Bulk Deals to Watch

06-MAR-2007,KERNEX,Kernex Microsystems (Indi,ENAM INVESTMENT SERVICES PVT. LTD.,BUY,125000,138.00,-
06-MAR-2007,MTNL,Maha Tel Nigam Ltd.,MORGAN STANLEY DEAN WITTER MAURITIUS COMPANY,BUY,2200000,139.13,-
06-MAR-2007,RENUKA,Shree Renuka Sugars Limit,MORGAN STANLEY DEAN WRITTER MAURITIUS LTD,BUY,123000,311.78,-
06-MAR-2007,SRF,SRF Ltd.,FIDELITY MANAGEMENT AND RESEARCH COMPANY,SELL,515000,125.14,-

India's budget

More spending on education and health

India's budget, unveiled on February 28th, was low on structural reform but high on spending that will aid the economy's long-term prospects. The finance minister, P. Chidambaram, has used the backdrop of very strong economic growth to invest heavily in education and health—essential if India is to make use of the much-talked-about "demographic dividend" of a young and growing labour force. He also plans to invest heavily in rural infrastructure, which again bodes well for long-term development. With worries over inflation grabbing the headlines, the budget also includes some anti-inflationary measures--although the budget is in no way counter-cyclical as these measures will be outweighed by higher public spending. Nonetheless, although the finance minister could certainly have done more to tackle the fiscal deficit, rein in inflation and promote economic reform, he has done nothing that will derail the current high-growth story. The old adage, "If it is not broken, don't fix it," largely applies.

Government spending in the new budget is to increase by 21% to Rs6.81trn (US$154bn), while the government expects its revenue to rise to Rs4.86trn, also up 21%. Including non-debt capital receipts of Rs432bn, this should leave a central fiscal deficit of Rs1.51trn, equivalent to 3.3% of GDP, according to the government's projections. This outcome, if achieved, would be a marked improvement on the government's estimate of 3.7% for fiscal 2006/07. It would also be vastly better than the levels of around 6% of GDP recorded five or six years ago, indicating the encouraging progress India has made in tackling its fiscal problems. That said, the new budget still allocates Rs1.59trn to servicing the interest on its debt—almost a quarter of total government spending—indicating there is more work to be done on fiscal consolidation. Paying interest on government debt limits the room for spending on more productive purposes.

Focus on social spending

In the case of this budget, the term "productive" largely means spending money on agriculture, education and health. If the budget has a unifying theme, it is in what Mr Chidambaram describes as "faster and more inclusive growth". This means creating the conditions to allow more of the population, and not only the urban middle classes, to benefit from the country's rapid economic growth. Although the budget still aims to improve the fiscal position, Mr Chidambaram has largely chosen to spend the expected windfall from rapid growth on social programmes rather than on reducing the deficit and public debt further.

As such, the budget raises total expenditure on education by 34.2% to Rs324bn (US$7.3bn), and that on health and family welfare by 21.9% to Rs153bn. In the Economist Intelligence Unit's view, this is one of the most positive features of the budget, as if implemented properly (always a big if) these measures have the potential to alleviate some of the worst effects of poverty and boost India's long-term economic prospects.

Also prominent—and welcome, in our view—is the budget's focus on the ailing agricultural sector. The government aims to raise average annual growth in the farm sector from an average of 2.3% in the past five years to 4% by 2011/12, the end of its 11th five-year plan. The budget raises substantially allocations for several flagship programmes. The biggest of them, Bharat Nirman, a massive rural-infrastructure programme, is to get 31.6% more funds, bringing spending to Rs246bn. The budget also increases credit to the farm sector by 29%, to Rs2.25trn (US$51bn).

The focus on agriculture has two dimensions. The first is political. The Congress party, which heads the United Progressive Alliance (UPA) coalition government, has to be seen to be doing enough to raise the raise the living standards of the poor to ensure future electoral success. Secondly, the government's aim to raise annual economic growth to 10% by 2011/12 crucially depends on higher growth in the farm sector. Agriculture accounts for around 18% of Indian output, but its importance to the economy is even higher because of its impact on rural incomes and consumption; about two-thirds of India's labour force is employed in the farm sector.

Not so good for business?

The budget has disappointed businesses and stockmarket investors, as it does not cut the corporate tax rate, raises the dividend distribution tax from 12.5% to 15%, and makes employee stock options taxable as fringe benefits. This latter measure is expected to hit information technology (IT) companies. So, too, will a new budget measure that subjects firms in this sector to a "minimum alternate tax", which will increase their effective tax rate.

Because of IT's emblematic status as one of the economy's most dynamic sectors and its importance to the global outsourcing industry, Indian technology firms have typically enjoyed substantial tax exemptions. Although one could justifiably argue that many IT firms are profitable enough to absorb a heavier tax burden—particularly given the need for India to widen its tax base—overall we regard this as a negative feature of the budget. The competitiveness of Indian IT companies is crucial to the country's continued appeal to foreign business. More generally for business, a 2% education "cess" on all taxes is to rise to 3%—good for the government's development objectives outlined above, but not so good for corporate profits.

Despite this, the budget is by no means disastrous for business. Indian firms in many sectors will continue to enjoy a variety of exemptions and other tax breaks that lower their effective tax burdens--indeed, the government claims the effective rate of tax rate actually paid by companies is only 19.2%. Small businesses with a taxable income of Rs10m or less will benefit from the removal of a surcharge on income tax. And the basic rate of corporate income tax has been left unchanged at 30%, although the increase in the education cess lifts its effective rate (before exemptions) to almost 34% from 33.66%. On balance, the budget's position on corporate tax is probably a reasonable compromise for all concerned: the corporate sector can at least console itself with the knowledge that the main income tax rate has not risen further; while from a fiscal point of view it is useful for the government's revenues that tax has not been cut to appease business. India's share of budget revenue to GDP is one of the lowest in Asia, at barely 13%, and the government needs all the revenue it can muster. A tax cut would also have potentially added to inflationary pressures.

Lower duties

Inflation remains a major macroeconomic concern, and one that carries political risks for the UPA coalition as well. The budget includes some notable anti-inflationary measures. It reduces the peak rate of import duty for non-agricultural products from 12.5% to 10%, a move that will help to limit import-led inflation. It cuts customs duties on various items, including plastics, chemicals, fibres and yarn. It also cuts excise duties on petrol and diesel.

Reform-lite

If the budget takes a distinctly long-term view in its focus on education and farming, it largely omits bold structural economic reforms in areas such as privatisation, the labour market and the retail sector. Nor does it seek to remove foreign direct investment caps in insurance and banking.

Of course, this is unsurprising given the reality of coalition politics. The government's economic-reform agenda has often met resistance from the leftist parties on which it relies for political support. The Left Front is partly behind the government's focus on social spending. For example, the budget extends the National Rural Employment Guarantee Scheme (NREGS), a public-works programme introduced under the Congress-led UPA government and supported by the Left Front, from 200 to 330 districts. The budget allocates Rs120bn to the NREGS.

Liberalising reforms are likely to become even more politically unpalatable to the Congress-led coalition as the general election, which must be held by May 2009, gradually approaches. In this context, the 2007/08 budget just announced was arguably the government's best chance before the next election to implement major change. Next year's budget and, if an election has not taken place by then, the following year's will be more heavily overshadowed by pre-election considerations. While the term "inclusive" is certainly an apt description of the government's budget, "missed opportunity" is another phrase that arguably applies.

Indian equity market most expensive after China

FOLLOWING the 2,000-point (14%) correction in the Sensex, the P/E has fallen 18 times the one-year forward earnings. While that may provide some relief to investors, it has reinforced the fact that the Indian equity market is the most expensive emerging market after China.

Even after a 10%-plus correction, the Chinese benchmark index - Shanghai Composite - is currently trading at some 34 times the one-year forward earnings. After the recent bullishness among its industries, Japan’s benchmark index - Nikkei 225 - is trading at 22 times the one-year forward earnings. Little wonder then that money has been flowing out of these markets.

According to EPFR.com data, outflows from India and other emerging markets so far are nearly 50% of their investments into
them. This is significant considering that valuations in India still look stretched in the wake of global weakness and the impact of the Union Budget that is expected to slow down growth for India Inc. “What is not surprising is the fact that profit-booking is expected once markets have reached their potential. But what is surprising is the lack of depth in the emerging markets, including India. A 10% sell-off leads to panic sales,” says an investment manager of a UK-based hedge fund, currently operating out of Mauritius, with a $100 million-plus India fund.

The depth of the Indian market has been questioned by many FIIs. Even though the Indian equity market has seen a correction in line with other emerging markets, the spiralling effect is scary. Part of the reason is because small investors, who are more like speculators, invest directly into the equity market.

The Indian benchmark index is currently trading at 18 times the one-year forward earnings. And the general consensus among FIIs and hedge funds is the index will continue to give a 200-300 basis points (2-3%) premium for the India growth story. A 10-year study shows that the benchmark index trades at 14.5 times the one-year forward earnings. Accommodating the 2-3% premium, it looks like valuations are getting back to normal.

But things seem to be changing fast considering that the risk appetite for emerging equities has declined. “Even from these levels, there is more possibility of a downside than an upside,” says one of the top three FIIs with a large investment portfolio in India and other emerging markets.

Yet taking a contrarian view, there are some who believe a further correction would be the right time to buy the ‘India story’. A Morgan Stanley analyst, based out of New York, states: “My view remains the same as reported in our research note. This is an extended bull market, and a correction is long overdue. So, we would buy after a 10-12% correction in the Indian equity market.”

A mixed bag

While the Union Budget 2007-08 has been positive for rural development and inflation control, it has done little for industry.

Finance Minister P Chidambaram has left no stone unturned to promote investment in agriculture and education, but he hasn’t been as friendly to industry. In order to control inflation, he has cut excise duty on petrol and diesel and raised excise on cement.

The stock markets found nothing to cheer about and the Sensex tanked 4 per cent on Budget day unfortunately timed with a global sell-off, and closed on Friday 4.4 per cent lower than the pre-Budget session.

Says Dinesh Thakkar, CMD, Angel Broking, “The overall direction of the market remains neutral as far as the impact of the Budget is concerned.”

There are various reasons affecting the sentiment. First, dividend distribution tax and education cess have been raised, which will adversely affect the profitability of all companies, though to a small extent.

Further, the Budget has introduced minimum alternate tax on all exporting companies including the IT sector, thus impacting margins of software exporters.

Also, the Budget has been harsh on companies that issue employee stock options by bringing it under fringe benefit tax. Construction companies have been denied Section 80IA benefits.

However there is a silver lining. The government’s focus on boosting the rural economy and infrastructure will help sectors like power and power equipment, FMCG, tractor, textiles and education-based sectors.

Let us take a look at what broking firms have to say about the sectors and stocks that have been favoured or knocked out by the Union Budget 2007-08.

Agriculture-related: Positive Proposals

An additional 900,000 hectares irrigation will be created. The investment will go up from Rs 7,100 crore to Rs 11,000 crore. Higher capital allocation and farm credit of Rs 2,25,000 crore to improve productivity of agriculture area and availability of better seeds. The reduction of custom duty on sunflower oil from 65 per cent to 50 per cent as well as the removal of 4 per cent countervailing duty.

Impact Broking firms feel that the increased allocation on agriculture activity will help companies operating in agriculture equipment and pump manufacturer. Jain Irrigation, which makes irrigation implements such as drip irrigation system, sprinklers, valves and water filters will be the major beneficiary. There is also good news for Kirloskar Brothers, which is a leading player in pumps. Analysts feel there is an increased focus on augmenting the productivity which will help companies operating in seeds and pesticides in the long run. Monsanto India manufactures agro chemicals and hybrid seeds. The company is well-placed within the crop protection industry and its focus on herbicides and hybrid seeds will give it more advantage to capitalise on agriculture drive. ASK Raymond James feels that the removal of specialised duty and reduction of customs duty on sunflower oil will modestly benefit edible oil companies. It would have a positive impact on Ruchi Soya, which is leading player in branded edible oil. Further, the withdrawal of the excise on food processing and the reduction of the duty on plastic will have positive impact for the company.

Cement: Negative Proposals The Budget has introduced a graded excise duty structure. For cement bags sold over Rs 190 per 50 kg bag (retail price), the excise duty stands reduced from Rs 408 per tonne to Rs 350. For cement sold above the Rs 190 per bag mark, excise has been increased to Rs 600 per tonne.

Impact While cement companies have already hiked prices by Rs 12 per bag and are passing on the increased excise to consumers, broking firms feel that the reduced differential with import prices as also an anticipation of future government intervention may restrain future price hikes. Overall, while companies may pass on the rise in costs and hence sustain margins in the near term, the finance minister’s proposal is largely seen as a negative for investor sentiment. With a pre-budget retail price of around Rs 240 and realisations of around Rs 205, Gujarat Ambuja has very little scope for further price increases given the thin differentials with imported cement in its key western market. This was also reflected in its fall of over 7.7 per cent in what was the greatest post-Budget correction among frontline cement stocks. But on the upside the fallen prices have made its valuations more attractive at about 12 times its estimated FY08 earnings. ACC with its pan India presence, and a pre-Budget retail price of Rs 230 per bag should have more room for increasing prices. The recent Rs 12 hike should impart more sustainability to its margins especially at a time when it is undertaking an expansion of its capacity by 35 per cent over the next three years to 27 million tonne. At about 13.7 times its estimated FY08 earnings, however, the stock is expensive compared to most of its peers. South-based companies like India Cements and Madras Cements will be less impacted by the Budget measure as retail prices for these companies would remain comfortable at Rs 215-225 per bag even after the hike of Rs 12. At about 7 times and 8 times their estimated FY08 earnings respectively, India Cements and Madras Cements look quite an attractive option. CONCRETE LOSS Company name Pre-Budget price (Rs) Post-Budget price (Rs) % chg Price as on March 2 (Rs) P/E (FY08E) ACC 961.05 900.05 -6.35 855.55 13.66 Gujarat Ambuja 125.70 115.95 -7.76 109.60 12.30 Ultra Tech 946.40 891.10 -5.84 872.00 12.00 Shree Cement 1235.30 1147.25 -7.13 1190.00 9.30 India Cements 191.85 179.05 -6.67 168.95 7.25 Overall, analysts are still pessimistic about the cement sector and expect a further correction.

Construction: Negative Proposals Section 80IA withdrawn for companies with retrospective effect Withdrawal of tax exemption for real estate developers under section 80IB Provision for National Highway Development Programme (NHDP) increased Corpus of Rural Infrastructure Development Fund (RIDF)-XIII raised Separate window for rural roads to continue Capex under the Bharat Nirman infrastructure project hiked by 32 per cent

Impact Broking firms believe that the removal of section 80IA benefit will have a negative impact on EPS and future cash flows of construction companies besides the retrospective effect of eating into FY07 profits significantly. ASK Raymond James estimated earnings of companies to decline in the region of 10-25 per cent. According to Emkay Shares and Stock Brokers, the effective tax rates will increase from the current 15-20 per cent to 30 per cent. Accordingly, it estimates increased cash outflows for past liabilities for companies like HCC (Rs 26 crore), IVRCL (Rs 43 crore), Nagarjuna (Rs 35 crore) and Patel Engineering (Rs 38 crore). CRUMBLING STRUCTURE Company name Pre-Budget price (Rs) Post-Budget price (Rs) % chg Price as on March 2 (Rs) P/E (FY08E) Nagarjuna Constrcution 193.45 155.90 -19.41 159.00 15.90 IVRCL 344.45 290.65 -15.62 301.60 24.13 Hindustan Construction 122.00 102.50 -15.98 107.90 23.98 Patel Engineering 385.25 347.55 -9.79 312.60 15.10 Madhucon Projects 235.25 200.90 -14.60 213.60 11.55 Broking firms, however, believe that the government’s thrust on infrastructure spending by way of higher allocation to schemes like Bharat Nirman, NHDP and RIDF will lead to more construction activities and thus high order flows and earnings visibility

FMCG: Neutral Proposals Specific excise duty on cigarettes was increased by 5 per cent. Excise duty on biscuits priced below Rs 50 per kg, and instant food mixes reduced from 8 per cent to nil. Customs duty on food processing machinery reduced from 7.5 per cent to 5 per cent. Customs duty reduced from 12.5 per cent to 10 per cent and from 12.5 per cent to 7.5 per cent for chemicals. Central sales tax (CST) cut from 4 per cent to 3 per cent.

Impact Man Financial and Sharekhan see the reductions in peak customs duty and excise duty as a positive for a host of industries, such as food processing, personal care products, footwear, ceramics, paints, and watch industry. The hike in specific duty on cigarettes does not seem to have any impact on companies as the increase will be passed on to the consumer, according to Kotak Securities. Morgan Stanley Research finds the 1 per cent education cess increase to be negative for all FMCG companies, while with a reduction in customs duty on food processing machinery it expects FMCG companies to expand operations. A POSITIVE MIX Company name Pre-Budget price (Rs) Post-Budget price (Rs) % chg Price as on March 2 (Rs) P/E (FY08E) ITC 165.20 171.85 4.03 166.50 19.41 Nestle 941.75 958.35 1.76 935.05 22.28 Britania Industries 1257.35 1235.80 -1.71 1300.00 21.47 HLL 185.30 176.15 -4.94 178.85 14.73 Colgate Palmolive 319.75 321.40 0.52 307.00 18.31 ASK Raymond James sees input costs of FMCG companies reducing modestly due to low packaging and material costs.

Information Technology: Negative Proposals Extension of minimum alternate tax (MAT) to income in respect of which deduction has been claimed under sections 10A and 10B. Inclusion of employee stock options (ESOPs) in fringe benefit tax (FBT) ambit. Service Tax of 12 per cent applicable on commercially rented or leased immovable property.

Impact Morgan Stanley Research and Deutsche Bank expect cash flows of software service firms to be impacted negatively but reported profits to remain neutral. Brokerage firms like Emkay and Sharekhan expect the effective tax rate to go up by 4-5 per cent, margins to decline by 1.5-4 per cent and EPS to decline by 1.5-5 per cent as a result of MAT. SOFTWARE, HARD TAX Company name Pre-Budget price (Rs) Post-Budget price (Rs) % chg Price as on March 2 (Rs) P/E (FY08E) Infosys 2187.85 2078.35 -5.00 2093.50 17.60 TCS 1265.20 1188.45 -6.07 1202.10 29.37 Wipro 605.25 560.85 -7.34 574.20 22.03 Satyam 450.45 412.50 -8.42 427.30 18.03 HCL Technologies 660.40 596.10 -9.74 631.95 16.89 Sharekhan finds the inclusion of ESOPs in FBT net a negative as stock options as an instrument to retain talent would turn unattractive. Deutsche Bank expects a less than 1 per cent negative impact on FY08 expected EPS of service tax on lease rentals for software companies.

Metals: Neutral Proposals Removal of import duty on coking coal of any ash content Export duty of Rs 300 a tonne on iron ore and Rs 2000 a tonne on chrome ore exports Halving of import duty on defective steel to 10 per cent

Impact Exemption of customs duty on coking coal will have a neutral effect as players import coking coal with low ash content, which attracts zero import duty and coking coal forms a small portion of revenues of manufacturers. However, according to Brics Securities, the key beneficiaries would be Tata Steel and SAIL. Export duty on iron ore will have a marginal impact as there are not many iron ore exporters except Sesa Goa and NMDC. According to Kotak Securities, reduction in customs duty on defective steel will benefit those companies with electric furnaces and which use steel scrap as feedstock for steel like Bhushan Steel and Mukand.

Oil and Petrochemical: Positive/Marginally negative Proposals Cut in excise duty on petrol and diesel from around 8 per cent to around 6 per cent Extension of 80IA benefits (infrastructure status) to pipelines Cut in central sales tax from 4 per cent to 3 per cent Cut in customs duty on polyester and polyester intermediaries from 10 per cent to 7.5 per cent

Impact Analysts believe that the cut in excise on petrol and diesel should bring down losses on retail sales and benefit oil marketing companies like HPCL,BPCL and IOC. Moreover, with their price to earnings ratio ranging between 6.9-8 times their estimated FY08 earnings, the OMC stocks look quite attractive. RIL took a hit of nearly 3.6 per cent in the post-Budget correction as the cut in duties on polyester intermediaries was expected to have a marginally negative impact on integrated players. Kotak Securities feels that the extension of 80IA will positively impact companies like GAIL, Gujarat State Petronet and RIL in the form of tax benefits and lower cost of borrowing OIL’S WELL Company name Pre-Budget price (Rs) Post-Budget price (Rs) % chg Price as on March 2 (Rs) P/E (FY08E) HPCL 274.75 270.80 -1.44 263.30 6.95 BPCL 309.60 310.95 0.44 299.85 7.80 IOC 418.40 413.95 -1.06 407.85 7.97 RIL 1404.95 1354.60 -3.58 1317.35 18.20 ONGC 817.35 790.60 -3.27 800.00 8.75 Sharekhan feels that the cut in CST would be a positive for purely refining companies like Chennai Petroleum, which faces under-recoveries on CST when selling outside the state. Based on consensus estimates the stock trades at an attractive 5 times its estimated FY08 earnings.

Pharmaceuticals: Positive Proposals Allocation of funds to AIDS control to the order of Rs 969 crore. Increase in allocation to polio eradication to Rs 1.3 crore. Tax incentives for Research and development expenditure extended for another five years up to March 2012. Fringe benefit tax on free samples has been excluded. Exemption of service tax for clinical trials.

Impact Broking firms feel that the AIDS control focus should benefit companies with strong manufacturing capabilities like Ranbaxy, Cipla, Wockhardt, Aurobindo and Novartis. Pharma giant Ranbaxy fell over 4 per cent on budget day. At 16 times estimated FY08 earnings, valuations however remain reasonable, especially given that it would be one of the chief beneficiaries from the Budget proposals like extension of R&D benefits and greater focus on AIDS control. While Sun Pharma’s valuations appear at a significant premium to other major players, some analysts have also factored in a slightly negative impact accruing from the extension of MAT. The company could, however, benefit from the extension of tax benefits on R&D spends. Another beneficiary with a strong R&D focus would be Dr Reddy’s which is valued at about 18 times its estimated FY08 earnings. Analysts believe that the emphasis on polio eradication will benefit with strong capabilities in oral polio vaccines like Panacea Biotech. Sharekhan expects the service tax exemption for clinical trials to benefit companies like Nicholas Piramal, Vimta, Jubilant and Biocon. Nicholas Piramal with a valuation of less than 15 times its estimated FY08 earnings appears attractive as compared to many other frontline peers.

Power: Neutral Proposals Seven more Ultra Mega Power Projects (UMPPs) under process and at least two to be awarded by July 2007 Allowing merchant power plants to be set up by private developers and more private participation in transmission projects Budgetary support for APDRP (Accelerated Power Development and Reforms Project) increased by 23 per cent to Rs 800 crore Allocation to Rajiv Gandhi Grameen Vidyutikaran Yojana (RGGVY) increased by 33 per cent to Rs.3,983 crore

Impact Broking firms feel that the UMPPs and private participation of transmission will lead to higher demand for power equipment. While Emkay is positive on BHEL and Siemens, ASK Raymond James is optimistic about Crompton Greaves and ABB. Besides it will also benefit companies involved in power generation (NTPC, Tata Power and Reliance Energy). Analysts feel that higher allocation to schemes like APDRP and RGGVY will speed up transmission and distribution activities and hence benefit transmission (KEC International, Jyoti Structures, Kalpataru) and transformer manufacturers (like EMCO and Indotech).

Textiles: Positive Proposals Provision for integrated textiles parks increased by 2.2 times to Rs 425 crore Technology Upgradation Fund (TUF) scheme extended with a higher provision of Rs 911 crore Duty cut from 10 per cent to 7.5 per cent on polyester yarn, fabric and intermediates like PTA, DMT and MEG

Impact Kotak Securities feels that allocation for integrated textiles parks will lead to better technology and efficiency in the textile sector leading to higher exports and increasing profitability. Broking firms believe that the increased allocation and extension of TUF scheme will lead to further investments in the sector. Accordingly it will also lead to higher demand for machinery, which is positive for Lakshmi Machine Works. STRONG FABRIC Company name Pre-Budget price (Rs) Post-Budget price (Rs) % chg Price as on March 2 (Rs) P/E (FY08E) JBF Industries 111.10 108.70 -2.16 108.00 3.90 Lakshmi Machine Works 3082.15 3010.75 -2.32 3107.00 16.10 Rajasthan Spinning 97.30 94.00 -3.39 94.00 3.62 GHCL 167.10 165.25 -1.11 165.00 8.25 While analysts feel that the duty cut on PTA and MEG will reduce raw material costs of polyester manufacturers, Emkay estimates that PSF and VSF prices will come down. The reduced customs duty is positive for companies like Rajasthan Spinning, Banswara Syntex, JBF Industries and to some extent Indo Rama Synthetics.

All fall down

If anyone needed a lesson in how integrated global markets have become, the last four weeks should have provided one that will not be forgotten easily—including in India, where the Sensex has fallen 16 per cent since February 9. A small trigger in China has led to a global contagion of correction across global equity markets. As Stephen Roach, chief economist at Morgan Stanley, said in a Los Angeles Times column, “Like nearly everything else in the world these days, it now appears that global stock market corrections are made in China.”

A week ago, today, the Chinese stock market fell 8.84 per cent because there were concerns that the government was going to clamp down on loans that were funding stock market investments. While this caused some bearishness, there were other triggers as well. What is known as the Japanese yen carry trade—borrowing cheap yen to invest for better returns in other currency markets and pocketing the difference—has been in the news as investors are turning risk-averse, unwinding riskier assets and closing out such trades. The US has had its own problems—mortgage defaults are on the rise, consumer confidence is declining and concerns about a recession have pushed down US markets. This last development increased concerns in markets like Japan and Europe, and the domino effect continued. In India, the foreign institutional investors (FIIs) triggered selling, with local players participating amid the global meltdown and an uninspiring Budget. While there may be many proximate causes, the larger reality is that markets all over the world had become expensive and investors were not ready to take more risk.

This is the third consecutive stock market correction in India which has been part of a global phenomenon. In May 2006, the choppy correction began with rising crude oil and other commodity prices, which meant that there would be cost-push inflation. That correction ended when the US Federal Reserve announced that it would stop hiking interest rates. In the correction that began in October 2005, the trigger was again global investors withdrawing funds from over-heated markets—only for them to come right back a few weeks later.

Where does this leave India’s markets? As always, market pundits have started talking about the suddenly lower risk appetite for equities, and why investors should look at equity risk premium once again. The fact is that Indian stocks had become expensive. The Sensex was trading at a trailing price-earning multiple of 23.25 on January 15; that number has now declined to about 19.1. As P/Es go, even that is considered high if one’s worldview is pessimistic. If the US slips into a slowdown or recession, it will take a large part of the world with it. Even if India is an island of strong economic growth within, it has much closer links with the rest of the world economy than was the case even a decade ago. Also, institutional investors may want to stay with safety. A lot of professional investors have also been pointing out that most stocks have not recovered their losses 10 months ago, and that a handful of stocks is propping up the Sensex.

It is possible that some value buying will emerge from the sidelines—be it by long-term institutional investors or their domestic counterparts. But the real bet is on whether the Indian economy is slowing down, and if so then by how much. Also, what impact will that have on corporate earnings? The answers will not be available for another month.

FII: -Rs 313 Cr, MF +Rs 192 Cr

FII Gross purchases Rs 2863 Cr, Gross Sellers 3176 Cr, Net Sellers Rs 312.7 Cr.
MF Gross Purchases Rs 519.50 Cr Gross Sellers Rs 327.63 Cr Net Buyers Rs 191 Cr.

Our View:

Thats a small FII number. The indicated was much bigger sale figure as per provisional numbers given out yesterday. The fiasco is that the Friday provisional FII figure came in negative and the final figure was actually positive, Really it has shaken the confidence of the investors.. However overall with more confidence in markets.. one may see some recovery and value buying accompanied by short covering. on the back of not so negative FII sale figure. Todays provisional figure of -489 Cr also is disheartening.. so expect selling on highs

Close: Bounce back on global cues !

Markets started off strong at the start of the trading session on the back of a strongly positive Asia and the fact that investors felt that the selling had been overdone. However it was a volartile session as Sensex gave up almost all of its 300 points gain by mid day only to see value buying in the later part of the session. 'Volatile' is how one would describe the markets. Buying was witnessed in the IT counters on talks that the Fringe Benefit Tax on ESOP's could be done away with. The chances of removal are not very strong taking into consideration the reason for which it was implemented by the Finance Minister in the recent union Budget though the size of this tax could be a small one where information is yet awaited. Buying was also seen in mid caps along with Cement stocks at lower levels. It was on the global front that the performance was extremely supportive as the Asian Indices ended in dreen and the European ones too saw strength right from the word go.

Ashok Leyland was also in demand after its sales numbers. There were talks that it was a likely winner for Punjab Tractor Ltd. The Stock ended up by 5%. Jet continued to trade at higher prices to end up by 3% after there was a change in Govt Policy regarding Air Port charges. The change in the policy gave full Service Providers like Jet a competitive against Low cost airlines that were giving them tough competition from the pricing point of view.

Sensex closed up by 282 points to end at 12697.09. It was helped up by gains in Wipro (580.75,+8 percent), Infosys (2116.3,+5 percent), ACC (854.4,+5 percent), Satyam (433.95,+5 percent) and Bharti Tele (718.45,+4 percent). Restricting the gains were Hindalco (130.1,-3 percent), NTPC (133.1,-3 percent), Hero Honda (666.85,-3 percent), Tata Motors (726.3,-1 percent) and HLL (171.4,-1 percent).

Bharat Petroleum Corporation Ltd (BPCL) ended up by 5% after it announced its plans to start an oil-trading arm in Singapore, in an effort to become a price maker and to capture export markets as it boosts refining capacity. Currently, the Indian refining capacity of 135 m metric tonne (MMT) is outstripping domestic demand by around 20-25 MMT, thus leading to increasing exports by Indian companies.

There was not much impact on Indian Oil Corporatrion (IOC) after there was a fire reported in its refinery in Assam. Refinery which has the capacity to process 20,000 barrels of crude per day is expected to be shut for 3-4 days. More information on this issue is expected from the company by late Tuesday. Despite that Stock was up by almost a percent for the day. All the oil refiners were helped by the fact that crude slipped from $ 62 / barrel levels to under $ 60 / barrel. We continue to avoid these politically sensitive stocks.

Technically Speaking: Decline outnumbered the Advances for the day as there were 1465 declines against 1105 advances. Trading session generated a volume of Rs. 3,807 cr. Resistance for the day ranged between 12858-12976 levels while support was at 12525-12309 levels. Sensex has closed at day high. We might open higher tomorrow, which could again attract selling. Need to watch the levels of 12840 and 13250 on the higher side, whereas 12450 and 12300 are key levels as supports.

KRC - Investment Ideas 6 March

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Citigroup - ICICI Bank (ICBK.BO): Buy: Subsidiary Unlock

• Spinning off Insurance and AMC into a listable entity — ICICI will be spinning off its holdings in Life Insurance, General Insurance and Asset Management businesses into a 100%-owned holding company. The transfer – Rs19.5b (9% of capital) of its investment will be at book value. Management suggests a listing timeframe of 6-9 months, within regulatory approvals needed for this structure.
• Objectives: Raise and generate capital, crystalize value, management continuity — Primary drivers for this move appear to be: (1) creating structure to generate capital for and from these business and avoid regulatory roadblocks with the current holding structure; (2) better recognize value of its investments through a market-priced holding; (3) ensure management continuity – Ms Kalpana Morporia, Joint MD, slated to retire in mid-2007, will now be CEO of this entity.
• Capital self-sufficiency for the parent, the big gain — This structuring and expected capital raising thereafter should bring capital self-sufficiency for the parent, for the medium term. We see this as a positive for ICBK valuations; frequent access to the capital markets has, in our view, been a drag on ROEs, and an overhang on valuations. This should now no longer be the case.
• How much is the subsidiary business worth? — The value of the subsidiaries has not been ignored by the market; the issue is how much is recognized in ICBK’s stock price. Our estimates suggest a value of Rs177 per share for the 3 entities (Rs160 for Life Insurance). This translates into about 21% of market value or about 16% of our target price of Rs1,125.

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Sharekhan Daring Derivatives for March 06, 2007

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Kotak - ENIL

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Thanks Dunbaka

Sharekhan Highnoon dated March 06, 2007

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Anand Rathi - Daily Fundamental Snippets - Mar 6

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IT pivotals, RIL provide springboard for the 282-point rebound

The market recouped a portion of the recent heavy losses, tracking a recovery across Asian markets. Short-covering in derivatives also played a part in today's remarkable upsurge. IT, telecom shares and leading banks edged higher. An upmove in index heavyweight Reliance Industries (RIL) provided the much-needed springboard for the sharp rebound.

The 30-share BSE Sensex jumped 282.05 points (2.2%), to settle at 12,697.09. A bout of volatility struck in afternoon trade, and the market was firm till then. A sudden sell-off later had pulled the Sensex down up to 12,427.13 by 12:56 IST, just 12.09 points higher for the day.

The S&P CNX Nifty gained 79.15 points (2.2%), to settle at 3,655.65. The Nifty March 2007 futures were at 3,644 compared to the spot Nifty closing of 3655.65.

The BSE clocked a turnover of Rs 3807 crore compared to Monday (5 March 2007)’ s Rs 3996 crore. Turnover on NSE’s futures & options segment rose to Rs 35406.27 crore from Monday’s Rs 33865.52 crore.

Asian shares recuperated from the recent steep losses, as investors struck bargains. Key benchmark indices in the Asian region rose 1% to 2%. Asian markets had declined sharply over the past few days due to worries pertaining to the US economy, volatile markets in China, and more frequently, the unwinding of yen carry trades, or when investors borrow the yen to take advantage of low interest rates in Japan, and then invest in higher-yielding assets.

As per provisional data, FIIs were net sellers to the tune of Rs 489.57 crore today. FIIs were net sellers to the tune of Rs 312.70 crore on Monday (5 March 2007), the day when the Sensex had tumbled 471 points. FIIs were net buyers to the tune of Rs 324.90 crore on Friday (2 March 2007), the day when the Sensex had lost 273 points.

Today recovery was not supported by the market-breadth. Against 1,465 shares declining on BSE, 1,105 shares declined. Just 50 shares were unchanged. Losers outpaced gainers by a ratio of 1.32:1. The BSE Small-Cap Index lost 11.23 points (0.18%), to settle at 6,259.52. BSE Mid-Cap Index rose 25.05 points (0.48%), to 5,219.45.

Among sectoral indices, BSE IT Index was the top gainer in percentage terms. It surged 231.64 points (4.9%), to 4,961.94. The BSE Oil & Gas Index surged 131.25 points (2.2%), to 6,067.22. The banking benchmark, BSE Bankex, advanced 132.24 points (2.1%), to 6,353.28. Some indices did decline. The BSE Metal Index dropped 34.37 points (0.4%), to 8,002.12. The BSE FMCG Index shed 1.73 points (0.1%), to 1,699.63.

Wipro led the rally in IT shares. The Wipro stock jumped 8% to Rs 582. IT bellwether Infosys gained 6% to Rs 2130, Satyam Computer gained 5% to Rs 435.50 and TCS advanced 3% to Rs 1198. The recent easing of the rupee triggered renewed buying for IT shares. The rupee’s fall will ease pressure on their profit-margins. The IT sector derives a lion’s share of its revenue in dollars. In early trade, the Indian rupee was at 44.550/560 per dollar, extending its move off Monday's trough of 44.695, the lowest since 21 December 2006. It had closed at 44.625/640 on Monday.

Reliance Industries (RIL) rose 3.5% to Rs 1304.05. The stock gained on bargain-hunting after a recent steep fall in the counter. RIL enjoys 11.1% weightage in the BSE Sensex.

ICICI Bank surged 4% to Rs 854. The stock enjoys 9.3% weightage in the barometer Sensex. ICICI Bank said on Saturday (2 March 2007) it plans to transfer investments in four subsidiaries to a new wholly-owned unit, ICICI Holdings, and may list the unit next year.

Cement shares came off the lower level in volatile trade. ACC surged 5.9% to Rs 861.50, Grasim gained 1.4% to Rs 2133 and Gujarat Ambuja Cements gained 1.7% to Rs 113.80. Steel shares recovered from an intra-day decline. State-run Steel Authority of India advanced 1.2% to Rs 98.20, off the session’s low of Rs 91.50. Tata Steel ended flat at Rs 421, off the session’s low of Rs 404.55.

Steel and cement shares had declined over the past few days with the government taking steps to rein in prices to combat inflation. Steel makers on Monday decided to rollback Rs 300 - Rs 700 per tonne price hike in reinforced steel. Producers have also agreed to cut prices of hot rolled coils by Rs 500 a tonne. At least two steel makers, Essar Steel and Tata Steel, had raised the price of hot rolled coils by Rs 1,000 per tonne on 1 March 2007, in line with international prices.

However, cement makers refused to roll-back a price hike, executed post-Budget, following an increase in excise duty on cement.

Bharti Airtel gained 4.7% to Rs 724. The near-term trigger for the scrip is the number of new subscriptions for February 2007. Bharti Airtel has 5.8% weightage in the Sensex.

L&T rose 3% to Rs 1427. The stock rose on bargain-hunting after a recent steep drop. L&T has benefited from the government’s thrust on infrastructure in the Union Budget for the next fiscal.

NTPC dropped nearly 3% to Rs 132.80. The board of NTPC approved a proposal for the company's foray into nuclear power generation.

Ashok Leyland jumped 5% to Rs 38.50. The company said on Tuesday vehicle sales in February rose 33% to 8,036 units from 6,038 units a year ago. Domestic sales rose 33% to 7,353 units from 5,517 units a year earlier, while exports climbed 31% to 683 from 521 units.

Aban Offshore rose 2% to Rs 1815. The company said on Tuesday its subsidiary had secured a drilling contract worth $123 million from affiliates of Canada's Addax Petroleum and China's Sinopec.

Gujarat Narmada Valley Fertilizers rose nearly 2% to Rs 95.70. As per reports, the company plans to invest Rs 750 crore in 2007/08 to convert its urea plant feedstock to natural gas, in order to improve efficiency.

Hotel Leelaventure lost nearly 3% to Rs 52. The company said on Tuesday its board would meet on 14 March 2007, to consider raising up to $110 million through various means, including foreign currency convertible bonds (FCCBs).

Gemini Communication gained 0.3% to Rs 370. The company said on Tuesday it had bagged an order worth Rs 75 crore from a state utility for computerising its collection centres.

Orchid Chemicals was volatile. The stock lost 0.3% to Rs 232. It staged a strong intra-day rebound from a 12.3% fall. The company today said its board had forfeited 10% of the share price amount paid by R Vijayalakshmi (promoter) and Dr M R Girinath (promoter group), aggregating to Rs 8.05 crore, on account of the non-conversion of the 35,60,000 share warrants into equity within the stipulated 18-months from the date of their allotment.

Micro Inks lost 35% to Rs 320. The company today reported a net loss of Rs 16.89 crore in the December 2006 quarter compared to a net profit of Rs 16.07 crore in the December 2005 quarter. Total income for the December 2006 quarter was flat at Rs 242.85 crore (Rs 242.26 crore).

Vivimed Labs lost 0.7% to Rs 178.20. The company today said it has been approved as a global supplier to L'Oreal of France.

Software firm Hexaware Technologies rose 5.1% to Rs 152.65 after 2.5 million shares, or 1.9% of the share capital, changed hands in a block deal on the BSE at Rs 148.

The major gainers among side counters were UTV Software (up 14.8% to Rs 281), MM Forgings (up 13.9% to Rs 170.90), Nalco Chemicals (up 13.7% to Rs 749), Rainbow Papers (up 13% to Rs 88.75), Gwalior Chemicals (up 12.9% to Rs 56.30), Automotive Axles (up 9.9% to Rs 599), GMM Pfaudler (up 9% to Rs 123.40), Rolta India (up 8.6% to Rs 307.50), Glenmark Pharma (up 8% to Rs 545.70), and PTC India (up 8% to Rs 58.80).

Trading on the bourses has been extended by 45 minutes till 16:15 IST due to sun outage. The extended trading hours are till 19 March 2007.

Indian stocks had tumbled in the last few days due to a sell-off in global markets, and also due to disappointment from Union Budget 2007-08 of 28 February 2007. The fall was accentuated as margin calls were triggered. The Sensex had tumbled 541 points on Budget day itself. The market had recovered the next day (on 1 March 2007) on the back of a rally in IT shares under the reckoning that their earnings will be impacted only to a small extent following an increase in tax in the Budget. The Sensex had surged 221 points, to 13,159.55 on 1 March 2007. However, a sell-off had gripped the bourses again, which saw the Sensex hurtle to 12,415.04 on 5 March 2007.

While there was no cut in the 10% corporate surcharge which the market was expecting, the dividend distribution tax was raised to 15% from 12.5%. The Budget also raised direct/indirect taxes for cement, construction and IT sectors.

A section of the market believes that the current fall offers a good buying opportunity for long-term investors. Deutsch Bank in a post-Budget report states that Bhel, Infosys, Punjab National Bank and Grasim (a high-risk, high-return play) are its top picks.

UBS shares a similar view. ‘Post the recent correction, relative valuations don’t appear as expensive as they used to be. India is now the fourth most expensive market in Asia compared to the most expensive status that it used to have about a month back’, it states in its post-Budget report. At current levels, the Sensex trades at 15.8 times 1-year forward EPS – an 8% premium over the long-term average of 14.6, the report adds.

Market ends upbeat, gains 282 points

The market appears to be back on track after slipping for the last two sessions. The market had fallen prey to the weak global indices in the past few sessions and had witnessed a major correction. The Sensex bounced in early trades on the back of the revival of buying triggered by firm Asian markets. The Sensex was up over 300 points amid strong optimism in the morning. However the bourses slipped in mid-morning trades amid considerable volatility and the Sensex shed most of its early gains to touch the day's low of 12427. The market inched up from lower levels on sustained buying in information technology, telecom and front-line stocks to touch the day's high of 12760. The Sensex closed with gains of 282 points at 12697. The Nifty added 79 points to close at 3656.

However, the breadth of the market was negative. Of the 2,578 stocks traded on the BSE, 1,451 stocks declined, 1,089 stocks advanced and 38 stocks ended unchanged. Among the sectoral indices the BSE IT Index advanced 4.90% at 4962 followed by the BSE Teck Index (up 4.07% at 3488), the BSE Oil & Gas Index (up 2.21% at 6067) and the BSE Bankex (up 2.13% at 6353). However, the BSE FMCG Index and the BSE Metal Index closed in negative territory.

Select blue chip stocks notched up significant gains. Wipro soared 8.12% at Rs581, Infosys advanced 5.47% at Rs2,116, ACC climbed 5.07% at Rs854, Satyam Computers surged 4.92% at Rs434, Bharti Airtel gained 3.98% at Rs718, ICICI Bank added 3.77% at Rs852, Reliance Industries jumped 3.19% at Rs1,229, TCS advanced 3.17% at Rs1,199, L&T gained 3.17% at Rs1,428 and SBI was up 3% at Rs991. Among the laggards Hindalco tumbled 3.02% at Rs130, NTPC dropped 2.74% at Rs133 and Hero Honda lost 2.57% at Rs667. Tata Motors, ONGC, HLL, ITC and Tata Steel ended with marginal losses.

The techs were in the limelight. Mphasis soared 5.12% at Rs258, Patni Computers jumped 2.66% at Rs415, HCL Technologies added 2.53% at Rs625, Financial Technologies advanced 1.84% at Rs1,741 and i-Flex solutions ended with moderate gains.

Over 59.87 lakh SAIL shares changed hands on the BSE followed by IDFC (51.85 lakh shares), Reliance Communications (42.50 lakh shares), Gujarat Ambuja Cement (41.32 lakh shares) and NTPC (38.48 lakh shares).

Value-wise Reliance Industries registered a turnover of Rs151 crore on the BSE followed by Reliance Communications (Rs127 crore), Infosys (Rs97 crore), Century Textile (Rs68 crore) and Tata Steel (Rs68 crore).

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Edelweiss - Daily Market Outlook 6th March, 07

Market Snapshot

The Sensex opened with a negative gap of 169 points at 12,717, and continued to drift lower. The selling pressure was so intense that the index tumbled to a low of 12,344. The index, thereafter, attempted to recover but was met with unabated selling at every rise. Heavyweights in particular bore the brunt of the selling today. The Sensex finally ended with a hefty loss of 471 points at 12,415 while the NSE Nifty settled with a loss of 150 points at 3576.5.

The NSE & BSE cash volumes were slightly lower compared to the previous day at INR 85 bn and INR 39 bn. The F&O volumes were a touch higher at INR 332 bn.

Sentiment Indicators

The Implied Volatility (IV) across Nifty strikes has increased to 32-33% levels. The WPCR of Nifty Options decreased to 0.76 compared to the previous day while the 5 day average is 0.90.

Outlook

We expect the market to open with a positive gap in line with its Asian peers. The pullback can take the Nifty up to 1.5% up from the yesterday’s close. Domestic mutual funds are expected to buy select heavy weight stocks at the current levels as most of the fund houses are sitting on significant pool of cash. However, the tone of caution still pervades amongst the investors and they might look to sell off their positions after a rise.

The last couple of days have seen a significant buildup in Nifty OI as compared to SSF OI. This underlines the cautious tone in the market as investors prefer to take positions in broader instruments like the index as a hedge to their long positions.

We recommend the investors to invest in large caps like Infosys, Bharti, RCOM, and ICICI bank since these stocks can lead the pullback rally.

The Nifty took a support at it’s 200 DMA at 3562. Further the Nifty has another support at 3531. In addition to the 200 DMA support, the Nifty has deviated substantially on the downside from its short term moving average. The technical charts indicate a bounce back from the current levels. On the upside the first resistance for Nifty is at 3651 followed by 3726.

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