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Sunday, May 27, 2007

DLF shares draw premium in grey mart

The grey market for the initial public offering (IPO) of real-estate major, DLF has become active following announcement of the dates and price band by the Delhi-headquartered company yesterday. The shares of DLF command an unofficial premium of Rs 26-28 a share in Ahmedabad, which is considered as the most active centre for grey market transactions.

The K P Singh-promoted DLF is raising Rs 9,600-odd crore through the IPO. The shares, with a face value of Rs 2 each, would be issued in the price band of Rs 500 and Rs 550.

The grey market is the unofficial market for IPOs and the premium or discounts indicate the level of retail interest in the public issue. It is also considered as an unofficial price discovery mechanism before the listing.

The unofficial premium for DLF in the grey market is lower, in absolute terms, compared with the recent IPOs such as ICRA Mindtree Consulting, Advanta and Global Broadcast Network, where the prices doubled in the first few days after listing. The share prices of ICRA and Global Broadcast Network doubled on the listing day itself.

The grey market premium of Rs 26-28 a share is not small, as the size of the DLF issue is large at 17.5 crore equity shares. The premium indicates that market players expect the retail portion of the DLF offer to be fully subscribed or even subscribed by two times, said a broker who did not want to be quoted as grey market is not legal.

The returns from the grey market are calculated in terms of money invested and the expected allotment of shares. For instance, if a retail investor puts in Rs 1,00,000 in the IPO application, he/she will get 100 to 200 shares at the lower end of the price band. A premium of Rs 26-28 assures the investor a return of 3-6 per cent within a time-frame of a month, the broker explains. All the profit (or loss) would be borne by the person who pays the premium.

The grey market exists in tier-two cities and areas where the investor population is sizeable, though such deals are not legally allowed. The market is vibrant in Ahmedabad, Unjha, Kolkata and some other cities.

The normal settlement in the grey market is trust-based and the brokers have the backing of big brokers who may be based in Kolkata or Mumbai. This market also offers multiple products.

The premiums for the IPOs are forward deals. There is also a product called koshtak. This product offers interest rates on the price paid per application form, depending on the demand for shares. The interest rates are paid for applying for the issue. The allotment and post-listing premium goes to the person who pays the interest rates.

The interest amount or price per application form for the DLF issue ranges between Rs 2,700 and Rs 2,900 for an application worth Rs 1 lakh.

There is a third product known as “subject to.” The retail investors in most of the IPOs, follow the HNIs (high networth individuals) and QIBs (qualified institutional buyers). Some brokers, acting on behalf of promoters, assure certain returns to high networth investors and if the listing price does not give the assured returns, the broker concerned makes good the returns assured.

Business Standard

Weekly Market Update

It was a week of two way movement in most of the indices. The strength at the opening of the week was marred by casual profit taking at the higher levels, as predicted in this report last week. Distinct feature of the week was ongoing NEGATIVE DIVERGENCE between the two leading indices viz. SENSEX and NIFTY. Both the indices are not moving in tandem with each other. Another noteworthy point is that the volumes in F&O segment remain stagnant in spite of addition of 31 stocks to this group. Expect much more profit taking to emerge in the coming week as the trading community will remain confused about the immediate future of the market. A divided market cannot ensure sustained movement on either side though negative divergence tilts the balance marginally in favor of the sellers

It was a see-saw movement in the Nifty primarily due to a divided party among the market players. The Nifty closed marginally positive while the Sensex closed slightly negative . The Bears attacked the leaders of the rally Banking sector and RIL, but as expected the CGS, FMCG and IT sector stocks rescued the Bulls. The volumes were lower than previous session which is a bit of concern. After some profit taking at higher levels, the Nifty bounced from its weekly S1 of 4,143 points. It is holding on to its trendline support in green which is currently pegged at 4,185 points. A decisive breach of this level will test the support of 4,135-4,143 points. As long as 4,101
points holds the up trend is intact. Crucial resistance in the Nifty is pegged in the 4,323-4,332 points’ range. Failing to cross the resistance zone, another round of profit taking canno t be ruled out. From an immediate scenario, if the Nifty succeeds in crossing the bottleneck area of the 4,291-4,305 we could see it attempting the
monthly R2 of 4,332 points. Crucial support is at 4,185 points. One should be extremely cautious as we are seeing negative divergence in the Nifty. Traders should book profits regularly on rise. We had mentioned that the IT & FMCG stocks have to participate for the Nifty to sustain in the new high territory. Also keep an eye on the settlement finisher ONGC as above ones could decide the future movement of the
Nifty. Metals stocks have been consistent performers but how long can they run?

Is India heading for a slowdown?

Nobody in the world thinks that India’s trillion-dollar economy is headed for a slowdown. The projections made in the month of March and April 2007, even after higher interest rates by various national and international agencies put the growth in GDP in the range of 7.6-9.3%

The impact of high interest cost on large corporates of India is insignificant. Though there is some increase in the average cost of borrowings, the ratio of Interest to sales, which measures the impact of borrowings to expand the scale of operation, is insignificant. For almost all Sensex companies the ratio remains in the range of 1-2%

Rising interest rates do two things to the consumers; they slow down the demand and also increase delinquencies. The first effect is beginning to be felt. Two major consumer financiers ICICI Bank and HDFC report slowdown in credit growth from 30% to 25% in past year and project credit growth to be 20% in 2007-08. Other categories of retail lending, like two-wheeler, car loans and consumer durables may face the heat due to their demand being more price-sensitive. However, the mortgage-based consumption in India is only 2% of GDP compared to similar figure of 50% in US and 15-20% in South East Asia. Hence, the impact of high interest rate on consumption and thereby on GDP is limited in India.

Falling interest rates have been considered as the biggest trigger to push investors to the equity investments vis-à-vis the debt investments. Will the converse be true? It is true that rising interest rates on bank deposits offer investors a risk-free earning avenue and over the last year, large number of investors has been attracted towards it. The deposit growth over the past year has been phenomenal 23% and RBI expects it to grow further.

When the investors re-do their calculation, dividend being tax-free and long-term tax on capital gains being only 10%, the investors are sure to realize that the return on equity investments would be far higher than the taxable 9% return on bank deposits. We are quite sure that investors in India are pretty savvy to calculate their total returns and make intelligent choice.

When the interest rates are rising, the first reaction of everyone is to predict a slowdown in the economy. It is too simplistic to project lower corporate profits in wake of higher cost of funds. However, a closer look at the reality shows that things are not as bad as they may seem. There is lot more spirit and spontaneity in the Indian economy which is not going to be bogged down by the higher cost of funds. India Inc. has large number of options to finance its growing appetite for growth. The ratio of interest to sales, which measures the impact of borrowings to expand the scale of operation, is insignificant for Sensex companies.

If consumption and investment that accounts for more than 80% of the GDP are not getting much affected, how on earth the interest rates would cause a slowdown in the economy?

Original Author: Unknown

Dr Reddy's, 3i, KS Oils are favourites

Dr Reddy's Laboratories, 3i Infotech, KS Oils and Bartronics India are the favourite picks of brokerage houses SSKI Securities, Emkay Research, Angel Broking and ICICI Securities.

SSKI Securities has rated Dr Reddy's Laboratories as an 'Outperformer'. 'Dr Reddy's Q4 FY07 results are significantly ahead of estimates largely driven by contribution from high margin one-offs like higher ondansetron sales and unanticipated rabeparazole API sales to Teva along with strong performance in all core business segments (except betapharm).' The management has provided guidance of 50-52 per cent gross margins, with incremental growth in APIs on a much higher base, continued growth in formulations, and improved performance in Germany, according to the report. 'We reiterate that with its well balanced generics and discovery portfolio, DRL is one of our top picks in the space.We maintain outperformer rating on it with a price target of Rs 835, said the report. The current price is Rs 640.

Emkay Research has recommended a 'buy' on 3i Infotech
3i Infotech's revenue grew by 57 per cent to Rs 655 crore led by 70 per cent growth in products and revenues and 45 per cent growth in services revenues during FY07. Products' gross margin improved by 200 basis points to 54.3 per cent while services gross margin improved by 180 basis points to 38 per cent. EBIDTA increased by 85 per cent to Rs 159 crore and net profit grew by 81 per cent to Rs 104 crore. 'We believe 3i Infotech is an attractive investment option. We maintain a BUY on this stock with a target price of Rs 377', said their report on 3i Infotech.

Angel Broking has recommended a 'buy' on KS Oils. 'KS Oils is slated to grow at a CAGR of 47 per cent in topline and 59 per cent in bottom line over FY07-09,' estimates Angel Broking. KS Oils has been fast gaining market share with the introduction of VAT. For FY07, KS Oils clocked record revenues of Rs 1,037 crore registering a healthy growth of 76 per cent over FY06. 'We initiate the coverage on stock with a buy recommendation and 12 month target price of Rs 480,'said the report on KS Oils. The stock trades at around Rs 440.

ICICI Direct recommends Bartronics, which will reap the benefits of its smart card facility in FY08 as the capacity utilisation increases and with opportunities opening in the new sector. 'We expect net sales to nearly triple from Rs 63.5 crore in FY07 to Rs 175.5 crore in FY08 while bottomline is expected to grow from 13.47 crore in FY07 to Rs 36.38 crore in FY08. We rate the stock 'outperformer' with a price target of Rs 146 in the next six months' said the report.

Goldman Sachs, Morgan Stanley and SSKI Strategy

Goldman Sachs believes recent appreciation in the INR has been unprecedented in its scaleand timing. The INR has appreciated by 8.7% in the last 9 weeks. Goldman Sachs says, the more recent run in the currency shows symptoms of over-shooting. The weight of reasons supporting a weaker INR appears to outweigh those arguing for a stronger currency and expect the INR to weaken from these levels, albeit gradually. Goldmach Sachs is revising the 3-month, 6-month and 12-month USD/INR targets to 41.3, 42.1 and 42.4 respectively.

Morgan Stanley thinks that Corporate psychology in India is strongly positive, as evidenced by booming activity on both the asset and liability sides of balance sheets. Thus capex, M&A, debt issuances and equity issuances are all in new territory. Underpinning this frame of mind are soaring and record profits, high cash balances, low financial gearing and more than four years of strong share prices. The resulting sweet spot seems to give corporations too many options to tackle any mishap, with the risk that they may start to feel infallible.

SSKI expects Sensex earnings growth to slowdown (12.6% CAGR over FY07-09), primarily due to our negative bias on prices of global commodities. However, non-commodity stocks (primarily domestic cyclicals) will continue witnessing a robust 22.7% CAGR over FY07-09; strong margins and topline expansion will keep return ratios strong

PNB, BPCL, Tata Steel, Sun Pharma, GMR Infrastructure

Merrill Lynch surprisingly keeps a BUY on PNB with a target of 700.They believe PNB is trading at 1.26x FY08E Adj book with forecast ROE of +20%. They believe PNB could trade up to 1.3x to 1.4x FY09E adj book owing to +25% earnings growth, high CASA and being ahead on technology. Rise in bond yield remains key risk to PO.

Macquarie recommends OUTPERFORM on BPCL with a target of 495 (33% upside). Macquarie believes that BPCL is a value play and reaffirm their Outperform rating

Merrill Lynch upgrades Tata Steel from Neutral to Buy with a target of Rs800. They are enthused by with the potential synergies and cost reduction from Corus acquisition. Even though the stock has risen 47% last 3 months, at P/E of 6.6xFY08E,they believe the recent performance reflects only the steel price leverage and the market is not yet appreciating the synergy benefits which should unfold over the next 18 months.

Merrill Lynch recommends BUY on Sun Pharma as they think Taro acquisition is highly Strategic. Sun Pharma's acquition is said to be EPS accretive in 12-18 months

Macquarie initiates coverage on GMR Infrastructure with a OUTPERFORM.GMR was among the first business groups in India to recognise the value proposition of owning monopoly assets in a high growth but supply constrained infrastructure sector. The NPV of its existing asset portfolio is Rs186bn, representing 18% upside from current levels with a target of 560

Decolight Ceramics: Avoid

Investors can avoid the initial public offer of Decolight Ceramics for now. This vitrified ceramic company, whose revenues started flowing in only in 2005, may have to garner higher market share in the organised segment to sustain in the tile market. It could otherwise face stiff competition from unorganised players and Chinese products.

At the offer price band of Rs 45-54, the share is being offered at 8-10 times its FY-07 earnings. Post-equity expansion, the price earnings multiple (at the offer price band) is likely to be 10-11 times the expected earnings for FY08. This valuation is at a premium to bigger players in the industry. While Euro Ceramics recently made an IPO with similar valuation, the premium appeared justified considering that it was moving to a slightly higher-end segment of sanitary ware. .

Weekly Stock Recommendations

Asian Paints: Buy
The stock of Asian Paints appears to be a good addition to the portfolio for conservative investors with a two-year investment horizon.

Strong growth prospects for decorative paints arising from the higher pace of construction activity and a ramp-up in revenues from international operations could aid sales growth over the next couple of years.

ICRA: Book profits
Investors in the initial public offering from ICRA have reaped substantial rewards from their investments, though only two months have elapsed since the offer. After listing at a significant premium to the offer price, the stock has delivered almost a three-fold appreciation from its IPO price of Rs 330.

At the current price levels of Rs 940, investors can look to book profits on at least a part of their holdings, as current stock valuations appear to capture a good portion of the earnings growth potential over the next couple of years.

Petronet LNG: Buy
Investors can consider acquiringPetronet LNG stock with a long-term perspective. The company is in a growth phase and accounts for a quarter of the domestic gas market. The growing demand for natural gas augurs well for Petronet's expansion plans while the near-term earnings are likely to be buoyed by spot and short-term market cargoes.

The growing acceptance of regasified LNG (liquefied natural gas) by users such as power and fertiliser companies, even of gas sourced at relatively higher rates in the spot market, holds out promise for Petronet's business .

Stock Takes

Will cash help Tata Tea?

With reports of Coca Cola's interest in the Glaceau brand doing the rounds for quite some time now, the stock price of Tata Tea had already run up to a significant extent in expectation of a deal to buyout Tata Tea's stake in Energy Brands Inc (owner of Glaceau).

Apart from a sizeable cash inflow of $1.2 billion (about Rs 4,800 crore) from the deal, Tata Tea has also managed to pocket a tidy profit of $523 million (about Rs 2,100 crore) representing the difference between its own acquisition price for Glaceau and the recent sale price for its 30 per cent stake. However, the manner in which the company chooses to deploy this cash would be crucial to the future direction of the stock price. If used to retire the substantial debt on the groups' balance-sheet after a series of debt-funded overseas acquisitions in recent years, the cash inflow could help improve earnings prospects.

Balanced against this is the fact that Glaceau was among the most promising brands in Tata Tea's current portfolio, in terms of its growth potential. With the sale of this brand, Tata Tea is once again left with a clutch of conventional beverage businesses spanning the globe. As these are unlikely to offer the growth potential of Glaceau, the company may again be forced to scout for new acquisitions to drive growth. The stock may continue to trade at a valuation discount to its FMCG peers.

Everest Kanto faces margin pressure

Everest Kanto Cylinders (EKC) registered an 80 per cent growth in net sales and 114 per cent increase in earnings for FY-07, on a consolidated basis.

Healthy realisations and high utilisation led to the expansion of net profit margins. However, on a standalone basis, revenues remained flat while earnings fell by about 50 per cent. This can be explained by the exclusion of contributions from EKC's Dubai facility in Q4 of FY-07 compared to the corresponding previous quarter, as the Dubai facility has been transferred to EKC's wholly-owned subsidiary.

On the operational front, while margins expanded on a year on year basis, change in sales mix in the Indian operations led to a decline in margins on a sequential basis. Driven by a robust demand, EKC has announced an investment of $60 million (approximately Rs 240 crore) for further expansion through equity-linked instruments. This apart, the company has also announced a 5:1 stock split.

Tension mounts for Fortis

The Fortis Healthcare stock has been under pressure in recent times following an escalation in tension between the Fortis management and a leading cardiologist at its key hospital — the Escorts Heart Institute and Research Centre (EHIRC). The two parties have reached an out-of-court settlement towards the end of the week. But irrespective of this outcome, uncertainties remain about the initial takeover and operation of EHIRC by the Fortis group, which is under litigation.

Further clarity on this front may emerge only after the next Court hearing. At the current price of Rs 92, the stock trades at a premium to Apollo Hospitals, a peer company which has better profitability and return parameters. This suggests that further downside to the stock cannot be ruled out.

House Chitter Chatter

ISEC recommends BUY on BPCL at 371 with a 12 month target of 540-566.BPCL seems attractive on current valuations given the robust outlook on refining margins and benign Government policy on under-recovery sharing. Proposed reforms on CST, octroi and a possible fuel price increase post the Uttar Pradesh elections would provide further impetus.

ISEC recommends BUY on Mahindra & Mahindra at Rs.735.EBITDA margin expansion is likely to drive net profit growth of 28.8% YoY.

ISEC recommends BUY on Indraprastha Gas at Rs.110. Net income expected to surge 20.7% YoY to Rs360mn. CNG, PNG volumes and depreciation are the key factors to watch for

KR Choksey says Patel Engineering is the cheapest stock amongs its peers
and can deliver good returns.

CLSA recommends RCOM with a price target of 514

Prabhudas Lilladher recommends Dabur at CMP of Rs 98 which is trading at
25.2x FY08 earnings and at 21.5x FY09 earnings. They continue to remain positive on the company and believe that Dabur would be able to sustain its premium valuations in view of its strong growth appetite. Therefore maintain an Outperformer on the stock at the current levels.

Man Financial upgrades NIIT Tech to BUY with a target of 660 which is
12x FY09E earnings.

SSKI recomends OUTPERFORMER on BPCL with a price target of 431

SSKI recommends Centurion Bank of Punjab with a OUTPERFORMER

Edelweiss recommends ACCUMULATE on ITC

ITCs Q4FY07 results were above expectations on the back of 14.3% Y-o-Y growth in cigarettes due to pre-price hike hoarding. Margins of cigarettes, FMCG-Others, and hotels improved by 37bps, 415bps, and 167bps, respectively. The key highlight s of this quarter were: (1) net sales grew by 24.5% Y-o-Y to INR 34,663 mn; (2) gross margins declined by 23bps Y-o-Y due to increased proportion of the lower margin FMCG-Others and agri business; (3) EBITDA margins declined by 198bps Y-o-Y due to higher advertising expenditure; and (4) PAT before exceptional items grew 14.7% Y-o-Y to INR 6,507 mn. We believe ITC has effected higher-than-required price hikes to make up for the impact of VAT and rise in excise duties. This is likely to shield the company from any decline in realizations. We are increasing our estimate for realization growth from the earlier -8% to 0%.

Further, paper business margins are expected to improve as new pulp capacity comes on stream by Q4FY08, the hotel business is expected to maintain the high margins driven by ARR hikes, and the agri business is expected to scale up this year with the launch of 20-25 Choupal Sagars. At CMP of INR 167, the stock trades at P/E of 20.8x and 17.4x and EV/EBITDA of 14.8x and 11.4 x on FY08E and FY09E, respectively. There is a likely upside from roll back of entry tax levied by states if the ruling goes in ITC's favour. We continue to maintain our ACCUMULATE recommendation. Positive outlook on all segments Cigarettes: As per our estimates, the higher-than-required price hikes effected to make up for the VAT impact and rise in excise duties are likely to shield the company's realizations from declining.Further, with only 30% of ITC's volumes come from low-end brands, we do not expect realizations to decline. We are increasing the estimate for rise in realization from the earlier -8% to 0%.