Monday, February 26, 2007
Citigroup - Flash: India Banks - CRR Returns - Some Concessions, Not Structural
Summary
- Banks get a little gain in FY07, and going forward — The RBI made a few changes to the returns it offers to banks on their CRR balances. This should add about 5bp in margins for FY07 (back-ended in 4Q07), and about 3bp going forward, across the sector. Supports profitability, to a limited extent.
- But, CRR remains a fundamental drain on bank profitability — Raised returns do not materially change the drain that is the CRR. We estimate an opportunity cost, and effective loss, of 55-60bp of margin for banks. This is estimated at current market rates, and the increased returns only provide an offset of about 3bp.
- Two changes - retrospective and prospective — RBI had announced 0% returns on CRR in June 06. Since the notification has only been effected in January 07, RBI is a) Compensating banks over the June – Feb 07 period, at a higher rate (350-200bp) level; b) Raising returns from 0% to 1%, prospectively. The effective yield for banks is substantially lower – they do not get any returns on the first 3% of CRR, and so effective returns are only 0.5% on 6% CRR assets.
- The concession – Likely driven by rising P&L impact of CRR — We would believe RBI has made a slight concession to its June 06 change as the financial impact of the CRR has increased since June 06 as a) CRR itself has been raised to 6% from 5% since; and b) the cost of funding the CRR has risen by 150-200bp since. This is only a mild concession, but potentially reflects some cognizance of onerous regulatory requirements on the banking system.
- Positive, but only a mild one — This does come as a slight positive for banks – private and Government, against a slew of more onerous regulatory developments in the recent past. However, not structural or meaningfully directional.
Budget 2007-08: Real Estate: black of white ! there are many demands here !
Industry expectations are as follows:
Continuation of section 801B of the income tax which gives tax relief to the builders for construction of units, which are less than 1000 square feet built up in metros. Special incentives for making small houses i.e. one BHK apartments less than 400 square feet carpet area especially in Mumbai. --> Really the FM has little love for Mumbai though it is the place which gets in the biggest revenue. Cheaper housing certainly could go a long way with the Common Man Theme.
Increase in exemption limit under section 24 of the Income Tax act which is regarding the exemption of the interest alone on the home loan should go up from the present Rs 1.5 lakh to Rs 3 lakh effective from the date of Booking and not from the date of Possession. This is hope really but with the FM looking to reduce exemptions this would mean asking for the moon.
TDS to be brought down from 16.83% to 10% especially for NRIs and a flat slab of 15% should be considered on rental income for NRIs, as this is their only income against the property. --> With bursting Forex reserves the reason to appease NRIs seems unreasonable.. We dont think this will happen.
Standard deduction of 30% towards maintenance should be increased to 40% for local residents and 50% for NRIs. Again a hope and demand for more.. However if this is allowed against bills, it would improve demand for cement. Currently demand for Cement is driven by new house construction and big way by reconstruction / repairs. Its a guess whether this will happen.
Abolition of service tax on builders when a builder hires an outside contractor to build the units. --> With service tax having a pass through, its unlikely this will be agreed to.
Reduction in Stamp Duty from the existing 5% to 2.5% More steps to curb Black money. ---> Really it would be a step in the right direction however this revenue goes to the States who are already fighting the centre for the loss in sales tax. Unlikely to be agreed we think. Most houses have a cash and chq component when they are sold. Really, tough to curb it unless the stamp duty is lowered. The real estate market is quite illiquid.
Complete scrapping of Urban Land Ceiling Act. Rationalizing Property tax on both Residential as well as Commercial properties. and there are more demands.
Close: A seesaw ride - and a positive finish
The Railway budget was on expected lines. There was the aura of reforms of digitisation and also the populism. Passenger fares have been cut across the board. This is to compete with airlines. There is no direct increase in freight rates and rationalisation has been done with regards to freight in an attempt to become more competitive. The idea is to sweat the assets more. The positive is from the East West dedicated Freight corridor which is expected to commence in 2007-08 at a cost of Rs 30,000 cr. There is a focus to use IT to increase efficiency ! - Its hats off to the Railway Minister as he has done which no other Railway Minister has done. Lower fares and increase profitability.
Coming back to markets it was a seesaw ride and a volatile one at that. Sugar, Cement, Steel stocks saw some buying but it was the banks which were the big gainers. Reliance was volatile post the Friday announcement of promoters intending to increase stake on profit selling once the news was out.
Sensex closed up 17 points at 13649.52 helped up by gains in Guj Ambuja (127.55, ACC (945.9) Tata Motors (839.6, Grasim (2341.14) and Satyam (461.45) Restricting the gains were Bharti Tele (732.4,), RCVL (425.9,), BHEL (2258.75,), Ranbaxy (351.2,) and Wipro (614,).
Banks made a smart come back. They were part of our hunters pick. Clearly they have been on the receiving end. However, the RBI offered them a largesse post close on Friday. They would be eligible for some interest income retrospectively on the CRR balances and that will help the bottomlines. SBI closed up and so did PNB and other banks.
Sesa Goa was one of the winnders today. The talk is that the buyer countries have agreed to a price hike of of ore by about 10%. Companies having their own ore will certainly do well and Sesa gets the direct benefit.
Rayban was smashed. The Italian Partner has asked the company for No objection to start a 100% subsidiary for doing business in India. Its likely to have been bitten by the Sebi rule of takeover which has asked it to give an open offer when it acquired Rayban's sunglasses business globally. We are positive on the business but these developments have negative implications.
Technically Markets: Sensex is poised for a pullback which could happen upto 14030. Resistance will be found at 13710 and 13830. On the lower side 13440 seems to be a good support. Below which we could fall upto 13330 and 13040.
Sensex exhibits resilience
The Sensex began the trading session with a positive gap of 52 points at 13685 and touched an intra-day high of 13723 amid considerable volatility in early trades. However the market slipped and in the first half of the session exhibited a range-bound trend with alternate bouts of buying and selling. A sharp bout of selling towards the close saw the Sensex slip into the red and touch a low of 13384, but renewed buying at lower levels in several front-line stocks saw the index erase its losses and end the session with gains of 17 points at 13650. The Nifty advanced three points and closed at 3942. The breadth of the market was negative. Of the 2,593 stocks traded on the BSE, 1,227 stocks advanced, 1,319 stocks declined and 47 stocks ended unchanged.
The sectoral indices were mixed. The BSE Metal index, the BSE FMCG index, the BSE Bankex, the BSE PSU index, the BSE Auto index and the BSE HC index ended in positive territory. On the other hand the BSE Teck index, the BSE CD index, the BSE IT index, the BSE Oil & Gas index and the BSE CG index exhibited weakness.
Among the gainers Gujarat Ambuja surged 3.83% at Rs128, ACC gained 3.30% at Rs946, Grasim jumped 3.08% at Rs2,341, Tata Motors added 3.07% at Rs840, SBI advanced 2.87% at Rs1,089, Satyam Computers was up 2.87% at Rs461, ITC advanced 2.59% at Rs170 and Tata Steel was up 2.29% at Rs470. Dr Reddy's, Maruti Udyog and Hindalco closed with steady gains. However, Bharti Airtel dropped 3.13% at Rs732, Reliance Communications shed 1.49% at Rs426 and Wipro dipped 1.48% at Rs614. Ranbaxy, L&T, Bajaj Auto, Infosys, BHEL, HDFC Bank and Reliance Industries closed with marginal losses.
Over 1.17 crore Power Finance Corporation shares changed hands on the BSE followed by Reliance Communications (32.93 lakh shares), IDBI (28.66 lakh shares) and Rolta India (23.07 lakh shares).
Value-wise Reliance Industries registered a turnover of Rs235 crore on the BSE followed by Reliance Communications (Rs138 crore) and Power Finance Corporation (Rs130 crore).
Market ekes out nominal gains amid volatility
The market pulled off an almost incredible rebound after a steep intra-day fall in mid-afternoon trade. The sharp fall came soon after the railway minister completed his budget speech in Parliament. Cement, banking, auto and steel shares were behind the Sensex’s rebound. The rise in cement and steel shares was due to a cut in rail freight rate on key raw materials in their manufacture. Index heavyweight, Reliance Industries (RIL), also recovered.
The 30-share BSE Sensex advanced 16.99 points (0.12%), to 13,649.52. It had come off the lower level after plunging 248.65 points, to 13,383.88, by 14:15 IST. The S&P CNX Nifty gained 3.05 points (0.08%), to 3,942. The Nifty March 2006 futures were at 3,969 compared to the spot Nifty closing of 3,942. On Friday (23 February), Nifty March futures had settled at a discount of 5.20 points.
The market was extremely volatile. The Sensex swung 1000 points, between some of the vital intra-day tops and bottoms of the day. The barometer index also swung 339.52 points between a low of 13,383.88 and a high of 13,723.40.
Railway Minister Lalu Prasad Yadav today announced a 5% cut in freight transportation rates for diesel-petrol, and a 6% reduction for all minerals, including iron ore and limestone. The lowering of freight rates is part of the rationalisation of tariffs announced by the minister even as he refrained from announcing any across the board increase in freight rates.
Lalu Yadav also introduced a commodity-based tariff policy, which will take effect from 1 April 2007, on an experimental basis for major commodities to provide a stronger base to the Railways' competitive capabilities. "We will introduce this new policy through an exclusive package for cement," he said.
The market-breadth evened out by the end of trading. Against 1,287 shares rising on BSE, 1,279 declined. Just 48 scrips were unchanged. In mid-afternoon trade, the ratio of losers to gainers was 1.8:1. The BSE Small-Cap Index lost 9.98 points (0.14%), to 6,894.45, while the BSE Mid-Cap Index advanced 31.82 points (0.5%), to 5,696.71.
The BSE Metal Index was the biggest gainer in percentage terms among BSE’s sectoral indices. It rose 201.61 points (2.2%), to 9,000.54. The BSE FMCG Index advanced 25.98 points (1.4%), to settle at 1,812.26. The BSE’s banking sector Index, the Bankex, advanced 42.87 points (0.6%), to 6,802.45. The BSE IT Index lost 16.42 points (0.3%), to 5,245.42.
The turnover on BSE was Rs 3793 crore, compared to Friday’s Rs 4552 crore.
Fears of nasty surprises in the Union Budget 2007-08, have caused a sharp correction on the bourses in the past few days. It plunged 723 points last week (week ended 23 February). At 13,649.52, it is off 6.8% from the lifetime high of 14,652.09 of 8 February 2007. It is down about 1% in calendar 2007 thus far.
Market men fear that short-term capital gains tax on the sale of shares may be hiked from 10% to between 12.5%-15% in the budget. 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. On the flip side, analysts also expect the finance minister to give a big impetus to agriculture and infrastructure in the budget.
FIIs have resorted to profit-taking over the past two days. Their net outflow was Rs 225.20 crore on Thursday (22 February) compared to an outflow of Rs 40.20 crore on Wednesday (21 February 2007). An intermittent surge in inflow has been witnessed this month following an upgrade in India’s rating to investment grade by foreign rating agency, Standard & Poor's, late in January 2007. The cumulative FII inflow for February 2007 stands at Rs 3950.20 crore (till 22 February) compared to their purchases of Rs 492 crore in January 2007.
Earnings growth for India Inc remains strong. Growth in recent years has hovered near the breakneck pace of more than 20%. The long term India growth story remains intact. India’s long-term growth drivers are a favourable demography (large share of young population), robust domestic consumption and acceleration in infrastructure creation.
In today’s trade, battered cement shares edged higher on bargain-hunting. ACC jumped 4% to Rs 952, Grasim gained 3.6% to Rs 2354 and Gujarat Ambuja Cements advanced 4.5% to Rs 128.40. Cement shares had tumbled over the past few days with the government keeping a close watch on cement prices. In late-January 2007, the Centre scrapped 12.5% import duty on cement to rein in domestic prices. The recovery in cement shares was also due to reduction in freight rate on limestone – a key input in cement making by 6%.
Buying was conspicuous in PSU banks after the Reserve Bank of India (RBI) said it will resume paying interest on eligible cash reserve ratio (CRR) balances it held. State Bank of India gained 4.4% to Rs 1105, Punjab National Bank gained 5.5% to Rs 459, Bank of India gained 5% to Rs 166, Canara Bank rose 3.9% to Rs 218, and Bank of Baroda rose 2.5% to Rs 219.
Auto shares recovered on expectations of an excise duty cut on cars. Tata Motors gained 3.8% to Rs 846, and Maruti Udyog rose 3% to Rs 889.50. Market expects excise duty on cars to be brought down to 16% from 24% in the Union Budget 2007-08. In the last budget, the government had slashed excise duty on small cars to 16% from 24%.
Steel shares were in demand on expectations that steel makers will raise prices by Rs 1000 per tonne after the budget due to firm global prices. Tata Steel rose 2.5% to Rs 470.95, while Steel Authority of India (Sail) gained 2% to Rs 114. The upmove in steel shares was also due to reduction in freight rate on iron ore – a key input in steel making by 6%.
Reliance Industries shed 0.7% to Rs 1402.20. The stock recovered from the lower level after losing as much as 2.7%, to Rs 1373.50, by 14:09 IST. Reliance Industries (RIL) on Saturday (24 February 2007) unveiled a plan for an integrated cracker and petrochemicals complex, with a total capacity of 2 million metric tonnes per annum in the special economic zone (SEZ) at Jamnagar.
RIL’s board also approved a preferential issue of 12 crore warrants, exercisable into equal number of equity shares of Rs 10 each, to promoters as per SEBI guidelines for preferential issues. On exercise of the rights, the paid-up capital of RIL will increase from Rs 1393 crore to Rs 1513 crore.
Iron ore exporter Sesa Goa jumped nearly 7% to Rs 2012, after freight rate on transport of iron ore was cut by 6% in the Railway Budget.
IT bellwether ended 0.2% to Rs 2232. The stock was quite volatile. It moved between a low of Rs 2161.10 and a high of Rs 2248.70. Satyam Computer Services gained 2.8% to Rs 461.45 on market talk that the company may soon announce a large outsourcing deal.
C & C Constructions settled at Rs 239.90. The stock today debuted at Rs 350 compared to the IPO price of Rs 291.
Copper producer Sterlite Industries rose 1.5% to Rs 508.05, after Shanghai futures rose by their 4% limit on Monday, following sharp gains in the metal on the London Metal Exchange (LME).
Hindustan Zinc jumped nearly 8% to Rs 668, after the company raised zinc prices by 4.2% Saturday (24 February 2007) onwards.
Gas transporter, Gujarat Gas Company, ended flat at Rs 1300. The company said on Friday its net profit jumped 67% to Rs 18.23 crore (Rs 10.90 crore). Net sales for the same quarter surged 46.5% to Rs 234.49 crore (Rs 159.96 crore).
Indiabulls Financial Services ended flat at Rs 438. The company said on Friday three Merrill Lynch units acquired 2.93 million shares in the company, raising its stake to 5.13%.
Sugar shares edged higher following reports that some sugar companies have started hedging their risks in the futures market at a time when sugar prices are falling. Bajaj Hindustan jumped nearly 6% to Rs 169.75, and Balrampur Chini Mills gained 2.3% to Rs 57.80.
IFCI rose 1.2% to Rs 28.15. Volumes in the stock were a huge 1.3 crore shares on BSE. The stock has been consistently clocking huge volumes over the past few days.
Power Finance Corporation jumped 5% to Rs 117.15. The stock debuted at Rs 105 on Friday (23 February 2007) compared to the IPO price of Rs 85.
Civil engineering firm, McNally Bharat Engineering, jumped 5% to Rs 168.90 after the company said on Monday it had secured a Rs 556 crore order from Rashtriya Ispat Nigam, to construct a new sinter plant at Visakhapatnam.
Great expectations
| Besides addressing the inflation problem, the Budget is likely to focus on infrastructure and agriculture. |
| It is once again that time of the year when the focus of everyone—be it the common man or the industrialist--shifts from Mumbai to Delhi, from Dalal Street to the Parliament, as the Finance Minister unveils the Budget. |
| But this year’s Budget is going to be tough for Finance Minister P Chidambaram. The economy is growing at a scorching pace, but inflation levels are also hitting multi-year highs. |
| Thus, a balance between sustaining growth and controlling inflation is going to be a Herculean task. This is also evident from the behaviour of the market last week, which tanked by 723 points or 5 per cent as there is a growing concern how the finance minister would be able to balance both. |
| Though there are high expectations among industry players, sectors like automobiles, cement, infrastructure, power, banking, oil and gas, agro-based, textiles, sugar and paper are expected to be in focus. |
| “We broadly expect the government to deploy more money in agriculture and in the development of agriculture infrastructure,” says, Raamdeo Agrawal, managing director, Motilal Oswal Securities. |
| “Today, 65 per cent of the population is leaving in rural areas and most of them are directly and indirectly involved in agriculture business. With rising revenues, the government can afford to focus on the agriculture sector,” adds Dinesh Thakkar, CMD, Angel Broking. |
| Here is a closer look at what industries and analysts expect from the Union Budget 2007-08. |
| Automobiles The industry demands rationalising excise duty of 16 per cent for all cars and not just small cars (at present all cars except small cars attract a duty of 24 per cent). However, this seems unlikely. |
| Industry players need more clarification on the definition of a small car as in the last Budget, it was defined both in terms of length (ie under 4,000 mm) and engine size (1,200 cc for petrol-1,500 cc for diesel), while the Auto Mission Plan has defined small cars only by length (under 3,800 mm). |
| Two- and three-wheeler players have been hankering for lowering the excise duty from the current 16 per cent to 8 per cent though analysts feel it is unlikely that the government would go the full length. |
| The extension of R&D tax benefits beyond March 31, 2007 is a strong possibility and will be a positive given the accelerated rate of product launch in a fiercely competitive market. |
| Key policy pronouncements could also be made regarding the macro environment in line with the Auto Mission Plan. The emphasis on auto parks and specially designated SEZs for automobiles reflected in the mission plan could see some fiscal sops on this front. |
| Concessions for exports of components, small cars and multi-utility vehicles and tractors could also be a key positive for volume growth. Some movement on the demand increase in the motor vehicle depreciation rate from 15 per cent to 25 per cent should also prove a key positive for industry. |
| The auto-ancillary segment too has its own wishlist of revising the abatement of parts and components at higher levels (currently 33.5 per cent) and maintaining customs duties at the present level. |
| A reduction in the peak customs duty on components from the current 12.5 per cent, which appears probable in the light of the government's resolve to move towards Asean rates, could mean that while OEMs could source cheaper imported components, domestic components makers would face increased competition especially from their east Asian peers. |
| Banking and finance In order to ensure greater availability of resources to meet the rising demand for credit, analysts feel that the lock-in period of the investment in the term deposits eligible for tax deduction under section 80C may be reduced from five to three years. |
| There are expectations that the earlier 80L tax exemption on interest income may be restored and that the limit for tax deducted at source may be increased to Rs 10,000 from Rs 5,000. |
| Kotak Securities expects that perpetual non-cumulative and redeemable cumulative preference shares in Tier I and II capital respectively should be allowed in order to improve the capital adequacy ratio ahead of Basell II norms. |
| Cement, construction and infrastructure With government donning its anti-inflation gear, the tight cement price situation has come under the scanner in recent times. However, little action is expected on this front as the import duty on cement was removed only last month. |
| The cement sector feels that it is highly taxed with excise alone equivalent to at least 32 per cent of the ex-factory price. Hence, the key industry demand is to reduce the specific excise duty of Rs 408 per tonne at present to Rs 250 per tonne. While it is unlikely that the government will meet the demand entirely, there could be some reduction given the government’s concerns over the price situation. |
| There is a strong likelihood of a reduction or even a phase-out of import duties of 10 per cent on pet coke-a key alternative to coal. There could also be cut in import duties on coal. |
| Other key expectations include a reduction of royalty on limestone, presently at Rs 45 per tonne, in line with other commodities and excise duty exemption for cement supplied to SEZs and a phase-out in the levy on captive power generation. |
| The strong focus on infrastructure could see some action on the customs duty front for construction equipment. |
| The key industry demand for increasing the proportion of Viable Gap Funding, which is a one-time or deferred grant, provided with the objective of making a project commercially viable, presently at 40 per cent could be increased, which will mean entry of more private players in infrastructure projects. |
| The other key demand is to extend tax benefits for infrastructure projects other than power and BOT projects (like pipelines) as also the exemption from application of minimum alternative tax applicable to infrastructure companies. |
| Fertilisers The fertiliser sector is expecting simplification of rules for claiming duty exemption on input such as naphtha, fuel oil and ammonia. It also expects concessional duty of 5 per cent on import of urea to manufacture complex fertilisers. |
| FMCG In the processed food and ready-to-eat food category, the industry is expecting the exemption of duty which is currently about 8 per cent. |
| The industry also demands a tax break and other incentives for setting up food processing industry in the form of 100 per cent tax deduction in first 10 years. The paints industry expects a cut of 2.5 per cent in the import duty on titanium dioxide, which is the single largest raw material. |
| There are expectations that cigarettes will come under the value added tax regime this year. |
| At present, there is a 4 per cent additional excise duty on cigarettes, which could be removed and VAT implemented. As long as the excise duty or VAT increases by up to 5 per cent, cigarette companies should be fine. But if the VAT rate is 12.5 per cent, it could affect cigarette volumes negatively. |
| Hospitality The hotel industry expects the Budget to give it infrastructure status as that would entail hotel projects to attract a 10-year tax holiday. |
| Analysts expect the current 10 per cent rate of depreciation to be raised to 20 per cent, which will result in lower taxes for hotels. |
| In a drive toward rationalisation of service tax, Kotak Securities expects hotels to be exempted from paying service tax on services received from foreign tour operators and travel agents, whose services are received outside India. |
| There are expectations that the luxury tax is made uniform across all states, and that it should be charged on the actual billed amount. Emkay expects luxury tax to be capped at 10 per cent. |
| Information technology Software exports from units located in SEZs are exempt from taxes for ten years in the following manner: for the first five years, 100 per cent of income from export, while for the next five years, 50 per cent of income from export is deductible from taxable income. |
| Software exports are also exempt from tax until FY09 under section 10A/10B, a provision, which the industry expects to be extended for another 10 years. However, analysts believe this may not come through. |
| The information technology (IT) industry expects the concessions given to software exports from special economic zones (SEZs) to be extended to software technology parks (STPs), as per Man Financial. |
| According to Sharekhan, if the tax exemption on STP units is not extended to SEZs, the effective tax rate is expected to increase to 18-24 per cent range, up from 11-17 per cent depending upon the proportion of income from exports and contribution from the domestic business. This would result in lower net margins to the extent of 150-300 basis points. |
| Kotak Securities expects an exemption of genuine business expenditure from the fringe benefit tax. The industry also expects a withdrawal of service tax on the maintenance or repair of software. |
| Media Sharekhan expects a reduction of customs duty on import of capital goods in line with the reduction in peak customs duty, which is currently up to 36 per cent. This would be beneficial to the entire media industry as it would reduce set-up costs. |
| According to Kotak Securities, such a move would encourage growth of segments like digital exhibition, which would in turn reduce revenues losses incurred due to piracy and boost tax collections. |
| Man Financial expects the print media to come under the service tax net, in order to bring parity between print and electronic media, as the latter pays service tax on advertisement revenues of 12.24 per cent per cent tax. |
| The industry expects a reduction in excise duty levied on equipment like set-top boxes (STBs) from a normal rate of 16 per cent to nil, which would bring the rates applicable on broadcasting equipment on par with telecommunication equipment, and encourage domestic production of STBs. |
| Further, Kotak Securities expects a correction of this anomaly created last year as there was a reduction in customs duty from 15 per cent to nil on STBs but there was no corresponding reduction in import duties on inputs used in the manufacture of STBs. |
| Metals Broking houses do not expect any significant measures for the industry as duties on many were recently reduced on January 23, 2007. Customs duty for most of the key metal products like aluminium, zinc, copper, tin and ferro-alloy stainless steel was reduced to 5 per cent from 7.5 per cent. |
| However, they expect reduction in the excise duty in general in order to rein in inflation. If the duty on on copper concentrate is reduced, copper manufacturers will do better. |
| Oil and Gas In a bid to reduce fuel prices, the oil ministry is seeking cuts in taxes and duties levied on retail petroleum products as well as energy exploration. |
| Gas pipelines and exploration activities are expected to be granted an infrastructure status, which would entail them to income tax benefits. |
| Kotak Securities also expects a concession in service tax on companies offering drilling, surveying and offshore vessels services. |
| Add to this, a reduction in project import duty structure for infrastructure projects in petroleum sector would help curb inflation of project costs of refineries due to taxation, given the fact that petroleum product exports are the largest commodity exports from the country. |
| Further, the industry expects a rationalisation of customs duty structure, which currently varies across different petroleum products. A 5 per cent customs duty is levied on crude oil, 7.5 per cent on petrol and diesel, 10 per cent on air turbine fuel and 5 per cent on naphtha, at present. |
| Rationalisation of excise duty on petrol and diesel is sought as well, from a structure of a percentage of cost plus fixed rate to a specific duty of Rs 15.92 a litre for petrol and Rs 6.08 a litre for diesel, according to Kotak Securities. |
| Man Financial expects a cut in excise duty on naphtha and fuel oil from the current level of 16 per cent. Again, there is a scope for making the sales tax structure uniform at a rate of 4 per cent, which is up to 29 per cent for diesel and up to 20 per cent for petrol in a number of states at present. |
| Petrochemicals and chemicals There is a possibility of a cut in import duties on purified terephthalic acid and mono ethylene glycol t o 5 per cent and that on polymer to reduce from the current 5 per cent. |
| Analysts also expect a cut in the excise duty on polymers (15 per cent now), fibre intermediaries (15 per cent) and polyester (currently at 8 per cent) to around 5-10 per cent. |
| As regards chemicals, analysts expect a review of the excise and customs duty of 16 per cent and 10 per cent respectively on caustic soda and soda ash. |
| Pharmaceuticals One of the key demands of the sector includes reduction of MRP based excise from 16 per cent to 12 per cent and increase in abatement to 52 per cent. The latter seems unlikely as the government recently increased the abatement from 40 per cent to 42.5 per cent. |
| The extension of the income tax benefits on R&D expenditure (150 per cent weighted deduction) beyond March 2007 for another five years is a strong possibility. |
| Others demands include a reduction in customs duty on raw materials for molecules from the current 12.5 per cent to 5 per cent and tax concessions on milestone payments received on new chemical entity out-licensing. |
| Service tax exemption on clinical trials and other scientific services for foreign clients is also another demand if fulfilled which would boost domestic companies wanting to take advantage of the contract research opportunity. On the customs duties front, an exemption on life-saving drugs looks a strong possibility. |
| Power and engineering Broking houses expect a lot from the Budget for the power sector. Emkay Shares and Stock Brokers feels that power equipment players will gain if duty on raw materials on power generation, transmission and distribution are reduced from the current 16 per cent to 14 per cent. |
| Kotak Securities expects duties on project imports to be reduced from 12.5 per cent to 7.5 per cent and the Accelerated Power Development and Reform Programme (APDRP) scheme to be continued. |
| Edelweiss Securities says that if the concessional zero customs duty structure is extended to transmission projects associated with mega power projects, power transmission players will benefit. |
| If the Budget provides infrastructure status to the power generation and distribution sector, power equipment players and even companies in the capital goods and engineering sectors will gain. |
| The engineering and capital goods industry, which was reeling under pressure of rising input costs, had benefited in the previous Budget as customs duty of major inputs like aluminium and copper had reduced. |
| Thus, broking houses don't expect any measures on this front except increased allocation of government spending on infrastructure, which is positive for the industry. Emkay Shares and Stock Brokers feels that excise duty on earth moving and construction equipment may be reduced from 16 per cent to 8 per cent. |
| Sugar Depressed by supply and compressed by margins, the Indian sugar industry is expecting this Budget to announce some sweet initiatives. |
| Indian Sugar Mills Association (ISMA), the apex body representing the sugar industry, has proposed to reduce the excise duty on molasses and to be levied at 8 per cent of the selling price of the molasses. |
| Sugar companies pay excise duty on a fixed basis of Rs 750 per tonne of molasses, compared with the final prices of molasses at about Rs 1000 in some states. |
| Besides expectations of a quicker implementation of ethanol blending at 10 per cent in fuel, the industry wants ethanol to get infrastructure status. |
| Telecommunications The telecom industry expects a rationalisation of license fee revenue sharing which varies from 6-10 per cent in different circles to a uniform rate of 6 per cent across the country. However, this is unlikely. |
| Analysts also expect an increase in service tax levied from telecom operators from the current level of 12 per cent. These changes however, may not impact the revenues of the operators, as they would be passed on to the consumer. |
| Mobile handsets attract an additional customs duty of 4 per cent at present, which the industry expects to be removed. |
| Textiles In order to make the Indian textile industry more competitive in the global market, Kotak expects the deadline for Technology Upgradation Fund to be extended to March 2012 from the current March 2007. |
| It also recommends that the excise duty on man-made fibre to be reduced from 8 per cent to 4 per cent to bring parity with cotton yarn, and that on mono ethylene glycol (key input for man-made fibre) from 12 per cent to 8 per cent to make it the same as on purified terephthalic acid. |
PowerYourTrade Trading Calls
Ashwani Gujral
Sell Ranbaxy Labs with stop loss of Rs 375 for target of Rs 250
Sell Century Textiles with stop loss of Rs 586 for target of Rs 350.
Deepak Mohoni
Short sell IndusInd Bank above Rs 48.25 with stop loss of Rs 49.25. This is a day-trading recommendation
Buy Sesa Goa below Rs 1900 with stop loss of Rs 1860. This is a day-trading recommendation.
STRATEGY INPUTS FOR THE DAY
Not again…a Manic Monday
If we increase freight rates, the goods will move through the roads and the condition of the roads will become worse – Railway Minister Lalu Prasad Yadav.
The condition of most roads are bad enough and so are the condition of the bulls. They have been at the receiving end and are likely to remain under pressure at least in the near term owing to rising inflation and hardening interest rates. All is not lost yet though. The FIIs can resurrect the market. But, it appears they are perhaps waiting for the budget to be out of the way before taking a fresh call on India. Having seen a fall before the budget, expectations are the market need not crack post the budget. Remember, despite the fall, valuations are not cheap as yet. Unless inflation comes down sharply and there is some stability in interest rates, the undertone may continue to be weak.
As for today, we expect a cautious opening on the back of Friday's plunge. Any further weakness at start could result in margin calls and have a cascading effect. Some stability will bring about bottom fishing as the main indices were down 5% each last week. Friday's provisional FII figure of Rs3.43bn in the cash segment could prove to be the savior for the bulls. Our advice is don’t get trapped in any relief rally.
Another positive could be Reliance Industries. The company is making a Rs15bn preferential issue to Mukesh Ambani to raise funds for future expansion. This will lead to a further hike in the promoters' stake in the company when the warrants are converted into equity shares. Also, coming at a time when the stock is close to its all-time high augers well for investors and for the market.
Banking shares may also rebound after the RBI said it will pay interest on CRR for the second half of 2006 and for the period starting Feb. 17. Dena Bank and Canara Bank will be among the stocks to keep an eye on following reports of a possible merger between the two state-owned banks. The banks and the Finance Ministry have denied any such move though.
Cement stocks could continue to underperform amid fears of some unfavourable announcements from the Government for the sector. Some incentives in the railway budget may perhaps bring temporary relief to the cement counters.
Ahluwalia Contracts is likely to fall amid reports that SEBI will probe into the sharp rise in the stock on listing last week.
FIIs have been net sellers in the last couple of sessions in the cash segment. With this, their tally for the month works out to around $877mn, which is actually not bad considering the crash in the market. Mutual Funds were net buyers of just Rs7.56mn on the same day.
Foreign funds offloaded stocks worth Rs13.47bn in the F&O segment on Friday.
3M India, NEPC Textiles and Visaka Industries will announce their results today.
Shares of C&C Construction will get listed today on the bourses.
From the Research Desk - PSL
PSL Ltd. (Q3FY07): Result Update
During the quarter the company executed orders of GAIL, Reliance and some other small orders. More than half the contribution to topline during the quarter has been from GAIL and Reliance. This helped the company register a 22.2% topline growth to Rs4.9bn in Q3FY07 against Rs4.1bn in the corresponding last year. For 9MFY07 the company registered topline growth of 10.4% to Rs11.8bn against Rs10.7bn last year. There was an improvement in bottomline by 54.5% and 47.2% for Q3FY07 and 9MFY07 respectively. This translates into nine month annualized EPS of Rs20.5.
The company has a healthy order book of Rs15bn as on December 31, 2006 majority of which will be executed over the next couple of quarters. Order book consists of orders from GAIL, Reliance and L&T in addition to exports (~20% of current order book) and other smaller orders. Of this orders worth about Rs1.5bn from GAIL and Rs2.5bn from Reliance will be executed over the next quarter. The order book consists of orders from oil & gas and water sector. With continued emphasis being on developing infrastructure for oil & gas and water transportation orders for the sector are expected to keep on flowing.
Robust order book coupled with expanded capacities will facilitate strong growth going forward. With industry demand scenario appearing good for the future especially for large diameter pipes the company is well positioned to take advantage of it. We expect the company to not only gain orders from the domestic arena but also from global markets. Pipes are amongst the most economical medium of transportation for high value commodities i.e. oil and gas, as they can transport large volumes thereby reducing cost. PSL is appropriately positioned to benefit from this development as it is amongst the foremost manufacturers of HSAW pipes in India who offer large diameter pipes. To add to its competitiveness the company’s 11 mills are strategically located across India in close proximity to the ports enabling it quick deliveries and reducing transportation costs. With the scenario for the pipes industry remaining robust over the longer term, our broad calculations indicate the company to close FY07E with an earnings of Rs21.9 and FY08E with 26.2.
Market Watch
Insider Trades:
Lloyd Electric & Engineering Ltd: (i) Morgan Stanley & Co. International Ltd. a/c Morgan Stanley Dean Witter Mauritius Co. Ltd (ii) Morgan Stanley & Co. International Ltd a/c Morgan Stanley Investment Mauritius Ltd has purchased from open market 50000 equity shares of Lloyd Electric & Engineering Ltd on 19th February, 2007.
Market Volumes:
The turnover on NSE was 13% to Rs103.3bn.BSE Bank index was the major loser and lost 3.42%. BSE FMCG index (down 3.35%), BSE Technology index (down 3.22%) and BSE Pharma index (down 2.65%) were among the other major losers.
Volume Toppers:
PFC, IFCI, Firstsource, TTML, SAIL, IDBI, ITC, India Cement, Tata Steel, Hindalco, R Com, Ashok Leyland, Satyam Computer, IVRCL Infrastructure, Cinemax India, Reliance Industries and HLL.
Lower Circuit Filters:
Amara Raja, Unitech, GMR Industries, Kesoram Industries, Nelco Ltd, Classic Diamond, KRBL, Fedders Lloyd, Swan mills, Nesco, Alps Industries, Ansal housing, BSEL Infrastructure, Crew BOS and Country Club.
Long Term investment:
Valecha Engineering.
Major News Headlines:
ICICI Bank raises Deposits, Lending rates by 50 basis points
Nitco Tiles to raise funds up to Rs2.5bn by way of FCCBs/GDRs/ADRs/QIP
Pratibha Industries to raise Rs2bn by way of QIP
Atlanta withdraws record date for stock split
Sterlite Optical gets contracts worth Rs1.5bn from power Grid Corporation of India
House of Pearl acquires new warehouse in UK
HOW MARKET FARED
All eyes on Budget
The bulls again were on the receiving for fourth straight trading session. The markets corrected sharply ahead of an important event ‘The Union Budget 2007’ next week. All round selling pressure in the scrip’s across the sectors dragged the benchmark Sensex to hit an intra-day lown of 13568.08. The key indices traded in red throughout the session all the key indices closed in negative territory with BSE Bank index being the major loser losing 3.42%. Finally, the BSE 30-share Sensex plunged by 388 points to close at 13632 and NSE Nifty dropped 101 points to close at 3938. Grasim, Bharti Airtel, ACC and ICICI Bank were among the major losers. However, GAIL, Tata Steel and Reliance industries were among the major gainers outperforming both the key indices today.
ICICI Bank lost over 4% to Rs907. The company raised deposits and lending rates by 50 basis points. The scrip touched an intra-day high of Rs954 and low of Rs892 and recorded volumes of over 17,00,000 shares on NSE
Pratibha Industries declined 5% to Rs183. The company announced that they would raise Rs2bn by way of QIP. The scrip touched an intra-day high of 195Rs and low of Rs183 and has recorded volumes of over 12,000 shares on NSE.
Apollo Hospital was down 1.8% to Rs491. According to reports the company is eyeing UK-based Abbey Hospitals. The scrip touched an intra-day high of Rs505 and low of Rs490 and recorded volumes of over 87,000 shares on NSE.
Hexaware dropped over 2.5% to Rs161. The company is reportedly looking at buying an IT firm in Europe or the US. The scrip has touched an intra-day high of Rs170 and low of Rs160 and has recorded volumes of over 1,00,000 shares on NSE.
Pharma stocks stocks were in poor health today on back of profit booking. Ranbaxy dropped over 3% to Rs356, Sun Pharma slipped 3% to Rs974, Cipla dropped 2.5% to Rs241 and Dr Reddy lost 3.5% to Rs681.
Capital Good index was also on the receiving end. Punj Lloyd plunged by over 6% to Rs830, L&T fell over 2.5% to Rs1611, ABB declined 2% to Rs3708 and BHEL was down 0.8% to Rs2276.
Technology stocks ended lower, the indeed fell over 3%. Heavy weights like Wipro fell over 4% to Rs623, Infosys was down 2.2% to Rs2237 and Satyam Computer slipped 2% to Rs449. Rolta, Mastek and Polaris were the major losers among the Mid-Cap stocks.
Edelweiss Daily Market Outlook
Market Snapshot
The Sensex opened with a positive gap of 50 points at 14,071, but selling pressure forced the index into the negative zone. Unabated selling, mainly in bank, cement and pharma stocks, saw the index drift to lower levels as the day progressed. The index tumbled to a low of 13,568 before finally settling with a significant loss of 389 points at 13,633. Nifty lost 101 points to 3,939.
The NSE cash volumes were significantly lower compared to the previous day at INR 103 bn while the BSE cash volumes were better at INR 45 bn. The F&O volumes were significantly lower compared to the previous day at INR 359 bn.
Sentiment Indicators
The Implied Volatility (IV) across Nifty strikes has increased to 27-29% levels. The WPCR of Nifty Options decreased to 0.84 compared to the previous day while the 5 day average is 1.07. The February futures are now trading at 5 points discount. The Nifty Futures OI has increased by 11%.
Outlook
Nifty breached crucial trend line support of 3965 on the last trading session. The tone of the market is of abundant caution before the fiscal budget and we expect volatile movement to continue after last week’s fall. Significant OI addition was seen across strikes in the Nifty puts signaling hedging of long positions. At the same time, call IVs have decreased slightly indicating covered calls being written in the market.
Also, Rail Budget will be announced today. Any kind of positive surprises on Capex front would augur well for the market and might trigger small pull back till Union Budget is announced on Wednesday. Capital Goods and Engineering sector is expected to see lot of action today on expectations of Rail Infrastructure Capex. High metals prices at LME will strengthen metal stocks.
A close below 3965 indicates intermediate term bearishness as predicted. It completes the bearish lower top, lower bottom pattern. The immediate support of Nifty is 3880 and the next at 3880. On the upper side Nifty has a resistance at 3965, followed by 4014.
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Outlook remains weak
Fears over inflation nearing to its two years high and the Sensex losing over 1000 points in the last three weeks may keep the bias negative. The market is also worried about the Union budget, which is expected to remain populist and profit booking on any rise is also cause of concern which may keep the market volatile. Mixed Asian markets in the morning trades also likely to keep pressure on investors sentiment. Among the domestic indices, the Nifty could test 3900 and below this level may slip to 3850, while on the upside it could edge higher to 4050. The Sensex has a likely support at 13568 and may face resistance at 13780.
The Nymex light crude oil for April delivery rose 19 cents to close at $61.14. In the commodity space, the Comex gold for April series gained $3.70 to settle at $686.70 a troy ounce.
The speech Chidambaram will not make
Ten years ago I promised to reduce Indian tax rates to Asean levels, and thus become part of the Asian economic miracle. I am happy to announce that I am cutting the peak import duty to 8%, the targeted Asean level. Some people are inconveniently reminding me that I had also indicated 10 years ago that I would reduce direct taxes to the Asean level, which is now around 25%.
I cannot do this overnight for revenue reasons, but will target this rate over the next five years. For starters, I considered reducing the peak income and corporate tax rate to 30% inclusive of surcharge. But the latest Times of India poll suggests that citizens hate taxes but like cesses. So I propose to abolish income and corporate tax, and instead impose a social services cess of 30% in lieu thereof. I hope this will help us win the Uttar Pradesh election.
Our effective corporate tax rate is only 17% because of a myriad exemptions. The most unwarranted exemption is for software companies, which are not infant industries but prize athletes. I propose to levy a Minimum Alternative Cess (replacing the Minimum Alternative Tax) of 15% on all companies other than those covered by the law on Special Economic Zones. The new Minimum Alternative Cess will also apply to units in SEZs unless they export at least 85% of their output.
Our policies have yielded record GDP growth of 9.2%. I hope you agree that the entire credit for this goes to Sonia Gandhi. The economic boom has boosted tax receipts, and I am happy to announce that I have met the FRBM target of reducing the fiscal deficit to 3% two years ahead of schedule. Having said that, let me confess what serious economists have long know — that, rather like Enron, we have been hiding part of the debt in off-budget items (oil bonds, debts of the FCI).
Borrowings of the Food Corporation for political purposes like the public distribution system are logically part of the government’s own deficit, and so are subsidies to oil consumers financed by forcing oil companies to run at a loss.
Inclusive of these items, the fiscal deficit is higher by more than 1% of GDP. In the interests of transparency and accountability I propose henceforth to include these off-budget items in the official fiscal deficit, and get this consolidated figure down to 3% by 2009.
The Fringe Benefit Tax has attracted criticism because of its complexity. I know this is a bad tax, but I hate admitting that I am wrong. So I propose to give companies the choice of paying an additional 2% corporate tax in lieu of the fringe benefit Tax. Some of my Marxist colleagues want me to re-impose capital gains tax on shares.
This would be a bad idea, since prudence requires that people should churn their portfolios (constantly selling some assets and buying fresh ones), and a capital gains tax will tax such prudence. It will also place Indians at a tax disadvantage compared with foreign institutional investors.
A better way of promoting egalitarianism without affecting growth is to levy estate duty at 5% on all properties of deceased persons in excess of Rs 20 lakh. This will encourage people to save and invest in their lifetime, while ensuring that they pay their dues to society (rather than undeserving heirs) after entering the next world. It also helps that dead people do not vote.
The biggest tax anomaly is that services account for 55% of GDP but only a small fraction of taxes. I am widening the service tax net to include several categories including lawyers, so nobody can accuse me of trying to keep myself out of the service tax net.
I am also raising the level of service tax to 16%, and moving most excise duties to 16%. I hope this will lay the foundation for moving in the next four years to an all-India Goods and Services Tax levied mainly at 16%. As part of that transformation, I propose to abolish the Central Sales Tax in one go, and compensate states in full for this loss.
We spend vast sums on unproductive subsidies, of which two-thirds non-merit subsidies benefiting mainly well-off people. The fertiliser subsidy has induced farmers to use nitrogen rather than phosphorus and potassium, thus ruining the soil. Free power encourages overpumping and the drying up of drinking-water wells and shallow tubewells of small farmers. I cannot control power subsidies given by state governments. But I propose to abolish subsidies on food, fertilisers and employment programmes, and instead give a cash grant of Rs 5,000 to every family with a BPL card or Job card. That will be a more rational subsidy regime, and will also reach those most in need.
Little is known of the outcome of vast sums spent on various programmes, and I cannot trust any ministry to honestly assess its own shortcomings. So I propose to hire independent evaluators to track the actual outcome of programmes. This will give us an accurate picture of which programmes deserve to be overhauled or abandoned, and which expanded.
All eyes on Railway Budget
Sensex lost 723 points last week as a major correction gripped bourses due to caution ahead of the announcement of the Railway Budget and Union Budget 2007-08. Data showing heavy FII sales in derivatives and their outflow in the spot market for the second day in a row on Thursday 22 February may weigh on the bourses today.
Railway Minister Lalu Prasad Yadav today unveils the Railway Budget. Market talks are that the government may cut some passenger and freight fares in a bid to combat inflation. Last year passenger and freight rates were left broadly unchanged.
Union Budget 2007-08 to be presented on Wednesday 28 February remains a key near term trigger for the market. 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.
FIIs were net sellers for the second day in a row on Thursday. They were net sellers to the tune of Rs 225.20 crore on Thursday compared to their outflow of Rs 40.20 crore on Wednesday 21 February. But as per provisional data, FIIs were net buyers to the tune of Rs 334 crore on Friday 23 February, the day when Sensex had lost 389 points.
While FIIs were net buyers in the spot market, they pressed heavy sales in index-based futures on Friday. They were net sellers to the tune of Rs 1547 crore in index-based futures on Friday. They were net buyers to the tune of Rs 18 crore in individual stock futures on that day. Nifty March futures settled at 3933.75 on Friday, a discount of 5.20 points compared to spot Nifty closing of 3938.95.
Asian markets were mixed on Monday (26 February). The key benchmark indices in Japan and Taiwan were up by between 0.4% to 1.5%. The key benchmark indices in Hong Kong and Singapore were down by between 0.2% to 0.7%.
US stocks fell for a third straight session on Friday as concern over rising defaults in the subprime mortgage industry drove down financial services shares and the price of oil hit a 2007 high. The Dow Jones industrial average fell 38.54 points, or 0.30 percent, to end at 12,647.48. The Standard & Poor's 500 Index dropped 5.19 points, or 0.36 percent, to finish at 1,451.19. The Nasdaq Composite Index lost 9.84 points, or 0.39 percent, to close at 2,515.10.
US crude rose for a fourth day, up 31 cents to $61.45 a barrel on Monday and nearing a fresh 2007 high, as rising tensions over Iran's nuclear programme added to concerns over on an unexpectedly deep drop in US fuel stocks and supply disruptions. Western powers prepare to meet in London on Monday to discuss tightening sanctions on Iran over its nuclear plans amid tough talk between Washington and Tehran. Iran insists it is entitled to nuclear power to generate electricity but many in the West suspect it is trying to build an atomic arsenal.
Nikkei nears seven-year high, Nikko Cordial jumps
The Nikkei share average rose to its highest in nearly seven years on Monday, gaining 0.51 percent as Softbank Corp., Nippon Steel Corp. and other firms popular with retail investors benefited from improving market sentiment.
Shares of Nikko Cordial Corp., Japan's third-largest brokerage, shot up 13.2 percent to 1,371 yen. Citigroup is in talks to buy a one-third stake in Nikko, which faces a possible delisting due to an accounting scandal, financial industry sources told Reuters on Saturday.
Retail investors, many of whom were hit with big losses in last year's small-cap sell-off, were now returning to stocks, on expectations of higher profits from leading companies such as Nippon Steel, market participants said.
"With the rebound of Sony Corp. and steel companies, individual investors have bounced back a lot," said Katsuhiko Kodama, senior strategist at Toyo Securities.
The Nikkei finished the morning session up 92.43 points at 18,280.85, after earlier hitting 18,300.39, its highest since May 2000.
The broad TOPIX index was up 0.35 percent at 1,821.30, after earlier hitting 1,823.46, its highest since November 1991.
Mobile telephone provider Softbank, a favourite of Japanese retail investors, rose 3.1 percent to 3,030 yen. Its shares have recovered some 31 percent so far this year, after a decline of 54 percent last year.
Nippon Steel gained 2.4 percent to 841 yen after earlier hitting its highest in more than 17 years. The world's second-largest steel maker has gained 23 percent this year, helped by expectations of better earnings and further consolidation in the industry.
READY TO SELL?
But some market participants said they were expecting a decline in the near term, given recent gains.
"I think we are ready for a slowdown," said Ken Masuda, senior dealer in equities at Shinko Securities.
"I think steel stocks and shippers look ripe for some selling."
Shipping stocks have gained about 22 percent so far this year.
Shares of Nissan Chemical Industries Ltd. jumped 8.7 percent to 1,596 yen after brokerage Goldman Sachs raised its rating on the chemical manufacturer to "buy" from "neutral", citing its prospects for earnings growth.
Goldman Sachs said in a note on Friday the company's earnings growth was likely to outpace the industry average in the next year.
Sony rose 0.8 percent to 6,400 yen after Merrill Lynch on Monday raised its rating on the consumer electronics giant to "buy" from "sell" and lifted its target share price to 7,600 yen from 5,100 yen.
The company was likely to benefit from continuing yen weakness and the strength of overseas economies, Merrill said.
Trade volume remained active with 1.5 billion shares changing hands, compared with last week's morning average of 1.3 billion shares. Advancers outnumbered decliners 964 to 636.
Ashish Chugh - HIDDEN GEMS - Linc Pen & Plastics
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Investsmart - Morning Call
Nifty at a support of 3885 & 3835 levels with 3965 & 4010 as resistance for
the markets .
Buy : BajaHind above 162 target 170 s/l 158
Sell : ITC below 165.2 target 160 s/l 167
Markets to be choppy and volatile and any rally to see profit booking at
all higher levels do not take any fresh psotion before the Budget .
Out House :
Railway Budget today .
Sensex at a support of 13515 & 13425 levels with resistance at 13786 &
13838 levels .
Buy : RIL & RelCap
Buy : ONGC & Gail
Buy : INFY & Satyam at dips
Buy : Polaris & Mphasis at dips
Buy : Texmaco at dips
Buy : Gitanjali at dips
Buy : ADlabs & Glenmark at dips
Buy : UtiBank & KTK bank at dips
Dark Horse : RIL , Gitanjali , Utibank , Adalbs , SesaGoa , NDTV , Glenmark
& Sail
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Roundtable Conference 2007
Chetan Parikh: Good evening Ladies and Gentlemen,
On behalf of Capitalideasonline.com, I would like to thank all of you for taking time out to be with us this evening for the Annual CIO Investor and Fund Managers’ Roundtable.
Let me first tell you an anecdote:
“In the 1930s, out of power and financially strapped, Churchill taught a lecture course at
The class gasped. Churchill, obviously relishing the moment, pointed at a young woman in the tenth row. “What’s the answer?” he demanded.
The woman flushed and replied, “Well, obviously it’s the male sexual organ.”
Wrong!” said Churchill. “Who knows the correct answer?”
Another woman raised her hand. “The right answer is that it’s the pupil of the human eye, which expands to twelve times its normal size when exposed to darkness.”
“Of course!” exclaimed Churchill, and he turned back to the unfortunate first woman. “Young lady,” he said, “I have three things to say to you. First, you didn’t do the homework. Second, you have a dirty mind, and third, you are doomed to a life of excessive expectations.”
The reason why I recounted that story is that the key to successful investing is expectations and you can make money and much more than 12 times when your expectations differ materially from those embedded in market prices and you are right.
And you increase your chances of being right when you have an edge.
Bill Miller, the market beating portfolio manager of Legg Mason, wrote that there are three sources of competitive advantages that an investor can develop: informational, analytical or behavioral.
Informational is when you know something material that others don’t. It is extremely difficult to get that edge in large, well researched stocks unless you act unethically on inside information. But small and midcap stocks, which are outside the radar of most brokerage houses, offer possibilities of developing that edge.
Take the second sort of edge: Analytical advantages come from taking publicly available information and processing and assessing it differently from others. And finally, there is the behavioral edge and there are ways to systematically exploit human behavior in the financial markets. I don’t want to go into prospect theory, support theory, cognitive psychology and neuroscience but behavioral finance and investor psychology are as important as understanding financial statements and valuation metrics.
Capital Ideas Online has promoted Capital Ideas Club. You may be seeing the banners and pamphlets of Capital Ideas Club and may well wonder why you need a CIC when you have CCI in
Capital Ideas Club is an exclusive investment community where the best value investment ideas are presented and reviewed by other expert investors.
I urge you to apply for membership because this will be a great way to become a better investor and analyst as your ideas will be shared in an online forum with other expert value investors.
Membership is free, but will be limited to only a few sophisticated investors who will join based on the quality of their investment idea. Just 200 members will qualify for the Club.
The admission will be granted only after a careful screening of candidates.
Each person applying must submit an application at www.capitalideasclub.com that includes a current investment recommendation.
The quality of the applicant's investment analysis and research will be the main criteria for admission. Entrants submitting the best ideas will be accepted as members of the Capital Ideas Club and will be eligible for a quarterly cash prize. Let me emphasize that I suspect that for members the main motivation will be the thrill of playing the game and not the spoils.
There will be a 45 day delayed Access to ideas posted by members for non-members and only members will be eligible to post ideas.
With the investment community and your blessings and support, I would like to today formally launch the Capital Ideas Club.
We had released the book “
Capitalideasonline.com would like to thank the Bombay Stock Exchange for allowing the use of this Convention Hall and the help and support they gave us for today’s evening. In particular, I would like to thank Mr. Kalyan Bose, Mr. Jeevan Sakpal, Ms. Saheli Chatterjee and Mr. Balasubramanian. Capitalideasonline.com would like to thank Reliance Mutual Fund for sponsoring the event and Emkay Shares and Stock Brokers Limited for being the associate sponsor and Business Standard for being the media partner. I would also like to thank Mr. Rakesh Jhunjhunwala for his support.
Capitalideasonline.com would like to thank the members of the today’s panel Mr. Ramdeo Agrawal, Mr. Anoop Bhaskar, Mr. Sanjoy Bhattacharyya, Mr. Prashant Jain, Mr. Rakesh Jhunjhunwala, Mr. Madhusudan Kela, and the moderator Mr. Ramesh Damani for taking time out to be with us today.
I would like thank Mr. Chetan Ahya of JM Morgan Stanley, who looks after
I would like to thank all the members behind Capital Ideas Online – Mr. Navin Agrawal, Mr. R N Bhaskar, Mr. Manish Chokhani, Mr. Ramesh Damani, Mr. Jamshed Desai, Mr. Bharat Shah, Mr. Utpal Sheth and Mr. Avinash Wadhwa. Above all I would like to acknowledge the contribution made by Mr. Chandrakantbhai Sampat and his guiding values.
For making Capital Ideas Club possible I would like to thank Mr Bhavya Jain for his untiring effort and guidance. I would like to also thank Mr. Mayank Sharma.
I would like to thank Mr. Ramesh Wadhwa and Mr. Ravi Wadhwa for going well beyond the call of duty to make this evening a success. I would like to thank my wife, Sheila for all the work she put in behind the scenes. I would also like to thank Praveen Parola for the effort he has put in.
Value investors often refer to short-term price movements as noise. May I request you not to add to the noise by switching off your mobile phones.
It is a pleasant duty for me to hand over the remaining part of the evening to the wizard behind the wizards of
Rameshji has been a member of the Bombay Stock Exchange for over a decade and a half. He is probably the most listened to financial commentator. He is one of the
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
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
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
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
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
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:
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
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
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
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. The panelists have a vested interest in the recommendations they are making. Moreover the panelists may change their views on the stock recommendation at any point and therefore investors are requested to do their own homework before acting on this advice. 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 (
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 (
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 (
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
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
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
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
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
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 
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
And there are signs that
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
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
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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