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Tuesday, June 19, 2007
Credit meltdown ahead
The subprime mortgage world has been reduced to rubble with no lasting impact on another, larger, credit market dancing on an equally fragile precipice: high-yield corporate debt. In this fast-growing arena of loans to business—these days, mostly, private equity deals—lending proceeds as if the subprime debacle were some minor skirmish in a little known, far away land.
How curious that so many in the financial community should remain blissfully oblivious to live grenades scattered around the high-yield playing field. Amid all the asset bubbles that we’ve seen in recent years—emerging markets in 1997, Internet and telecom stocks in 2000, perhaps emerging markets or commercial real estate again today—the current inflated pricing of high-yield loans will eventually earn quite an imposing tombstone in the graveyard of past manias.
Like past bubbles, the current ahistorical performance of high-yield markets has led seers and prognosticators to proclaim yet another new paradigm, one in which (to their thinking) the likelihood of bankruptcy has diminished so much that lenders need not demand the same added yield over the treasury or “risk-free” rate that they did in the past.
To be sure, the emergence in the past 20 years of more thoughtful policy making may well have sanded the edges off economic performance—what some economists call “the Great Moderation”—thereby reducing the volatility of financial markets and consequently the amount of extra interest that investors need to justify moving away from treasuries.
But to think that corporate recessions—and the attendant collateral damage of bankruptcies among overextended companies —have been outlawed would be... foolhardy.
And just as the unwinding of the subprime market occurred at a time of economic prosperity, the high-yield market could readily unravel before the next recession. With the balance sheets of many leveraged buyouts strung taut, a mild breeze could topple a few, causing the value of many leveraged loans to tumble as shaken lenders reconsider their folly.
The surge in junk loans has also been fuelled by a worldwide glut of liquidity that has descended more forcefully on lending than on equity investing. Curiously, investors seem quite content these days to receive de minimis compensation for financing edgy companies, while simultaneously fearing equity markets.
Assessing the likely consequences of a correction is more daunting than merely predicting its inevitability. The array of lenders with wounds to lick is likely to be far broader than we might imagine, a result of how widely our increasingly efficient capital markets have spread these loans. No one should be surprised to find his wallet lightened, whether out of retirement savings, an investment pool or even the earnings on their insurance policy.
The bigger—and harder—question is whether the correction will trigger the economic equivalent of a multi-car crash, in which the initial losses incur large enough damages to sufficiently slow spending enough to bring on recession, much like what happened during the telecom meltdown a half-dozen years ago.
But we have little choice but to sit back and watch this car accident happen. It would have been a mistake to dispatch the Federal Reserve to deflate the dot-com mania or the housing bubble. And it would be a mistake now for the Fed to rescue imprudent high-yield lenders. They have to learn the hard way. Hopefully, not too many innocent bystanders will share their pain.
Sensex settles just short of 14300
The market, which opened firm today, kept on advancing as time progressed. The rally gathered steam in mid-afternoon trading.
The BSE 30-share Sensex closed with a 215.36 point spurt or 1.53% gain at 14,295.50. It opened slightly higher at 14,088.58 and started declining till it touched a low of 14,058.79 at 10:49 IST. The benchmark index bounced back from that level as buying resumed, to strike a high of 14,315.18 at 15:24 IST.
The S&P CNX Nifty advanced 67.20 points or 1.62% at 4,214.30. The Nifty June 2007 futures were at 4,212.50, a marginal discount of 1.80 points compared to the spot closing.
Strong response to the follow-on public offer (FPO) of ICICI Bank, boosted the sentiment. Short covering extended the rally further towards the fag end of the day. Some market players had gone short on the market expecting a fall in share prices due to shift of funds by investors from secondary market to primary market to subscribe for the large sized Rs 8750 crore FPO of ICICI Bank. These short sellers rushed to cover their positions.
The sentiment was also boosted by reports that advance tax paid by companies and individuals were up 28.6% for the April-June 2007 period, from a year earlier, which in turn raised hopes of robust corporate earnings in the period.
Strong buying momentum was seen in select index pivotals including Reliance Industries (RIL), State Bank of India (SBI) and Oil & natural Gas Corporation (ONGC). However, IT stocks underperformed today, 19 June 2007, as the rupee strengthened against dollar.
The FPO of ICICI Bank was fully subscribed by the first one hour of the opening of the issue today, 19 June 2007. The subcription to the FPO gathered further steam later. It was subscribed 2.70 times by 16:00 IST.
Today's rally in the market was in contrast to the trend witnessed over the past two days when despite opening stronger the Sensex had settled with losses on sell-off, despite strong global markets. Market men said the latest circular issued by the Central Board of Direct Taxes (CBDT) on Friday, 15 June 2007, failed to provide the much-needed clarity with regard to tax on profit/gain arising from sale of shares. CBDT issued the circular after trading hours on Friday, 15 June 2007.
The total turnover on BSE amounted to Rs 4326 crore while the NSE F&O turnover amounted to Rs 37415.18 crore.
The market breadth was positive on BSE with 1,397 shares advancing and 1,180 declining. 82 remained unchanged.
The BSE Mid-Cap Index rose 71 points or 1.2% to 6,244.04 while the BSE Small-Cap Index gained 41 points or 0.6% to 7,357.75.
Among the Sensex pack, 23 advanced while the rest declined
State-run banking major State Bank of India (SBI) surged 3.78% to Rs 1368.30, on 5.56 lakh shares. It was the top gainer from the Sensex pack. SBI is set to raise $225 million from the overseas market this year by issuing perpetual bonds. The overseas issue opened on Monday, 18 June 2007, and the bank is expected to price the bonds this week. The bank plans to raise a total of Rs 15,000 crore this year in the form of equity (tier-I) and debt (tier-II).
ICICI Bank advanced 2.69% to Rs 942.50. Before trading hours on Monday, 18 June 2007, ICICI Bank set the price band for its follow-on public issue. The price band for the issue has been fixed at Rs 885 to Rs 950 per equity share.
Retail bidders would be allotted shares at a discount of Rs 50 per share to the issue price determined by the book-building process. The public issue opens for subscription today, 19 June 2007. The issue size is Rs 8,750 crore. In addition, there is a green-shoe option under which the bank may allocate additional equity shares up to Rs 1,312.5 crore. The issue including the green-shoe option aggregates Rs 10,062.5 crore.
Led by SBI and ICICI Bank, the BSE Bankex surged 2.71% at 7,681.51. Other shares from the banking pack, Bank of India (up 6.65% to Rs 204), Bank of Baroda (up 1.86% to Rs 265.10), Kotak Mahindra Bank (up 4.75% to Rs 589.95), Canara Bank (up 5.57% to Rs 252) and HDFC Bank (up 1% to Rs 1098.70) gained.
Engineering & construction major L&T gained 3.52% to Rs 1995. The company’s joint venture won an order worth Rs 610 crore for a residential building project in Dubai. The project is to be completed in 660 days from the date of commencement.
Auto stocks extended early gains. The BSE Auto Index settled 1.4% higher at 4,697.47. Tata Motors (up 2.86% to Rs 663.80), Bajaj Auto (up 2.10% to Rs 2125), Maruti Udyog (up 1.10% to Rs 752) and Hero Honda Motors (up 2.05% to Rs 667.10) advanced after the minister for petroleum and natural gas Murli Deora said yesterday, 18 June 2007, that that the government has no plan to hike the price of petrol or petroleum products. Recently, a senior oil ministry official said the government was likely to review retail prices of petrol and diesel in mid-July 2007 to bring them in line with the recent rise in global oil prices.
Index heavyweight Reliance Industries (RIL) advanced 3.42% to Rs 1728.35, on 7.49 lakh shares. It rallied to a high of Rs 1731.90, in late trade. As per reports, global oil giants including Shell, Exxon and Chevron are eying a stake in Reliance Industries’ overseas oil & gas assets. RIL recently hived off these assets into a separate company, Reliance Exploration and Production DMCC.
State run oil exploration major Oil & Natural Gas Corporation (ONGC) advanced 2.53% to Rs 912. It plans to set up a 7.5 million tonne refinery as part of the proposed special economic zone at Kakinada, Andhra Pradesh state. The company unveils its Q4 March 2007 and FY 2007 results on 25 June 2007.
Led by RIL and ONGC, the BSE Oil & Gas Index surged 2.9% to 7,645.59, and was the top performer among the sectoral indices on BSE.
IT pivotals were off-loaded today, 19 June 2007, as the Indian rupee climbed to a one-week high, with sentiment bolstered by a strong outlook for foreign investment flows, but suspected central bank intervention capped the rupee's gains. The BSE IT index slumped 1.61% to 4,861.28, and was the top loser among the sectoral indices on BSE.
Infosys lost 1.55% to Rs 1958.10 on 3.31 lakh shares. It was the top loser from Sensex pack.
Satyam Computers (down 1.50% to Rs 469.90), TCS (down 0.54% to Rs 1158.30) and Wipro (down 0.53% to Rs 520) were the other losers.
In early trade, the rupee was at 40.715/725 per dollar moving up from Monday (18 June 2007)'s close of 40.7725/7825. It hit a nine-year high of 40.28 in late May 2007, but has since been broadly trading in a 41-40.50 band.
Metal stocks caught up with the overall momentum. The BSE Metal Index rose 1.8% to 10,611.59. Tata Steel (up 3.40% to Rs 609), JSW Steel (up 3.72% to Rs 595.50) and Sail (up 2.93% to Rs 136.90), were the notable gainers.
Hindalco Industries lost 0.12% to Rs 161.90, after slipping to a low of Rs 159.15. It reduced aluminium prices for a fifth time this year to match global rates. Prices were cut by Rs 3,000 ($73), or 2.4%, to Rs 1,20,500 a metric tonne.
Decolight Ceramics settled at Rs 44.50 on BSE, a discount of 17.5% over IPO price of Rs 54. The scrip debuted at Rs 57, and had touched a high of Rs 65.90 in early trades and thereafter touched a low of Rs 43.50. The counter saw high volumes of 1.58 crore shares on BSE today.
HTMT Global Solutions (HGSL) settled at Rs 583, compared with a base price of Rs 800 on its debut today, 19 June 2007. The scrip resumed trading on BSE at Rs 790 (also its day’s high). It touched low of Rs 495 during the day. On BSE, 29.18 lakh shares were traded on the counter. As the stock is also included in the futures & options (F&0)segment on NSE, there is no daily price band for the scrip. The lot size of the stock in NSE's F&O market is 250. HGSL's debut on the bourses today follows a restructuring scheme of Hinduja TMT (HTMT).
Petron Engineering Construction surged 20% to Rs 227.15 after the company’s promoters agreed to sell their controlling stake in the company to Kazakhstan-based KazStroy Oil and Gas Construction Company. A newspaper report today estimated a sale price of Rs 150 crore for the entire promoter holding of 63.45% in Petron. KazStroy builds cross-country pipelines, offshore terminals, power plants, chemical plants and other process plants.
Sterlite Industries India rose 2.87% to Rs 560 on getting approval for listing of its initial public offering of 130.44 million equity shares in the form of American Depositary Shares (ADS) at $13.44 each. These equity shares (in the form of ADS) represent an approximately 18.9% interest in the company post offering. The company's ADS have been approved for listing on the New York Stock Exchange under the symbol SLT. After this offering, the company will have approximately 689 million equity shares outstanding. Each ADS represents the right to receive one underlying equity share in the company.
Jet Airways (India) rose 1.05% to Rs 793 after the company said its board will consider rights issue of equity shares to raise up to $400 million. The company's current equity is Rs 86.33 crore, with 8.63 crore outstanding shares of face value of Rs 10 each.
TRF rose 1.98% to Rs 710, after touching a high of Rs 727.70. It bagged $16.5-million order from Shadeed Iron & Steel Oman for supplying material-handling system for a new steel plant in Oman.
Dynamatic Technologies galloped 6% to Rs 1300 on acquiring the hydraulic business division of UK-based Sauer Danfoss for total consideration of $10 million. The buyout has been effected through the company's wholly owned subsidiary, Dynamatic UK. The acquired unit generates business worth $25 million annually, and is profitable.
ABG Shipyard fell 3.6% to Rs 400 after its net profit rose by a marginal 6.69% to Rs 32.99 crore in Q4 March 2007 (Rs 30.92 crore). Sales rose 0.15% to Rs 193.07 crore in Q4 March 2007 (Rs 192.78 crore). Meanwhile, as per media reports, the shipping firm plans to enter oil-rig construction with an investment of Rs 600 crore to tap replacement opportunities in the offshore energy sector.
Japanese shares were trading slightly lower today on overnight cues from Wall Street, with banking shares such as Mitsubishi UFJ Financial Group and Sumitomo Mitsui Financial Group slipping, but exporters such as Canon Inc. and Sony Corp. gained as the yen continued to weaken against the US dollar. Japan's Nikkei was up 0.08% to 18,163.61.
Other Asian markets were steady. South Korea's Seoul Composite was up 0.05% to 1,807.85 whereas Singapore's Straits Times index was up 0.04% to 3,625.28.
Hang Seng (up 2.69% to 21,582.89) and Shanghai Composite (up 0.38% to 4,269.52) also edged higher.
European markets which had opened higher, pared gains.
Wall Street edged lower on Monday, 18 June 2007, after three consecutive days of solid gains as investors watched Treasury bond yields fluctuate amid lingering questions about inflation. The Dow Jones fell 26.50 points, or 0.19%, to 13,612.98. Broader stock indicators were also slightly lower. The Standard & Poor's 500 index fell 1.86 points, or 0.12%, to 1,531.05, and the Nasdaq Composite index slipped marginally by 0.11 point, or less than 0.01%, to 2,626.60.
Crude oil was little changed in New York after rising to a nine-month high on 18 June 2007, as attacks on pumping stations in Nigeria raised concern output from Africa's biggest oil producer may extend declines. Crude oil for July delivery was at $68.95 a barrel, down 14 cents, in after-hours electronic trading on the New York Mercantile Exchange in Singapore today, 18 June 2007.
Sebi unearths manipulations in F&O trading
The Securities and Exchange Board of India (Sebi) today unearthed manipulations in the futures & options (F&O) segment - the first time in derivatives trading - by 10 entities and 14 brokerages including Indiabulls Securities, Angel Capital, SMC Global Capital and Khandwala Financial Services, and warned them to "desist and cease" from such operations.
The 40-page order by G Anantharaman, its whole-time member, said this is not a final order as further investigations are on.
The F&O segment has been attracting huge volumes in recent months with the average daily turnover in the range of over Rs 40,000 crore on the National Stock Exchange.
All the 24 entities were found to have created artificial volumes in the F&O segment during January to March this year by buying and selling equal quantities of contracts within the same day, at a price which was significantly above or below the price at which the first transaction was executed, though there were no significant variations in the traded price of the underlying.
The manipulation, commonly referred as `reversal of trade', implies that for a buy transaction initially entered into by a broker for a particular client for a specific quantity, there is a corresponding sale transaction which takes place during the day for the same quantity between the same set of broker/clients and vice-versa.
"It was observed that the transactions were in the nature of fictitious transactions, resulting in creation of a misleading appearance of trading in these options. It also resulted in unusual profit and loss for these entities," the order said.
The 10 entities warned in F&O manipulation are Rakhi Trading, Kasam Holding, Tungarli Tradeplace, Manu Vyapar, Raj Corporation, TLB Securities, Amar Mukeshbhai Shah, Shah Chirag Kirtikumar, Amit Business and Suresh Bharrat have been directed to cease and desist from indulging till further orders.
The other brokerages named in the Sebi investigation are Kumar Share Brokers, CPR Capital Services, Shilpa Stock Brokers, Vibrant Securities, Systematix Shares & Stk (India), Steel City Securities, Ashika Stock Broking, Prashant Jayantilal Patel, PSJ Securities, Pratibhuti Vinihit and Manu Stock Broking.
SEBI ostracises 15 brokers for deals 'not done'
India's stock market regulator on Tuesday said it had found synchronised deals by brokers in the derivatives segment on the National Stock Exchange's which were false and misleading.
Following the revelation of some "non-genuine" transactions, the regulator has asked 15 brokers and 10 other entities not to indulge in distortion of the derivatives market.
"The entities/brokers have indulged in non-genuine transactions to create false and misleading appearance of trading," SEBI said in an order.
Indiabulls Securities Ltd., Khandwala Int. Fin. Ser. Pvt. Ltd. and Angel Capital & Debt Market Ltd. were among the fifteen brokers named in the order. SEBI said it had analysed transactions for the period between January to March 2007.
Market Close: Pull back rally !
Global cues led to positive start for markets. Profit booking crept in as a result indices slept into red. Session was extremely choppy. However later in the day buying activity intensified across major sectoral indices along with small and mid caps. Buying activity was witnessed on Auto, Banking, Cement and Engineering counters. Strong rupee continues to impact the technology counter. European indices were trading in red after starting in green.
ICICI Bank's FPO offer worth Rs.8,750 cr witnessed an overwhelming response for the investors. The FPO got fully subscribed within minutes after the issue opened. The FPO was over subscribed by 2.6 times by the end of the first day of opening. HTMT Global which got relisted at Rs.650 ended lower in discount. Decolight Ceramics which got listed today in premium also ended in discount. Educomp was the star of the day with gains of 14.5%. Kotak put out a positive view. We have a note on this one..do read it.
Sensex closed higher by 215 points at 14295.5. It was helped up by gains in SBI (1372.4,+4 percent), L & T (1995.7,+4 percent), TISCO (608.85,+3 percent), RIL (1727.15,+3 percent) and RCVL (503.6,+3 percent). Restricting the gains were Satyam (468.45,-2 percent), Infosys (1956.85,-2 percent), TCS (1160.6,-1 percent), Cipla (207.45,0 percent) and Wipro (521.25,0 percent).
Zicom ended 2% lower. The company announced a strategic tie-up with Future Media for retailing its products from exclusive Zicom retail counters placed in 100 outlets of Future Group's select retails formats. These formats include Big Bazaar, Brand Factory, Collection I, Central, E Zone, Electronic Bazaar, Food Bazaar, Furniture Bazaar, M Port, WSC, etc. The Company has entered the retailing domain with 'Zicom Consumer Service Group' in order to provide complete security solutions to homes, offices, residential and more. Popular among them are Burglar Alarm Systems and Video Door phones for homes, CCTV Surveillance Systems for SME's, shops, Multi Apart Video Door Phones for Buildings and Finger print locks. All of them are easy to operate and secure one's premises at the click of a button. Bennet and Colemen had recently acquired a stake in the company. Company is aggressively trying to market the security solutions.
Financial Technologies ended a percent lower. There was news of income tax department raids across 16 establishments of the commodity traders across the country. The raid was conducted by the IT officials as a part of search & survey operation at 14 locations in Mumbai and 2 locations in Gujarat. MCX officials later informed that it was a routine inspection by the regulatory authorities. According to MCX officials the purpose of the raid was to find out more details regarding how the business is conducted. We are convinced by the business idea of the company. We would recommend the company as an investment option from the long term point of view. Do read our note on the company for more details.
Technically Speaking : Indices remained choppy through out the day, between an intra day high of 14,315 and low of 14,059. Breadth was in favor of advances as there were 1,397 advances against 1,180 declines. Volume for the day stood at Rs.4,326 cr. As expected, we are having a pull back rally and which is likely to face major resistance at 14360--14380. If sensex breaks below 14200 again, we might move lower upto 13880.
Soon after the market hour news of 15 Brokers being banned from F&O struck the market. Charges against the brokers are 'involved in Synchronised trading'. Really, something like this should have not much impact but it may well be the excuse for some weakness tomorrow.
IT officials raid MCX
The Income Tax Department is conducting raids on the Multi-Commodity Exchange and its "associates" in Mumbai on Tuesday, but there were no searches on stock brokers.
Though an official statement issued in this regard did not name MCX, sources said raids were conducted on the premises of MCX and one of its Ahmedabad-based official.
"The Income Tax Department is conducting searches on a commodity exchange and its associates in Mumbai," the statement said.
Surveys are also being conducted on the exchange branches in Ahmedabad, Bangalore, Chennai, Delhi and Kolkata, the statement added.
However, there is no raid on any share broker connected with a stock exchange, the statement said.
The action by IT officials came days after the Financial Technologies-promoted MCX sought details from its members about their Mumbai-based clients whose trade on the exchanges exceeded more than Rs one lakh in the January-March quarter.
Although the exchange termed the circular as a 'routine' affair, saying the same is being issued every quarter, sources said it was based on the Income Tax Department Directive.
The notification said: "All the members shall submit the details of their clients (a) who executed transactions of value exceeding Rs 1 lakh and (b) who are located in Mumbai and Navi Mumbai."
MCX members felt that exchange should not provide the details to any other authority except the market regulator Forward Markets Commission (FMC) unless income tax authority asks details of any particular transaction or a trader.
"Only FMC has the power to know the details about the transactions, which are anyway known to the commodity exchanges," MCX member Sushil Pawa said.
FMC Chairman B C Khatua said other authorities (apart from FMC) can ask for details if they require certain specific information related to a transaction or a trader.
Oil prices dip below $69 a barrel after overnight climb
Oil prices edged lower on 19 June after U.S. crude futures closed at a nine-month high above $69 (Rs2,813) a barrel in the previous session, but unrest in Nigeria continued to pressure the market.
Light, sweet crude for July delivery lost 12 cents to $68.97 a barrel in electronic trading on the New York Mercantile Exchange, midday in Europe.
The contract had risen $1.09 on 18 June to $69.09 a barrel after Nigerian oil unions called a strike for this week amid continuing unrest and violence in the country’s oil producing regions.
A Nymex front-month contract last closed above $69 on 1September.
Brent crude fell 10 cents to $72.08 a barrel on the ICE Futures exchange in London. Analysts said the news out of Nigeria on 18 June prompted large funds to buy energy futures, driving prices higher.
“I think it’s just profit taking,” said Tetsu Emori, chief commodities strategist at Mitsui Bussan Futures in Tokyo, speaking of Tuesday’s drop. The overnight jump in oil prices is not reflective of the demand-supply picture, he said.
“It’s quite difficult to understand why oil prices rise so high when crude oil supplies are still enough,” Emori said. Others, however, said any disruption, no matter how small, could boost prices.
“In a bullish market, every thimble full of oil counts,” said Peter Beutel, president of U.S. energy risk management firm Cameron Hanover. “Every little bullish feature will loom large.”
Attacks by villagers and gunmen that cut supply on two Nigerian oil facilities helped drive the price increase on 18 June.
Hundreds of angry villagers chased workers away from a Chevron Corp. oil-transfer facility on 18 June in southern Nigeria and occupied the premises to try to get money they say is owed by the oil industry.
Gunmen also seized some two dozen Nigerian workers and security forces at a flow station operated by Italian energy giant Eni SpA’s subsidiary Agip.
Nigerian oil unions called a general nationwide strike to begin on 20 June in protest of a government price hike on automobile fuel, but there are signs the strike could be called off as union leaders are studying a government counteroffer.
The government offered to halve its increase on automobile fuel and repeal a hike on the value-added tax, both of which have already gone into effect.
Emori said the market had already taken into account the supply risks posed by the general unrest in Nigeria, Africa’s biggest oil producer and one of the top overseas suppliers to the United States.
“We have to understand that the world’s oil production capacity is at a historic high,” Emori said. “That means that (producers) can quickly produce crude if there is a big drop” in global supply, he said.
Spice fixes IPO price band at Rs 41-46
Cellular operator Spice Communications Ltd said on 19 June it has fixed the price band of its proposed public issue between Rs41 and Rs46 an equity share of Rs10 each.
“We have recently concluded a pre-IPO placement of 24,837,889 shares at Rs45 per share, thereby raising about Rs112 crore. A clutch of investors led by Lehman Brothers and Sinnaker Investments have picked up a small stake in Spice Telecom,” company chairman and managing director Dilip Modi told reporters at a press conference here.
Following the IPO, the stakes of the both the promoters, B K Modi and Telekom Malaysia, would come down by 10% each.
At present, B K Modi holds 51% and Telekom Malaysia, the remaining 49%.
Post-IPO, Modi will hold 41% while Telekom Malaysia, 39%, with the public holding the remaining 20%.
“We are the second largest operator in Punjab with 1.91 million subscribers and the fifth largest operator in Karnataka, with 0.82 million subscribers,” Modi said.
The company intends to consolidate and boost its presence in both the markets by expanding its coverage with a view to increase its marketshare, he said.
“We also plan to work with our roaming partners to improve and expand our coverage and to provide consistent products and services to our subscribers,” he added.
Sensex ends firm
Despite witnessing correction for the last couple of sessions the Sensex resumed on a positive note at 14089. However, the weakness in Asian markets dampened the investor sentiment and dragged the index to its day's low of 14059. After moving in the range of 14050-14100 the market showed some strength thereafter. As the recovery process started the Sensex rebounded to positive territory by the afternoon. Substantial buying in banking, oil and capital goods stocks saw the Sensex notch up significant gains in late trades and touch the intra-day high of 14315. The Sensex finally wrapped up the session with gains of 215 points at 14296. The Nifty ended the session by adding 67 points at 4214.
The breadth of the market was positive. Of the 2,629 stocks traded on the BSE 1,403 stocks advanced, 1,144 stocks declined and 82 stocks ended unchanged. Among the sectoral indices the BSE Oil & Gas index flared up by 2.86%, the BSE Bankex surged 2.71%, the BSE CG index added 2.29% and the BSE PSU index gained 2.12%. While the other sectoral indices were up around 1% each, the BSE IT index and the BSE Teck index ended in negative territory.
The recovery in the market was led by SBI, which shot up by 4.10% at Rs1,372. Among the major gainers L&T advanced by 3.56% at Rs1,996, Tata Steel moved up by 3.38% at Rs609, Reliance Industries added 3.34% at Rs1,727, Grasim scaled up by 3.13% at Rs2,450 and Reliance Communication jumped 3.07% at Rs504. Select index stocks witnessed selling pressure. Satyam Computer was the major loser and dropped 1.80% at Rs468 and Infosys fell by 1.61% at Rs1,957. TCS, Cipla., Wipro, Hindalco and Ranbaxy also ended in the red.
Oil stocks witnessed buying support. Apar Industries scaled up by 5.43% at Rs169, Manglore Refineries jumped by 5.33% at Rs41, Gujarat Gas added 4.81% at Rs299, Chennai Petro gained 4.51% at Rs254 and Gail India was up 2.88% at Rs305. Select banking stocks, too, logged decent gains. Oriental Bank moved up by 1.32% at Rs211, Kotak Bank advanced 1.20% at Rs567, Punjab National Bank flared up by 1.06% at Rs495 and Andhra Bank gained 1.05% at Rs87.
Over 1.58 crore Decolite Ceramics shares changed hands on the BSE followed by IKF Technologies (1.14 crore shares), GV Films (77.55 lakh shares), IFCI (70.30 lakh shares) and Reliance Natural Resources (57.83 lakh shares).
Time Technologies was the most actively traded counter on the BSE and registered a turnover of Rs180 crore followed by HTMT Global Solutions (Rs165 crore), Nitin Fire Protection Industries (Rs137 crore), MIC Electronics (Rs130 crore) and Reliance Industries (Rs127 crore).
Short-term Trading Calls
Sell Tata Steel with stop loss of Rs 620 for a target of Rs 520. This reco is from one week's perspective.
Sell TCS with stop loss of Rs 1195 for a target of Rs 1080. This reco is from one week's perspective.
Buy Vas Animation with stop loss of Rs 64.50(On closing basis) for a short-term target of Rs 113.
Buy Power Trading Corp above Rs 67.30. Stop Loss at Rs 63. Target of Rs 72.80-81.9 (Delivery-based Call)
Sensex vaults 210 points
The market, which opened firm today, kept on advancing as time progressed. The rally gathered steam in mid-afternoon trading. The BSE 30-share Sensex was up 210.39 points to 14,290.53, as per provisional closing. It opened slightly higher at 14,088.58 and started declining till it touched a low of 14,058.79 at 10:49 IST. The benchmark index bounced back from that level as buying resumed, to strike a high of 14,315.18 at 15:24 IST.
Strong response to the follow-on public offer (FPO) of ICICI Bank, boosted the sentiment. Short covering extended the rally further towards the fag end of the day. Some market players had gone short on the market expecting a fall in share prices due to to shift of funds by investors from secondary market to primary market to subscribe for the large sized Rs 8750 crore FPO of ICICI Bank. These short sellers rushed to cover their positions.
Strong buying momentum was seen in select index pivotals including Reliance Industries (RIL), State Bank of India (SBI) and Oil & natural Gas Corporation (ONGC). However IT stocks underperformed today, as rupee strengthened against dollar.
The follow on public offer (FPO) of ICICI Bank was fully subscribed by the first one hour of the opening of the issue today, 19 June 2007. The subcription to the FPO gathered further steam later. It was subscribed 2.66 times by 15:00 IST.
The total turnover on BSE amounted to Rs 4326 crore compared to Rs 2992 crore by 14:30 IST. The turnover vaulted as the market headed higher.
The market breadth was positive on BSE with 1,397 shares advancing and 1,180 declining. 82 remained unchanged.
Among the Sensex pack, 23 advanced while the rest declined
State run banking major State Bank of India (SBI) surged 3.78% to Rs 1368.30 on 5.56 lakh shares. It was the top gainer from the Sensex pack. SBI is set to raise $225 million from the overseas market this year by issuing perpetual bonds. The overseas issue opened on Monday, 18 June 2007, and the bank is expected to price the bonds this week. The bank plans to raise a total of Rs 15,000 crore this year in the form of equity (tier-I) and debt (tier-II).
ICICI Bank advanced 2.69% to Rs 942.50. Before trading hours on Monday, 18 June 2007, ICICI Bank set the price band for its follow-on public issue. The price band for the issue has been fixed at Rs 885 to Rs 950 per equity share.
Retail bidders would be allotted shares at a discount of Rs 50 per share to the issue price determined by the book-building process. The public issue opens for subscription today, 19 June 2007. The issue size is Rs 8,750 crore. In addition, there is a green-shoe option under which the bank may allocate additional equity shares up to Rs 1,312.5 crore. The issue including the green-shoe option aggregates Rs 10,062.5 crore.
Other shares from the banking pack, Bank of India (up 6.65% to Rs 204), Bank of Baroda (up 1.86% to Rs 265.10), Kotak Mahindra Bank (up 4.75% to Rs 589.95), Canara Bank (up 5.57% to Rs 252) and HDFC Bank (up 1% to Rs 1098.70) gained.
Engineering & construction major L&T gained 3.52% to Rs 1995. The company’s joint venture won an order worth Rs 610 crore for a residential building project in Dubai. The project is to be completed in 660 days from the date of commencement.
Auto stocks extended early gains. Tata Motors (up 2.86% to Rs 663.80), Bajaj Auto (up 2.10% to Rs 2125), Maruti Udyog (up 1.10% to Rs 752) and Hero Honda Motors (up 2.05% to Rs 667.10) advanced after the minister for petroleum and natural gas Murli Deora said yesterday, 18 June 2007, that that the government has no plan to hike the price of petrol or petroleum products. Recently, a senior oil ministry official said the government was likely to review retail prices of petrol and diesel in mid-July 2007 to bring them in line with the recent rise in global oil prices.
Index heavyweight Reliance Industries (RIL) advanced 3.42% to Rs 1728.35, on 7.49 lakh shares. It rallied to a high of Rs 1731.90, in late trade. As per reports, global oil giants including Shell, Exxon and Chevron are eying a stake in Reliance Industries’ overseas oil & gas assets. RIL recently hived off these assets into a separate company, Reliance Exploration and Production DMCC.
State run oil exploration major Oil & Natural Gas Corporation (ONGC) advanced 2.53% to Rs 912. ONGC unveils Q4 March 2007 and FY 2007 results on 25 June 2007.
IT pivotals were off-loaded today, 19 June 2007, as the Indian rupee climbed to a one-week high, with sentiment bolstered by a strong outlook for foreign investment flows, but suspected central bank intervention capped the rupee's gains. Infosys lost 1.55% to Rs 1958.10 on 3.31 lakh shares. It was the top loser from Sensex pack.
Satyam Computers (down 1.50% to Rs 469.90), TCS (down 0.54% to Rs 1158.30) and Wipro (down 0.53% to Rs 520) were the other losers.
In early trade, the rupee was at 40.715/725 per dollar moving up from Monday (18 June 2007)'s close of 40.7725/7825. It hit a nine-year high of 40.28 in late May 2007, but has since been broadly trading in a 41-40.50 band.
Hindalco Industries lost 0.12% to Rs 161.90, after slipping to a low of Rs 159.15. It reduced aluminium prices for a fifth time this year to match global rates. Prices were cut by Rs 3,000 ($73), or 2.4%, to Rs 1,20,500 a metric tonne.
Decolight Ceramics settled at Rs 44.50, a discount compared to IPO price of Rs 54. The scrip debuted at Rs 57, and touched a high of Rs 65.90 and low of Rs 43.50. On BSE, 1.58 crore shares were traded in the counter.
HTMT Global Solutions (HGSL) settled at Rs 583, compared with a base price of Rs 800 on its debut today, 19 June 2007. The scrip resumed trading on BSE at Rs 790 (also its day’s high). It touched low of Rs 495 during the day. On BSE, 29.18 lakh shares were traded on the counter. As the stock is also included in the futures & options segment on NSE, there is no daily price band for the scrip. The lot size of the stock in NSE's F&O market is 250. HGSL's debut on the bourses today follows a restructuring scheme of Hinduja TMT (HTMT).
Japanese shares were trading slightly lower today on overnight cues from Wall Street, with banking shares such as Mitsubishi UFJ Financial Group and Sumitomo Mitsui Financial Group slipping, but exporters such as Canon Inc. and Sony Corp. gained as the yen continued to weaken against the US dollar. Japan's Nikkei was up 0.08% to 18,163.61.
Other Asian markets were steady. South Korea's Seoul Composite was up 0.05% to 1,807.85 whereas Singapore's Straits Times index was up 0.04% to 3,625.28.
Hang Seng (up 2.69% to 21,582.89) and Shanghai Composite (up 0.38% to 4,269.52) also edged higher.
European markets which had opened higher, pared gains.
Wall Street edged lower on Monday, 18 June 2007, after three consecutive days of solid gains as investors watched Treasury bond yields fluctuate amid lingering questions about inflation. The Dow Jones fell 26.50 points, or 0.19%, to 13,612.98. Broader stock indicators were also slightly lower. The Standard & Poor's 500 index fell 1.86 points, or 0.12%, to 1,531.05, and the Nasdaq Composite index slipped marginally by 0.11 point, or less than 0.01%, to 2,626.60.
As per the provisional data, FIIs were net sellers of Rs 88.36-crore equities, while domestic institutional investors (DIIs) bought shares worth a net Rs 370 crore on Monday, 17 June 2007.
Crude oil was little changed in New York after rising to a nine-month high on 18 June 2007, as attacks on pumping stations in Nigeria raised concern output from Africa's biggest oil producer may extend declines. Crude oil for July delivery was at $68.95 a barrel, down 14 cents, in after-hours electronic trading on the New York Mercantile Exchange in Singapore today, 18 June 2007.
ICICI Bank FPO
ICICI Bank is the largest private sector bank and the second largest bank in the country in terms of assets. It is a pan-Indian player. The company has boosted its overseas operations in the last three years and has now presence in 17 countries either through subsidiaries or extension counters. Total branches excluding the network of recently merged Sangli Bank, stood at 710 branches, 45 extension counters and 3,271 ATMs. Of this, 63% of the branches are in metropolitan and the remaining in semi-urban/rural areas.
Together with its subsidiaries, ICIC Bank offers a complete spectrum of financial services and products ranging from commercial banking to investment banking, mutual fund to insurance. ICICI Prudential Life Insurance, the life insurance subsidiary, is the largest private sector insurer in the country with a market share of 10% end March 2007. Similarly, ICICI Lombard General Insurance, the general insurance subsidiary, is the second largest private general insurance company in the country with a market share of 12% end March 2007. Likewise the company through its subsidiaries is one of the top two players in the asset management and private equity (venture fund) businesses.
The Rs 8750-crore follow-on public offering (FPO) with a green-shoe option of Rs 1312.50 crore is part of the bank’s consolidated capital-raising exercise of Rs 20125 crore including a green-shoe option of Rs 2625 crore. The balance Rs 10062.5 crore, including a green-shoe option of Rs 1312.50 crore, is to be raised through an issue of ADRs listed on the New York Stock Exchange (NYSE). The issue will be 100% book built with up to 5% of the issue, or Rs 437.50 crore, reserved for existing retail shareholders of the bank. Retail bidders, including existing retail shareholders, will be allotted shares at a discount of Rs 50 per share to the issue price determined through the book-building process.
The issue also provides retail bidders and non-institutional bidders the part-payment option. Retail investors can pay Rs 250 per share on application, Rs 250 on allotment and the balance amount on call to be issued by the bank within six months from the date of allotment.
The primary object of the issue is to enhance the capital base to meet the future capital requirement that would arise on the implementation of the Basel Norm II from 31 March 2008 and to capitalise on growth opportunities that the Indian financial sector will throw up as it grows at a fast pace. The capital adequacy ratio (CAR) was 11.7% (with Tier 1 CAR of 7.4% and Tier 2 CAR of 4.3%) end March 2007, higher than the Reserve Bank of India (RBI) stipulated 9%. CAR would have been 12.81% end March 2007, but for the exclusion of US$ 750 million raised through foreign currency convertible bonds (FCCBs). These FCCBs purportedly qualify for Upper Tier II capital. The company has, however, indicated they were excluded pending clarification from RBI.
Strengths
- ICIC Bank is at the forefront of building market leadership in the entire spectrum of the financial services business that is driven by robust economy and backed by strong network, savvy technological platforms and aggressive strategies.
- Proposes to reorganise holdings in the life and general insurance and asset management subsidiary companies in favour of ICICI Financial Services (IFSL), a new subsidiary created for this purpose. Subsequently, 5.9% stake in IFSL will be divested to bring in additional capital required for the expansion of business in the three financial services spectrum. The bank has got definite offers for subscribing to equity stake worth Rs 2650 crore, in the process valuing IFSL at Rs 44600 crore.
- In future, more capital will be available for expansion of the core business as subsidiaries are likely to become self-financing after their reorganisation.
Weaknesses
- The net non-performing asset (NPA) ratio stood at 0.98% end March 2007 compared with 0.71% end March 2006. Of the gross NPA of Rs 4850 crore end March 2007, the gross retail non-performing liability (NPL) was Rs 3090 crore. Net NPA was Rs 2019 crore end March 2007, with the share of net retail NPL at Rs 1512 crore (47% non-collateralised). The coverage ratio (total provisions and technical write-offs made against non-performing assets as a percentage of gross NPAs) has come down from 63.72% end FY 2006 to 58.37% end FY 2007. The share of retail finance to gross advance net of write-off stood at 65.2% end March 2007 compared with 62.9% end March 2006 and 60.9% end March 2005. The recent sharp rise in interest rates increases the chances of defaults in the retail segment, and ICICI Bank remains the most vulnerable to this possibility.
- Despite a wide network of branches and extension counters, the deposit base had poor CASA (current account-saving account) ratio of 21.8% end March 2007 compared with 22.7% end March 2006 and 24.3% end March 2005. This coupled with the bank’s penchant for garnering high cost deposits has meant low net interest margin of 2.57%. Most of its deposits are also short term, creating funding mismatch as a large portion of the assets, including the home-loan portfolio, has medium- and long-term maturities. Home loans formed 49.4% of the total retail advances end March 2007.
- This is the third FPO in the last four years, indicating capital guzzling. On the one hand, the bank’s four-year net profit CAGR is only 17%, much below the 30-40% rate at which peers are growing. On the other hand, its equity has increased at a CAGR of 10%, thus depressing the CAGR in EPS to 7%
Valuation
Pre-issue, ICICI Bank’s FY 2007 EPS and Book Value (BV) stand at Rs 34.6 and Rs 270.35, respectively. At the current price of Rs 917.85 (on 18 June 2007, the pre-IPO opening date), P/E and P/BV stand at 26.5 and 3.4, respectively. HDFC Bank’s and UTI Bank’s P/E and P/BV stand at 30.5, 5.4 and 26, 5.1, respectively.
The last three-month high/low and the average share price of works out to Rs 994.3, Rs 791.15 and Rs 890.14, respectively. The offer price band is Rs 885 to Rs 950. Naturally, without the Rs 50 discount, retail response would have been very poor. The ADR price of ICICI Bank closed at US$ 47.39 per ADR (representing two underlying shares) on NYSE, which is equivalent to Rs 970.78 per share at an exchange rate of one US$=Rs 40.97. The ADR issue price is likely to be at a premium to the domestic issue price.
At the upper and lower end of the price band of Rs 885 and Rs 950, ICICI Bank’s FY 2007 EPS on post-issue equity works out to 27.6 and 28. Post-issue BV stands at 394 and 400.
Given the tremendous growth potential in the Indian financial markets and its capacity to capitalise on it, ICICI Bank will remain one of the most fancied stocks of FIIs (current foreign holding is 71.57%). As long as global liquidity conditions remain favourable, there will be no dearth of FII buyers. How else can you explain the ICICI Bank scrip shooting up 74% since its last FPO in December 2005 compared with a 60% gain in the BSE 30-share Sensex, when the bank has managed only a 22% growth in net profit (compared with the Sensex companies’ aggregate growth of 31%) on 22% dilution of equity since its last FPO, effectively showing almost a flat growth in EPS.
Well if you should require any quantitative justification, there are two. BV jumped due to the premium collected in the last FPO. The bank issued shares at Rs 525 per share (at Rs 498.75 for retail investors) when the pre-issue book value was just Rs 185.41. Second is the recent unlocking of value of its insurance and asset management subsidiaries ( their value works out to Rs 495.92 per pre-issue share). After the present FPO too, BV will jump 46%-48% due to the huge premium. Besides boosting BV, the FPO funds will bolster the net interest margin (NIM) also as they will not carry any cost in the profit-and-loss (P&L) account and, possibly, the growth in net profit in FY 2008 could outstrip equity dilution of 24%-25%. For FIIs, post-issue P/BV of only 2.2- 2.4 would remain an attractive carrot.
Investsmart - Morning Call
Market Grape Wine :
In House :
Nifty at a support of 4100 & 4072 levels and resistance at 4175 and 4210 levels .
Pressure on Market to continue at higher levels as 4200 is acting as huge resistance .
Sell : Intraday : ACC below 819.5 target of 796 s/l of 826
Sell : Intraday : ZEE targtet 276 s/l of 286.5
Buy : KCP target 350 posiitonal medium term
RelCap & FinanTech looks positive .
Out House :
Markets at a support of 14014 & 13939 levels with resistance at 14194 & 14234 levels .
Buy : RIL at dips
Buy : Century & Educomp
Buy : Praj at dips
Buy : IBulls & IbullsReal at dips
Buy : GujNre & Titan
Buy : LUPIN & Auropharma & Divis
Buy : SesaGoa
Buy : AsianElec & SKumar & Aban
Buy : GMR , LITL & RelCap looks good at dips
Dark Horse : SesaGoa , Prajind , Educomp , Auropharma , IBulls , GMR & RelCap
Bullet : LITL & Divis with strict stop loss .
BSE Bullet : IOl Broad Band with strict stop loss .
Daily Strategist Note
The NIFTY futures saw a rise of 3.40 % in OI with prices opening high and closing low indicating selling pressure emerging at higher levels and fresh short positions built up in the market thus suggesting weakness may be seen in the market which may force longs to liquidate their positions if market not sustains above 4180 levels. The nifty June series futures discount came down from 42 points to 12 point indicating shorts covering their positions at lower end. Market if it sustains below 4120 levels then we may see further short positions built up in the market and longs liquidation. The FII were buyers in index futures to the tune of 646 crs and buyers in index options to the tune of 44 crs. The PCR has changed from 1.25 to 1.24 levels indicates some buying support may be seen in the market at lower levels .IV in the market was 27.95 and HV was 22.16.
Among the Big guns, ONGC saw rise in OI with prices coming up although market showing weakness indicating that the counter may show strength in the coming days. Whereas RELIANCE saw drop in OI with prices remaining in a range suggesting that both bulls and bears were liquidating their position in the counter suggesting that one should have neutral view on the counter.
In the TECH counters INFOSYSTCH & SATAYMCOMP saw drop in OI with prices moving down indicating long positions liquidating and fresh short positions built up in the counter suggesting some weakness may be seen in the counter. TCS and WIPRO saw built up in counters with prices coming down indicating built up of fresh short positions in these counters suggesting further weakness may be seen.
In the BANKING counters, SBIN & HDFCBANK saw rise in OI with prices facing resistance at higher levels thus suggesting if follow up continues we may see fresh short positions in these counters and further weakness may prevail. ICICIBANK saw gain in OI with prices remaining in a dull range thus one should have neutral view on this counter.
In the Metal pack, TATASTEEL saw marginal drop in OI with prices coming down sharply indicating long positions liquidating their positions and fresh short positions being built up in this counter suggesting weakness may be seen in this counter. SAIL saw drop in OI with prices down indicating longs liquidating their positions. HINDALCO saw drop in OI with prices remaining in a range thus one should have neutral view on the counter. NALCO saw gain in OI with stock saw buying emerging at lower levels thus suggesting further strength may be seen in this counters. STER saw built up with price facing resistance at higher levels suggesting weakness may be seen in this counter.
We feel that the volume and built up in OI suggests that market may show weakness only if it remains below 4100 levels where we may see fresh short positions built up in the market thus one should hedge the positions to avoid any unexpected direction in the market. One should trade with strict stop losses to be adhered too.
Daily Technical Note
Nifty and Sensex have exhibited a bearish candlestick.
Technically, one may use the level of 4120 (Nifty) and 14000 (Sensex) as the stop loss level.
Range Nifty 4185-4080 Sensex range 14300-13900
Nifty faces resistance at 4185 and Sensex at 14250.
BSE Smallcap and BSE Midcap also exhibited bearish candlesticks.
CNX IT has lost ground.
In the Punter's zone we have a Buy in Rolta & BEML India and Sell in Reliance.
In the Technical call section, we have a Buy in IGL and Sell in Rcom & Tata Tea.
Daily Technical Note - Jun 19 2007
Weak trend may persist
The correction witnessed by the market for last couple of sessions is likely to keep sentiment bearish. Major factors like the offloading of domestic equities by the FIIs and weakness in global indices may add pressure. Among the key indices, the Nifty may decline to 4140 while on the upside the index faces resistance in the 4200-4210 range. The Sensex has a likely support at 14000 and could test higher levels of 14270.
US indices were narrowly lower on Monday as oil jumped to its highest level in nine months in a session with no economic reports. While the Dow Jones slipped by 0.19% or 27 points at 13613, the Nasdaq was marginally down to close at 2627.
Indian floats trading on the US bourses also closed with the marginal losses. Among the major losers Wipro slipped 2.48% while HDFC Bank, MTNL, VSNL, Satyam, Infosys, Tata Motors and Patni Computers lost around 1% each. However, ICICI Bank and Dr Reddy's Lab gained around 1% each.
Crude oil prices continued to moved up, with the Nymex light crude oil for July series rising by $1.09 at $69.09 a barrel. In the commodity space, the Comex gold for August delivery flared up by $1.20 to settle at $659.90 a troy ounce.
RCOM in talks with Accenture to float JV
Telecom operator Reliance Communications (RCOM) is in talks with IT services and consulting giant Accenture to float a joint venture to manage and operate the Anil Dhirubhai Ambani Group’s IT infrastructure services and processes.
The JV will be largely owned by RCOM and will have control over a business worth $1.5-2 billion, a person close to the negotiations said.
“Talks have been on for nearly two months for the joint venture. The proposed JV will also have an exit clause giving RCOM the opportunity to buy out Accenture in the future,” said sources.
ADAG’s IT team now employs about 600 people to cater to the IT needs of RCOM and other group companies such as Reliance Capital and Reliance Natural Resources. This task is expected to be done by the new JV, said sources.
RCOM is also said to be in talks with Hewlett Packard (HP), Germany’s T-Systems and French IT consulting giant Capgemini. HP declined to comment while Accenture was unreachable for comment. An RCOM spokesperson said, “We do not comment on speculation.”
Accenture, however, is learnt to be taking its time in responding to the RCOM offer because globally, it does not work on the JV model. Discussions with HP are in very early stages, sources added.
Telecom operators such as Bharti Airtel and Idea Cellular have shed non-core functions such as IT and network management to multinational giants such as IBM and Nokia in order to focus on the main function of selling services.
Accenture and HP, both globally renowned names in outsourcing, have not bagged any contract in the booming Indian telecom space. IBM is servicing Bharti Airtel as well as Idea Cellular in contracts worth over $1.2 billion and $600-800 million, respectively.
While IT outsourcing refers to hiring an outside agency to provide IT services to a company, insourcing is the in-house management of technology. ADAG is well known for not outsourcing its call centres, IT or networks management requirements despite industry trends to the contrary. Bharti Airtel, Hutchison Essar and Idea have outsourced most of these functions to specialists.
“Another model under consideration is hiving off the IT division and selling a minority stake to Accenture or any other interested party on the lines of the telecom tower business. The JV can then get business outside the ADA group too,” said industry sources.
With RCOM looking at cashing in on its IT assets, it floated a proposal to outsource IT services nearly three-four months back. Some firms including Accenture, Hewlett Packard and Germany’s T-Systems expressed interest in the contract, valued at around $1.5 billion. Subsequently, some officials in RCOM felt that they should consider some other models.
“As a result, the concept of JV was mooted where Accenture could give its services and expertise to RCOM’s manpower. It will give a steady revenue stream to the company’s JV partner and bring latest technological expertise to th
Indiainfoline - Intraday Stock Ideas
NIFTY (4147) SUP 4114 RES 4173
BUY CANDC (185.8)
SL 181 T 193, 195
BUY EUROCERA (160.10)
SL 156 T 168, 170
SELL BAJAJHIND (163)
@ 165 SL 169 T 154, 152
SELL CANBANK (238.8)
@ 241 SL 245 T 231, 229
@ 267 SL 271 T 256, 253
STRATEGY INPUTS FOR THE DAY
Avoid all that glitters
Weak eyes are fondest of glittering objects.
A little weakness and suddenly you may find some scrips very attractive. Resist such temptations. We warned you about a morning trap on Monday and right enough the bulls failed to hold on to their gains made in the first half. In fact they succumbed to the selling pressure in the latter half despite a strong rally across Asian markets. Today, we expect a weak start and another choppy day.
IT shares continue to be under pressure. Whether it is a stronger rupee or just some offloading, there are no clear answers. All we know is IT caused a drag on the key indices yesterday. FIIs have been reluctant this month to add to their tally of strong inflows seen in the previous two months. High valuations coupled with volatile global markets could have proved to be the main deterrents. The latest issue that could hit foreign capital inflows is the latest CBDT circular on the classification of earnings from the sale of shares.
Plus, there are concerns about interest rates going up across global markets, sucking out liquidity that has driven equity markets to record levels. Crude oil prices have been rising off late and are now hovering around the $69 per barrel mark. Higher energy prices might weigh on the markets as we still have to contend with the summer in the US and the hurricane season. To add to the woes, OPEC is refusing to increase output.
Locally, there are short term worries regarding the impact of large public issues of DLF and ICICI Bank on the secondary market. Then there is the confusion over the CBDT circular, record high open interest in the F&O segment, an erratic start to the monsoon and the usual uncertainty about corporate earnings. Most importantly, the bulls seem to be suffering from fatigue after having bounced back from the lows of February-March. Investors are not willing to take high risks with the main indices near all-time highs. As a result, the market has turned volatile yet range bound. The ongoing yo-yo trend may continue in the near term, though medium- to long-term outlook remains strong. Once again keep some cash handy for better bargains in the coming days.
There is a new listing today. Decolight Ceramics Ltd. will make its stock market debut. The offer price fixed at Rs 54 per share. HTMT Global Solutions will also list today following the demerger of Hinduja TMT's ITES-BPO business into a separate company.
US stocks fell on Monday for the first time in four days after oil prices jumped to a nine-month high and confidence in the homebuilding industry dropped to a 16-year low. The losses were limited as energy shares rallied on higher crude oil prices. The Standard & Poor's 500 Index fell 1.86 points, or 0.1%, to 1531.05. The Dow Jones Industrial Average decreased 26.50 points, or 0.2%, to 13,612.98. The Nasdaq Composite Index finished flat at 2626.60.
US light crude for July delivery settled up $1.09 to $69.09 a barrel. The front-month contract was trading 16 cents lower at $68.93 a barrel in extended trading in Asia. COMEX gold for August delivery added $1.20 to $659.90 an ounce. Treasury prices edged higher, putting the yield on the 10-year note at 5.14%. In currency trading the dollar eased against the euro and was higher versus the yen.
European stocks traded modestly lower. The Dow Jones Stoxx 600 ended 0.4% lower at 397.89. The UK's FTSE 100 declined 0.4% to 6,703.50 and the French CAC 40 shed 0.3% to 60.87.15 and the German DAX 30 rose 0.1% to 8,036.12.
In the emerging markets, the Ibovespa in Brazil rose 0.4% to 54,730 while the IPC index in Mexico gained 0.3% to 32,218 and the RTS index in Russia added 0.2% to 1896.
Asian stocks fell this morning, dragging the Morgan Stanley Capital International Asia-Pacific Index from a record high, after confidence in the US homebuilding industry dropped to a 16-year low and metals prices declined.
The MSCI APAC index slipped 0.1% to 153.14 as of 10:37 a.m. in Tokyo, ending a three-day, 2.6% rally that lifted the index to a record yesterday. China's CSI 300 Index swung between gains and losses.
In Japan, the Nikkei 225 Stock Average was little changed at 18,141.71, while the broader Topix index dropped 0.3%.
Australia's S&P/ASX 200 Index slid 0.3%. Benchmarks swung between gains and losses elsewhere in the region. Markets in Hong Kong and Taiwan are closed for holidays.
Markets ended lower extending its downward run in the first day of the new week, as bulls seem to be running out of steam and finding it hard to find direction at higher levels. Today again after opening at a high both the key indices pared its intra-day gains as selling pressure in the IT, Auto and Capital Good stocks dragged the markets down. However, the select Banking stocks managed to hold on to its gains.
Even the Mid-Cap and the small cap indexes closed in red. Spice Jet hogged the limelight following stake sale reports. Recently listed Time Techno also was in focus as the scrip was up by over 10% to Rs525. Finally, the 30-share Sensex slipped 82 points to close at 14080. NSE-50 Nifty dropped 24 points to close at 4147.
Spice Jet surged by over 3.5% to Rs59 on stake sale reports. The scrip touched intra-day high of Rs60 and a low of Rs58 and recorded volumes of over 13,00,000 shares on NSE.
Aurobindo Pharma edged lower by 0.2% to Rs744. The company announced that it secured tenth approval from MCC South Africa. The scrip touched intra-day high of Rs760 and a low of Rs741 and has recorded volumes of over 1,00,000 shares on NSE.
PFC marginally gained 0.2% to Rs144 after Government granted Navratna status to PFC. The scrip touched intra-day high of Rs149 and a low of Rs143 and recorded volumes of over 19,00,000 shares on NSE.
Geodesic Information was locked at 10% upper circuit to Rs274.50 after the company recommended bonus issue in the ratio of 1:2. The scrip touched intra-day high of Rs274.50 and a low of Rs260 and has recorded volumes of over 1,00,000 shares on NSE.
Cranes Software surged by over 4% to Rs132 after the Board of Directors of the company approved acquisition of US Dunn Solutions. The scrip touched intra-day high of Rs133 and a low of Rs128 and recorded volumes of over 1,00,000 shares on NSE.
Technology stocks were again under pressure as the Indian rupee strengthens against the US Dollar. Satyam Computer has slipped by 1.2% to Rs475, Infosys was down 1% to Rs1989 and Wipro declined by 1.5% to Rs523. Mphasis BFL, NIT Ltd and Polaris were the major losers among the Mid-Cap stocks.
Pharma stocks were in poor health. Ranbaxy dropped by 3.8%t o Rs359, Glaxo was down by 2.7% to Rs1275, Sun Pharma slipped by 1.1% to Rs1046 and Cipla lost 1% to Rs207. However, Cadila surged by over 5% to Rs366.
Select metal stocks also were on the receiving end. Tata Steel slipped by 1.8% to Rs589, SAIL was down by 1.7% to Rs133. However Nalco was up by 0.8% to Rs889 and Hindalco added 0.4% to Rs161.
Securities in ban period:
The derivative contracts in the underlying BRFL, Parsvnath and Nagarjuna Fertilizers have crossed 95% of the market-wide position limit and are currently in the ban period.
Results Today:
Aarti Industries, Cambridge Solutions, Chettinad Cement, Gujarat Fluorochemicals, Indian Hotels, Kavveri Telecom Products, Lumax Industries, SREI Infrastructure Finance, Shalimar Paints and Tide Water Oil.
Major Bulk Deals:
Citigroup has picked up Prime Securities and Goldman Sachs has purchased Vakranjee Software.
Insider Trades:
Cipla Ltd: Life Insurance Corporation of India has purchased from open market 46531512 equity shares of Cipla Ltd on 13th June, 2007.
Gujarat NRE Coke Ltd: HSBC Global Investment Funds - A/C HSBC Global Investment Funds (Mauritius) Limited has purchased from open market 250000 equity shares of Gujarat NRE Coke Ltd on 12th June, 2007.
Housing Development Finance Corporation Ltd: N M Munjee, Director has sold in open market 1000 equity shares of
Housing Development Finance Corporation Ltd on 11th and 12th June, 2007
Shringar Cinemas Limited: Mr. Balkrishna Shroff, Director has purchased from open market 7216 equity shares of Shringar Cinemas Limited on 14th June, 2007.
Lower Circuit:
IKF Technology, Crazy Infotech, Yashraj Securities, UB, Raj Tele, Dawn Mills, IID Forgings and BF Utilities.
Upper Circuit:
Marksans Pharma, Asian Electronics, Chola DBS, Swan Mills, Geodesic Information, Ruby Mills, Shaw Wallace and Ess Dee Aluminum.
Delivery Delight (Rising Price & Rising Delivery):
AIA Engineering, Asahi India, Ashok Leyland, Century Textiles, EIH, Gujarat NRE Coke, GSPL, HCC, Indraprastha Gas, ITC, Nestle India, ONGC, Sterlite Industries, Union Bank of India and Welspun Gujarat.
Abnormal Delivery:
LIC Housing, Dishman Pharma, VSNL, MLL, India Cement, M&M, Mahindra Gesco, Ranbaxy, Unitech, Orchid Chemicals, UTI Bank and Wockhardt.
Major News Headlines:
HCL Tech secures $15mn contract from Alenia Aeronautics
Vikash Metal inks MOU with Bihar State Electricity Board
Aurobindo Pharma gets tenth approval from MCC South Africa
Cranes Software Board approves acquisition of US Dunn Solutions
Government grants Navratna status to PFC
Geodesic Info recommends bonus issue in the ratio of 1:2A lackluster day for US Market
Stocks lose steam going into close as crude kisses $69 mark
US market witnessed a lackluster trading session today without any major catalyst rocking the market. Surprisingly, all the three indices ended in red in spite of the yield on the 10-year note dropping back to 5.14%. New concerns about subprime lending further made stocks stumble.
A report in a London paper that BHP Billiton is believed to be reconsidering a $40 billion bid for Dow component Alcoa cheered investors for a little time as oil prices kissing the $69/bbl mark pulled out steam from the stocks going into close.
Almost half of the 30 Dow stocks retreated into red in the final trading hour today. The Dow Jones Industrial Average closed lower by 26.5 points at 13612.98. Nasdaq slipped marginally by 0.11 points to close at 2626.6 and S&P 500 went down by 1.86 points to close at 1531.05.
Alcoa, Caterpillar, Walt-Disney and Coco-Cola were the major Dow winners today. Boeing, Honeywell and P&G were the main Dow laggards.
Among other merger related news, General Electric is reportedly pairing up with Financial Times publisher, Pearson to make an offer for Dow Jones.
New data shows continuing deterioration in the housing market
When market opened in the morning, the indices were sporting modest gains despite a lack of concerted leadership. Dow was up by almost 13 points at one point.
But within one hour of trading, the indices reversed their course of action and Dow remained in the red for major part of the day. Nasdaq, though crossed the flat line a couple of times, also slipped into red going into close.
New data showed continuing deterioration in the housing market. The National Association of Home Builders said the outlook for home building is the worst in 16 years. The builders' housing market index fell by two points to 28 in June, the lowest since February 1991.
The yield on the 10-year note stood at 5.17% during the first half of the day after hitting 5.14% earlier in the morning.
Energy was the best-performing sector today due to the jump in oil prices. Technology and Financials were mixed.
Yahoo shares up 8% on CEO resignation
Crude oil futures rose substantially today to their highest levels since September 2006. crude oil futures for light sweet crude for July delivery closed at $69.09/barrel (higher by $1.09/barrel or 1.6%) on the New York Mercantile Exchange. Prices are down just 1.1% from a year ago.
Crude prices surpassed $69/bbl on news that Nigerian unions planned a strike this week, threatening supplies from Africa's biggest oil producer. The strike is called for 20 June to protest increases in taxes and domestic fuel prices.
Trading volumes showed 1.206 billion shares exchanging hands on the New York Stock Exchange and 1.732 billion trading on the Nasdaq stock market. Declining issues topped gainers by 17 to 15 on the NYSE and by 15 to 13 on Nasdaq.
In after market trading hours, Yahoo shares were up 8% on news that company’s CEO, Terry Semel has resigned. For tomorrow, the economic data expected before market opens is Census Bureau’s report on May Housing Starts and Building Permits. On the earnings front, Best Buy is a major name to come out with its report.
Angel - Nagarjuna Constructions
Angel Broking is bullish on Nagarjuna Construction and has recommended buy rating on the stock with the target price of Rs 201.
Angel Broking report on Nagarjuna Construction:
Investment Arguments
Fast emerging as diversified infrastructure behemoth:
We believe NCC is on track to emerge as a diversified infra heavyweight with about 20% of our sum-of-the-parts (SOTP) valuation coming from SPVs and real estate businesses. We believe NCC's new business model allows it to capitalise on the substantial infrastructure capex of around USD 350 billion mentioned in the XI five-year plan (FY2008-12).
Strong Order Book of 2.5x FY2007 Topline
NCC grew its order book at a strong CAGR of 61% over FY2005-07. The company's order backlog, currently at Rs 7,300 crore, comprises water and irrigation, transportation, buildings, etc. A strong order book gives higher visibility to the company's earnings over the next few years.
Aggressive strategy to bid for high-margin BOT/BOOT projects
BOT projects enjoy an IRR of 14-18%. Currently, BOT projects account for 10% of the total order book of NCC. We have valued NCC’s BOT projects using the DCF method, which works out to Rs 18.7 per share.
Realty to deliver real gains
NCC has total land bank of 529acres. A booming real estate sector is expected to percolate to construction as well, which is the core competency of NCC. We have valued NCC's real estate business at a net asset value (NAV) of Rs 20.6/share.
Valuation
At the CMP, the stock trades at 20.5x FY2008E, 15.9x FY2009E earnings. However, adjusting for the value of the BOT projects (Rs 18.7/share) and Real Estate (Rs 20.6/share), the stock trades at 15.5x FY2008E, 12.0x FY2009E earnings. Based on the SOTP methodology, we have arrived at a Target Price of Rs 201. We initiate coverage on the stock with a Buy recommendation.
Macquarie - Hero Honda
Macquarie Research is bearish on Hero Honda and has recommended an underperformer rating on the stock with 12 months target price of Rs 608.
Macquarie report on Hero Honda:
Initiate coverage with an Underperform
We initiate coverage on Hero Honda, India’s largest two-wheeler manufacturer, with an Underperform recommendation and a target price of Rs 608. Our target price reflects potential downside of 13% from the current market price.
Structural decline in product mix
The proportion of high-margin products in Hero Honda’s portfolio – notably, its cash cow, the Splendor – has been declining. Going forward, we believe new low-profit products will cannibalise the existing product range. Competition has been directly targeted at Hero Honda’s most profitable motorcycles in the executive segment, further affecting profitability.
Market share losses – competition to the fore
Recent market share gains notwithstanding, Hero Honda has consistently lost market share over the past three years. With competitive intensity set to increase, we expect the company to lose market share over the medium term. Ironically, Honda’s subsidiary, Honda Motorcycles and Scooters India, could be its biggest competitor in near to medium term.
Operating margins under pressure
Our earnings estimates for FY3/08 and FY3/09 are roughly 10% and 7% below consensus, respectively, which reflects our bearish view on EBITDA margins. We expect operating margins to decline by another 100bp to 10.9% in FY3/08, but to rebound marginally in FY3/09 and FY3/10 as irrational pricing subsides. Apart from increasing competitive pressures, we expect rising royalty costs and marketing expenses to impact profitability.
Valuations – still too high
Despite the recent underperformance, we believe the stock price does not completely factor in the lower growth prospects for Hero Honda. The stock is trading at a low PER compared with its recent trading history. However, its lower growth prospects (FY3/07–10E CAGR of 7.6% vs FY3/01–07 CAGR of 25%) warrants the lower multiple, in our opinion. We value the stock at Rs 608 on a two-stage DCF methodology. At our multiple, the stock would trade at 12x FY3/09E earnings, which we believe would reflect the weaker growth prospects.
Key risks and catalysts
Apart from the macroeconomic factors, key upside risks for Hero Honda include exceptional success of a new model, curtailment in Honda Motors’ product plans and an increase in the value of investments. Key catalysts include a further decline in market share, an increase in interest rates and a further decline in operating margins.
Macquarie - Bajaj Auto
Macquarie Research report on Bajaj Auto:
Initiate with an Outperform; value in the parts
We initiate coverage on Bajaj Auto with a non-consensus Outperform rating and a target price of Rs 2,453. While the core two-wheeler business remains weak, the non-core business areas – investment and insurance – provide a strong base. We value the core business on a DCF basis at Rs 1,216 per share. Together with the insurance business (Rs 546 per share) and fair value of investments (Rs 868 per share) at a target price of Rs 2,453, the stock provides share price upside of 17%.
Core business remains weak…
While Bajaj is better-placed than its peers, the core domestic two-wheeler business is likely to face strong pressure in the short-to-medium term. Increasingly intense and even irrational pricing competition coupled with a strong commodity cycle will sustain pressure on operating profitability. While growth in the three-wheeler business could stabilise, we believe exports could be a major sales driver in the future. We estimate that the core business earnings will grow at a CAGR of 13% between FY07–10.
…but is available cheaply
Net the value of insurance, investments and a holding company discount, the imputed value of the core business at current market prices is Rs 869 per share. This would imply a FY09E core earnings multiple of less than 8.3x. This is well below Bajaj’s historical trading band and is based on our earnings estimates, which are 10% below consensus. Our DCF-based target price of Rs 1,216 for the core business would imply a valuation of 12x FY09E core earnings – well below Bajaj’s recent trading band.
Insurance provides strong value
Our value for the insurance business of Rs 546 per share is significantly ahead of the Street; we believe the profitability of the general insurance business is being undermined by the market. On the appraisal valuation method, Bajaj’s life insurance business is valued at an NBAP of 17x FY08E – well below the valuations we assign to its peers like ICICI Prudential (ICICI Pru: 29x FY08E). The stake sale by ICICI Pru has provided a strong valuation benchmark for Bajaj’s insurance business.
Key risks and potential catalysts
Apart from the macroeconomic factor, key risks for Bajaj Auto include strongerthan- expected margin pressure in the automobile segment, a faster-thanexpected decline in the three-wheeler market and a decline in the value of investments. Key catalysts include the listing/stake sale of ICICI Pru, which has provided a market valuation to the insurance business; success of the new motorcycle to be launched in 2H FY08 and a gain in two-wheeler market share.
Macquarie - Bajaj Auto
Macquarie Research report on Bajaj Auto:
Initiate with an Outperform; value in the parts
We initiate coverage on Bajaj Auto with a non-consensus Outperform rating and a target price of Rs 2,453. While the core two-wheeler business remains weak, the non-core business areas – investment and insurance – provide a strong base. We value the core business on a DCF basis at Rs 1,216 per share. Together with the insurance business (Rs 546 per share) and fair value of investments (Rs 868 per share) at a target price of Rs 2,453, the stock provides share price upside of 17%.
Core business remains weak…
While Bajaj is better-placed than its peers, the core domestic two-wheeler business is likely to face strong pressure in the short-to-medium term. Increasingly intense and even irrational pricing competition coupled with a strong commodity cycle will sustain pressure on operating profitability. While growth in the three-wheeler business could stabilise, we believe exports could be a major sales driver in the future. We estimate that the core business earnings will grow at a CAGR of 13% between FY07–10.
…but is available cheaply
Net the value of insurance, investments and a holding company discount, the imputed value of the core business at current market prices is Rs 869 per share. This would imply a FY09E core earnings multiple of less than 8.3x. This is well below Bajaj’s historical trading band and is based on our earnings estimates, which are 10% below consensus. Our DCF-based target price of Rs 1,216 for the core business would imply a valuation of 12x FY09E core earnings – well below Bajaj’s recent trading band.
Insurance provides strong value
Our value for the insurance business of Rs 546 per share is significantly ahead of the Street; we believe the profitability of the general insurance business is being undermined by the market. On the appraisal valuation method, Bajaj’s life insurance business is valued at an NBAP of 17x FY08E – well below the valuations we assign to its peers like ICICI Prudential (ICICI Pru: 29x FY08E). The stake sale by ICICI Pru has provided a strong valuation benchmark for Bajaj’s insurance business.
Key risks and potential catalysts
Apart from the macroeconomic factor, key risks for Bajaj Auto include strongerthan- expected margin pressure in the automobile segment, a faster-thanexpected decline in the three-wheeler market and a decline in the value of investments. Key catalysts include the listing/stake sale of ICICI Pru, which has provided a market valuation to the insurance business; success of the new motorcycle to be launched in 2H FY08 and a gain in two-wheeler market share.
SKP Securities - HEG
SKP Securities report on HEG:
Company Profile:
HEG, a premier company of the LNJ Bhilwara Group, is India's leading graphite electrodes manufacturer. HEGL has its graphite manufacturing plant located in Mandideep (Madhya Pradesh) with a capacity of around 52,000 MT per annum. The Company also operates a sponge iron plant, a steel billets plant, and captive power genaration units totaling 56.3 MW.
Investment Rationale:
Unalleviated demand from the steel industry:
Steel manufacturing companies with electric arc furnace are the only consumers of graphite electrodes. With the increase in the adoption of electric arc furnace method to produce steel and limited number of graphite manufacturing companies, the demand for graphites is expected to rise in future, thereby ensuring constant growth in revenues and profitability for the company.
Escalating Margins:
HEGL's Operating Profit Margins (OPMs) has improved significantly since FY04 after it spinned-off its textile unit. HEGL has been able to maintain the OPMs over 21% for the last two years due to higher realizations from the graphite electrodes and we expect the company to continue to do so in the future.
Continuous expansion to meet the growing demand:
HEG Ltd. had increased its graphite manufacturing capacity from 33,600 mtpa in FY05 to 52,000 mtpa in FY06. This will be further increased to 57,000 mtpa in the current financial year by de-bottlenecking the production process.
Captive power plant to lower the overall production cost:
HEGL has its captive power generation facilities with a total capacity of 51.3 MW and it plans to set up another power plant with a capacity of 30MW. This will save a considerable amount of power cost thereby improving the overall margins.
Management's stewardship to drive the company to growth path:
HEGL is a part of LNJ Bhilwara group of companies, which has its interest in diverse fields i.e, Textiles, Graphite & Steel and Power Generation & Consultancy. Being a part of such a management, which has an experience in managing the businesses over several decades, assures the best of operations for HEGL.
Outlook & Recommendation:
Visualizing the demand for graphite in the steel industry, HEGL had increased its manufacturing capacity over the period. HEGL being the leading graphite manufacturer in India will be able to realize the benefits of the rising demand and increasing prices. At the current level of Rs 164.40 HEGL is trading at 6.90 x FY08E earnings and 5.77 x FY09E earnings of Rs 23.83 and Rs 28.48 respectively. We rate the stock a BUY with a 1-year target price of Rs 225 at 8x FY09E earnings, giving it an upside potential of 35.14%.
Sharekhan Investor's Eye dated June 18, 2007
Zensar Technologies
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs484
Current market price: Rs342
Zen(sar) and the art of growing
Key points
- Strengthening its portfolio of service offerings: Zensar Technologies (Zensar) has effectively utilised the inorganic route to gain the required critical mass in the fast growing enterprise solutions segment (through the acquisition of OBT Global and ThoughtDigital), to strengthen its footprint in under-penetrated geographies such as Japan (through joint venture with Eza, Japan), and to gain access to marquee clients.
- Maintaining the growth momentum: Zensar is well poised to report a healthy growth of over 40% in FY2008. It is witnessing a strong traction in its organic business and the incremental revenues of Rs110 crore from the recent inorganic initiatives would only add to the overall growth momentum in its revenues. Consequently, even after factoring in the adverse impact of the rupee appreciation, the company is expected to achieve its stated revenue guidance of Rs850 crore in FY2008.
- Margins are sustainable: Zensar is also expected to buck the general declining trend in margins in FY2008. That's because some of its relatively new businesses of ITS and BPO that have been in the investment mode are expected to show a substantial improvement in their margins. It also has other margin levers like a favourable revenue mix and lower overhead costs to cushion against the adverse impact of wage hikes, the appreciation in the rupee and the consolidation of the relatively lower-margin revenues of ThoughtDigital.
- Key concern of stake sale by Fujitsu has been dispelled: The acquisition of the entire stake of Fujitsu in Zensar by the RPG group has eliminated a key concern that was a drag on the stock's valuations.
- Attractive valuations: At the current market price the stock trades at 10.6x FY2008 and 8.2x FY2009 estimated earnings; the valuations are extremely attractive considering the estimated earnings growth of 33% CAGR over FY2007-09. We recommend Buy on the stock with a price target of Rs484.
STOCK UPDATE
ICICI Bank
Cluster: Apple Green
Recommendation: Buy
Price target: Rs1,173
Current market price: Rs918
Preferred play on insurance boom
Key points
- India's largest private sector lender ICICI Bank plans to raise Rs20,125 crore ($5 billion) through a follow-on public offer (FPO). The FPO is to be equally distributed in the domestic and foreign markets. The FPO would remain open from June 19- 22, 2007 and the offer price band is at Rs885-950 with a Rs50 discount offered to retail bidders. Further issue details are provided on next page.
- The bank's management has indicated that the pace of growth in the economy as well as the bank's business in the past few years is unprecedented and the FPO tries to address the increased capital requirements of the bank for the next three years.
- The life insurance sector has been growing at a scorching pace for the past few years and ICICI Prudential Life Insurance is the private sector leader with a 30% market share among the private players and a 10% market share in the overall insurance market. The insurance sector is considered to be a sunrise sector and currently there are no listed insurance companies to play on the boom in the insurance sector. Hence, ICICI Bank, which has a 74% stake in ICICI Prudential Life Insurance, remains our preferred choice to play on the insurance story.
- In the past the bank has had to divert a significant amount of the capital raised through its earlier issues to fund its insurance subsidiaries. However this time we feel the difference is that ICICI Bank has already made arrangements for continuous funding of its insurance businesses. Thus with the funding of the insurance businesses taken care of, we feel, there will be more capital available to the bank to grow its core banking business without frequent dilutions in future. However, the huge FPO would take its toll on the return on equity (RoE), which is expected to come down to 10.3% and 10.5% in FY2008 and FY2009 respectively from 13.3% in FY2007.
- We feel one of the concerns pertaining to the bank revolves around its subsidiary ICICI Financial Services (IFS). The formation of the subsidiary is still in the conceptual stage and the bank has only received a firm commitment of Rs2,650 crore for a 5.9% stake sale. To fully materialise and be executed in black and white from the conceptual stage the deal would require regulatory clearance from the Reserve Bank of India (RBI), Insurance Regulatory and Development Authority (IRDA) and Foreign Investment Promotion Board (FIPB).
- We feel the stock will continue to consolidate around the current levels, as has been the case in the past after the announcement of any equity issuance. This provides a good opportunity to buy the stock. At the current market price of Rs918, the stock is quoting at 20.1x its FY2009E earnings per share (EPS), 8.9x its pre-provision profits (PPP) and 2.0x FY2009E book value (BV). We maintain our Buy recommendation on the stock with the price target of Rs1,173.
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