Treasury prices crept higher, lowering the yield on the benchmark 10-year note to 4.69% from 4.7% late on Thursday. In currency trading, the dollar gained modestly versus the euro and the yen.

European shares closed slightly lower on Friday. The pan-European Dow Jones Stoxx 600 index lost 0.1% to 380.81. The U.K. FTSE 100 decreased 0.2% to 6,419.50, the German DAX Xetra 30 closed flat at 6,957.07 and the French CAC-40 shed 0.1% to 5,713.59.

Asian stocks were mixed in early trading. Many markets are closed for Lunar New Year celebrations, investors awaited a decision on Japanese interest rates later in the week. Markets in China and Taiwan are closed for the week to celebrate the Year of the Pig. South Korean markets reopen on Tuesday and exchanges in Hong Kong, Singapore and Malaysia will reopen on Wednesday.

The Morgan Stanley Capital International Asia-Pacific Index gained 0.1% to 147.08 as of 11:11 a.m. in Tokyo. Japan's Nikkei 225 Stock Average added 0.2% to 17,918.24, while the broader Topix index rose 0.1%. Australia's S&P/ASX 200 Index climbed 0.6%.

The Bank of Japan (BOJ) is holding a two-day meeting tomorrow on reviewing interest rates. Analysts are divided on whether Governor Toshihiko Fukui and his colleagues will keep the key overnight lending rate at 0.25% or nudge the rate upwards a little on Feb. 21.

Market Watch

Insider Trades:
Gujarat Ambuja Cement Ltd: A L Kapur (Director) has sold in open market 10325 equity shares of Gujarat Ambuja Cement Ltd on 11th February, 2007.

Avaya GlobalConnect Limited: Reliance Growth Fund - Schemes of Reliance Mutual Fund has purchased from open market 500000 equity shares of Avaya GlobalConnect Limited on 14th February, 2007.

Glenmark Pharmaceuticals Ltd: Gracias Saldanha, Director has purchased from open market 1500 equity shares of Glenmark Pharmaceuticals Ltd on 12th February, 2007.

Market Volumes:
The turnover on NSE was up by 12% to Rs100bn. BSE Consumer Durable index was the major gainer and gained 3.88%. BSE Technology index (up 3.71%), BSE Capital Good index (up 3.22%), BSE Metal index (up 3%) and Bank index (up 2.95%) were among the other major gainers.

Volume Toppers:
IFCI, IDFC, SAIL, House of Pearl Fashion, Cinemax India, TTML, Pochiraju Industries, R Com, TV Today, Arvind Mills, Hindalco, Nagarjuna Fertilizers, Bajaj Hindusthan, India Cements, Essar Oil, HLL, ITC and GBN.

Lower Circuit Filters:
Mangalam Cement, Rana Sugars, Unitech, 3M India, Goldiam International, Fedders Lloyd, Action Construction, Dawn Mills, Donear Industries, Electro Therm, Champagne Industries, Garware Offshore, Taneja Aerospace and McNally Bharat.

Delivery Delight:
ABB, ABG Shipyard, Adlabs Films, Arvind Mills, Bajaj Hindustan, Balrampur Chini, BHEL, Crompton Greaves, Dr Reddys Laboratories, HCL Technologies, IDFC, Jet Airways, L&T, M&M, NDTV, Praj Industries, Reliance Capital, Reliance Communications, Siemens, SRF, VSNL and Wipro.

Brokers Recommendation:
Wipro – Overweight from HSBC with target of Rs750.

Long Term Investment:
Voltamp Transformers.

Major News Headlines:
Inflation rises to 6.73% in week ended Feb 3 vs expectation of 6.58%

NTPC signs an agreement with BEML for coal venture

GSK Pharma Q4 net at Rs677.9mn (up 60%), revenues at Rs3.5bn (up 1.5%)

Hindustan Zinc raises Zinc price by 3.7% to Rs163,700 a ton and lead prices by 1.7% to Rs88,200 a ton

Indian Hotels to buy Four Season Hotels Los Angeles property for $200mn – Reports

VSNL sells broadband business to unit for Rs4bn

Subhash Projects signs MoU with Gujarat Government

Silverline Tech unit Millennium Care gets US contract

Alcatel-Lucent, ITI gets order for 2mn GSM lines from MTNL

Jain Irrigation to acquire Aquarius Brands Inc. for US$21.5mn

Indiabulls approves plan to separate broking business

From the Research Desk

Shree Cements (Q3 FY07) - Result Update

Cement despatches increased sharply in Q3FY07 by 79.5% yoy to 1.29mn ton. On qoq basis the same increased by 16.7%. Capacity utilization of the enhanced capacity touched 116% for the quarter. SCL increased its clinker to cement conversion ratio from 1.36 in Q2FY07 to 1.41 in Q3FY07. We expect cement volumes to clock 6.23mn ton in FY08 as 1.5mn ton integrated cement plant is expected to go on line from FY07 end at Unit 4and Unit 5 with 1.2mn ton clinker capacity with split grinding capacity of 2 mn ton is expected to come on line from Dec 2007.

SCL’s realization per ton increased yoy by 40.7% in line with the industry to Rs2817, in Q3FY07. On qoq basis it fell from Rs2849, as SCL tested new markets during the quarter. On yoy basis operating margin improved by 1400 bps to 43.9% in Q3FY07, but eased from 45.2% recorded in Q2FY07. Fall in realization coupled with increased freight cost to venture new pockets has brought down the operating margin. We expect operating margins to improve in the coming quarter as realization improves in the peak construction period and freight expenses coming back to normal levels.

SCL’s CMP of Rs1350 discounts our estimated EPS of Rs109.8 and Rs143.8 for FY07P and FY08P by around 13x and 10x, respectively. We expect SCL to command better valuations going forward with multifold increase in capacities and increase in blending ratio. We rate the stock as BUY with a target of Rs1726. Our target price discounts FY08 estimated earnings by 12x and EV/EBIDTA by 7.7x.


Recovery may continue

The bulls made a strong come back on the bourses with benchmark BSE Sensex surging 345 points to close above the 14300 mark. NSE Nifty advanced nearly by 100 points. After registering strong opening the key indices traded firmly throughout the day keeping the bears off shore. The Capital Good, Metal, Technology and Banking index led from the front as the Inflation numbers which were at 6.73% in week ended February 3rd against expectation of 6.58% were ignored by the investors on D-Street. Further all round buying in scrip’s across the sectors lifted the benchmark Sensex to hit an intra-day high of 14372.96. Finally the BSE 30-share benchmark Sensex rallied 345 points to close at 14355. NSE Nifty surged 99 points to close at 4146.

House of Pearl Fashions made a weak debut on the bourses today. The stock opened at Rs500 as against the issue price of Rs550. The scrip slipped by over 15% to Rs466 touching an intra-day high of Rs525 and a low of Rs444 and recorded volumes of over 82,00,000 shares on NSE. The company entered capital market with an IPO of 5.98mn shares of Rs10 each.

NTPC slipped 1.3% to Rs142. The company signed an agreement with BEML for Coal Venture. The scrip touched an intra-day high of Rs146 and a low of Rs140 and recorded volumes of over 48,00,000 shares on NSE.

Capital Good stocks were among the major gainers. L&T surged over 5% to Rs1695, ABB advanced 2.2% to Rs3804, BHEL was up by 2.8% to Rs2385. However, Punj Lloyd edged lower 0.5% to Rs971.

Metal stocks shined brightly on back of fresh buying. Hindustan Zinc spurred over 7% to Rs666, Nalco surged by 5% to Rs244, Sterlite industries advanced 5% to Rs496 and SAIL gained 4.8% to Rs113.

Telecom stocks also recorded smart gains. Index heavy weights Bharti Airtel surged over 4% to Rs793, R Com spurred over 3% to Rs466, VSNL was up by 2.7% to Rs428 and MTNL added 3.7% to Rs151.

Auto stocks further gained momentum after government reduced gasoline prices by Rs2 per Liter. M&M surged over 5% to Rs901, Hero Honda paced ahead 4.7% to Rs745, Maruti spurred over 4% to Rs892 and Tata Motors added 2.2% to Rs869.

Fresh buying boosted the Sugar stocks. Bajaj Hindusthan surged over 12% to Rs160, Balrampur Chini spurred over 8% to Rs64, Sakhti Sugar jumped over 7% to Rs75 and Dhampur Sugar gained nearly by 6% to Rs77.

Ashish Chugh - HIDDEN GEMS

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Uptrend to continue

The market breadth was quite strong on Thursday 15 February, the day when Sensex had surged 346 points, registering its biggest single day point gain in a little over one month. This indicates that the rally has got strength.

However, volatility may heighten this week ahead of expiry of February 2007 derivatives contracts on 22 February 2007. On Thursday (15 February), Nifty February 2007 futures settled at 4160, at a premium of 13.80 points over spot Nifty closing of 4146.20. Nifty March 2007 futures settled at 4158.45, a premium of 12.25 over spot Nifty closing of 4146.20.

FIIs have resumed buying. FIIs were net buyers to the tune of Rs 210.50 crore on 14 February. FIIs had stepped up buying since February 2007 before the inflow slowed down. They turned net sellers on 13 February 2007. FII inflow was a robust Rs 2909.90 crore in five trading sessions from 2 February to 8 February. The strong inflow was triggered by an upgrade in India’s sovereign rating to investment grade by global rating agency S&P on 30 January 2007.

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 be 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.

Most Asian markets are closed for the Lunar New Year holidays. Taiwan and China are closed the entire week, while Hong Kong and Singapore are shut on Monday and Tuesday. South Korea and Malaysia are closed on Monday as are US markets.

The blue-chip Dow Jones industrial average edged up on Friday (16 February) to end at yet another record before a three-day holiday weekend. The Dow Jones industrial average rose 2.56 points, or 0.02 percent, to end at a record 12,767.57. The Standard & Poor's 500 Index slipped 1.27 points, or 0.09 percent, to finish at 1,455.54. The Nasdaq Composite Index dipped 0.79 of a point, or 0.03 percent, to close at 2,496.31.

In New York on Friday, oil futures prices jumped more than $1 to end above $59 a barrel as traders covered some short positions before the Presidents Day holiday on Monday, when NYMEX and US financial markets are closed. More unrest in OPEC member Nigeria also lifted oil prices.

Emkay - Morning Notes, Pre Budget

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What money managers expect in 2007

Ramesh Damani: To start the discussion we turn to the king of the panel first – so I’ll start with you, Rakesh, as always. Well, what do you think of the market?

Rakesh Jhunjhunwala: The bullish market is not the index, it is the bullishness of the Indian economy. And as long as I don’t come to a conclusion that India’s growth is not going to accelerate or we are not going to maintain 8-9 per cent economic growth constantly – this bull market is always going to remain alive whether the index is 12,000 or 20,000. The bull market is in the Indian economy and not in the stock market.
Although you could have the economy growing but you could have very high interest rates which is a big factor in the valuation of the market. That could temporarily disturb the market.
As long as India’s economy is doing well and I see no reason why it shouldn’t – the bull market is very much alive and kicking for me.
Ramesh Damani: Sometime they say stock prices are slave to corporate profits over the long term. What is your outlook for corporate profits or the Sensex in 2007?
Rakesh Jhunjhunwala: The bullish market is not the index, it is the bullishness of the Indian economy. And as long as I don’t come to a conclusion that India’s growth is not going to accelerate or we are not going to maintain 8-9 per cent economic growth constantly – this bull market is always going to remain alive whether the index is 12,000 or 20,000. The bull market is in the Indian economy and not in the stock market.
Although you could have the economy growing but you could have very high interest rates which is a big factor in the valuation of the market. That could temporarily disturb the market.
As long as India’s economy is doing well and I see no reason why it shouldn’t – the bull market is very much alive and kicking for me.
Ramesh Damani: Sometime they say stock prices are slave to corporate profits over the long term. What is your outlook for corporate profits or the Sensex in 2007?
Rakesh Jhunjhunwala: Well, to be very frank, I don’t do too much mathematical research. I don’t say that India is going to have consistent profit growth of 25-30 per cent y-o-y.

But I do believe that you have the biggest market and the biggest opportunity for all companies is the economy. Look at any sector, everything is at such an early stage of growth.
Ramesh Damani: I now have a question for you. We have had four years of solid gains in the Sensex. Do you make it five years in a row for 2007?
Rakesh Jhunjhunwala: Well, seeing the apprehensions that people have, I don’t see any reason why it shouldn’t be. Because if you have 15 to 18 per cent earnings growth, unless P/Es dip or those earnings dip, I don’t see any reason why there should not be a positive year.
Ramesh Damani: Sanjoy, in the 2006 roundtable, you had said that India will grow but it might be unprofitable growth. Were you here too early? Will margins shrink this year or inflation lead to unprofitable growth?
Sanjoy Bhattacharyya: I got it wrong the previous year. Clearly, I missed the way the economy would respond to a number of different stimuli – whether it was policy driven or liquidity driven – and many of those remain in place. To not have learned from that would be a tremendous sin.

Much of what has transpired in the past 12 months is indicative as Rakesh said of a turning point for this nation’s economy.
This market bears a burden of very high expectations. And the way people are pricing future earnings suggests that, the penalty for getting that wrong will actually be quite serious.
I don’t doubt that if you have an economy growing at 14-15 per cent in nominal terms and you have certain advantages which are there to stay and which are long term in nature, things are improving. That is a clear indication that things are getting better. That can only help productivity.
Ramesh Damani: And margins then?
Sanjoy Bhattacharyya: Margins are a function of where you are. I mean clearly in manufacturing margins are driven by factors which are not solely in the control of our economy.
Today we are much more open as an economy. There is much less tariff protection; much more global impact of commodity prices. So you are not able to insulate yourself from them and as we speak today, a lot of these things suggest that margins will be under pressure.
Ramesh Damani: If you were to say outlook for 2007 in terms of the Sensex, would you say it would be a negative year?
Sanjoy Bhattacharyya: I do think though that 2007 will not have the kind of returns we have seen in the last four years. We will not see 30-40 per cent plus type returns spread. The last four years actually have seen the index multiplying 4 1/2 times.
Ramesh Damani: Raamdeo, you started this great Bull Run with low interest rates as you said because previously capital was always crowded. In 2003 capital became easily available.
Now you’re seeing the tightening–prime rates are going up, housing rates are going up. Can that then stop all or even finish this bull market because interest rates are now swinging from low to extremely high?
Raamdeo Agarwal: This is the first globalised bull run in every asset class all over the world. The world economy is struggling to figure out all this noise about inflation, and only time will tell because there is no dearth of money.

The government is worried about the response to inflation and is saying the rate will fall in April. But the issue is that it is responding by closing down exports. So what happens is when sugar export was possible, you banned it. You got the inflation under control but what happened? It has shattered the entire sugar community.
Ramesh Damani: Raamdeo, what are your (Motilal Oswal’s) forecasts for 2007 Sensex earnings?
Raamdeo Agrawal: By the last count when this quarterly results got completed, our team had an EPS of Rs 710 for FY07 and more like Rs 840-845 for FY08 for the Sensex stocks.
Ramesh Damani: Madhu, Jim Rogers says that there is a 20-year bull market for commodities. But yet commodities sold off quite sharply recently. If you see, oils, zinc, copper have all sold off. What is your view on the commodities price going ahead?
Madhu Kela: See, I am not a commodity expert. But however you see there are pockets of commodities which will do well. Soft commodities in the world would do well.

Things like food grains which have not seen any price – real rise in the world – will do well. But, I am truly scared when I look at let’s say something like zinc. You know on a five-year perspective is there a possibility that zinc prices can be stable at $3000-3500 a tonne while your cost of production is $500-600 for an efficient player? So these commodity prices which have really hit a significant high from their lows may not sustain. But that does not mean you will have bearishness across the board in commodities.
Ramesh Damani: Madhu, you have been one of the most successful stock pickers. Any particular themes that you think will work in 2007? In 2006, Madhu had come here and had said the thing to attract is real estate. What do you think of real estate now?
Madhu Kela: I am certainly not as gung-ho as I was last year. And in my wildest of imaginations, I also didn’t expect that stocks will go 100 times in a matter of a year. So, having said that, I don’t think you can completely ignore this sector because this is where 30-40 crore Indians are interested. Land and property would always be an interest to India. So you have to be far more stock specific and try and find value which will emerge in this sector.
Ramesh Damani: Tell us how the Sensex will end this year, plus or minus?
Madhu Kela: I am positive in a longer run. Making money is going to be tough if I take a 12-18 or even 24 months period. There are not companies which are available at 5 or 10 P/E multiples. However, we have had 50 years of under-valuation in India. What is the big deal about over-valuation for 12 or 18 months?
Ramesh Damani: Prashant, how seriously should investors view the threat of inflation and what do you tell your investors and how do you protect your portfolio in this case?
Prashant Jain: Real inflation is actually much more than probably what the numbers are suggesting. The largest component in any household expenditure is a house and houses are clearly unaffordable by whichever measure you see. If you look at the inflationary impact on the total consumption expenditure of the household, inflation is way in excess of what these numbers suggest.

Banks are offering 10-11 per cent on deposits, and as we go into March they may start offering 12 per cent. So over long periods of time, there is certainly a strong case to be made that exposure to equities in Indian households which is very low should increase significantly but I don’t know at what pace it will happen – given the fact that fixed maturity plans from mutual funds offer virtually safe 10 per cent return, which used to be 5-6 per cent two-three years back.
Economic growth will still accelerate, but profit growth will slow down. Profit growth will be lower in 2008 than the profit growth in 2007, and 2009 will be even lower.
Ramesh Damani: Does Raamdeo’s Sensex earnings target of Rs 840-845 seem too optimistic to you?
Prashant Jain: Yes. I don’t look at the Sensex as one composite.
In fact, Sensex has two parts to it–the secular growth companies which would be companies like telecom, IT, consumer goods and the cyclicals. If you split the Sensex into these two parts, you will get a more realistic picture of the valuations. And it is not very good. If you look at the secular growth companies they are all trading at close to 20 times FY09 earnings – two years forward, which is not cheap.
And there are risks – telecom will certainly slow down by then. You cannot have 100 crore mobiles in India in the next four-five years. So it has to slow down. You can only argue whether it will take three months or six months or one year.
Cyclical growth companies are trading significantly above replacement cost and we are somewhere close to a peak cycle. So how the sectors will pan out, how zinc, lead, aluminium and steel prices behave, how the margins behave is very hard to forecast. One thing is clear that these are economically unsustainable prices and these profits are not likely to sustain for long time.
Ramesh Damani: Anoop, what is your outlook for the market? Are you more cautious or optimistic?
Anoop Bhaskar: Last year has been quite camouflaged. If you look at the large-caps, there are only six or seven stocks which have contributed to the entire movement of the markets.

In terms of small-caps, we have been in a bear market for the last 15-18 months. So, it is only six stocks which have made this whole audience come out here and say that we are still in a bull market. The bull market has stopped around 12-15 months back, frankly.
People with only small-caps and mid-caps in their portfolios would have only gained about 8-12 per cent in the last eight months, which is not a bull market. I think we’re taking a breather.
With interest rates being where they are, a rational investor would take a three-month deposit paying about 9.5-10 per cent. So, people should invest in debt rather than equity with such returns from the markets.
In equity it is more like a marathon–you cannot run a sprint all the time. This is the point where you conserve your energy for the next 12-18 months and make sure that you conserve your capital for the next round. You cannot keep on running a 100-metre sprint for the next 20 years for sure. There are times when…
Ramesh Damani: …you got to move to debt or the like. Having said that, for the record, I think everyone knows the answer, but what would 2007 end for the Sensex, plus or minus?
Anoop Bhaskar: It will depend a lot on liquidity because what really matters today is not value, it’s only liquidity. I think the Sensex will be down between 7-10 per cent.
Ramesh Damani: In the first part, we surveyed the forest. Now we take a look at the trees. How do you turn the big picture view about the economy, interest rates, equity markets into winning stocks? There is, of course lies the essence of successful investing. I will start with my favourite stock-picker, Bhattacharyya… I would like to see three good stock ideas from you, for one year or three years…
Sanjoy Bhattacharyya: Tata Elxsi, Grindwell Norton and Rane (Madras). Tata Elxsi is in a focused business, it has gone away from doing things which it didn’t do well earlier. So, it has learnt from the past mistakes and is actually a rare company in information technology where the margins are becoming higher and higher progressively.
Second, the valuations still remain very attractive. This year it will earn Rs 16 per share. If you leave out the fact that it has had a difficult and troubled past, its earnings power relative to capital that it is employing is very impressive, a reasonably impressive management team and the growth is definitely sustainable.
Ramesh Damani: And a merger with TCS on cards?
Sanjoy Bhattacharyya: That would be a cherry on the top. I need not worry about that at all, even if it does not merge with TCS. Next one, Rane (Madras) is a play on the Indian automotive industry. It is in linkage products and manual steering gears.
Fortunately, in the Indian passenger vehicles, tractors, LCV business, a very large proportion of vehicles manufactured in these categories have manual steerings. So, growth is assured. Second, it has a very strong dominant competitive position with only two serious competitors – Sona Koyo and ZF Steering, and the record of all three suggests that the industry as a whole is doing very well. Third, it has been through a major financial restructuring. So, you will see a dramatic change in terms of the efficiency with which capital is utilised to prepare and grow for the future. And in exports, it has a link with TRW, a major global player.
Hopefully we will see Rs 100 crore exports in this to TRW by the year 2009 which will actually change the operating margin profile of Rane (Madras). Because right now the EBITDA margin is very low at 9.5-10 per cent which over time should improve and there should be benefits of scale.
It is cheap, it is going to earn about Rs 11.50 a share and it will continue to grow at 20-25 per cent for the next three years. Reasonably competent, trading at 8 times this year’s earnings, you should be all right.
Grindwell Norton is a quasi player at the middle of the abrasives market, with only two other big players: at the bottom is Orient Abrasives and Carborundum is the other one at the high end with coated abrasives.
With the industry growing at 9-10 per cent, an abrasive is like a consumable. To that extent, demand is assured, no hiccups.
The interesting thing is that Grindwell has managed to become far more efficient on the working capital front, sales growth has been 12-15 per cent and the company is now moving into higher and higher value added products as it has consolidated market share at the bottom end. So, there is a scope for increasing profitability with virtually no incremental capital employed.
Other names that I like are as follows: EIH Associated Hotels, which has gone through a major transformation. Another company called Steelcast and the third one is a company called Amara Raja Batteries.
All are on the same theme: cheap, sustainable earning power, volume growth, well managed. Oh, and one more company, ABC Bearings which has margins higher than the industry leaders. It is growing and it is very cheap at 8 times this year’s earnings.
Ramesh Damani: Raamdeo, what ideas do you bring for us?
Raamdeo Agrawal: I prefer business leaders – globally competitive and somewhat unpopular. One is Tata Steel. In 1994, it was struggling with half a million tonne and see the transformation of its balance sheet in the last 12 years. Although it is a cyclical business, this is one company that can execute, has competence, passion and trained people who understand steel like nobody else does.
The opportunity to make money in steel is going to be huge in the next five-ten years. I am not happy with the price it has paid for Corus, but one thing can happen. Corus’ average price is about $950 whereas that of Tata Steel is about $550.
The opportunity is that Tata Steel will borrow the technology and competence from Corus to bring up its entire 10-12 million tonne steel to fetch $900 average. And Corus doesn’t know how to operate blast furnaces.
They pour hot metal at $450. These guys will supply them the technology to bring it down to $150. That is what should pan out. Whether it will or not, at this price you cannot lose much. If it happens, then this should give a very good return.
Second leader in its own category is Glaxo. It has underperformed the market in the past year. The reason is twofold: its earnings didn’t grow much and valuations were pretty stretched at the beginning of the year.
But in 2008 there are 3-4 patented products which are going to be launched globally from Glaxo’s portfolio and they will be launched simultaneously in India. I think at current valuation of 22-23 times CY07 earnings, you are not paying a very high price.
The patent law is in place, the products are being launched and it has a very good, transparent management. Of course, it is not a momentum driven stock, one cannot predict whether in six months one can make money or not.
Ramesh Damani: Any mid-cap, small-cap ideas?
Raamdeo Agrawal: One idea, a mid-cap called Dena Bank. A Rs 1,000-crore bank, it dominates half of Gujarat, about Rs 6-7 EPS this year, Rs 10-12 earning next year. The bank’s book value is going to be Rs 50 next year, and there is no bank stock today which you can get below price-to-book-value of 1.
Ramesh Damani: Madhu, last year you whispered ‘real estate’ in our ears. What are the themes or sectors and what are the magic words you would whisper today?
Madhu Kela: I would like to mention the contract research and manufacturing theme out of India. If you analyse this space, and as Raamdeo said, that now we’re discussing post-patent, so people are not scared to venture into whether it is outsourcing or contract manufacturing in this space.
Multinational companies annually spend something like $45 billion on research and another $45 billion is spent on manufacturing of pharmaceutical products. So, this is one very interesting opportunity which over the next three to five years will pan out very well for India.
Ramesh Damani: Madhu you’ve also been invested in media companies. Can you shed some light on the prospects for the media group?
Madhu Kela: In the media business the biggest thing that will work in its favour is the entry barrier, which is humongous across the board. Like in newspapers, you only have 80 per cent of the advertisements in the top newspaper, 15 per cent in the second one and the remaining 5 per cent in the next twenty. The second thing is, when convergence really happens, content will be the true king.
Ramesh Damani: … and the low advertisement rates in India have to go up over a period of time, so that represents the opportunity on the balance sheet side. Anoop, give us some ideas. Mid-cap space is something which the retail investor is always enthusiastic about.
Anoop Bhaskar: There are two broad ideas I would like to share. We produce roughly around 220-odd million tonne of food grain, which we have to take it to around 340-350 million tonne in the next five-seven years, because of our population.
Plus, if you have more income, you’re going to consume better than in the past. And in the last seven years there has been no greenfield project which has been set up for fertilisers because of government policies, constraints of finance etc.
India buys around 30 per cent of the world market of urea. And we are paying around $260 per tonne to buy it from the market. If we were to produce it in India at whatever cost of gas we get, it would cost us around $180-190.
Another idea is lubricants, a market in which the pricing is not controlled by the government and where the government companies are as ready as the private sector to raise prices. For the last 12 months, the prices of lubricants have moved up by almost 37 per cent. And this is one segment when over the next two-three years, lube oil refineries around Asia are going to double their capacities.
Therefore, the price of lube oil could actually move totally opposite to that of crude oil. Because there would be so much of supply and the pricing of the final product is not controlled by the government.
These are companies which have some brands. If they are able to keep a part of the fall in lube oil prices, then the jump in profits of these companies would be very high.
Ramesh Damani: Prashant, you won’t bet on stocks but tell us some themes at least.
Prashant Jain: I think auto components. If India is to become an automobile hub, look for companies in the auto-ancillary space which bring scale, the opportunity can be very large.
And there are signs that India is likely to emerge as auto ancillary hub. And these oil companies – I’ve been wrong last year, but they are available at a fraction of the replacement cost, and now government intention is that at least the oil bonds will…
Ramesh Damani: … make up for the losses.
Prashant Jain: Yes. So the downside becomes limited. They are available at book values, and the book values are fraction of the replacement costs. So, I think there’s some value. If oil prices fall, the upside could be very fast and very significant. But clearly there is no momentum and it is an out of favour sector, so one has to be patient. They also have good earnings yields.
Ramesh Damani: Let’s hear the stock picks from the best stock-picker in India. Rakesh, you’re going to share your picks, so please, we’re breathless.
Rakesh Jhunjhunwala: I agree with Raamdeo, that Tata Steel could be an extremely good long term investment over a three-five year horizon. The steel industry has changed.
The approach to the steel industry has changed from one of government approach to one of profit. Second, when people say that Tata Steel’s acquisition of Corus is a bull market excess, what bull market is Tata Steel in when it is valued at 6 times earnings, and pre-tax 5 times?
Tata Steel will make iron ore intensive products and sell it to Corus. Plus, Corus can add 4 million tonne finishing capacity without much investment, which can be utilised with the same labour force. Tata Steel itself is going from 10 million to 12 million tonne.
Mr Muthuraman has said that the combined EBITDA margin will be 25-30 per cent. If you look at Rs 100,000 crore of sales, at 25 per cent EBITDA margin, it’s Rs 25,000 crore. Tata Steel’s equity is not going to exceed Rs 750 crore, even after an issue. And then you look at it, they are financing it perfectly.
Tata Steel has $1 billion cash, $2 billion equity will come – they put that into an SPV. That SPV will borrow $1 billion which may have recourse to Tata Steel and that money will be invested in Corus. Corus will take debt, which will not have any recourse to Tata Steel. So, Tata Steel is not really risking anything except that $1 billion, which is 6-7 month cash flow for the company. And if they succeed at what they’re saying, a 750 crore equity can produce Rs 25,000 crore EBITDA.
My second investment is Titan. It’s a very expensive stock, but there are certain companies which will produce dominance, and when they will be in their youth, they will produce huge cash flows. So I believe Titan can be one such company. It’s for a patient investor and investing in it is fraught with risk.
The third stock is Bilcare, and again this is for a patient investor for three-five years. If Bilcare is successful in doing what it has set out to do, it will be among the top companies of the world in the pharmaceutical package. It will have a fully diluted equity of about Rs 21 crore and this year it will earn about 50 crore.
It’s not cheap at about 20 times its earnings. It has invested in facilities in Singapore, it has gone into the clinical trials business. Both will take time to mature. But if they do well, this stock will give mind-boggling returns. And with this, I will conclude by saying that I’m feeling very bullish after this discussion.
Ramesh Damani: There’s a very nice philosopher, who’s an existentialist – Albert Camus and he wrote a very nice thing, which is a great way to conclude this discussion.
He said you’re forgiven for your happiness and success only if you generously consent to share them. I want to thank my panelists by sharing the joy and wisdom of investing generously with all of us today.

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