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Sunday, April 08, 2007

Index Outlook

Sensex (12856.1)

The rather exaggerated response to the RBI's move last Monday stresses the fact that the path of least resistance is currently downwards. Another spunky fight back was required to pull Sensex back from the brink. What is worrying at this juncture is the underperformance of our equity markets vis-à-vis the rest of its global peers in March.

Autos took it on the chin and the BSE auto index is now headed towards its June lows. Healthcare and metals can offer refuge in these choppy times. Mid-cap and small-cap stocks are in a state of hibernation and are best avoided.

A cautionary stance adopted by market participants ahead of the earnings season was reflected in the low volumes recorded last week. FIIs were selling in the cash segment last week. But they have been net sellers in the derivatives segment on days that the market fell and net buyers on the days that the market recovered. Such myopic activity reflects the general air of indecision prevalent in the market.

This ambivalent air is echoed in the daily momentum indicators as well. The weekly momentum is showing the first signs of cracking. The 14-week RSI is positioned at 46 and the 10-week ROC is beginning to move deeper in to the negative. The 10-month ROC will be an interesting oscillator to track over the next two months. It is poised above the zero line. This indicator has not dipped in to the negative since 2003!

Sensex reversed from a low of 12425 last week. The 200-day moving average has once more come in handy in supporting the index. The e-wave counts are unaltered. The medium term outlook stays negative as long as Sensex stays below 13800. The short-term trend is currently sideways. The second wave from the top of 14723 could be evolving in to a flat pattern.

The next minor wave of this flat can take Sensex higher to 13086 or 13495 next week. Any up-move will struggle to cross the 13500-level, as a cluster of technical resistances is present there. The outlook for the week will, however, turn negative if Sensex fails to rally past 13000. The downward targets in this scenario would be at 12359 and then 11992.

Investors can bide their time till the market makes up its mind about Infosys' earnings and guidance. Traders should stick to intra day trades.

Nifty reversed from a low of 3617 last Monday. The recovery thence has not been strong enough to make the short-term outlook positive. Wait for a rally past 3800 before playing long with a target of 3820 and then 3946. Failure to get past 3800 will be a cue to play short with a stop at 3825. The downward targets would be 3594 and then 3486.

The important resistance that investors need to watch out for is around 3900.

Global Cues

Equities across the globe had a splendid week, with many of the indices leaving the woes of February far behind and hitting new highs. The out-performers included many Asian markets such as China, South Korea, Indonesia and Taiwan. India was at the bottom of the heap with Sri Lanka and Pakistan. Neighbourly solidarity!

Nymex light crude could not get past the resistance at $68 and eased down towards $64 on the resolution of the Iran-UK standoff. The long-term average present at $63 would now be closely watched. Fall below this line can take the price to $60.5. The medium term outlook, however, continues to be positive.

Nifty (3752)


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SSKI - Cement Sector - Numbers don't lie

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Trader's Corner

There are many animals that stalk the corridors of the stock markets. Among the four-legged ones, we have the bull, cat, dog and even stags. But none is as dreaded or as unwelcome as the bear. For bears personify periods of great distress when the portfolio whittles down to less than half of its original worth.

The origin of the word `bear' in the stock market parlance can be traced historically to London jobbers who sold bearskins before they had received it, hoping to profit from the difference between the sale price and the near-future purchase price — akin to short-selling today. Investopedia defines a bear market as a prolonged period in which investment prices fall, accompanied by widespread pessimism.

There is no strict limit for the magnitude of fall that should be recorded before a bear phase can be pinpointed. But the consensus veers towards a drop of over 20 per cent from a long-term peak that prolongs for more than two months.

Falls that are less than 20 per cent would then be called a bull market correction. If we go by this definition, the correction of May and June 2006 would meet the percentage-of-drop criteria but it would fall short on the time criteria as it lasted less than two months. The correction witnessed since February 2007 is nearing the two months deadline, but the correction has been only 16 per cent from the peak of 14723.

So going by conventional parameters, we are not in a bear market yet. But even if we are, is it as bad as it is made out to be? As the saying goes, all good things come to an end. Investors should accept the fact that bear markets are part of stock market cycles. The value investors should welcome a bear market when the mood is absolutely pessimistic and the stocks have no takers. The blue chips can be picked up at attractive valuations in such periods of prolonged down trend.

Investors who dislike being in a market when the stock prices keep sliding lower can reduce their exposure to the stock markets and channel their money towards fixed income securities instead. Traders would be the least fazed by the onset of a prolonged down trend. All they would have to do is to change their strategy from buy-in-dips to sell-on rallies

Deciphering the analyst's jargon

When analysts recommend stocks, they often use such terms as `overweight', `underweight', `outperformer', `neutral' etc. I thought that you could only buy, sell or hold a stock. What do these terms mean?

They are often just investment-speak for a recommendation to buy, sell or hold a stock. But there are subtle nuances to each term, which can convey an analyst's opinion on the returns expected or risks attached to a stock.

To start with, analysts may use different terms to convey the same view on a stock. Therefore, an `accumulate' rating on a stock often means the same as a `buy'. A `book profits' suggestion means the same as a simple `sell'. A `book profits' is usually suggested in the place of a sell, when the analyst has already recommended buying at a lower price and the stock has run up subsequently, leaving you with profits. In contrast, a `cut losses' recommendation could be an admission of guilt! The message it sends out is that the earlier `buy' recommendation has not worked and you had better exit while the going is good!

Standard terminology

A `reduce' recommendation asks you to trim your exposure to a specific stock in your portfolio; it is generally a milder form of an unequivocal `sell' (which means that the stock is expected to drop like a stone). Every brokerage or advisory house usually adopts standard terminology to convey its views on stocks and sectors and this is applied uniformly across the stocks and sectors that it covers. A basic `buy', `sell' or `hold' recommendation conveys whether the analyst expects the stock to rise, fall or trade sideways from its current price. A stock may appreciate 15 per cent from a price at which you bought it; but will you be happy with the pick, if the Sensex rises by 20 per cent over the same period? Maybe not. If you own a portfolio of stocks, you would probably like most of your stocks to do better than the market. This is why ratings such as `outperformer', `overweight' or `neutral' are used to add on another layer of information for those who own an entire portfolio — they talk about the stock's performance relative to the market as a whole. An `outperformer' rating on a stock or sector conveys the view that the stock or sector will do better than the market in future. Similarly, an `underperformer' rating suggests that the stock may lag the market.

Do note that you could lose money on a stock that is an `outperformer', as the rating does not convey absolute returns.

If the Sensex slides by 16 per cent over a month, a stock that was battered by only 14 per cent would be an `outperformer'... but you would not have made any money on it! Similarly, `overweight' or `underweight' ratings tell you about the exposure that you should take to a specific stock or sector in your portfolio, relative to an index.

`Neutral' rating

If an analyst puts an `overweight' rating on Reliance Industries, he is asking you to take a larger exposure in the stock than it has in the benchmark. You could probably choose to invest 15 per cent of your money in the stock, though it has only an 11.5 per cent weight in the Sensex basket.

If recommendations such as `outperformer' and `overweight' convey a strong positive view on a stock, a `neutral' rating can mean several things. In the strict sense of the term, a `neutral' rating is an indication that, though the analyst in not wildly enthusiastic about the company's prospects, he believes that it will perform in line with the markets; therefore the stock is worth holding. However, a `neutral' rating can also convey that an analyst has turned ambiguous about the company's prospects.

`Neutral', in some cases, could also be a euphemism for an outright sell recommendation! To interpret a neutral rating, it may be best to check the ratings on the stock before the latest recommendation. It is a negative sign if the view on the stock has turned from a `buy' to a neutral and a positive one if the view has turned from `sell' to `neutral'.

We hope we've covered the whole gamut of investment terms that you've come across while researching stocks. Hope this helps you navigate the minefield of stock market investments better!

Outcome bias

Last week, two traders were arguing at a meeting about how people from all walks of life can be successful in equity trading. One of them said that she often found doctors to be bad traders! Her argument was that doctors could be emotionally detached from their patients, as there was nothing personal at stake. In trading, however, emotions kick-in because it is their own money at risk. You may not agree with this argument. Let us instead look at the emotions that are common to doctors and equity traders. It is called the "Outcome Bias". What is it?

Suppose you are a doctor. Your patient is diagnosed with a certain heart condition. You have to choose between a minor surgery and strong medication. You choose the latter after weighing the pros and cons of performing the surgery. Two days later, the patient suffers a heart attack and is in serious condition. How would you react?

Error in judgment

Your decision not to perform the surgery was taken with great deliberation. That the outcome was different is quite another thing. Yet, you may now doubt whether you took the right decision in not performing the surgery. This is an example of "Outcome Bias". It is the error in judging your intelligent decision after the outcome turns out to be different.

Traders face the same problem. Suppose you choose to buy Stock A instead of Stock B. If Stock B moves up faster, you may beat yourself for choosing the wrong one. Three or more such instances and you begin to doubt your judgment. It does not matter if you are a doctor or a trader, you better not doubt yourself after making an intelligent decision.

Infosys Guidance: Uncertainty ahead for software majors

When the senior management of Infosys Technologies, the software services bellwether, stands up to deliver the management guidance for 2007-08 on April 13, it is likely to strike a far more conservative note than usual. Till late 2006, the broad market consensus was that Infosys will be able to comfortably deliver 30 per cent earnings growth for 2007-08. But with the subtle change in the global macro-economic environment, that expectation is slowly fading and the markets are now veering towards a low to mid 20s earnings forecast from the software major.

Even as late as February, there were positive signals from several directions. In early February, Nasdaq-listed Cognizant Technology Solutions announced 43.3 per cent earnings guidance for 2007, broadly in line with its guidance at the start of 2006.

Accenture, the multinational consulting-cum-services major, not only delivered a strong second quarter performance, it also dwelt on its robust outsourcing pipeline led by its management consulting practice. The company, which has 13,000 management consultants, is expected to nearly double its size over the next three years, of which some growth will come from low-cost, highly skilled locations such as India.

Large-deal momentum

Informal checks conducted across frontline software services companies also corroborated the widely-held view that the offshoring pipeline continues to be strong and large-deal momentum is also swinging in favour of the Indian players. For instance, Tata Consultancy Services indicated in its Analyst Day presentation in February that it was pursuing 10 deals of $50 million and above and some in the $100-million range. And in the third quarter, it added five $50-million deals, with two above $100 million.

Satyam Computers has also indicated that it is pursuing 12-13 deals above $50 million, of which five may be in the $100-million range. Its large-deal initiative is being spearheaded by Mr Hetzel Folden, a former CSC executive, who heads the Strategic Deals group at Satyam. The company recently announced that it has signed a five-year $200-million contract with Applied Materials Inc.

In its analyst interaction in February, Wipro also talked about a large-deal team headed by Mr Sanjay Joshi that is focussing on seven large contracts.

Anecdotal evidence is that nothing has changed materially on the large-deal front; in fact, the pace has only quickened over the past year. What has materially changed over the past month, however, is the macro-economic environment, and specifically three key variables. These are:

US slowdown and its impact

The former Federal Reserve Chairman, Mr Alan Greenspan's allusion to the possibility of a recession in the US by year-end has rattled the markets at the global level. Though the Fed Chairman, Mr Ben Bernanke, has stepped in to allay those fears, the markets still remain on tenterhooks.

If the slowdown fears are for real, the entire IT industry may be entering a tricky phase, something the sector has not encountered since the dotcom/telecom meltdown in 2001. If recession fears play out only in the latter part of 2007, it may be too early to assess the shift in the spending priorities among enterprise clients, the extent of weaker sales of packaged application products such as SAP or Oracle and slowdown in discretionary spends on software development projects in the US and Europe. Now that this fear has surfaced, Infosys is likely to remain conservative in its full-year guidance, irrespective of the robust momentum on the ground.

Rupee appreciation

The appreciation of the rupee against the dollar has traditionally played spoilsport for software companies. The sharp appreciation of the rupee, especially in late March, has not only taken the sector by surprise, but will also contribute to the conservative guidance stance of Infosys.

For the sector, which is already miffed by the Minimum Alternate Tax and Fringe Benefit Tax on ESOPs introduced in the recent Budget, this will be an unexpected double whammy for margins and earnings growth.

Sectoral impact

Considering that three key players — TCS, Infosys and Cognizant — derive a chunk of their revenues from the BFSI (banking, financial services and insurance) space, any slowdown on this front can have negative implications for the sector. Except for the merger talks in ABN Amro, the IT spending patterns appear to show no visible signs of slack at present.

However, recent reports in Financial Times suggest that Barclays is expected to unveil its takeover of ABN Amro in the next 10 days. If this largest financial services deal goes through, it has the potential of shaking up the entire BFSI space. The competitive fall-out of this deal will have to be watched carefully. ABN Amro has an ongoing five-year $400-million application support contract with TCS and Infosys, struck in September 2005.

Even assuming that the impact of this development is minimal, if slowdown fears persist, Indian vendors may find it difficult to put through billing rate hikes in their renegotiations with clients.

This, again, is likely to reinforce a conservative streak in Infosys. In this backdrop, investors may be better off waiting for Infosys to unveil its 2007-08 guidance before taking fresh exposures across the IT sector.

Bulk deals help investors see what is on the cards

If you are confused about what stocks to buy or sell, which sector to invest in or how not to let the stock market take you by surprise, a look at the data on bulk deals, put out daily by stock exchanges, can offer important clues.

The information on bulk deals at the NSE over a three-year period, from 2004 to 2006, reveals that had investors taken cues from them, they might have been better able to spot sectors and stocks fancied by fund managers and sailed through periods of correction without too much stress.

This apart, investors contemplating investments in newly-listed stocks could also have got a tip or two from the bulk deals in selecting the promising ones.

Bulk deals are transactions that involve the transfer of more than 0.5 per cent of the number of equity shares of any company listed on the stock exchange. However, off-market transactions, through which Mergers and Acquisition deals are often routed, do not get reflected in the bulk deals data. Crystal-gazing with the help of bulk deals, though not foolproof, is a good indicator of market trends.

Riding market themes

At any point in time, some sectors are "in" or "out" of favour of the market. However, spotting the favourite themes and sectors at the right time is difficult. A sector-based study of the bulk deals shows that had investors been guided by such deals, they would have been able to spot the shift in the buying interest across some sectors, just in time. The comeback of IT stocks in 2004, the sugar story in 2005 or even the prolonged play on construction stocks could have been discerned in time by those tracking bulk deals.

IT stocks staged a comeback in 2004-05, after a bullish first quarter revision in management guidance from Infosys Technologies. The rise in interest was evident in the number of IT sector-specific bulk deals transacted that year. Mastek and NIIT were among the stocks that attracted significant buying interest.

Bulk deals in Mastek first appeared around April 2004. Though the month saw both buying and selling of the stock by funds, the stock saw substantial buying interest only by July 2004. Had investors bought the stock in July 2004, they would have earned about 40 per cent returns in six months.

Similarly, deals in NIIT, which were also put through in the same period, would have returned as much as 90 per cent had investors held on to the stock for a little over a year.

The data from bulk deals in 2004 also threw up some sell candidates, such as Polaris and SSI. Polaris, interestingly, remained out of action in 2005 and returned a negative 14 per cent that year, as the company struggled with the integration issues related to its merger with Orbitech. Despite an improvement in its financial performance in the first two quarters of 2006-07, buying interest by way of bulk deals in the stock surfaced only in the first week of December 2006. Bulk deals in this case were crucial, given that the stock price started soaring only around the last week of December 2006. Any investor who had spotted the bulk deal and followed suit, would have earned as much as 50 per cent till date.

Sugar story

Sugar stocks, which attracted market fancy throughout 2005, could also have been spotted early on from the bulk deals data. Bulk deals in sugar scrips started to show up in 2004, with buying seen in Balrampur Chini Mills and Sakthi Sugars; the bulk deals peaked only in January-March 2005.

Stocks such as Bajaj Hindusthan, Dhampur Sugars and Dwarikesh Sugar, which appeared on the buyer's radar around that time with significant bulk deals, appreciated considerably in six months.

Significantly, though the bulk deals revealed buying interest in sugar scrips in early 2005, the much-talked-about sugar story gathered momentum only around June-October 2005. Had investors spotted this rising interest in sugar scrips via bulks deals could have enjoyed better returns.

Similarly, had investors taken the cue from the bulk deals by which some mutual funds and global investors exited sugar stocks in January-February 2006, they might have avoided getting stuck in the sugar sell-off, which was fairly strong by end-April 2006.

Construction stocks, however, remained in fancy whole of this three-year period.

While stocks such as Gammon India and IVRCL Infrastructure remained in demand throughout this period, bulk deals revealed the emergence of new plays, such as BSEL Infrastructure, DS Kulkarni and even the quasi real-estate play Bombay Dyeing in 2005.

Investors who had built up exposure in these stocks around that time (when bulk deals were really happening) would have enjoyed fairly significant returns.

Bulk-buying interest in media stocks such as NDTV, Balaji Telefilms and TV-18 started right from 2004. While bulk deals in media stocks were few in 2005, with just some stocks changing hands, they gathered momentum in February-April 2006 with the listing of Sun TV and Entertainment Network. Both these stocks, which have since emerged as buy candidates in bulk deals, returned about 50 per cent and 30 per cent in a year's time.

The bulks deals during this three-year period did not capture any significant interest in sectors such as cement, retail or pharma.

Spotting stocks, post-listing

Bulk deals, though common in newly-listed stocks, can offer important clues if they are delivery-based. Buying by funds and other investors into a stock, despite a premium listing, could reflect the bullish undercurrent in the stock.

Among stocks that attracted such buying interest and have since yielded considerably good returns, are Indiabulls Financial Services (returned more than eight times), Tech Mahindra (160 per cent), Everest Kanto Cylinder (125 per cent), AIA Engineering (70 per cent) and Voltamp Transformers (50 per cent).

Similarly, selling a stock post its listing could also imply a bearish view on the stock. Among stocks that witnessed bouts of selling post-listing were JP Hydro and LT Overseas. While JP Hydro has remained sideways post-listing, LT overseas has shed 17 per cent till date. Investors could find bulk deals information a useful input before investing in newly listed stocks.

Market corrections

Bulk deals, though not a predictor of market corrections, could well serve as an indicator of market sentiment. During the much-talked about May 2006 correction, bulk deals data revealed that a few global investors had exited a number of mid-cap stocks such as Trent, Prajay Engineers, Fedders Lloyd, Esab India and Gujarat NRE Coke, when the market peaked in mid-May, reflecting the change in view.

If investors had sold these stocks around the same time, they could have avoided the steep correction later that month.

In stark contrast, even as retail investors were selling in panic during end-May and early June, mutual funds and some global investors scouted for value buys in the market via bulk deals.

IVRCL Infrastructure, Geojit Financial Service, Dewan Housing Finance Corporation and TV18 all enjoyed buyer's interest during this period. The 2004 May correction, which was short-lived, however, did not witness any significant action in the bulk deals space.

A word of caution

While bulk deals have in the past hinted at sectors and stocks gaining favour among savvy institutional investors, they might not be the only input to be considered for final decision-making.

Sufficient homework needs to be done by investors before deciding on the stocks.

Nevertheless, transactions via bulk deals do act as pointers to the retail investor and, used with prudence and discretion, can help them unearth some multi-baggers and dark horses in the market.

ITD Cementation: Sell

Infrastructure player, ITD Cementation, has not made much headway, despite the infrastructure boom in the country over the past couple of years. Insignificant turnover growth, poor margins and high valuations not backed by earnings growth make the stock an unattractive candidate in the infrastructure space.

Frequent change in ownership has also slowed the capital ramp-up essential for operating in this sector. Investors looking to play the infrastructure theme can consider exiting the stock and switching to other attractive players in the space.

At the current market price, the stock trades at 90 times its earnings for the financial year ended December 2006. Even considering revenues on conversion of unexecuted orders, as of March 2006, the valuation appears unjustified vis-à-vis its peers.

ITD is engaged in building marine structures, piling and civil engineering works, transportation and hydropower projects.

Declining numbers

For the fourth-quarter ended December 2006, ITD's sales and net profits fell 22 per cent and 16 per cent.

With this, the company has seen a negative annual net profit growth of 11 per cent over the past three years compared to at least 20 per cent growth reported by a numbers of peers.

That the company has managed to improve its operating profit margin by 300 basis points to 6 per cent for the latest financial year can be viewed as a positive.

However, increasing staff cost and interest costs have dented the net profit margins to just 0.5 per cent.

While reasonable raw material price could have aided the company last year, the OPM may not be sustainable, given the uncertainty in cement pricing. Further, the unexecuted orders worth Rs 1,969 crore, as of March 2006, consisted of about 50 per cent road projects, which typically earn low margins against 7 per cent of piling and foundation projects (a segment in which the company is well-established) which yields better returns.

The company's interest coverage ratio of just about one also appears to dent confidence in the current high-interest rate scenario.

Even as the company made a rights offer in October 2006 to partly fund working-capital requirements, we believe that working-capital requirement can only increase if the company tries to ramp up its sales volume.

Not geared for future

While a chunk of ITD's business comes from road projects now, it has so far not participated in public-private partnership projects such as the build-operate transfer model that may provide large orders with relatively better margins. We believe that such models are likely to dictate the infrastructure space in future.

Lack of early qualification in this space may lead to intense competition when the company plans to enter this segment.

Further, ITD's net worth was eroded in 2004. The company's capital funding also came to a halt as its ownership changed hands twice in four years.

Any support through joint venture from its parent, Italian-Thai Development Public Company, to bid for BOT projects may provide a breakthrough.

The joint ventures with the promoter company have so far been only in the non-BOT space. The promoter company is also not precluded from bidding for projects on its own or through other joint ventures.

This background, therefore, does not build a strong case for support from the promoter company.


Investors with a penchant for high risk can consider taking fresh exposure in the Videsh Sanchar Nigam (VSNL) stock with a one-year perspective. At the current market price, the stock trades at a price-earnings multiple of 24 times its likely 2006-07 earnings. While the valuation is not cheap and the fundamentals yet to stabilise fully, there are two near-term potential triggers for the stock.

Impact of listing

One, the proposed listing of Flag Telecom, Reliance Communications subsidiary, at the London Stock Exchange, is likely to have a positive impact on the valuation of Tyco Global Network, the undersea cable network acquired by VSNL. These assets were acquired by VSNL by $130 million in 2005 and its undersea cable capacities are similar to Flag Telecom at 65,000 km.

Going by the preliminary valuation estimates of $1.5-2 billion for Flag Telecom, if the listing happens at this value, it will have a positive effect on VSNL too. Even if we assign a value of 70-80 per cent to the assets of Flag, Tyco's value will work out to Rs 160-175 per share.

Two, according to recent news reports, VSNL has plans to de-merge the telecom business into a separate company. The existing company, which holds the prize-surplus real-estate assets of VSNL, will become the holding company.

This proposal is said to be under government scrutiny. While no confirmation is available, this reflects that the government is possibly moving closer to a decision on monetising the real-estate assets that will unlock handsome gains for shareholders of VSNL.

According to the original privatisation and shareholding agreement, 51 per cent shareholding in the real-estate company was to be held by the government and the rest with the shareholders.

On a per share basis, rough estimates place the real estate value at anywhere between Rs 200 and Rs 240.

Though no moves are afoot now, with the listing of Idea Cellular and Vodafone's acquisition of Hutch-Essar, the Tatas may consider restructuring the entire telecom holding within the group.

If the Tatas decide to consolidate all the assets under Tata Teleservices, the mobile arm of the group, VSNL, which holds an effective equity stake of 14.1 per cent (as of March 31, 2006) in the former will have an opportunity to monetise this equity holding.

The value of this equity stake will be about Rs 75 depending on the valuation placed for Tata Teleservices.

Based on the sum-of-the-parts valuation, elements such as real estate, Tyco and equity stake in Tata Teleservices offer a fair degree of valuation comfort in the stock.

The flip side

On the flip side, however, there are three variables that are a cause for concern. VSNL has recast its business into three broad segments — wholesale voice, carrier and enterprise/carrier data and broadband.

Of these three segments, it is likely to face intense competition in the wholesale voice, which includes the international/domestic long-distance voice operations as newer players enter the fray.

The segment margin on the wholesale voice business has been stable at 17.5 per cent in the first nine months of 2006-07 compared to the corresponding previous period.

Two, any slowdown in enterprise/carrier data is likely to hit them hard as the margins from this segment are spectacular.

Finally, Flag Telecom has approached the Arbitration Tribunal of the International Chamber of Commerce seeking monetary relief of $406 million from VSNL relating to construction and maintenance of Flag Europe-Asia cable system. As it is a legal dispute, its impact of financials is hard to evaluate at this point.

Shoppers' Stop: Hold

Shareholders can retain the stock of Shoppers' Stop (SSL). The underperformance in retail stocks in recent months could well be recognition of the challenges in sustaining strong growth rates in a hyper-competitive retail environment. With a focus on the premium segment and a dominating presence in the departmental store format (which is relatively less contested), however, SSL remains a superior option among retail stocks. However, rising rental and employee costs could be a damper on margins in the near term. Any slow down in growth could cause valuations to temper; the stock remains richly valued at about 36-38 times the FY-08 per share earnings, assuming current growth rates. However, given the scarcity of options in the space, the stock could attract buying interest at lower levels.

Delays in store openings

SSLhopes to have four million sq. ft of retail space by 2010 from 1.1 million sq. ft now. With 20 stores and an additional six to open this fiscal, the retailer is behind its initial target of 39 stores by FY-08The company is, however, fairly positive that it will meet its 2010 target with improving competence on the part of mall developers. Despite a slower pace of store openings, revenue growth continues to be robust on the back of strong same-store sales, which was nearly 20 per cent in the December quarter. Such strong same-store growth could further boost profitability, as according to the management, its stores reach their peak profitability between three and five years from their opening.

Focus on premium

Operating margin at close to 10 per cent is better than its peers despite a comparatively low share of private labels in overall sales. The retailer focusses on the higher end of the market and is well-placed to partner with international retailers that seek an entry into the Indian market. The UK-based Home Retail Group is the latest partner, which will be introducing its Argos chain of stores, which sells products for homes through its stores, as well as online and via the telephone. The first store is expected to open by the end of this year.

Through its tie-up with the Nuance Group, it also recently won a bid to set up duty-free retailing for the Hyderabad International Airport; it bagged a similar concession in November last year for the Bangalore International Airport.

The concession of the Hyderabad airport, which is likely to commence operations in April 2008, is expected to earn $240 million over the next seven years. Such tie-ups appear to tap unexplored markets, which could have high growth potential if the current growth trend in discretionary spending continues. SSL has recently taken a 19 per cent stake in HyperCity, the hypermarket format operated by the Rahejas. This opens up a bigger opportunity in food and grocery retailing. The initial response to the store has been impressive with the store expected to break even within its first year of operation. However, we expect substantial competition in this segment from players with deep pockets. SSL has the option to buy a 51 per cent stake by December 31, 2008.

Margin pressure

Continued spending on lifestyle products and an improving share of private labels in the revenue mix has so far helped the retailer to stave off the inevitable margin pressure that could weigh on earnings growth in the medium term. With the industry in the throes of change, attrition levels remain high and a scarcity of talent in the middle management levels is leading to increasing employee costs.

While the management has indicated that it would only take up properties on realistic rental rates, its format lends itself to a greater presence in premium locations where rentals will be higher.

Several of the new stores that are likely to come up over the next couple of quarters are in the North where rentals are higher and this could skew the margins picture in the medium term.

Over the long term, however, once operational ramp up takes place, the pressure should ease, as these properties are also likely to command higher realisations per square feet.

Grindwell Norton: Buy

Investors can consider taking an exposure in Grindwell Norton, a leading player in abrasives and industrial ceramics with one-two year perspective.

At the current market price, the stock trades at about 11 times its expected calendar year 2007 per share earnings. A healthy demand outlook stemming from increased capex in user industries, increased focus on exports combined with Grindwell's strong foothold in the domestic market in certain product categories are likely to spur future earnings growth. It is also likely to benefit from the access to newer export markets and product sourcing from Saint Gobain, its parent company.

In the abrasives industry, Grindwell and Carborundum Universal together cater to about 75 per cent of the domestic demand. The abrasives segment of Grindwell is likely to drive future growth, given the positive demand environment for user industries such as steel or infrastructure. For the calendar year 2006, while the revenue contribution of the abrasives segment increased by 21 per cent, the segment profit jumped by 42 per cent. This apart, its recent acquisition of Orient Abrasives is also expected to contribute to the earnings stream. However, significant contributions from Orient Abrasives are likely to flow in from the second half of 2007 only. Contribution from the ceramics and plastics segment, however, is likely to be maintained.

For the calendar year 2007, Grindwell has outlined capex plans of Rs 20 crore for maintenance and de-bottlenecking. This is likely to help improve margins, which have been under pressure during the second half of 2006. The operating profit margins, during the quarter ended December 2006 had dipped by 280 basis points to 15.6 per cent. However, the pressure on margins is expected to ease with the company's cost reduction efforts. Any slowdown in the capex plans of the user industries and increase in imports from China remain principal risks.


If you are a conservative investor with a low-risk appetite and willing to invest for medium/long-term returns, then NTPC is a stock that you could consider.

Trading in the Rs 130-140 price band for the last few months, the stock broke out last week to touch a high of Rs 160. It has since retraced its steps marginally, and given the thumbs down from the market to the 2006-07 provisional results announced on Thursday, it could fall further in the next few trading sessions.

Investors can use this opportunity to acquire the stock, as the company's prospects appear promising in the medium-term.

The NTPC stock is not for those eyeing short-term returns but for those seeking a defensive play in a volatile market.

Efficient generator

In a sector plagued with efficiency issues, NTPC stands out for its operating efficiencies within the overall limitations of its public sector character. Its coal-based stations achieved a plant load factor (PLF is the measure of capacity utilisation) of 89.43 per cent in 2006-07; the average for the whole country is less than 80 per cent.

Of course, NTPC's PLF would drop if the performance of its gas-based stations were included. But, again, even here, the company has managed to push up the average PLF beyond 75 per cent during the last couple of quarters by sourcing gas in the spot market.

This has enabled the company to recover fixed charges unlike earlier. NTPC sourced spot market gas at prices as high as $10.5-11.5 per million British Thermal Unit (mbtu) during the third quarter to push up PLFs.

Yet, its power cost remained competitive because the quantities were low and when averaged with the much cheaper domestic gas, the overall price was still affordable compared to the cost of naphtha, the alternative fuel, at $22-25 per mbtu.

The experience will stand it in good stead in the next few months when the demand for power shoots up, giving NTPC the chance to run its gas-based stations that have traditionally been idling at low PLFs, at full throttle.

The weighted average cost of NTPC's power rose marginally to Rs 1.73 per unit but it still ranks among the cheapest in the country.

This is a big advantage under the merit order system of power despatch in terms of which the cheapest power is sourced first.

Emerging fuel balance

Coal-based stations have traditionally dominated NTPC's portfolio with a share in excess of 85 per cent of its total generation capacity; gas-based capacity makes up the balance. The downside of total reliance on thermal power came to the fore last year when soaring prices of crude oil and scarcity of natural gas forced the company to idle its gas-based stations while a looming shortage of domestic coal caused a minor scare forcing it to resort to imports.

The fuel mix will undergo a change for the better in the next couple of years when a good part of its ongoing hydel projects go on stream. Hydel stations are ideal to meet peak power demand and thermal stations to meet base demand. The 800-MW Koldam hydel project will be the first to go onstream towards end-2008 followed by two other projects in Uttaranchal adding up to 1120 MW. The company is also looking at two projects in Arunachal Pradesh that will, if implemented, add another 4,500 MW to its hydel capacity.

The mix will further change in the long-term when the company's plans to enter the nuclear generation segment turn into reality. Consultants have submitted a road map for the foray into nuclear generation.

Meanwhile, NTPC has addressed the issue of security for its most important fuel source — coal — by integrating backwards into coal mining. The first of its coal mines will commence production by the end of this calendar year and the stated aim is to have up to 25 per cent of its requirements met by captive mines in the next 10 years.

Ambitious programme for capacity-addition

The company plans to add about 22,000 MW to its capacity in the next five years, which appears a trifle ambitious if you consider that it added just over 7,000 MW in the last five years. But what lends confidence is that projects adding up to a little over 11,300 MW are already under construction and the company last year awarded contracts for a further 3,600 MW.

Importantly, NTPC's capex budget of Rs 12,792 crore for this fiscal is 63 per cent higher than last year's Rs 7,820 crore. And, again, the budget looks believable if you consider the extremely healthy cash generation in 2006-07 — the company had free cash of about Rs 12,000 crore as on December 31, 2006. Four straight years of 100 per cent realisation on its bills have clearly improved the cash flows and strengthened NTPC's finances considerably.

The company is also moving with the times by venturing into merchant power plants, which sell their power to the highest bidder and normally have no pre-allocated buyers. It has classified four of its upcoming projects — including the two Uttaranchal hydel projects — as merchant power plants. Given the 14 per cent peak power deficit and the existence of its own power trading arm, NTPC Vidyut Vyapar Nigam Ltd., the merchant power plants augur well for the company's revenue and earnings.

Provisional results

The 16 per cent increase in post-tax profits to Rs 6,726 crore and 17 per cent rise in net sales to Rs 30,638 crore during 2006-07 as per the provisional results were lower than what the market expected halting the uptrend in the stock. Any price weakness can be exploited to acquire the stock with a medium/long-term holding perspective.