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Thursday, February 22, 2007

Edelweiss - Glaxo

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Page Industries IPO Analysis

Good business but tight price

Page Industries (PIL) commenced operations in Bangalore in 1995 with the key objective of bringing the innerwear brand, Jockey to India. Over the last 11 years, the company has grown from three factories to eight, and from 249 employees to over 3,200 employees. From 800 stores in 1996, its products are now sold in over 14,000 outlets in over 1,100 cities and towns spanning across the country.

The promoters (Genomals) had been associated with Jockey International Inc as their sole licensee in Philippines. Jockey International later proposed that PIL take up the India licence and set up operations in the country to cater India, Bangladesh, Nepal and Sri Lanka.

At time when there was no quality international innerwear brand retailing in India, PIL introduced a wide range of quality products for men, women and children as well innovative marketing concepts such as display modules aimed at enhancing the consumer’s involvement with purchase.

Presently, PIL has a capacity of around 33 million pieces per annum. The company generates 70% of its revenue from men’s wear, 15% from women’s wear, and 15% from leisurewear. It currently focuses on the premium segment and plans to enter the super-premium segment in each of these categories.

PIL plans to raise around Rs 100.94 crore - Rs 110.75 crore (depending on the price band). Of this, Rs 50-55 crore will be through offer of sale by the promoters. The balance will be used to fund brand building, expansion and modernisation. The company will spend around Rs 23.35 crore over the next three years on brand building that will include TV advertising, advertising in lifestyle supplements, and opening of exclusive stores. It will also spend Rs 30.10 crore to expand its existing manufacturing facilities of garments, socks, accessories like elastics, setting up new facilities for manufacturing of products at Bommasandra, Bangalore; modernise production process; implement new generation ERP software (SAP),and purchase corporate head office in a central location in Bangalore. The balance will be spent to meet general corporate purposes and expenses of this offer.

Post-expansion, PIL’s capacity will increase to 47 million pieces per annum in FY 2008 and 74 million pieces in FY 2009.


* ‘Jockey’ is a well-established brand in the market.

* PIL has a good and growing retail presence. Brisk expansion of organised retail is positive for the branded innerwear segment.


* PIL could face severe competition from the existing apparel brands that have now launched innerwear as their brand extension. Moreover, many foreign brands are lined up to enter the Indian market. Overall, the innerwear market will remain highly competitive and the competition in the premium segment will also grow.

* The company is the licencee of the Jockey brand and does not own the brand. It pays royalty to Jockey International, i.e., around 5% of its net sales.


The annualised EPS for the six months ended September 2006 stood at Rs 16 resulting in a price to earning (PE) multiple of 22.5 to 24.7 times at the lower and upper band of Rs 360 to Rs 395. While the textile sector is attracting low PEs, the comparable listed company Maxwell Industries (which owns the more popular VIP and Lovable brand) trades at a TTM P/E of around 26 times. Notably, Maxwell is undergoing restructuring through merger of group companies/strategic tie-ups and the current price is factoring the benefits of that restructuring, which is not visible in its EPS currently. Moreover, Maxwell owns the its brands, while PIL is only a licencee of the Jockey brand.

This too shall pass - Chetan Parikh

In a great book "Hedge Hogging", the author, Barton Biggs, writes about the dangers of switching investment styles.

“Agonistics don’t believe in either religion. They say that everything in the investment business is temporary. “This too shall pass” is their mantra. Religious fanatics, they argue, often end up getting burned at the proverbial stake. When growth stocks are relatively cheap and the economic environment favors them, agnostics will own growth. When value is cheap and growth is expensive, they will look for value. Sometimes they will own a little a both. They maintain that there are fashion swings between growth and value that the intelligent investor can capitalize on. The hard-core growth and value investors reply that switching back and forth is a loser’s game. I am an agnostic, but because buying cheap beats buying expensive most of the time, I have a strong value bias.


The performance history of growth versus value is clear. Over a period of years, value beats the daylights out of growth, and small-cap value is by far the best of all. Authorities like Ibbotson and Fama-French have constructed indexes of growth and value and have calculated their performance. Since 1927, according to Ibbotson, large value stocks have compounded at 11.5% a year and small value has compounded at 14.8%. By contrast, big growth has gained 9.2% per annum and small growth 9.6%. Because of the magic of compounding over 75 years, these are staggering differences. One dollar invested in each index in 1927 would be worth today $35,957 if you had put it into small value, $4,802 into large value, $1,089 in small growth, and $820 in large growth! The difference between small-cap value and everything else is astounding. Small value did almost eight times better than large value and more than 40 times large growth. Ben Graham must be smiling. Only in the 1930s and the 1990s has large growth beaten large value for a full decade. Small growth has trailed small value in every decade except the 1930s. However, in any given year the disparity can be incredible. For example in 1998 large growth stocks returned 33.1%, while large value did a mere 12.1%.

If you have to pick only one vehicle, small-cap value is where individual retirement accounts (IRAs) and long-term index money should be in the United States. It’s obvious. Equities are a high-return class, and small cap is the best of breed. Unfortunately, right at this moment, small cap, both growth and value, are historically expensive relative to big cap. Over the last six years, small caps have done much better than large caps and small cap value has soundly trounced small-cap growth. I would be patient and wait to buy either small-cap index. Instead, right now in mid-2005, large caps are relatively attractive compared to small caps, and large-cap growth is relatively undervalued compared to large-cap value. The Leuthold large-cap growth index of 90 companies is selling at 20.5 times earnings and the Leuthold value index is at 11.9 times, which is a growth to value price earnings ratio of 1.68 versus the history median of 2.5.

For IRAs the Vanguard index funds make sense to me. Sure, you can capture alpha, extra return, if you identify a winner mutual fund, but you are bucking a number of headwinds in terms of higher costs, performance cycles, manager turnover, and so on. When the time comes and small value is cheap again, Vanguard has a Small-Cap Value Index Fund. The stock selection is based on the MSCI Index, which, in making its selection, uses eight value and growth factors, including price/book value, dividend yield, earnings yield, sales growth, and long-term-earnings growth. MSCI defines U.S. small cap as those equities ranked from 751 to 2,500 in market capitalization. Based on each stock’s score, the computer then places it in the MSCI value or growth index. Not an ideal way to do it, in my view, but nevertheless it captures the essence of the exercise. Equally important, management expenses for the fund are minuscule. There is no sales load whatsoever, and total annual expenses are 27 or 18 basis points, depending on the class of shares owned. Comparable actively managed funds would have expenses of 80 to 150 basis points not including sales charges.

Growth managers argue that the Vanguard and Ibbotson indexes are ridiculously simplistic, and they say their special skill is in identifying companies that are capable of sustained growth and avoiding the losers. They maintain that their portfolios are populated with vision stocks. Arbitrary quantitative groupings, they say, prove nothing. These growth managers sometimes maintain, a little arrogantly, that they have the true seeing eye for beauty, and disdain the value geeks who grub in the muck, searching for cheap ugliness. The real test, they argue, is the results of the portfolios of professional growth stock investors versus those of value investors. They also maintain that, for tax-paying investors, the turnover and tax bill in value portfolios is much higher because, in accordance with their religion, value investors have to sell their winners when they go up. By contrast, growth investors can live happily in their eternally growing money trees for decades.

Here is an example of how it can work if your stock selection is fortunate. In the early 1970s, my father was worried about his health and inflation and suspected my mother would outlive him by a considerable number of years. He never was much of a believer in bonds. “Bonds are trading sardines, but good stocks are eating sardines,” was an expression he favored. So he constructed for my mother a portfolio of growth stocks (and cyclical growth stocks) such as Phillip Morris, Caterpillar, Exxon, Coca-Cola, AIG, IBM, Citicorp, Hewlett-Packard, Berkshire Hathaway, GE, Merck, Pfizer, and so on—nothing very imaginative, but solid, long-term companies you would want to sleep with. When she died two years ago at age 95, her cost on many of those positions was actually less than the current dividend.

My mother’s portfolio compounded over 32 years at 17% a year, and her dividend income grew at about the same rate. I figure the purchasing power of her income stream had compounded at roughly 12% per annum. The only taxes she paid were on those dividends. Talk about tax-free compounding! Of course, as she grew very old, it made little sense for her to sell any of those shares. No matter how egregiously overpriced they became, she held on to them because she would have had to pay a whopping capital gains tax and then her heirs would have to pay a 55% inheritance tax on the proceeds. Of course, the trick is to find and hold growth stocks that can stand that test of time, and obviously it’s difficult. My brother Jeremy and I watched her list intently, and from time to time, we did weed out and replace a few companies that we thought were beginning to falter.

My brother and I were lucky, and we had the wind at our backs. I think it’s too dangerous for the amateur to pick individual stocks. As I mentioned earlier, history shows that the lifespan of growth stocks is short, and the fall from grace when it comes can wipe out years of gains. As for mutual funds, their managers come and go, and the fees are high. If you can find someone like, Bill Miller at Legg Mason, it’s a gift from heaven. As I noted before, an attractive alternative is owning an index fund, and they come in all shapes and sizes with minuscule fees. At least you are going to capture the index return. The two biggest index fund firms by far are Vanguard and Fidelity.

Growth investing, because of its bias toward a buy-and-hold strategy, is inherently more tax efficient. However, for tax-exempt investors, the hard evidence is that the actual portfolios of value managers beat those of growth managers.. It is also interesting to note that, during one of the great speculative growth stock bubbles of all time, only in 1998 and 1999 did growth absolutely bury value.”

HDFC Sec - Punj LLoyd

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FII: - Rs 40 cr, MF + Rs 19 cr.

FII Gross purchases Rs 2240 Cr Gross Sellers Rs 2280 Cr Net Sellers Rs 40 Cr.
MF Gross Purchases Rs 558 Cr Gross Sellers Rs 539 Cr Net Buyers Rs 19 Cr.

Our View:

FII numbers are quite low than provisional figures, nothing big to impact here.. As tomorrow is the last session of the week and the inflation is the one to drive the market...
Provisional figures for 22/02/2007 came out to be Rs 435 cr..

Market Close: Bears Blister at the End

Last day of the FNO settlement saw indices to start in positive territory but as buying and selling kept indices in a ranged manner. Globally Indices traded in green which saw some buying interest by the investors . As the day progressed selling intensified in heavyweights and during the final hours of trading Indices slipped down by over 200 points but managed to recover from the fall as buying was seen at lower levels. Small and Mid caps were spared which too traded in red. Crude nearing $ 60 saw weakness in Oil companies. Few stocks got listed today namely Ahluwalia Cont which was had a blistering start as it list at Rs 58 and jumped over 500% on the listing day. ICICI's First source too list which saw little response from the investors.

Sensex ended down by 167 points at 14021.31. Weighing on the Sensex were losses in Grasim(2420,-5.02%), ACC (966,-4.17%), Gujarat Ambuja (126,-3.93 %), HDFC Bank (977,-3.70 %) and Ranbaxy (368.90,-3.56%) Losses were restricted by gains in Reliance Com (450,+0.77%), Reliance Ind (1417,+0.77%), TCS (1295, +0.70%), HDFC (1682.65, +0.60%) and NTPC (143.20, +0.49%).

The government has invited bids from public sector financial institutions and mutual funds for its remaining 10.27 % stake in Maruti Udyog Limited. The process of sale is expected to be completed in this fiscal itself as the last date of bidding has been kept as March 9, 2007. The sale is expected to fetch Govt Rs. 2,700 cr. Government has earlier raised Rs 1567 cr from selling its eight per cent stake in the company. No Big impact from govt stake sales as majority part of the stake is with the Suzuki with has around over 51%.. Maruit traded weak as it closed down by 2.43%.

A leading business daily reported that the plastic products major Sintex Industries and the Gujarat government have entered into an agreement for the construction of 50,000 economically weaker sections (EWS) quarters with monolithic construction technology. The proposed investment in the project is about Rs 75 0 Cr. Monolithic constructions are housing solutions designed by Sintex to address mass and low-cost housing needs. With the company's range of plastic products with manufacturing units at 8 regions across India. These broadly fall under the categories of water storage tanks (16% of 9mFY07 plastic revenues), pre-fabricated structures (47%) and industrial custom molding (37%). This deal should be a promising one for Sintex Inds and should add to the topline as well in the bottom line too. Stocks was battered which ended in red by 4% as investors booked profit.

Tech major Infosys is planning to acquire a UK-based SmartStream Technologies, which provides solutions to the financial services sector, for over £ 100 m. SmartStream, majority of which is owned by the US buyout fund TA Associates, has more than 70 of the world's top 100 banks as its clients and has 38% share of the transaction lifecycle management solutions market. If the deal is finalised this would be the first acquisition made by Infosys. SmartStream has direct operations across Europe, New York, Sydney, Beijing, Singapore and Mumbai which should prove good for Infosys. Also, with Europe recording a very strong growth in outsourced IT spending, it makes sense to go in for an acquisition to enjoy the first mover advantage. FNO expiry broght down the stocks by 1%.

Technically Speaking: The Breadth was taken over by Declines at 1799 while Advances stood at 813. The turnover for the day stood at Rs. 3,938 cr. Sensex have closed at a very important support, dot on channel support on daily charts. With the expiry behind us and a long March expiry, we can expect a fresh move upto 15k

ENAM - Pre Budget Report

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Morgan Stanley - SBI

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Wednesday Telefolio - February 21, 2007

BUY Micro Technologies (India) Current Price Rs 242
BSE Code 532494 Face Value Rs 10
Micro Technologies over the years has developed wide range of Software Products especially for use in security systems. The company is expected to continue to grow at fast pace through product innovations, strategic tie-ups and geographical expansion.
Actual EPS for year ended March 2005 Rs 6.7 Projected EPS for year ended March 2007 Rs 31.1
Actual EPS for year ended March 2006 Rs 16.6

ICICI Daily, YES Bank, Grabal Alok Impex

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Thanks Ashis

Kotak - Gateway Distripaks

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Thanks Dunbaka

Sharekhan Reports

Sharekhan Daring Derivatives for February 22, 2007
Sharekhan Highnoon dated February 22, 2007
Sharekhan Commodities Buzz dated February 22, 2007

Sensex slips amid listless trading

The market exhibited considerable strength in the first half of the trading session. The Sensex opened with a positive gap of 12 points and moved up to touch the day’s high of 14287. The trend in the market was cautious, as today was the expiry day of the February series in the derivatives segment. After exhibiting range-bound moves, the Sensex moved up in the afternoon on sustained buying in technology and oil stocks. Towards the close, the market saw heavy selling pressure and erased most of the gains accrued during the day to touch an intra-day low of 13978. The Sensex finally ended the session with losses of 167 points at 14021. The Nifty also ended in the red at 4040, down 56 points.

The breadth of the market was extremely weak. Of the 2,684 stocks traded on the BSE, 1,805 stocks declined, 817 stocks advanced and 62 stocks ended unchanged. All the sectoral indices ended in the red on the BSE. The BSE Bankex shed 2.48% at 6999, the BSE HC index declined 2.10% at 3708 and the BSE Auto index was down 1.86% at 5459.

Select heavyweights declined sharply on substantial selling pressure. Grasim tanked 5.18% at Rs2,416, ACC dropped 4.41% at Rs964, Ranbaxy fell 3.75% at Rs368, Gujarat Ambuja Cement shed 3.35% at Rs127, Hero Honda lost 3.21% at Rs716, HDFC Bank declined 2.56% at Rs989 and Dr Reddy's dipped 2.55% at Rs711. SBI, Maruti Udyog, Cipla, ICICI Bank, Tata Motors, Bajaj Auto and Wipro shed around 2-3% each. Among the select gainers Reliance Communications, TCS, Reliance Industries, NTPC and Tata Steel closed with moderate gains.

Several pharma and banking stocks were battered. Sterling Bioteck tumbled 6.04% at Rs162, Biocon slipped 5.58% at Rs455 and Glenmark Pharma shed 3.13% at Rs592. Among the banking stocks Allahabad Bank declined 4.29% at Rs78, Bank of Baroda fell 4.11% at Rs216 and Bank of India was down 4.05% at Rs166. Kotak Bank, Union Bank, Punjab National Bank and Oriental Bank slipped over 3% each.

Over 23.03 lakh Ashok Leyland shares changed hands on the BSE followed by Hindalco (20.85 lakh shares), SAIL (19.24 lakh shares), IDBI (17.99 lakh shares) and HDFC Bank (17.53 lakh shares).

Value-wise HDFC Bank registered a turnover of Rs178 crore on the BSE followed by Reliance Industries (Rs145 crore), Tata Steel (Rs80 crore), Reliance Communications (Rs62 crore) and Maruti Udyog (Rs61 crore).

Expiry of derivatives plays spoilsport

Selling pressure gripped the bourses towards the fag end of the trading session today due to expiry of February 2007 derivative contracts. Much of the fall materialised in the last 50 minutes of trade. Cement, auto, banking shares and pharma pivotals weakened in late trading.

The 30-share BSE Sensex lost 167.18 points (1.1%), to settle at 14,021.31. It came off the lower level after having dropped as many as 210.44 points, to a low of 13,978.05, at 15:15 IST. But for a relatively firm trend in index heavyweight Reliance Industries (RIL), the fall in the BSE Sensex may have been even much steeper.

Although the market was volatile today, the sharpest movement came only in late trading. In early trade, the market had lost ground soon after a strong opening, which was triggered by firm Asian markets and data showing rising inflow of funds from FIIs.

The S&P CNX Nifty lost 56.20 points (1.3%), to settle at 4,040. Nifty March 2007 futures were at 4,064, a premium of 24 points over the spot Nifty closing.

Finance Minister P Chidambaram said on Thursday he expects the inflation rate to moderate as supply shortages ease in the coming days.

The Central Board of Direct Taxes (CBDT) today shot down reports of nationwide raids on stock brokers. TV channels reported that such raids were being conducted since the morning.

The market-breadth was quite weak. Against 1,799 shares declining on BSE, 813 rose. Just 67 shares were unchanged. Losers outpaced gainers by a ratio of 2.2:1. The BSE Small Cap index shed 50.98 points (0.7%), to 7,173.41. The BSE Mid-Cap index lost 72.70 points (1.2%), to 5,804.48.

The BSE clocked a turnover of Rs 3938 crore compared to Wednesday’s Rs 4098 crore.

Turnover on NSE’s futures & options (F&O) segment surged to Rs 55345.67 crore compared to Wednesday’s Rs 48152.93 crore. On Wednesday itself, the turnover had surged from Tuesday’s Rs 39292.32 crore.

All BSE’s sectoral indices ended in the red. BSE’s banking sector index Bankex lost 177.81 points (2.4%), to 6,998.97. The BSE Healthcare index lost 79.69 points (2.1%), to 3,708.72. The BSE Auto index lost 103.53 points (1.8%), to 5,458.67. The BSE FMCG index shed 18.92 points (1%), to 1,848.27.

The Sensex is up 1.7% in calendar 2006 thus far. It is off 4.3% from a lifetime closing high of 14,652.09 of 8 February 2007.

A key trigger for the market in the near-term is Union Budget 2007-08. Concerns that the government may raise short-term capital gains tax on sale of shares from the current 10% have gained currency. The securities transaction tax (STT) may also go up further. The STT was raised in the previous budget. The removal of 10% corporate surcharge may be offset by removal of certain open-ended exemptions. Market men also expect the finance ministry to give a big impetus to agriculture and infrastructure in the budget.

Rising interest rates have helped the market cool off from a record high. A number of state-run banks have raised their prime lending rates (PLRs) over the past few days after the Reserve Bank of India (RBI) raised the cash reserve ratio (CRR) by 50 basis points to rein in inflation and credit growth. An increase in PRL will raise borrowing costs for the corporate sector, as working capital loans are linked to it.

The rally has been cut short despite FIIs stepping up buying this month. The cumulative FII inflow for February 2007 has reached Rs 4707.70 crore (till 20 February compared to their inflow of Rs 492 crore in the month of January 2007).

Cement shares witnessed a sell-off in late trade today. Grasim plunged 5% to Rs 2417.75, ACC lost 3.7% to Rs 970 and Gujarat Ambuja Cements was down 3% to Rs 126.85. Cement scrips have turned bearish as the government is keeping a watch on rising cement prices. In late-January 2007, the Central Government had abolished 12.5% import duty on cement, in a bid to rein in domestic cement prices.

Ranbaxy was down 3% to Rs 370. It declined for the second day in a row, as market men continued to fret over possible equity dilution if Ranbaxy acquired Merck's generic drugs business. The stock has declined even as the company on Wednesday dismissed media reports that it was planning an issue of shares in the US, or dilution in stake by founders to fund the acquisition.

Dr Reddy’s Lab lost 3.5% to Rs 704, and Cipla shed 2.6% to Rs 247.85.

State Bank of India was down 3% to Rs 1073. Recently, the state-run bank raised its prime lending rate (PLR) by 50 basis points. Among private sector banks, HDFC Bank lost 3.7% to Rs 977 and ICICI Bank shed 1.5% to Rs 956.

Auto shares skidded. Hero Honda lost 3.4% to Rs 714, Bajaj Auto shed 2.4% to Rs 2906, Maruti Udyog shed 1.9% to Rs 883 and Tata Motors shed 1.6% to Rs 845.10.

Reliance Industries (RIL) was up 0.2% to Rs 1408.90, off the session’s high of Rs 1426. RIL has a substantial 10.8% weightage in the Sensex. As per reports, global oil major, Chevron Corporation, may assist RIL in developing an exploration block in the oil-gas rich Krishna-Godavari (KG) basin. Chevron Chief David J O’Reilly is expected to meet RIL Chairman & Managing Director Anil Ambani during the Chevron chief's Mumbai visit

Software bellwether Infosys shed 1.6% to Rs 2275 in volatile trade. As per reports in a section of the media, the software exporter could acquire Britain's SmartStream Technologies for over 100 million pounds.

Hindustan Zinc lost 0.3% to Rs 624. The company has raised lead prices 5.6% to Rs 93,100 a tonne.

Bearings maker SKF India was up nearly 3% to Rs 320, after it reported that October-December 2006 quarter net profit had tripled to Rs 31.73 crore, while total income rose 49% to Rs 382 crore.

Floriculture firm Karuturi Networks jumped 5% to Rs 248.75, after the company said on Thursday its board will meet on 1 March 2007 to consider a 1:1 bonus issue.

Sun TV was flat at Rs 1678.10. The Union Cabinet on Thursday approved foreign investment in the regional broadcaster’s direct-to-home project.

BPO firm Firstsource Solutions settled at Rs 79.60. The stock debuted at Rs 75.10 on BSE compared to the IPO price of Rs 64. Volumes in the stock were a huge 2.88 crore shares.

Steel pipe and strips maker Jindal Saw jumped 5.6% to Rs 507, after the firm said it had secured an order worth $355 million to supply arc-welded steel pipes in the US market. With this, Jindal Saw's order-book exceeds $1.5 billion.

India Cements lost 3.3% to Rs 189.90. The company today said its board will consider the merger of associate company, Visaka Cement Industry, with itself on 28 February 2007.

Madhucon Projects plunged 8% to Rs 239. The board of directors of the company today approved the proposal for a preferential issue of 18,50,000 convertible warrants of Rs 2 each, to promoters, at Rs 291 per warrant.

Ansal Infrastructure plunged 5% to Rs 595.95. Recently, the company declared a liberal 1:1 bonus issue.

Healthcare services firm, Max India, plunged 5% to Rs 1060, on worries of equity dilution after the company’s board approved raising up to Rs 1000 crore through an issue of equity shares to qualified institutional buyers. The board also approved raising the limit for foreign investment up to 49%.

Asian and European markets were firm. Key benchmark indices in London, Germany and France were up between 0.5 - 0.6%. In Asia, key benchmark indices in Hong Kong, Japan and South Korea were up between 0.7 - 1%.

US blue-chips fell on Wednesday after stronger-than-expected inflation data stirred interest-rate worries. But the Nasdaq ended at a six-year high, as investors snapped up Apple Inc and other recently pummelled technology shares, believing the sector may offer the best earnings growth.

The Dow Jones industrial average fell 48.23 points, or 0.38%, to end at 12,738.41 -- a day after it closed at yet another record. The Standard & Poor's 500 Index dipped 2.05 points, or 0.14%, to finish at 1,457.63. The Nasdaq Composite Index rose 5.38 points, or 0.21%, to 2,518.42, its highest close since March 2001.

Hard Times Ahead? - Sanjeev Pandiya

Interest rates have 'plateaued' said a headline in a pink paper. The chairman of one of the leading banks in India was quoted as assuring the public at large that interest rates had peaked. Even as he said this, his bank was putting out term sheets to corporates that quoted only a floating rate. Some time back the bank was happily writing fixed rate loans. So whom do we believe… the papers or the actual actions of the bank?

Don't believe what the banks say. Corporate demand for credit (i.e. projects already announced) stands at roughly $900 billion for an economy roughly $800 billion in size.Assuming a net savings rate (net of government and public sector dissavings) of 25 per cent, we can expect an inflow of roughly $200 billion per year growing at 8 to 10 per cent (assuming some increase in the savings rate because of higher interest rates).

Now add retail and government demand for credit to the demand side of equation and foreign supply of savings (FDI and portfolio investment into debt) to supply side of the equation, to get some idea of the balance between the demand and supply of money. This would mean that the current set of outstanding projects would need roughly 7-8 years to fund with domestic savings, on the assumption that half the domestic savings find their way into the hands of growing corporates.

I don't have data to give you the details, but consider the following: corporate demand comes from a large variety of projects. The actual investment into these projects would have different gestation periods - from one year in an FMCG project to six to seven years in a steel project (may be more in a core infrastructure project). The demand for credit, therefore, would have an average tenure, which I think is roughly four to five years because a large number of industrial greenfield projects would be executed over more than five years.

Sometime during all this, the equation will go out of whack. In the short run, demand for credit at the margins by corporates (that are looking to raise money for projects that are half executed), will trigger a liquidity crisis. The flow of savings will not match perfectly the needs of the project. From a “liquid” situation, we are moving towards a tight situation where any supply shock will create a spike in rates, similar to the steep hike in call rates that we just saw immediately after the CRR hike by the Reserve Bank of India (RBI). These actions by the RBI are like short jabs on the brakes when a driver seeks to tell the car behind him that he is slowing down. You don't want to surprise the guy behind you but you do want him to slow down.

This is the big point. For the last three years we have had high GDP growth in a high liquidity situation, very similar to the flood of fuel into an engine just prior to accelerating the car. What you will now see is the momentum of the fast moving car trying to pull out fuel from the carburettor, even as the fuel is drying up. In the analogy above, fuel is the equivalent of liquidity (supply of money) while acceleration and momentum relate to GDP growth (which in turn creates the momentum of credit growth).

Have I made my point? The average tenure of flows into the projects will rise above the average tenure of domestic savings flow (creating a large and widening) “savings gap” which will have to be funded by overseas inflows.

Up to a point, portfolio flows will be responsive to the rise in interest rates, especially if liquidity in the US dollar goes up. If we see a recessionary outlook in the US, followed by a few rate cuts we will see rising liquidity coming from the US. As the cost of capital drops, this might result in higher overseas flows of both portfolio investments and the foreign direct investment (FDI).

On balance we have to compare relative momentum.

Quite obviously, real interest rates (nominal interest rates minus inflation) in India have already risen above their long-term averages. The momentum of credit growth is not slowing down, although I am expecting to see first signs of credit growth cracking. There was a recent news item that home loan growth has already started falling off. The same should start happening to corporate demand for credit, shortly.

There are bigger risks on the supply side. The RBI with its repo/reverse repo and CRR rate hikes is doing its bit to slow down the expansion in liquidity. There is some drawing room talk of India's forex reserve being brought back in case of a crunch.

I don't see that happening, even as the central bank is going around tightening liquidity.

The prevailing bias would suggest higher interest rates. My colleagues in the CFOs' community have started to talk about the nightmarish Manmohan Liquidity Crunches of 1991 and 1996. The first was driven by the bankruptcy of India on external account and the second was a crunching, mind-numbing braking of the economy to fight inflationary fears, prior to a national election.

At the current juncture, circumstances are much better. For one, India has large forex reserves with a negative carry. This (negative carry) will increase as nominal interest rates rise in India and they fall in the US. At any point in time, these funds can be brought back to lessen the liquidity crunch.

That brings us to overseas capital flows coming from portfolio investments/FDIs. The big 'supply shock' from these flows will come from rising risk aversion in the middle of a global slowdown. The premium demanded for moving money to India will increase sharply, the moment the profit slowdown shows up in the bottom lines of the companies.

It is dangerous for me to put numbers behind each of the above factors but I am willing to bet on the direction.

There is a clear consensus among all large financial players that interest rates are hardening and the medium term view is that liquidity will stay tight. Banks that gave us 10 year fixed rate loans at roughly 7 per cent a couple of years back are today not willing to write.

similar loans even at 11 per cent. The message is clear - only floating rate loans, relatively lower tenures and no premature termination clauses. It is clearly turning into a sellers market reminiscent of 1996-1998. All this mumbo jumbo recounted above is meant for practicing CFOs (who might find most of the above to be obvious).

For you dear reader, I'll keep it very short. Start preparing for coupon rates to become perhaps one-and-a-half times current levels. As the base changes you can immediately expect a drop in the market PE ratio. Adjust this PE for, say, 15 per cent profit growth and re-calculate the level of the market. Do the same for the expectation of real estate returns (refer to my previous articles to understand the equivalence between equity, real estate and debt market returns).

In short, over the next 3-5 years, returns in the debt market (current yield) will rise but bond prices of existing issued paper will fall. Average PE in the stock market will also fall, so you will get less price appreciation for the same profit growth. And God forbid, if there is a profit dip, the stock will get crucified. Liquidity in the real estate market will dry up. In some overpriced markets, there may be bubble bursts but in most of India where houses have been bought without borrowings, there will merely be no buyers. A panic seller who is forced to liquidate for any reason will have to sell at a huge discount.

So where do you go? My answer is: there is a time to make money and there is a time to save money. We are entering that phase of the liquidity cycle where cash will be precious. This is the time to turn virtuous.

Power Finance Corporation Listing

PFC - Power Finance Corporation will list on Feb 23 2007

[Click the star to watch this topic] Edelweiss - PCG DAILY MARKET CALL 22-FEB-2007

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Indian Power - Outlook 2007-Fitch Sector Reports

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Anand Rathi - Daily Fundamental Snippets

Syschem India Ltd has embarked upon an expansion spree involving an investment of $12-15 million over the next two years.

Sanwaria Agro Oils Ltd would buy two solvent extraction plants in Madhya Pradesh for Rs 15 crore.

Sahara One Media & Entertainment Ltd has approved raising up to $20 million via foreign currency convertible bonds.

Sintex Industries has won a Rs 750 crore order from the Gujarat Government for the construction of low cost housing across the state.

Garnet Construction Ltd has entered into an exclusive global marketing alliance with the Sternon Group (Dubai-based real estate developers, builders and promoters) to market its residential and commercial projects

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Anand Rathi - The Strategist

Nifty futures lost OI to the tune of 0.68% with prices coming down indicating longs liquidating their positions as market could not sustain at higher level market at higher levels with nifty futures not ready to move above 4180 levels. If nifty sustains below 4140 levels we may see fresh short positions being formed in nifty futures .The nifty may show real strength once it crosses 4180 marks as lot of short covering may be seen in nifty futures around those levels and fresh buying may come around those levels. The FIIs sold nifty futures to the tune 384 crs. The PCR has come down from 1.33 to 1.25 levels which indicates weakness in the market.

Among the Big guns ONGC saw significant built up in OI to the tune of 3.68 %with prices coming down around 0.36% indicating that both bulls& bears were aggressive as counter came to its short term support level. .RELIANCE saw built up in OI to the tune of 1.08 % with prices coming down 0.56% indicating short positions building in the counter indicating in the weakness in the counter.

On the TECH front, ,TCS, saw built up in OI with prices coming down indicating short positions are formed indicating weakness in the counter whereas INFOSYSTCH,WIPRO,SATYAMCOMP saw a fall in OI with prices coming down in indicating longs liquidating their positions performing in line with the market.

On the Metal front, we saw fall in OI with prices coming up in both the majors HINDALCO and TATASTEEL indicating fresh buying coming in the counters which forced shorts to cover their positions indicating strength in these counters. SAIL saw built up of significant OI i.e. 7.70 % with prices going up marginally indicating their was selling pressure at higher levels which the counter may sustain if overall metal pack performs well.

In the BANKING arena SBIN saw fall in OI with prices flat to negative indicating that both weak bulls and bears came out of the market whereas heavy built up is seen in ICICIBANK with prices flat indicating both bulls and bears were aggressive in the counter.

However being the last day of the settlement we could see a surprise spring in the market if shorts are covered.

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Edelweiss - Daily PCG Call

Market Snapshot

The Sensex opened with a negative gap and moved in positive with fresh buying at lower levels and touched a high of 14,313. The index, however, could not hold gains and slipped again in late noon deals. The Sensex finally settled with a loss of 65 points at 14,188 while Nifty lost 11 points to 4,096.

The NSE & BSE cash volumes were slightly better compared to the previous day at INR 84 bn and INR 40 bn. The F&O volumes were significantly higher compared to the previous day at INR 484 bn.

Sentiment Indicators

The Implied Volatility (IV) across Nifty strikes has remained unchanged at 26-29% levels. The WPCR of Nifty Options decreased to 1.08 compared to the previous day while the 5 day average is 1.17. The February futures are now trading at 5 points premium. The Nifty Futures OI has decreased by 1%.


The market is expected to open positive inline with its Asian peers and remain volatile as Feb derivative contracts expire today. We recommend cautious approach before the annual budget.

The market wide rollovers are at 60%, which is in-line with previous expiries. Nifty rollover continues to see healthy shift to March contracts at 60% on the eve of expiration. However, the roll cost has been lower at around 62 bps, about 10bps lower than previous expiries.

On Nifty rolls, we expect short rollers to continue to be aggressive and levels are expected to contract to -6 to -8.

For VWAP trades, we expect Bharti, NALCO to be good counters for long position and BHEL, TVS Motors, IDFC, MTNL, BILT, HLL on the short side. We will be sending a detailed list of VWAP buy/sell counters throughout the day.

The Nifty is currently skewed between a small range at an immediate support of 4080 and 4047 and resistance of 4125 and 4165. A close above 4165 would trigger a break out on the upper side of the ascending triangle while a close below 4080 would turn the Nifty bearish.

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Market may remain volatile

The market may witness cautious trend as US indices ended nagative on yesterday and Asian indices also were exhibiting negative trends in morning trades. Although the bias remains positive, investors should maintain caution as profit-taking at higher levels may pull down the market. Among the local indices the Nifty could test 4050 on the downside while on the upper side it may move up to 4132. The Sensex has a likely support at 14000 and may face resistance at 14300.

US indices finished nagative on Wednesday. While the Dow Jones ended in negative at 12738 declined by 48 points, the Nasdaq up by 5 points at 2518.

Indian floats trading on the US bourses were traded on the lower in the morning. MTNL Bank was the lead performer and soared 1.69% while infosys declined over 1.14%. Satyam, Dr Reddy, Wipro, HDFC Bank, and Rediff lost nearly 0.50-1% each. However, ICICI Bank has advanced 1.66%, Patni Computers has moved up by 1.01% and Tata Motors and VSNL gains steadily.

Crude oil prices inched higher in the US market, with the Nymex light crude oil for March delivery adding $1.22 to close at $60.07 a barrel. In the commodity space, the Comex gold for April series fell $23 to settle at $684.

Intra-day Stock Ideas

NIFTY (4096) SUP 4070 RES 4106

SL 174 T 188, 190

BUY CUB (172.5)
SL 168 T 179, 181

BUY HTMEDIA (180.60)
SL 176 T 186, 189

SELL IOC (434.35)
@ 437 SL 441 T426, 423

@ 1020 SL 1030 T 1000, 980


Af-raid...Fear may vanish later

Fear is a question: What are you afraid of, and why?

The start could be bit of a dampener. Reports of raids on stock-brokers and builders among others could give the bears some more space to roam about at open. Reports say that the Income-Tax (I-T) department has conducted raids on 40 entities in Mumbai. These include builders, stock brokers and medical professionals. Things may settle down after a while though, as most Asian markets are up sharply this morning. US stocks closed mixed overnight and oil is trading close to the $60 per barrel mark.

We expect the market to remain choppy. The F&O expiry will keep the market volatile. We could see the key indices ending higher for the day on some short covering by the end. Expect stock centric action to continue. Coming to the broader market, there seems to be some confusion on the immediate direction given that general budget is just round the corner. We maintain that the budget is unlikely to have a big influence on the market, though historically the market has softened post the event.

FIIs were net sellers to the tune of Rs1.98bn (provisional) in the cash segment yesterday, according to the NSE. In the F&O segment, they offloaded stocks worth Rs5.81bn. However, SEBI data shows that on Tuesday, foreign funds pumped in Rs4.74bn ($107mn) in the cash segment. Mutual Funds were net buyers of Rs29.5mn on the same day.

Keep an eye on Firstsource Solutions, whose shares will make their debut on the bourses today. Maruti is likely to be in the limelight as the Government has called bids to sell its entire 10.27% stake in the car major. Wockhardt should also remain in action as the pharma major announces its results today. Clariant Chemicals India will also declare its audited financial results for the nine months ended December 2006. Max India's Board will meet today to approve the proposal to raise money through a QIP issue.

US market ended mixed on Wednesday as worries about inflation sent blue chips lower. The Dow Jones Industrial Average declined after closing at a record high. Shares fell after the consumer price index increased 0.2% in January, fueling worries that the Federal Reserve will not cut interest rates soon. Minutes of the Fed's Open Market Committee's January meeting showed that policy makers thought inflation remained the predominant concern.

The January Consumer Price Index (CPI) rose 0.2% versus forecasts for a rise of 0.1%, while the so-called core CPI, which excludes food and energy prices, rose 0.3%, above forecasts for a 0.2% gain.

Treasury prices slipped on the CPI report as traders bet interest rates are unlikely to come down any time soon. The decline lifted the yield on the benchmark 10-year note to 4.70% from 4.68% late Tuesday. In currency trading, the dollar gained versus the euro and the yen.

US light crude oil for April delivery jumped $1.22 or over 2% to settle at $60.07 a barrel in New York. The front-month contract was quoting very close to the $60 per barrel mark in extended trading in Asia. COMEX gold for April delivery rose $23 to settle at $684 an ounce.

Shares in Europe fell overnight. London's FTSE 100 declined 0.9% to close at 6,357.10. The French CAC 40 eased 0.3% to 5,694.56 and the German DAX Xetra 30 lost 0.6% to 6,941.66 after earlier touching a high of 7,005.34 - a level not seen since November 2000. The pan-European Dow Jones Stoxx 600 dropped 0.7% to 378.46.

Asian stocks rose this morning. Canon and Samsung led gains after the Japanese yen weakened against the dollar and the Korean won slid to its lowest this month.

The Morgan Stanley Capital International Asia-Pacific Index added 0.7% to 147.40 as of 10:19 a.m. in Tokyo. Stock markets are closed in China and Taiwan for the Lunar New Year holiday.

Japan's Nikkei 225 Stock Average climbed 1.1% to 18,104.30, poised to close above 18,000 for the first time since May 8, 2000. South Korea's Kospi index climbed 1%. The Hang Seng in Hong Kong was up 88 points at 20,740.

Other Asian markets open for trading rose, except in Malaysia, the Philippines and New Zealand.

In the emerging markets, the Bovespa in Brazil was up 0.5% at 46,090 while the IPC index in Mexico rose 0.4% to 28,715 and the RTS index in Russia gained 0.6% to 1905.

From the Research Desk - HLL

Hindustan Lever Ltd. (HLL) F12/06 - Result Update

HLL recorded 9.4% yoy growth in net sales at Rs121bn in F12/06 driven by 13.7% yoy growth in HPC (double-digit growth in laundry and toothpaste) and 9% yoy growth in Foods segment. During Q4 F12/06, the company has taken a price hike in some of its most popular brands like Lux (by 7.7%), Lifebuoy (100gms pack - by 11%) and Surf Excel Blue (1.5kgs pack - by 3.5%).

Operating profit increased by 14.2% yoy to Rs16.5bn. Operating margins expanded marginally by 60bps to 13.6% mainly due to sharp 26.6% yoy rise in adspend at Rs12.7bn (10.5% of sales). The company is likely to maintain the high levels of adspend (between 10-15%) going forward.

Pre-tax profit grew by 16% yoy to Rs18.6bn partly aided by higher other income and lower interest cost. Effective tax rate was at 17.3% resulting in a tax outgo of Rs3.2bn. Net profit grew by 13.7% yoy to Rs15.4bn.

Adjusted net profit after extraordinary income (Rs3.2bn) rose by 31.8% yoy to Rs18.6bn translating in an EPS of Rs8.4 per share. The company has declared a final dividend (including interim dividend of Rs3) of Rs6 per share.

Going forward, HLL’s growth would primarily be driven by growth momentum in the topline. At the current market price of Rs19, the stock is trading at 23.3x F12/07E EPS of Rs8.4 per share. We maintain ‘Market Performer’ rating on the stock.

Market Watch & Insider Trades

Insider Trades:
Lloyd Electric & Engineering Ltd: (1) Morgan Stanley & Co. International Limited a/c Morgan Stanley Dean Witter Mauritius Co. Ltd (2) Morgan Stanley & Co. International Limited A/C Morgan Stanley Investment Mauritius Ltd has purchased from open market 50000 equity shares of Lloyd Electric & Engineering Ltd on 19th February, 2007.
Godrej Industries Ltd: Nadir B Godrej (Director) has sold in open market 400000 equity shares of Godrej Industries Ltd on 14th February, 2007.

Market Volumes:
The turnover on NSE was up by 8% to Rs84.41bn. BSE Technical index was the major loser and lost 0.91%. BSE FMCG index (down 0.73%), BSE PSU index (down 0.62%) and BSE Oil & Gas index (down 0.61%) were among the other major losers. However, BSE Consumer Durable index gained 0.90%.

Volume Toppers:
IFCI, SAIL, Zee News, IDBI, IDFC, RNRL, HLL, Aptech, GBN, Balrampur Chini, TTML, Cinemax India, Hindalco, R Com, Indiabulls, ITC, Gujarat Ambuja, Tata Steel, Praj Industries and Satyam Computer.

Delivery Delight:
Aurobindo Pharma, Bayer, Bharti Airtel, BILCARE, BOC India, Britannia, Crompton Greaves, Dabur, Dr Reddys, Engineers India, Eveready Industries, Gammon India, GlaxoSmithKline, Gujarat Gas, HCL Tech, HDFC, Jagran Prakashan, Madras Cements, Nicholas Piramal, Suzlon, Tata Tea and Voltas.

Upper Circuit Filters:
Surana Telecom, Nucleus Software, Godawari Power, Tanla, PSTL, Jay Bharat Textile, HOV Services and KLG Systel.

Brokers Recommendation:
IVRCL Infrastructure – Buy from Man Financial with target of Rs483.

Long Term Investment:
Indotech Transformers.

Major News Headlines

Max plans to sell securities to large investors

Garnet Construction ties up with Dubai-based Sternon Group

Gail India to consider mid-year dividend on 6th March

Ranbaxy founders say no plans to sell stake

Deccan Chronicle to invest Rs250mn in Bangalore Edition

SKF India to set up manufacturing plant in Uttaranchal

Sintex bags Rs7.5bn order from Gujarat Government

Prithvi Information raises $50mn through FCCB


Another volatile day likely

Volatile market ended lower ahead of F&O expiry. The markets witnessed wild gyrations during the trading session with Sensex swing over 150 points in intra-day. The key indices traded in red for major part of the day. However fresh buying from lower levels in the mid afternoon sessions saw the benchmark Sensex bounce back in green hitting a high of 14312.88. Following its recent trend the key indices again slipped in the last hour of the trading session led by intensified selling pressure in the Technology, Oil & Gas and FMCG stocks. Finally, the 30-share benchmark Sensex lost 64 points to close at 14188. NSE Nifty dropped 10 points to close at 4096.

Deccan Chronicle's has advanced by 1.3% to Rs870. The Board of Directors of the company has approved start of Bangalore Edition. The scrip has touched an intra-day high of Rs885 and a low of Rs868 and has recorded volumes of over 4000 shares on NSE.

NTPC marginally gained by 0.4% to Rs142 after the company signed an accord with Kyushu Electric Power Company, Japan. The scrip touched an intra-day high of Rs143 and a low of Rs140 and recorded volumes of over 25,00,000 shares on NSE.

Gail India slipped over 4.5% to Rs283. The company announced that it would consider mid-year dividend on March 6. The scrip touched an intra-day high of Rs297 and a low of Rs280 and recorded volumes of over 22,00,000 shares on NSE.

Capital Good stocks pared their intra-day gains on back of profit booking. BHEL slipped 2% to Rs2314, L&T was down 0.7% to Rs1658, Punj Lloyd lost over 2.5% to Rs909 and BEL declined 1.8% to Rs1627.

Technology stocks were the major losers of the day. Heavy weights were among the major losers, Infosys slipped 2% to Rs2310 and Satyam Computer was down 3.2% to Rs462. Among the Mid- Cap stocks, NIIT LTD, Rolta and Moser Baer were among the major losers

FMCG stocks continued its down trend. HLL slipped by 1.9% to Rs195, Colgate lost 1.7% to Rs318; ITC was down 0.8% to Rs174. However, Dabur, Nirma and McDowell were among the major gainers.

Banking stocks were a mixed bag. The frontline stocks like SBI and ICICI Bank were flat. However, Bank of India slipped 1.8% to Rs172, Union Bank was down by 2.3% top Rs106 and Corp Bank lost 1.3% to Rs283.

ICICIDirect - Pennar Industries - Result update (Current Price: Rs 24.9, HOLD)

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Market may recover after weak start

The market may edge lower following reports that the Income Tax department in Mumbai is conducting raids on 40 entities including stock brokers, builders and medical professionals. The raids began early morning.

However, downside will be limited due to stepping up of inflow by foreign institutional investors and due to firm Asian markets. Volatility is likely ahead of expiry of February 2007 derivatives contracts. February 2007 derivatives contracts expire today.

On Wednesday 21 February, Nifty February 2007 futures settled at 4108.85 compared to spot Nifty closing of 4096.20. Nifty March 2007 futures settled at 4100.70 compared to spot Nifty closing of 4096.20.

FIIs have stepped up buying Indian equities again. FIIs were net buyers to the tune of Rs 473.90 crore on Tuesday (20 February 2007), which was much higher than the inflow of Rs 220.20 crore on 19 February 2007. FIIs had stepped up buying since the onset of February 2007, but turned austere later. The FII inflow was a robust Rs 2909.90 crore in five trading sessions, from 2 February 2007 to 8 February 2007. The strong inflow was triggered by an upgrade in India's sovereign rating to investment grade by global rating agency, Standard & Poor's, on 30 January 2007.

But as per provisional data, FIIs were net sellers to the tune of Rs 198 crore on Wednesday 21 February. FIIs were net sellers to the tune of Rs 385 crore in index-based futures on Wednesday. They were net sellers to the tune of Rs 175 crore in individual stock futures on that day.

A key trigger for the market in the near-term is Union Budget 2007-08. Concerns that the government may raise short-term capital gains tax on sale of shares from the current 10% have gained currency. 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 exemptions. Market men also expect the finance ministry to give a big impetus to agriculture and infrastructure in the budget.

Asian markets were firm on Thursday 22 February. Key benchmark indices in Hong Kong, Japan, South Korea and Singapore were up by between 0.21% to 1%. Japan’s Nikkei average was up 1% led by exporters as the yen hit a record low versus the euro and fell against the dollar after Bank of Japan (BoJ) signalled future interest rate rises would be slow in coming. BoJ on Wednesday raised interest rates to 0.5% from 0.25%.

US blue chip stocks fell on Wednesday after stronger-than-expected inflation data stirred interest-rate worries. But the Nasdaq ended at a six-year high as investors snapped up Apple Inc. and other recently pummeled technology shares, believing the sector may offer the best earnings growth. The Dow Jones industrial average fell 48.23 points, or 0.38 percent, to end at 12,738.41 -- a day after it closed at yet another record. The Standard & Poor's 500 Index dipped 2.05 points, or 0.14 percent, to finish at 1,457.63. The Nasdaq Composite Index rose 5.38 points, or 0.21 percent, to 2,518.42, its highest close since March 2001.

US crude shed 8 cents to $59.99 a barrel on Thursday after soaring on Wednesday on a slew of supply snags in the United States and tension over oil producer Iran. Data due later in the day is forecast to show U.S. distillates stocks fell 1.3 million barrels last week after a snowstorm hit the Northeast.

Anagram Daily Call

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Emkay Morning Notes, Taj GVK Hotels & Resorts

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A difficult-to- practice virtue - Chetan Parikh

In the great book, "Hedge Hogging", the author, Barton Biggs, writes about the virtues of patience

“Another example of the right way is that of Jeremy Grantham of a Boston investment partnership, Grantham, Mayo, Van Otterloo & Company. Jeremy Grantham, a contrarian, value-oriented, somewhat irascible fellow, has always been regarded as a serious thinker. He is a hungry observer of the investment life around him, a seeker of truth, a man of the mind. He doesn’t care what the world thinks. He is an irregular person. He has a hard glitter to him, if you know what I mean.

In 1995, Morgan Stanley; Grantham, Mayo; and three other firms were each given $1 billion by the Verizon pension fund. We were all paid a small fixed fee but could earn a substantial incentive fee if we beat Verizon’s benchmark global allocation. The program was the brilliant brainchild of John Carroll and Britt Harris. As I recall, Jeremy Grantham became bearish about equity markets in general and tech in particular around 1997. As a result his performance versus the benchmark and the rest of us was lousy. In fact by the spring of 2000, Grantham, Mayo was in last place, 500 basis points a year behind us, and I think at the time we were the leader.

We actually did okay versus the benchmark in the three-year bear market that followed because we also were bearish, but Grantham, who had stuck to his extreme position and was very overweight bonds and underweight stocks, positively soared. He passed all of us like we were standing still. He made up for four years of lousy performance in two years! It was unbelievable! It is to the great credit of Britt Harris, then the chief pension-fund officer of Verizon, that he stuck with Grantham through thick and thin. Britt knew Grantham’s thought process, had confidence in Jeremy’s integrity, and he never wavered. Very impressive! Most pension-fund officers would have fired the consistently worst performer, but not Britt.

But that isn’t the whole story. In the late 1990s, the firm, Grantham, Mayo, had a very rough time. The firm’s assets fell almost 40% as disgusted clients closed their accounts, and his more bullish partners left to form their own firms. Grantham, Mayo went into the red, and Jeremy was mocked as a stopped-clock contrarian. He was undaunted. He kept paying his good investors and spent money on client services and seeding new investment lines like timber and hedge funds. The firm’s headcount actually increased almost 50% even as it was losing money. That’s very hard to do.

Then when the bubble burst, Grantham, Mayo reaped the rewards. Not only was their performance superb during the bear market, when the rally began in 2003 they did well, particularly in emerging markets. Their emerging markets fund soared 70% in 2003 versus 51.5% for the MSCI emerging markets index, and the money poured in. By the end of 2003, assets under management had tripled from the low to $60 billion, and emerging markets alone had $10 billion with a rich fee. So what did Jeremy do? Because he felt that it was just a rally in what was still a secular bear market and that emerging market equities in particular had run far too fast, he closed the strategy to new investors at the end of September 2003.

In the summer of 2005, Grantham described his role as “trying to thrive in a secular bear market.” He believes deeply in “reversion to the mean” as a fundamental tenet of investment life. Markets are shockingly inefficient, he said, and as an investor you should wait for the fat pitch. Big portfolio bets should be tempered until valuations move to extremes. Patience is an investment virtue, but he concedes that it can be difficult to practice because mean reversion can take a long time. These are all adages that most of us give lip service to but have great difficulty following. Jeremy talks about them and rigorously practices them.

Presently he is still cautious on most equity classes. Expectations are still too high, and there are a number of things that could go bump in the night. Equities, particularly in America, remain expensive because valuations and returns have to revert back to equilibrium fair values. Assuming that they will over the next seven years, returns on all asset classes will be meager. He calculates that compound annual real return from large cap U.S. equities will be minus 1%. Treasury bonds are only slightly better, but international equities and emerging market debt will return 2.5% to 2.7% annually. The best asset classes will be emerging market equities and timber, which will earn 6%. Remember these are real returns and are therefore before manager alpha and inflation. Despite his negative outlook, since equity markets turned in the spring of 2003, his asset allocation accounts have performed very well.

What does Jeremy think are the big bets now for a long-term investor? First, move money out of American equities and into international. Emphasize high-quality, lower-volatility stocks and reduce small-cap, high-volatility, more-speculative equities. His specific advice is to move into conservative hedge funds, timberland, commodities, and conservative fixed income.

Jeremy is 66 years old and going strong. He continues to be committed to preserving his firm’s independence and to investors, not businessmen, running the firm. He told Institutional Investor, “What we did when we were losing money, the stance we took, would have been impossible if we were beholden to an owner demanding quick results. The stance we are taking now of closing winning strategies would also have been difficult. I am convinced that independence is in the best interests of the firm and our clients.” Boy, that is integrity!

I suspect that to be truly great, an investment-management firm has to be modeled on Plato’s Academy. Plato wanted to create a fertile atmosphere at his Academy where brilliant young men could be trained to be statesmen, and in this way the future political leadership of Greece would be enhanced. His theory was that the cross-fertilization of profound minds working in different disciplines (historians, artists, mathematicians, philosophers) mingling with each other would enrich the thought processes and insights of all. The intellectual sum of the whole would be far greater than the sum of the parts.”

Investsmart - Morning Call

n House :

Nifty at a support of 4075 & 4044 levels with resistance at 4133 & 4164
levels .

Maintain strcit stop loss as markets to be very choppy & volatile .

Buy : TvToday above 131 target 155 s/l 123

Buy : ABB above 3899 target 3960 s/l 3869

Sell : BPCL below 333.80 target 325 s/l 338

Out House :

Sensex at a support of 14114 & 14043 levels with resistance at 14325 &
14434 levels .

Buy : RIL & RelCap

Buy : Ongc & Wipro ( Bullet )

Buy : Polaris & Mphasis

Buy : NDTV & Praj ( Bullet )

Buy : Gitanjali & SesaGoa

Buy : ABB & Siemens

Buy : LT & Aban

Dark Horse : EKC , Praj , NDTV , IFCI , SesaGoa , Aban & IciciBank

Bullet for the Day : Wipro , Bharti & ONGC

Thanks Yash

Investsmart - HLL Result Update

Disappointing performance

Hindustan Lever Limited (HLL) posted a disappointing set of numbers for
Q4CY06. Net sales grew by just 6.1% to Rs31.56bn, driven mainly by a 10.1%
growth in the soaps and detergent business. The personal care segment,
accounting for 27.7% of total revenues in Q4CY06, registered a mere 2.5%
growth. This was due to the late arrival of winter which affected the skin
care range and also there was a subdued growth in shampoos and oral care.
The company's EBITDA margins fell by 40bps to 15.8%, resulting in a
marginal 3.8% growth in the EBITDA to Rs5bn. Net profits (excluding
extraordinary items), however, grew by 10.2% to Rs4.83bn. The growth in net
profits in Q4CY06 was also aided by 66.7% rise in other income to Rs1.07bn.

For CY06, net sales grew 9.4% to Rs121bn. EBITDA margins expanded by 60bps
to 13.6% due to an improved product mix and an increase in product prices.
Higher prices contributed to 40% of the topline growth, with volume offtake
accounting for the remainder. Advertising and sales promotion spend, as a
proportion of sales, increased from 9.1% to 10.5%, which ideally should
have resulted in higher revenue growth but it has brought little cheer to
HLL's topline. Net profits (excluding extraordinary items) for CY06
increased by 13.7% to Rs15.4bn.

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Networth - Siemens & Tata Power

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ABN Amro - IT Services

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Market Close: Expiry of Derivatives cast shadow on market.

The effects of the FNO expiry could be witnessed today as volatility continued throughout the day. The indices had a sea saw ride as it swung on either side. Global cues were mixed as BOJ rate hike kept market ranged. Buying interest was seen for some time but soon was overpowered due strong bout of profit booking. Selling pressure was seen in the IT, FMCG, Pharma and Banking stocks. Suzlon and Hero Honda were amongst the lead gainers while GAIL and Ranbaxy bore the brunt of profit booking. Small caps had the momentum as buying interest was seen there.

Sensex ended down by 65 points at 14188.49. Weighing on the Sensex were losses in Ranbaxy (382.5,-3 percent), Satyam (462.2,-3 percent), Infosys (2312.8999,-2 percent), HLL (195.5,-2 percent) and BHEL (2316.55,-2 percent). Losses were restricted by gains in Hero Honda (739.5,+3 percent), TISCO (455.2,+2 percent), Bharti Tele (806.3,+2 percent), Hindalco (150.45,+1 percent) and HDFC (1672.55,+1 percent).

One of the big events which everyone was waiting for finally came in as the Bank of Japan (BoJ) raised its key interest rate by 25 basis points to 0.50%, placing more emphasis on signs of a strengthening economy than a lack of inflationary pressure. Financial markets had been divided on whether the central bank would keep rates steady, as many politicians hoped it would, or whether it would move to head off the economic risks that arise from having ultra-low money rates for too long. Some liquidity outflow can be seen from the system as Japan has been the major investors in emerging markets.

SKF India Ltd ended up by 4.5 % as the company posted its Q4 results. The results were very impressive with net profit of Rs 101.96 crore for the year ended December 31, 2006 as compared to Rs 64.07 crore for the year ended December 31, 2005 an increase of almost 60%. Total income increasedby 65% from Rs 816.01 crore for the year ended December 31, 2005 to Rs 1350.83 crore for the year ended December 31, 2006. SKF India plans to set up a new plant in Uttarkhand (Uttaranchal) to manufacture bearings. SKF India is a market leader in the bearings industry and derives about 65% of the revenues from the automobile market. It has a strong presence in the original equipment segment as well as replacement market.

According to a leading business daily, India has no plans to subsidise sugar exports and is considering building a buffer stock to help ease the pressure on mills from falling prices. With huge surplus and softening domestic and international prices, sugar mills have been urging the government for transport and freight subsidies to make exports viable. Sugar prices have fallen in the last six months to about US$ 300 a tonne from US$ 400 per tonne, making exports unprofitable. India had banned sugar exports in August when global prices were high and lifted the restriction in January when prices fell sharply. The domestic sugar companies are facing huge pressure on the realisation and margin front. Being a highly regulated industry, the sugar companies may continue to face bitterness of the government policies till more clarity is given. Major sugar stocks traded up.

Technically Speaking: Market traded volatile in both the territory but finally lost its ground and ended in the red zone. Sensex rallied between the channels of 14,157 - 14,312 level. However, the breadth had been in the favor of the Declines as they stood at 1526 while the Advances were only 1074. Volumes was decent at 4083cr. Sensex has a resistance at 14300- 14325 level. A move above that would take to 14600 levels. However on the lower side, a good support is seen at 14020 level.

Anand Rathi - The first Call (Daily Technical Note)

Nifty and Sensex have exhibited a bearish candlestick.

Technically, one may use the level of 4045 (Nifty) and 14100 (Sensex) as the stop loss level.

Nifty faces resistance at 4187 and Sensex at 14530.

BSE Smallcap and BSE Midcap exhibited a near doji candlestick.

CNX IT has lost ground.

In the Punter's zone we have a Buy on Titan Ind , Sintex Ind & Cummins.

In the Technical call section, we have a Buy in A.C.C., HT Media & Orchid Chem.

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Thanks Yash

Pre Budget Expectations - VARIOUS REPORTS

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Sharekhan Investor's Eye dated February 21, 2007

Gateway Distriparks
Cluster: Cannonball
Recommendation: Buy
Price target: Rs250
Current market price: Rs173

Results below expectations

Result highlights

  • Gateway Distriparks Ltd (GDL) reported a net profit of Rs18.8 crore for Q3FY2007, which is below our expectations.
  • The revenues increased by 20% year on year (yoy) to Rs41.7 crore led by a strong volume growth of 112%, 51.5% and 392.9% at Garhi, Chennai and Vizag container freight stations respectively and a realisation growth of 9% year on year.
  • The operating profit declined by 2.4% yoy to Rs20.3 crore and the margins were under tremendous pressure on account of the strong competition and lower realisations at Chennai and Vizag. This consequently led to the margins declining by 1,130 basis points quarter on quarter (qoq) to 48.7%.
  • The other income grew by 109% yoy to Rs5.4 crore due to the interest income on the higher surplus cash of Rs200 crore during the quarter.
  • Depreciation grew by 36% yoy due to the amortisation of Snowman's goodwill during the quarter.
  • The tax rate for the quarter was at 14.5% as the company had 80IA benefits for its investments in inland container depot (ICDs). As a result the pre-exceptional net profit grew by 5.0% yoy to Rs18.8 crore in Q3FY2007.
  • During the quarter GDL acquired Snowman Frozen Foods, a cold chain logistic services business, at a cost Rs48.1 crore. The company incurred an expenditure of Rs2.1 crore for the acquisition, which has been treated as extraordinary expenditure. Thus the post-exceptional profit stood at Rs16.7 crore.
  • Snowman moves close to 9,000 tonne of frozen and chilled products across India and provides the entire spectrum of supply chain solutions with HLL being one of its major clients. We believe this acquisition will enable the company to cash in on the growth in the nascent food retailing market in India.
  • The company has recently won the bid for a 15-year operations and management (O&M) contract of the Punjab Conware container freight station (CFS) at the JNPT port. GDL will be able to expand the volumes at the Punjab Conware CFS considering the dominant position of the company at the port and its expertise in operating CFS' and ICDs.
  • We maintain our positive outlook on the company, as GDL will be one of the prime beneficiaries of the growth in container traffic, which currently just accounts for 10% of the total cargo. The company's strategy to become an integrated player by entering into rail-based container movement will help the company to offer better services to its clients. With the large players like Reliance and the AV Birla group betting huge on food retailing, the company's strategy to enter the cold chain business comes at a right time and will add significant value to the company's business going ahead. At the current market price of Rs173, the stock discounts its FY2007 earnings per share (EPS) by 20x and FY2008 EPS by 14x. We believe that the valuations are attractive and thus maintain our Buy recommendation on the stock with a price target of Rs250.

Hindustan Lever
Cluster: Apple Green
Recommendation: Buy
Price target: Rs280
Current market price: Rs195

A little cold

Result highlights

  • The Q4CY2006 net profit of Hindustan Lever Ltd (HLL) grew by 10.15% year on year (yoy) to Rs483.0 crore, which was below our expectations.
  • The net revenues grew by 6% yoy on the back of a 7% year-on-year (y-o-y) growth in the home and personal care (HPC) segment, which comprises the soap and detergent, and personal care businesses.
  • The profit before interest and tax (PBIT) margin showed a contraction of 40 basis points to 18.1%.The contraction in the PBIT margin was attributable to the lower growth in the personal care segment as well as higher input cost.
  • The soap and detergent business has shown a growth of 10% whereas the personal care product business has reported a lower growth of 2.5%. The growth was lower in the personal care product business mainly on account of a shorter winter season in 2006 and the high base effect of Q4CY2005 (the sales of personal care products were higher due to the relaunch of Clinic shampoo in the quarter).
  • The beverage business has shown a growth of 8.6% yoy whereas the processed food business has grown by 18% yoy.
  • The operating profit margin (OPM) of HLL contracted by 36 basis points to 15.84% on a y-o-y basis due to a higher raw material cost. The selling and administrative expenses as a percentage of sales were maintained at 9% compared with 11% for M9CY2006, which helped it to prevent further erosion in the margin.
  • The soap and detergent segment has been able to maintain its earnings before interest and tax (EBIT) margin at 15.6% yoy whereas the EBIT margin in the personal care product range has shown an improvement of 30 basis points to 31.9%.
  • At the current market price of Rs195, the stock is quoting at 23x its CY2007E earnings per share (EPS) of Rs8.5. We maintain our Buy recommendation on the stock with a price target of Rs280.



Racing ahead despite hardening rates
The automobile industry has begun CY2007 on a positive note with a strong volume growth of 14.8% for the first month of the year, January. However, there are some concerns on the horizon. Will the growth sustain on the high base of last year? How would the rising interest rates affect the demand in future? In this report, we have tried to assess the impact of the high base effect and rising interest rates on the demand for automobiles.

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Citigroup - Bharti Airtel (BRTI.BO): Buy: Tower Power - Raising Target Price to Rs960

  • New target price on the tower option — We incorporate an option value of Rs158 for Bharti’s towerco based on improving visibility in tower dynamics in India. Maximum leverage on many value drivers to robust Indian wireless growth keeps Bharti our top regional telco pick and a India model portfolio constituent.
  • Many drivers to more tower sharing in India — (1) Significant build-out ahead largely in rural areas – sharing bodes well for significant capex savings; (2) potential cost savings could see low tariffs go lower to drive penetration growth: a national objective; and (3) policy and regulatory forces are all in favor. Sharing at ~25% now; we estimate this will rise to 60-70% by FY11.
  • TowerCo: opportunity to further leverage Bharti’s competitive edge — Bharti’s demonstrated rollout capabilities, tower share of 36-38% (versus 22% subs share) and early initiatives on infrastructure sharing (asset spin-off, tower sharing MoU with Vodafone) open up the opportunity for Bharti Infratel to become the largest towerco in India.
  • TowerCo potential: numbers and value — On a DCF, we see US$6.1bn of NPV from the towerco initiative. The implied EV/EBITDA of 17.5x FY08E and 11.7x FY09E are at discounts to a US peer group trading at ~20x on the same metric.
  • Valuation implications for Bharti, and risks — TowerCo NPV is Rs145/Bharti share. We estimate cost savings at Rs13/share – all of which add to an option value of Rs158/share from its tower initiatives. We see this gradually building into the stock price as execution data points filter in. Slower tower sharing uptake would be the key risk to our argument.
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