Can Asia withstand a US slowdown?

In a speech on Tuesday, former chairman of the Federal Reserve Alan Greenspan played down the effect of his words on the world's financial markets.

"There's a general view out there that I have more influence than I know I have," Greenspan told a gathering hosted by the Commercial Mortgage Securities Assn. in New York. "I get accused of inducing market changes, really because I was standing next to the market when something else happens."

Given the muted reaction to his recent comments in Asia, Greenspan may be getting his wish about his influence. Despite his warning Tuesday over China's runaway growth, the prospects for increased premiums on emerging market debt, and higher interest rates in developed markets, Asian stocks were little changed on Wednesday.

Indeed, market watchers may have had a sense of deja vu. On May 24, China stock prices fell only marginally after Greenspan said -- the previous day -- he was concerned that equities in the world's fastest growing major economy might undergo a "dramatic contraction;" this despite the fact that the comments triggered a minor sell-off in the U.S.

Less Fear From Housing

In yesterday's trading, China's CS300 index actually closed up 2.1% at 4,118, while Hong Kong's Hang Seng index was down, but only by 0.35%.

In Tokyo, bond yields surged to a one-year high following Greenspan's comments, but the benchmark Nikkei 225 index lost just 28 points, closing at 17,732 points. Korea's stock market closed down 0.45% and, in India, the BSE Sensex 30 index was down by less than 1% in afternoon trading.

So why aren't Asia investors heeding Greenspan's warnings? First, the Dow Jones Industrial Average only slipped 129 points to 13.295 in Tuesday trading following the speech -- hardly a meltdown. Also, Asian investors are relieved that fears of a slowdown in the U.S. have receded in recent weeks amid signs that problems in the housing market aren't spreading to the rest of the economy.

Perhaps more important, Asia's buoyant economies are becoming less sensitive to swings in sentiment -- and high-profile pronouncements -- in the U.S., after being emboldened by China and India's emergence as global titans, Japan's prolonged recovery, and growing intra-regional trade.

Export Shift to Other Regions

For sure, most economists believe the success of Asia's economies is less closely linked to the fortunes of the U.S. than a decade ago.

"In the past we had a situation where Asia got pneumonia if the U.S. had a cold. No more," says Chang In Whan, chief executive of fund manager KTB Asset Management in Seoul. "The U.S. will still remain a trendsetter, but Asia and Europe will hum along by themselves unless we have a disastrous recession in the U.S."

What explains the shift? Peter Morgan, chief economist for the Asia-Pacific region at HSBC (HBC) in Hong Kong identifies three main factors.

First, Asia's exports are less dependent on U.S. consumers than they used to be. Europe and emerging markets in other regions such as Latin America and the Middle East have emerged as important export destinations.

On top of that, Morgan points out, Asia's nominal gross domestic product is approximately three percentage points higher than interest rates, while in the U.S. nominal GDP growth and interest rates are roughly equal. "Monetary conditions in Asia are still quite easy," Morgan says.

"This is having quite a positive impact on growth in the region." Throw in growing demand from Asian consumers, and it's clear why the region should be less reliant on the U.S. than it used to be.

Continued Recovery in Japan

Those factors hold true across much of the region. In Japan, Asia's biggest economy, interest rates are just 0.5%, compared to an annualized growth rate in excess of 3% during the last quarter, while exports to the U.S. are down on a year-on-year basis, and shipments are rising to Europe and other markets.

And China last year overtook the U.S. as Japan's largest trading partner. "For Japanese companies, Asia and Europe will offset any falls in demand in the U.S.," says Masanobu Kaizu, head of Nomura Securities Financial & Economic Research Center.

Even consumer demand, so far the missing ingredient in Japan's recovery, is finally showing some signs of health. Household spending rose 1.1% year-on-year in April, the fourth consecutive increase. And while deflation persists, falling unemployment -- the Japanese jobless rate hit a nine-year low of 3.8% in April -- is finally expected to lead to wage increases soon, which could boost spending further.

Korea is also benefiting from a diversified export base. While the U.S. remains a large market for companies like Hyundai Motor and Samsung Electronics, its share of Korean exports is 15% compared to China's 22% and to 52% for Asia as a whole.

"In the 1990s the world had relied on one engine for growth but now we have multiple engines," says Shin Dong Suk, economist at Samsung Securities in Seoul.

Asia More Service-Oriented

Shin adds that the effect of a downturn in the U.S. on the region will be limited in Asia unless the Fed takes radical steps to raise rates sharply and risks pushing the U.S. economy into a recession.

"We should remember that we are not really talking about a severe economic slowdown in the U.S. A soft landing will only have limited impact here," he says.

Changes in the structure of Asian economies may also make them more indifferent to changed sentiment among U.S. investors. Daryl Goh, an equity strategist at Credit Suisse in Hong Kong, says Asian economies have a far more diversified earning base than emerging markets in Eastern Europe and Latin America.

The growth of successful software companies, insurers, and other non-resource-based industrial companies such as Korea's LG Electronics and Hyundai, and Taiwan's Hon Hai suggest that these markets occupy "the space between emerging and developed markets."

That means global investors are less likely to take money off the table there than they would be in less developed markets when perceptions of emerging market risk are on the increase.

The Europe Factor

Nevertheless, not all Asia-watchers are convinced that, as regional demand has risen, the region has permanently decoupled itself from what happens in the U.S. Credit Suisse's Goh argues that domestic demand in the region has become relatively more important because of where Asian economies are in their economic cycles.

In the lead-up to the Asian crisis in the mid-1990s, Asia growth outside Japan was largely domestic-driven. After the crisis it was export-driven and linked to the telecom boom.

Others point out that while the region may appear less dependent on the U.S., that's balanced out by the growing dependence on Europe. Ultimately, that could mean Asia's economy is just as open to a downturn in global export demand as before, particularly if falling confidence in global markets spreads to domestic consumers in the region.

"There has been a positive wealth effect from stock market and higher property prices and we've seen relatively strong growth in incomes," says Michael Spencer, chief economist for Asia at Deutsche Bank in Hong Kong.

"But the question is would that continue if the export cycle turned down? My answer is no." For the time being, though, investors in Asia can perhaps afford to pay less attention to Greenspan's pronouncements.

Bharat Electronics, PFC and HAL now Navaratnas

The government on 22 June conferred Navratna status on three PSUs - Bharat Electronics Ltd, Hindustan Aeronautics Ltd and Power Finance Corporation, giving them more financial and administrative powers.

With the conferment of the coveted status on the three companies by Finance Minister P Chidambaram, now 12 public sector enterprises are Navratna, the title originally meant for nine
companies in 1997.

Speaking on the occasion, Chidambaram emphasised the UPA Government’s commitment to strengthen public sector enterprises and emphasised that more autonomy should be given to these units.

He asked unlisted public sector companies to list on stock exchanges to unlock their true value.
These three PSUs will now be able to forge joint ventures both in India and abroad, which can be up to 15% of their networth or Rs 1,000 crore, whichever is lower, without taking prior permission of the administrative ministry.

Moreover, the board will also have the power to decide on merger and acquisitions.
Heavy Industries Minister Santosh Mohan Deb said four more PSUs - National Aluminium Company, National Mineral Development Corp, Power Grid Corp and Rural Electrification Corp - would also be given Navratna status as soon as they fill all the vacancies for independent directors.

BoA approves 36 SEZ proposals

The government panel on Special Economic Zones on 22 June cleared three zones promoted by Reliance Industries’ chairman Mukesh Ambani and his aide Anand Jain, while giving formal approval to 36 SEZ proposals.

The Board of Approval, which met here to consider 52 proposals, also cleared Anil Ambani Group Reliance Infocom’s 18-hectare IT SEZ at Dhirubhai Ambani Knowledge City in Maharashtra.
It gave in-principle approval to nine other proposals.

Mukesh Ambani and Anand Jain promoted Navi Mumbai SEZ Pvt Ltd proposes to set up three zones covering an area of 345 hectare. Around 63.74 hectare will be occupied by a biotechnology zone, 179 hectare by a light engineering SEZ and 103.25 hectare by a pharmaceutical project.
The consortium also plans a 1,250-hectare multi-product SEZ in the area which is awaiting clearance from BoA. The Revenue Department has raised some issues regarding the project on which state government and promoters’ comments have been received.

“These have been circulated among the members of the BoA for consideration. The proposal would be taken up at the next meeting of the Board on 12 July,” BoA chairman and commerce secretary G K Pillai said.

The BoA also approved an electronic hardware SEZ promoted by Foxconn. The hardware supplier to companies like Nokia and Motorola got the nod for a 11-hectare SEZ in Sriperumbudur in Tamil Nadu, which it will eventually expand to 136 hectares.

The company already has an SEZ in the country and plans to invest $400 million in the new facility. In all Foxconn wants to invest $1.5 billion in India.

The Board also approved a 235-hectare SEZ in the textiles sector. Promoted by Sri Lanka-based multinational MAS Fabric Park, the zone in Andhra Pradesh involves a total investment of Rs880 crore. Overall the company has plans to invest $700 million that will create 30,000 jobs.
The BoA also approved two SEZs in Dadra and Nagar Haveli, the first ones for the union territory. A proposal by Ramky Infrastructure to set up a 1,012-hectare multi-product SEZ in West Bengal was given an in-principle clearance.

“This is the first multi-product SEZ that has been cleared for West Bengal. Now barring Bihar and the north-east, SEZs have been approved in all states. Bihar and northeast have been left out as no application has been received from those states,” Pillai said.
Of the seven cases deferred, two proposals for multi-product SEZs came from Skil Infrastructure. The clearance could not be given as they did not meet networth requirement.

The company said it has got a $500-million investment from a US company that has taken 26% stake. As the FIPB approval for the transaction is yet to come, Board deferred the two cases.
So far, 339 SEZs have formal approval of which 126 have been notified. In all, Rs35,145 crore has been invested in these zones, which have created 32,578 direct jobs.

Anagram - Eveninger - June 22 2007

Anagram - Eveninger - June 22 2007

Religare - Tantia Constructions, Garware Offshore

Religare - Tantia Constructions, Garware Offshore

ICICIDirect - Network 18 Fincap

ICICIDirect - Network 18 Fincap

Kotak - Infosys Technologies

Kotak - Infosys Technologies

Weekly Stock Ideas

Buy PNB at Rs517 with SL of Rs509 and target of Rs532, 537

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Buy Sun TV at Rs1636 with SL of Rs1618 and target of Rs1675, 1685

Buy NDTV at Rs399 with SL of Rs391 and target of Rs414, 419

Indiainfoline Weekly Newsletter

Inflation hits 13-month low

India's inflation, based on the Wholesale Price Index (WPI), declined to 4.28% in the week ended June 9, the Government said on Friday. This was lower than the previous week's level of 4.80%. The annual point-to-point inflation rate is now at its lowest since the week ending April 29 last year, when the rate was at 3.9%. It was lower than average forecast of 4.43% and was also down from 5.29% during the corresponding week of the previous year. The decline was attributed to lower prices of fruits, lentils and cereals.

The steep fall in inflation since mid-April has taken the pressure off the Reserve Bank of India (RBI) and the Government to announce more measures to curb spiraling prices. This also augers well as Finance Minister P. Chidambaram and the central bank do not want to disturb the momentum in economic growth. India's economy has averaged 8.6% growth since 2003 and grew by 9.4% in FY07. Meanwhile, the Government revised the inflation rate for the week ended April 14 to 6.34% from a preliminary projection of 6.09%.

FPO...ICICI Bk may price it close to upper end

Institutional investors lapped up the ICICI Bank's mega follow-on public issue. The biggest interest came from overseas investors, led by Temasek and Warburg Pincus. The issue, which opened on June 19, was fully subscribed soon after the bidding started. As of 19:00 hrs (IST) on Friday, the issue was subscribed 11.46 times. The private sector bank received bids for 1.13bn shares as against the issue size of 98.87mn shares.

Citi, Merrill Lynch, Temasek and LIC put in bids worth US$2bn while SBI invested US$1.35bn. Warburg Pincus, the US-based private equity giant, put in bids worth US$1bn. ICICI Bank plans to raise a total of Rs100.62bn, including a greenshoe option of Rs13.13bn. Given the response, the bank could price the issue close to the upper end of the Rs885-950 indicative range.

The follow-on issue is part of ICICI Bank's plan to raise as much as US$5bn from the combination of domestic and ADR offerings. ICICI Bank, which is listed in Mumbai and New York, is offering up to US $2.1bn worth of shares to US investors. A 15% over-allotment option is expected to be exercised, which could push the final size of the fundraising to US $4.9bn. Pricing was expected after the US sale concludes later on Friday.

Bulls bounce back; Banks shine

The bulls managed to stage a swift recovery yet again after a weak start this week. Earlier, fears of the impact of large public issues of DLF and ICICI Bank proved to be short-lived. Concerns over the CBDT circular, provided some hiccups as well. However, all's well that's end well. The bulls came roaring back with Banking and Capital Goods stocks leading from the front.

Banking stocks were in limelight after ICICI Bank's follow on issue was fully subscribed within minutes of the opening. Apart from ICICI Bank, other index heavyweights like REL, L&T, Gujarat Ambuja Cement and SBI contributed significantly towards the gains over the week. Capital Goods, PSU Cement, Pharma, Real Estate and Auto were among the other major gainers over the week. While IT stocks remained weak due to the rising rupee.

Finally, the benchmark BSE Sensex added 352 points or 2.49% during the week to close at 14,467 and the NSE Nifty advanced by 91 points or 2.20% to close at 4252.

Capital Goods stocks were in momentum, led by Power Generation and Heavy Engineering companies. The strong outlook for the infrastructure projects and healthy book order positions for most companies lifted the Capital Goods stocks. The BSE Capital Goods index was the second biggest gainer of the week, and rose 4.9%. L&T led from the front. The scrip surged by over 8% to Rs2107, BHEL rose 3.6% to Rs1440 and Alstom Projects surged by 21% to Rs723.

Auto stocks recovered some of the lost ground due to value buying. They had plunged over last few weeks on concerns that rising interest rates would impact sales and high commodity prices would crimp margins. However, with fears over interest rates receding, auto stocks picked up some momentum. Tata Motors was the top gainer. The scrip was up by 5.2% to Rs684, M&M paced ahead by 4.4% to Rs731, Maruti was up by 2.8% to Rs761 and Ashok Leyland added 5% to Rs38.35.

Expectations that the RBI will not tinker with the interest rates and the CRR in the near term boosted the banking stocks. The BSE Banking index was the biggest winner of the week, rising by 5%. SBI was the top gainer. The scrip rallied nearly 10% to close at Rs1324. ICICI Bank surged by over 5% to Rs954. The bank is likely to price its hugely successful follow-on public offer towards the upper end of the Rs885-950 price band. PNB, UTI Bank, Kotak Bank and Bank of India were among the other major gainers. However, HDFC Bank was down by 0.6% to Rs1103.

IT stocks bucked the positive trend and closed lower for yet another week. The rupee gained 0.3% this week and ended at Rs40.75 against the US Dollar. The BSE IT index was the sole loser of the week, slipping by 2.8%. Satyam was among the top five losers in the Sensex. The scrip fell 4.3% to Rs461, TCS dropped 3.7% to Rs1140, Infosys declined 3% to Rs1950 and Wipro dipped 2.5% to Rs514.

Educomp Solutions soared by 22% to Rs2312. The scrip touched the week's high of Rs2370 and a low of Rs1861. Educomp has raised US $80mn via a FCCB issue at a conversion price of Rs2949.83 per share. Also, the company received the RBI's nod for allowing 100% FII investment in the scrip.

Reliance Energy was another strong performer. The scrip rose over 11% to Rs590, touching the week's high of Rs597 and a low of Rs522. The Bombay High Court has restricted RIL from selling the gas from its KG basin field to a third party other than RNRL and NTPC.

Real estate stocks were also in the limelight during the week. Parsvnath surged by over 3% to Rs340 and Sobha Developers gained 3% to Rs871.

Can the bulls make it now?

No Matter How Far We've Come
I Can't Wait To See Tomorrow

The bulls will once again hope they scale past the previous Sensex peak in the coming week. The Sensex is now 256 points away from its all time high. Given the fall in inflation, healthy advance tax numbers and impressive rollover figures so far, bulls may hope to achieve the psychological milestone next week itself.

However, volatility will once again rule the bourses on account of the F&O expiry next week. In the recent past, any fall has been met with an immediate bounce back. The bulls will hope any fall will be met with lower level buying.

As always, keep an eye on the overseas markets. If global cues continue to remain strong, we may see another run for the bulls. The key event to watch out for would be the outcome of FED meet on Thursday. A volatile week lies in store as the bulls and bears struggle for a clear direction.

Govt okays Mittal investment in HPCL refinery
The Union Cabinet approved the proposed investment by steel tycoon Lakshmi Niwas Mittal in the Bhatinda refinery project of Hindustan Petroleum Corporation Ltd. (HPCL). Mittal Investments plans to acquire a 49% stake in the 180,000 barrels per day ( 9 million tonnes per year) refinery for Rs33.65bn through its 100% arm, Mittal Energy Investments Pte Ltd, Singapore. Mittal Energy Investments will also have to obtain the approval from the Foreign Investment Promotion Board (FIPB) before the deal is finalised. The Cabinet approval for the deal was required since current government policy restricts Foreign Direct Investment (FDI) in public-sector petroleum refineries at 26%. HPCL will hold 49% stake in the Rs179.73bn project, while the balance 2% would be allocated to financial institutions.

Govt hikes sugar buffer stock to 5mn tons

In yet another attempt at boosting the fortunes of the politically sensitive sugar industry, the Government decided to increase the buffer stock of sugar to 5mn tons from 2mn tons to help beleaguered mills hit by a huge glut and low exports. The buffer stock would be held by sugar mills. But, the Government would meet maintenance and storage costs. The money would be used by sugar producers to pay cane farmers. Stocks will be valid for one year. Sugar output in India, the world's second-largest producer and biggest consumer, is expected to touch 28mn tons this season ending September while domestic consumption is likely to be 19mn tons. After including last year's carryover stock of 4mn tons, the country would have a total stock of 13mn tons this year.

RIL can't sell KG gas to 3rd party: Bombay HC
The Bombay High Court ruled that Reliance Industries Ltd. (RIL) cannot sell natural gas sourced from its huge Krishna Godavari basin field to a third party other than RNRL and NTPC. However, RIL can use the gas from KG basin for its own captive use in the first eight years. RIL plans to begin production from the KG basin block from July 2008. Initial production will be about 40 million standard cubic meters of gas per day (mmscmd). Peak output would touch 80 mmscmd. Meanwhile, the Government is considering challenging the Bombay High Court decision. According to reports, it could move the Supreme Court against the Bombay High Court order as it would like the gas to be made available to power and fertiliser companies. The Bombay High Court order could also impact the Government’s revenues as it earns profit petroleum from the sale of gas.

Sterlite raises US$1.75bn from US market

Sterlite Industries India Ltd. announced that it has raised US$1.75bn from the US market in what is the biggest overseas equity offering by an Indian company. The Anil Agarwal-promoted copper and zinc producer has priced its IPO of 130,440,000 equity shares in the form of ADS, at US$13.44. These equity shares in the form of ADS represented about 18.9% post-issue capital of the company. Sterlite's ADS started trading on the New York Stock Exchange (NYSE) under the symbol "SLT". The Sterlite ADR closed at US$14.86 on Thursday. After this offering, Sterlite will have about 689mn equity shares outstanding. All the equity shares in the form of ADS were sold by Sterlite.

Tata Group forms new financial services unit

Tata Sons Ltd., the holding company of the Tata Group, announced the formation of a wholly-owned subsidiary company called Tata Capital Ltd., which will undertake new activities in the financial services arena. Tata Capital proposes to enter the area of Capital Market Services, Merchant Banking, Housing Finance, Private Equity Investments, Assets and Vehicle Financing, Retail Finance and other related areas. These activities would be undertaken either in subsidiary companies or divisions of Tata Capital depending on regulatory requirements, Tata Sons said in a statement. The existing Tata companies in the Financial Services space such as Tata AIG Insurance companies, Tata Asset Management Company and Tata Investment Corporation, will continue to remain separate entities and function as at present, Tata Sons said.

Kingfisher Airlines to buy 50 Airbus planes

Kingfisher Airlines Ltd. said it had signed a preliminary US$7.2bn deal to buy 50 Airbus aircraft. This will include 15 A350-800 XWB jets worth US$3bn. The order also includes five four-engine A340-500 planes, 10 A330-200 wide-body models and 20 single-aisle A320-family jets. Kingfisher had already ordered 5 of the original version of the A350 and has upgraded these orders to the redesigned A350 XWB model. The new order for 15 A350 XWBs brings the total commitment for the aircraft to 20. Kingfisher will use the planes to fly to the US and Europe and meet India's growing demand for air travel, said UB Group Chairman Vijay Mallya, at a press conference in Le Bourget. The single-aisle planes will be used to expand routes in the domestic market, where passenger traffic is set to grow 25% annually for the next decade.

Britannia shares up on Danone settlement news
Shares of Britannia Industries Ltd. jumped after a business daily reported that French food major Groupe Danone would exit the joint venture with the Wadia group in return for a free play in pursuing its solo foray in India. The newspaper said Danone was getting "impatient" for launching its independent operations in India and was willing to pay a compensation to the Wadias for terminating the joint venture. "We are willing to take radical steps to pursue our own plans," the daily quoted a Danone official as saying, provided the French firm was given a free hand to pursue its dairy and beverage plans, sans biscuits. The value of Danone's holding in Britannia is more than Rs10bn (US$245mn), but the company has not discussed the pricing so far, the newspaper said, quoting unnamed Danone sources.

Probe ordered into Naresh Goyal-underworld link

The Bombay High Court ordered the Mumbai police to probe Jet Airways chairman Naresh Goyal's alleged links with the underworld. The court has given the Mumbai Police Commissioner two months to submit a report, besides asking if the department wanted the help of Central Bureau of Investigation (CBI). The direction came while hearing a petition filed by a Delhi based journalist that alleges that the Intelligence Bureau (IB) had found links between Goyal and mafia don Dawood Ibrahim. It also alleges that Goyal's airline has got funds from the underworld. Jet Airways said in a statement that it had so far not received any intimation from any quarter of any proceeding or order that may have been passed. Similar allegations were also made in the past but government inquiries found no evidence against Goyal. Jet has always denied any links with the underworld.

HDIL, Spice Tele launch IPOs

Housing Development and Infrastructure Ltd. (HDIL) announced that it had fixed a price band of Rs430 to Rs500 per share for its Initial Public Offering (IPO) of equity shares. The public issue of HDIL will open on June 28 and will close on July 3. HDIL is part of the Wadhawan Group (formerly known as the Dheeraj Group), which has been involved in real estate development in Mumbai for nearly three decades. According to reports, HDIL has around 45.5 million sq. ft under construction and an additional 66.6 million sq. ft in various stages of planning. HDIL's land bank of 2,500 acres spread across Mumbai, Kochi and Hyderabad has been valued at Rs215bn by real estate consulting firms Knight Frank India and Cushman Wakefield India.

Spice Communications Ltd., the BK Modi Group wireless telecom service provider with operations in Punjab and Karnataka, launched its IPO of 113,111,111 equity shares. The issue will open on June 25 and will close on June 27. The issue will be 16.4% of the fully-diluted post-issue equity share capital of the company. Spice Communications fixed a price band of Rs41 to Rs46 per share for its maiden public issue. The promoters own 51% in Spice Communications while Telecom Malaysia holds the balance 49%. Post IPO, their shareholding will be 41% and 39%, respectively.

UTV arm raises US$77.33mn from AIM

UTV Software Communications Ltd. said its subsidiary UTV Motion Pictures Plc has raised US$77.33mn through an IPO on the Alternative Investment Market (AIM) of London Stock Exchange (LSE). UTV Software has closed the book for allotment of 24,137,931 equity shares of US$0.05 each (comprising 23.17% of the post allotment equity) at US$2.90 per share aggregating to US$70mn. UTV Motion Pictures has also retained a greenshoe option to further allot 2,528,735 shares at US$2.90 per share. Post the greenshoe option, UTV Motion Pictures would in aggregate raise US$77.33mn with 25% dilution, with UTV Software holding the balance 75%. Meanwhile, the Indian Film Company, promoted by the TV 18 Group and Viacom, made its debut on the AIM. Shares of The Indian Film Company were placed at 100 pence (£1) per share raising £55mn from the listing. Shares rose as much to 120 pence (up 20%) on their debut.

Barclays sets tone on deal street
HDFC and Barclays Bank Plc decided to sell their entire shareholding in Intelenet Global Services, an India-based third-party BPO service provider, to SKR BPO Services Ltd. (SKR) for an undisclosed sum. According to reports, the deal value was around US$200mn. SKR is jointly owned by the management of Intelenet and Blackstone GVP Capital Partners Mauritius V-B Ltd., a member of the Blackstone Capital Partners group, a leading global private equity investor. Intelenet provides BPO services to a variety of local and international customers. It is a 50:50 joint venture between HDFC and Barclays and was established in 2004.

Bank of India (BOI) said that it had signed an agreement to acquire a 76% stake in PT Bank Swadesi Tbk, Indonesia. Bank Swadesi is a well run mid sized bank operating in Indonesia for the last 38 years and has 16 outlets. It has a licence to Forex Business and is listed on the Jakarta Stock Exchange. The deal was first announced by BOI in December 2006. This is the first overseas acquisition for BOI, which has a representative office in Indonesia for the last 33 years.

KazStroyServices Plc acquired Petron Engineering Construction Ltd. for an undisclosed amount. KazStroyServices bought 21,095 shares from Amritha Sharanya Leasing & Investments (ASLI) and 721,530 shares from SRA Finance & Investments (SRA). ASLI and SRA held 80% shares in Petron Investments, which held 52.22% in Petron Engineering. In addition, KazStroyServices acquired Petron Investments shares from four individual shareholders. KazStroyServices also made an open offer for buying an additional 20% stake in Petron Engineering at Rs180 per share.

Batliboi Ltd. announced the acquisition of a 70% controlling stake in AESA Air Engineering SA, Europe’s premier Air Technology company for Euro 1.6mn (about Rs90mn) in an all cash deal. The acquisition of AESA marks Batliboi's second foray into the M&A space after the successful takeover of QuickMill, a Canadian Machine Tool company in March.

Cranes Software International Ltd. said its Board had approved the acquisition of Dunn Solutions Group, a US technology based consultancy company. The company's wholly owned subsidiary in USA, Cranes Software Inc. will invest Rs600mn in acquisition and immediate investments. Cranes Board also approved the acquisition of Tilak Autotech, thereby making it a wholly owned subsidiary of the company. The investment would entail about Rs100mn in acquisition cost and immediate investments.

Blackstone mops up US$4.1bn in IPO

Notwithstanding the proposed hike in taxes on private equity firms by the US Congress, Blackstone Group LP managed to raise US$4.13bn in the largest IPO in five years. Blackstone sold 133.3mn shares for US$31 each, the top of its US$29 to US$31 target range. Sale of the 12.3% stake values the New York-based firm at US$33.5bn. Blackstone will let underwriters, led by Morgan Stanley and Citigroup, sell an additional 20mn shares in case there is excess demand. That would boost the total offering to US$4.75bn. The IPO valued Chief Executive Stephen Schwarzman's stake at US$7.74bn. Schwarzman, who co-founded the firm 22 years ago, will also get a one-time payout of up to US$677.2mn. Senior Chairman and co-founder Peter Peterson's stake was valued at US$1.35bn. Blackstone, one of the largest private equity investment firms in the world, is set to begin trading on Friday on the New York Stock Exchange under the symbol "BX." Reports also said that Kohlberg Kravis Roberts (KKR) was also planning its own IPO. The private equity firm, known for its takeover of RJR Nabisco in 1988, has hired Morgan Stanley and Citigroup. But, KKR may still decide against the IPO, which values the firm at about US$34bn, The Wall Street Journal reported on its Web site.

WTO talks fail on farm issues
The ill-fated Doha round of global multilateral trade talks remains in doldrums after crucial talks among four leading WTO members - the US, the EU, Brazil and India - collapsed on the contentious issue of farm subsidies and tariffs. The US and the EU said that India and Brazil offered nothing new to break the impasse while the latter two blamed the developed nations for their reluctance to cut farm aid and import duties on agriculture commodities. "Since discussions began on June 19, Brazilian Foreign Minister Celso Amorim and Indian Commerce Minister Kamal Nath didn't move an iota from the point we started at two years ago," US Agriculture Secretary Mike Johanns told journalists in Potsdam, Germany. "I could have done cartwheels off the roof of this building and I'm still not sure I would have got a response," he added. Though WTO director general, Pascal Lamy said that an agreement in Potsdam would have been helpful, he held out hope that other members could resurrect the negotiation. "Helpful does not mean indispensable," Lamy said.

BHP may revive Alcoa bid: report

Anglo-Australian mining giant BHP Billiton was reportedly considering making a US$40bn bid for the US-based aluminium major Alcoa. "BHP Billiton is believed to be in the early stages of evaluating the merits of a takeover and is not thought to have formally approached Alcoa," London-based Times reported. Separately, Sydney Morning Herald reported that BHP and rival Rio Tinto were among those being considered by Alcan for the role of the white knight, but the process was still in early stages. Both the mining majors were considered potential counter bidders to Alcoa, the world's second-biggest aluminum maker which has already made a US$27.7-bn hostile takeover bid for Alcan, the newspaper said. While Alcan refused to confirm or deny the media report, BHP and Rio too declined to comment. Alcan rejected Alcoa's offer in May and the company has said it is considering other options that could include working with BHP and Rio to fight off the bid from the US rival.

ICI rejects bid from Akzo Nobel

Shares of Imperial Chemical Industries Plc (ICI) surged after the British firm spurned a £7.2bn (US$14.2bn) takeover offer from Dutch rival Akzo Nobel NV, saying that it undervalued the company. Akzo, the world's largest maker of paints and coatings, offered 600 pence a share, a price that significantly undervalues the business, London-based ICI said in a statement. That's 9.3% more than Friday's closing price. ICI said its directors had unanimously rejected the Akzo proposal. "The Board is very confident in the group's strategy and strong growth prospects," it said. "The company will continue to evaluate all strategic opportunities, including ICI, based on a disciplined and value-driven approach to earnings and returns over cost of capital," Akzo said. Apart from ICI, Valspar and Sherwin-Williams are among Akzo's likely takeover targets, analysts have said. ICI could also attract other suitors, according to them.

Luxottica to buy Oakley for US$2bn

Luxottica Group SpA, the maker of Ray-Ban and Ralph Lauren brand of eyewear, announced it would acquire Oakley Inc. for US$2.03bn. California-based Oakley's investors would receive US$29.30 per share, a 16% premium to yesterday's closing price. The deal has been approved by both company boards and is expected to be finalised in the second half of 2007. The Milan-based Luxottica said that Oakley would boost service and innovation for its wholesale customers. Oakley's namesake chain, Bright Eyes outlets and Sunglass Icon stores would complement Luxottica's LensCrafters and Pearle Vision retail business in North America, the companies said. Luxottica said the tie-up should produce € 100mn (US$134mn) in savings during the next three years. The deal would increase fiscal 2008 sales by around 12% and would be roughly neutral for earnings excluding any tax benefit, said Leonardo. It plans to fund the acquisition from operating cash flow, available lines of credit and new debt.

Sensex garners 305 points

The market surged last week despite liquidity concerns arising from the mega follow-up public offer of ICICI Bank. The FPO was subscribed a good 11.38 times. The issue opened for subscription on Tuesday, 19 June 2007 and closed on Friday, 22 June 2007.

The BSE 30-shares Sensex rose 304.65 points or 2.15% to 14,467.36, while the S&P CNX Nifty gained 80.6 points or 1.93% to 4,252.05 in the week ended 22 June 2007.

Trading for the week started on a bearish note with the Sensex declining 82.57 points to 14,080.14, on Monday, 18 June 2007. 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.

Sensex surged 215.36 point at 14,295.50, on Tuesday, 19 June 2007, boosted by short covering and buying in index pivotals. The sentiment was also boosted further 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.

The BSE index gained 116.45 points to 14,411.95, on Wednesday 20 June 2007, with shares from auto, banking, cement and metal leading the rally

The upmove continued for the third straight day, as the Sensex rose 87.29 points to 14,499.24, on 21 June 2007. Shares from the capital goods sector were in demand.

The three day rally fizzled out on 22 June 2007, with the Sensex slipping 31.88 points at 14,467.36, in highly volatile trade.

Reliance Industries (RIL) rose 1.43% to Rs 1704. As per reports, global oil giants including Shell, Exxon and Chevron are eyeing a stake in Reliance Industries’ overseas oil & gas assets. RIL recently hived off these assets into a separate company called Reliance Exploration and Production DMCC.

Meanwhile, the Bombay High Court’s in its interim order issued on Thursday, 21 June 2007, said RIL cannot sell the gas to be produced from one of its prime blocks in the Krishna-Godavari basin to any third party other than Anil Ambani’s Reliance Natural Resourses (RNRL) and NTPC. In the interim order on a petition filed by RNRL, the Bombay High Court said that the 81.6 million cubic metres of gas per day (mmscmd) is to be earmarked for RNRL, NTPC or for RIL’s captive use for the next eight years.

Bank stocks were in demand. State-run banking major State Bank of India (SBI) gained on its plans to raise $225 million from the overseas market this year by issuing perpetual bonds. 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 also rose on strong response for its follow-on public issue. The price band for the issue was 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 opened for subscription on Tuesday, 19 June 2007, and closed on Friday, 22 June 2007. The issue size is Rs 8,750 crore. The issue including the green shoe option aggregates to Rs 10,062.5 crore.

Engineering & construction major L&T gained after 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. L&T also signed a $95-million shipbuilding contract with Netherland's BigLift.

State-run engineering major Bharat Heavy Electrical (Bhel) also moved higher after it bagged a Rs 139-crore contract from NTPC for supplying and commissioning of 27 transformers on 19 June 2007.

Reliance Energy (REL) galloped. REL is one of the five qualified bidders to have submitted bids for the 4,000-mega watt Sasan ultra mega power project. The Lanco Infratech-Globeleq Singapore consortium had won the bid for the Sasan project after outbidding eight companies by quoting the lowest tariff of Rs 1.19 per unit. However, the project became controversial after Prince Stone Investments, the Mauritius-based holding company of Lanco, and Jindal Steel & Power together acquired Globeleq Singapore in February 2007.

Aditya Birla group’s aluminium and copper major Hindalco Industries edged up on market speculation that promoters are hiking their stake from the open market.

IT pivotals settled with losses, as the rupee gained strength. Frontline pivotals, Infosys, Satyam Computers, TCS and Wipro, all settled lower.

Glory Polyfilms settled at 28.85% premium at Rs 61.85 on BSE over IPO price of Rs 48, on 18 June 2007. The Glory Polyfilms stock made its debut at premium at Rs 50 on BSE. The scrip touched a high of Rs 84 and a low of Rs 50 during the day.

On 19 June 2007, 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 on BSE, touched a high of Rs 65.90 and low of Rs 43.50.

On the same day, HTMT Global Solutions (HGSL) settled at Rs 583, compared with a base price of Rs 800 on its debut, 19 June 2007 following a restructuring scheme of Hinduja TMT (HTMT).

India's wholesale price index rose 4.28% in the 12 months to 9 June 2007, lower than the previous week's increase of 4.80%, due to a decline in food prices, government data released on 22 June 2007 showed.

High volatility expected ahead of June 2007 derivatives expiry

Trend in global equities will continue to dictate share price movements on the domestic bourses. Volatility is likely to be high ahead of expiry of June 2007 derivatives contracts on Thursday, 28 June 2007.

Indian stocks have been closely tracking global equities since the past two years or so. A number of Asian markets are hovering at near their record highs which they had scaled recently. With US interest rates expected to be held steady at the 27-28 June 2007 Federal Open Market Committee (FOMC) meeting, investors will be looking to the Federal Reserve's assessment of the state of the US economy.

The only major Q4 result left which of ONGC will be out on Monday, 25 May 2007. ONGC’s results for the quarter ended March 2007 are likely to be disappointing due to a surge in the subsidy burden

Other firms announcing Q4 results next week include Jet Airways, Warren Tea, Munjal Auto, Kirloskar Electric, Ansal Properties & Infrastructure, Orient Ceramics, Bharat Earth Movers (BEML), Amrutanjan, Birla Kennametal and Celebrity Fashions.

Along with Q4 results, the board of Jet Airways will consider a proposal to raise up to $400 million by way of a rights issue of equity shares. At the beginning of the week, BEML will unveil the price band for its forthcoming follow-up public offer which opens for subscription on 27 June 2007.

The Q1 June 2007 corporate earnings season will kickstart from less than a month from now and, over the next few days, traders are likely to build positions based on Q1 results expectations. The Q4 corporate earnings were strong which had helped trigger a solid surge in domestic bourses since early April 2007.

Over the next few months, the progress of the July-September monsoon will hold key. The weather office said in April 2007 that this year’s monsoon was likely to be 95% of the long-term average, with a 5% margin of error. The annual monsoon is vital for India’s economic health as it is the main source of water for agriculture, which generates more than a fifth of the gross domestic product

Spice Communications IPO Analysis

Small player trying to survive

Promoted by Dilip Modi of the B K Modi group, Spice Communications provides cellular services in Punjab and Karnataka. Telekom Malaysia will hold a 39.2% equity stake post-issue compared with 40.8% of the Modi group. The company was the second largest cellular services provider in Punjab and the fifth largest cellular services provider in Karnataka, measured by the total number of subscribers with a combined market share of 14.49% in these two states (Punjab: 23.9% and Karnataka: 7.5%) end March 2007. The subscriber base was 3 million (2.05 million in Punjab and 0.95 million in Karnataka) with network coverage of 537 towns in Punjab, covering approximately 55% of the state population, and 229 towns in Karnataka, covering 33% of the state population end May 2007.

Spice Communications has pending applications for licences to provide cellular services in additional 21 circles throughout India. The company was recently awarded a national long distance (NLD) licence and international long distance (ILD) licence by the Department of Telecommunications and it intends to initially set up base infrastructure for a capacity of 30 million minutes per month across 15 locations in India.

The current initial public offering (IPO) is to raise Rs 464 crore at the lower band (Rs 41) and Rs 520 crore at the upper band (Rs 46). The net proceeds from the issue are to be used for part repayment of long-term debt, for payment of NLD and ILD licence fee, for meeting related capital expenditures to set up base infrastructure for NLD/ILD amounting to Rs 63.60 crore, for paying vendor(s) for network equipment and other capital expenditure amounting to Rs 177.63 crore, and for general corporate purpose and public issue expenses. Spice Communications has issued 2.49 crore of equity shares at a price of Rs 45 to certain investors pre-IPO and raised Rs 111.93 crore.

Strengths

• Has received NLD and ILD licences and proposes to offer data transmission services and voice transmission for calls originating and terminating on most of India’s and global telecom networks. It will be basically taking capacity on lease rather than setting up its own network. This will improve the operating profit margin.
• One of the objects of the issue is to repay part of debt, which is likely to reduce the interest burden.
• The Indian telecom industry is one of the fastest growing in the world adding nearly six million subscribers a month. The mobile subscribers base is estimated to increase to approx. 210 million by the year ending March 2008 (FY 2008), from the current level of 167.44 million subscribers end April 2007. Factors like falling handset costs, attractive tariffs and extensive reach have reduced the entry barriers for new subscribers and, thus, expanded the markets available to telecommunication service providers. The presence in the country’s richest state, Punjab, is likely to translate into volume growth.

Weaknesses

• In the absence of pan-India presence like other integrated operators, unable to provide seamless roaming services and is forced to share its revenue with other operators with whom it has roaming arrangement for its subscribers. Though licences in other circles have been sought, the current state of financials will hamper expansion in other circles in a major way in foreseeable future.
• Of the last five completed financial years, there were net losses in three years on account of low operating profit margin compared with the industry, high interest and depreciation. Losses have been incurred even in FY 2007. On account of continuous losses, the net worth has eroded. Accumulated losses stand at Rs 684 core (higher than the current issue size of around Rs 500 crore).
• Being a regional service provider, there is significant competition from larger integrated players with pan-India presence and greater financial, technical and marketing resources. In the past, key corporate clients were lost, particularly in Karnataka, primarily due to lack of coverage in certain geographic areas. Not been able to sustain its first mover advantage in both the states it operates.
• The Modi group’s track record is not encouraging.

Valuation

Spice Communication has made net losses in the six months ended December 2006 and year ended June 2006. However, it has been making profit at the cash level. The company will not be listed on NSE as it does not meet the financial track record prescribed by NSE for new listings.

At the price band of Rs 41 - Rs 46, the EV/EBITDA works out to 20.9 – 22.8, respectively. While Bharti Airtel, the largest integrated player in the sector with a pan-India presence in GSM (in all 23 circles), trades at EV/EBITDA of 21.5, and Reliance Communication, with CDMA presence in 21 out of 23 circles and GSM presence in eight circles constituting a pan-India presence in all the 23 circles, is trading at EV/EBITDA of 18.4. Idea Cellular, with operations in 11 circles, trades at EV/EBITDA of 22.6.

On the basis of FY 2007 consolidated revenue, the market capitalisation to sales works out to 8.5 for Bharti Airtel, 7.3 for Reliance Communication, 7 for Idea Cellular, and 3.4 for Tata Teleservices (Maharashtra). It is 3.7-4.1 for Spice Communications. The EV per wireless subscriber for Bharti Airtel, Reliance Communication and Idea Cellular is about Rs 41102, Rs 35382 and Rs 23434, respectively. For Spice Communication, it is Rs 13887 – Rs 15113. But one should also factor in that Spice Communications is operating in only two circles and has a low subscriber base/market share.

The blended average revenue per user (ARPU) of Spice Communication stood at about Rs 370 in the six months ended December 2006 against Rs 427 for Bharti Airtel, Rs 338 for Idea cellular and Rs 328 for Reliance Communication in the quarter ended December 2006.

Spice Communication is one of the suitable candidates for takeover. Earlier attempts have reportedly failed due to pricing issues. The company is not a growth story as it is neither capable of growing organically nor inorganically in a significant way. Ultimately, it will have to get itself taken over by a strong player. That’s the only thing that can add spice to its share price.

Short-term Trading Calls

Buy Rajesh Exports with stop loss of Rs 500 for a target of Rs 670.
Buy Aurobindo Pharma with stop loss of Rs 740 for a target of Rs 940.
Buy Bharat Electronics Ltd with stop loss below Rs 1853 for a target of Rs 1899 and Rs 1915 . This is a day trading recommendation. Use the buy calls only if the Nifty stays above 4260.

Asia Currency, Interest Rates

Asia Currency, Interest Rates

Sharekhan Investor's Eye dated June 21, 2007

Orchid Chemicals & Pharmaceuticals
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs390
Current market price: Rs253

Cefepime--a huge opportunity!

Key points

• Orchid Chemicals & Pharmaceuticals (Orchid) has received approval from the US Food and Drug Administration (USFDA) for its abbreviated new drug application (ANDA) for Cefepime injection.
• Cefepime injection is a life-saving Cephalosporin antibiotic drug used in hospitals. The brand product had recorded sales of $190 million in December 2006. The patent for the product has already expired.
• Since there will be only two players in the market including the innovator, Orchid will enjoy a near-exclusivity situation with this product and Apotex, through its strong marketing prowess, will be able to capture a healthy market share to the tune of 50-60%. Besides, with the entry of just one player, the market is also unlikely to get eroded beyond 20-30%.
• We believe that Cefepime injections will generate $18.3 million in revenues for six months of FY2008 (from July 2007-March 2008) and $36.6 million in revenues in FY2009. This will translate into incremental earnings of Rs2.6 per share and Rs5.3 per share in FY2008 and FY2009 respectively, on a fully diluted basis.
• At the current market price of Rs253, the stock is trading at 10.1x its estimated FY2008 earnings, on a fully diluted basis. Based on the FY2007 performance of the company, the outlook provided by the management and the recent news flow relating to the company, we are reviewing our estimates for Orchid and will come out with an update shortly. In view of the bright prospects for the company, we retain our positive stance on the stock and maintain our Buy call with a price target of Rs390.

Indian Hotels Company
Cluster: Apple Green
Recommendation: Buy
Price target: Rs180
Current market price: Rs144

Price target revised to Rs180

Result highlights

• The FY2007 results of Indian Hotels Company Ltd (IHCL) are above our expectations. However, on a stand-alone basis the FY2007 results are not comparable with the results of FY2006 as the former take into account the effect of the merger of five companies into IHCL with effect from April 1, 2006.
• The company reported a consolidated total income of Rs2,665.8 crore for FY2007 as against Rs1,914.1 crore for FY006. That implies a growth of 39%. Operating profit showed a growht of 39.5% from Rs512 crore to Rs715 crore in FY2007. The interest and depreciation charges were higher in FY2007 due to the merger of the five companies in the year. IHCL posted a consolidated profit after tax (PAT) of Rs369.9 crore in FY2007 as against Rs248.7 crore in FY2006. This resulted in earnings per share (EPS) of Rs6.1.
• The healthy trend in the top line is due to the rise in the number of foreign tourist arrivals in India, which has pushed up the average room rate (ARR) and the occupancy rate (OR). The hotel industry has witnessed continued buoyancy in the arrival of foreign tourists. The number of foreign tourist arrivals increased to 40 lakh from 44 lakh in FY2007, representing a 15% growth year on year (yoy).
• In FY2007 the ARR grew by 28.4% to Rs9,234 from Rs7,186 in FY2006; the OR increased from 70% in FY2006 to 73% in FY2007.
• IHCL has issued 16,219,670 equity shares to the members of Indian Resort Hotels, and Gateway Hotels and Getaway Resorts which has led to equity dilution of 2.76%. The new equity capital is 60.3 crore.

Q4FY2007 results (stand-alone)

• On a stand-alone basis, for the fourth quarter of FY2007 IHCL reported a top line growth of 42% at Rs505.2 crore against Rs355 crore in Q4FY2006. The operating profit margin (OPM) improved by 640 basis points from 35.5% in Q4FY2006 to 42.0%. The operating profit grew by 67.6% to Rs212.1 crore. The bottom line of the company grew by a healthy 71% to Rs134.5 crore from Rs78.7 crore in Q4FY2006, resulting in earnings of Rs2.23 per share.
• The company has merged Asia Pacific Hotels, Indian Resort Hotels, Gateway Hotels and Getaway Resorts, Taj Lands End and Kuteeram Resorts Pvt Ltd with itself with effect from April 1, 2006. This has led to an addition of around 400 rooms to the existing inventory. The results for the year ended March 31, 2007 are therefore not comparable with the results of the previous year.
• We have introduced our FY2009 estimates for the company with a consolidated PAT of Rs547.8 crore. At the current market price of Rs144 the stock is quoting at a price/earnings ratio (PER) of 20x FY2008E consolidated EPS of Rs7.4 and 16X FY2009E consolidated EPS of Rs9.1. We maintain our Buy recommendation on the stock with a revised price target of Rs180.

Sharekhan Investor's Eye dated June 21, 2007

Profit sales snap 3-day rally

The market closed lower Friday, as investors booked profits after three days of gains. Global cues were also unsupportive, and led to indices swinging between the positive and negative intra day.

Analysts said the volatility on Friday is a normal phenomenon ahead of the F&O June series expiry next week, and is expected to increase.

Bombay Stock Exchange’s 30-share Sensex closed down 0.27 % or 39 points at 14460. Intra day, it rose to a high of 14560 and low of 14441.

National Stock Exchange’s 50-stock Nifty settled 0.36 % or 15 points lower at 4252, after moving between the high of 4279 and low of 4242.

Sensex traded within a 120 point band and Nifty in 40 points band. Analysts expect the range to widen next week.

Frontline stocks took a beating, while mid-caps and small-caps were firm. BSE Midcap Index was marginally higher at 6375 and Smallcap Index up 0.23% at 7514.

On the Sensex, Ambuja Gujarat Cements, BHEL, Reliance Industries, Tata Steel, Wipro and Grasim Industries were the biggest losers.

The major gainers included Reliance Energy, NTPC, Hindalco, HDFC, Hindustan Unilever and State Bank of India.

Among sectors, oil & gas, capital goods, and metals were laggards. Technology stocks remained subdued due to the rupee’s rise, but banking managed gains.

In sectors, BSE Oil & Gas Index ended down 1% at 7590. Indian Oil Corporation dropped 1.76% to Rs 440. BPCL and HPCL fell 0.95% and 0.24%, respectively.

Shares of metal companies were weak, with the BSE Metal Index down 0.68% at 10,746. Hindustan Zinc lost 3.76%, Jindal Saw Pipes fell 1.29% and Jindal Steel dipped 1%.

In the derivatives segment, Nifty June futures traded at 14 point discount to the spot. Open interest in the contract rose 3.3% to 3.72 crore. Action was more in stock futures than in Nifty June futures.

SBI June contract ended at Rs 1,459.70, up from the previous close of Rs 1,452.45 and premium of Rs 6 to the spot. The futures clocked a turnover of Rs 1, 316.77 crore. The second most actively traded June contract was Reliance Industries with turnover at Rs 859.82 crore. It closed at Rs 1,710.30 compared to the underlying Rs 1,702.15. Open interest was up 3.1% at 82.8 lakh.

Real Estate Developers resort to tricks

Book a flat for Rs1 lakh and start earning rent on your flat from the next month onwards,” goes a radio advertisement by real estate developer Arun Dev Builders Ltd.
The scheme, which sounds tempting, is part of an effort by real estate developers, especially the relatively small ones, who are turning to flat buyers for financing after banks have started tightening lending to the real estate sector.

The plan is legal and simple: a builder typically takes a higher percentage of the total flat cost as the booking fee from a buyer prior to the launch of the project and uses the money to actually finish the project.

For instance, in a project launched by Arun Dev Builders, a buyer needs to pay a booking amount of Rs1-2 lakh and, after 40 days of the registration, the buyer will receive an interest of Rs1,500 every month from the company. In its brochure, the company refers to this interest payment as a monthly rent on the flat.

After 90 days of registration, the customer pays another Rs1 lakh to the developer as an instalment amount for the flat. A month after the second instalment amount is paid, the interest pay-out increases to Rs3,000-4,500. The remaining amount is to be paid at the time of possession of the flat.

The company launched this plan for its flats in Arun Dev Enclave in pilgrim city Haridwar. The flats vary between 404 sq.ft and 690 sq.ft in size, and the cost ranges between Rs4.4 lakh and Rs7.5 lakh, said Rahul Kumar, marketing officer of Arun Dev Builders.

Girirajii Associates, real estate brokers for Arun Dev Builders, claims that out of the 30,000 flats in Haridwar, around 10,000 have been booked so far.
While the proposal is an incentive for the flat buyer, the developer benefits from it because he gets higher than usual booking fees upfront. For instance, the booking amount of Rs1 lakh for a flat that costs Rs7.5 lakh is on the high side going by recent real estate standards. “The booking amount for any developer is usually 10% of the total cost of the flat,” says Kunal Banerji, a vice-president at another real estate developer Ansal API Ltd.

But for Arun Dev Builders, the booking amounts work out to a much larger proportion of the final flat cost. The interest fee handed by the company may go as high as 18% every year, but small developers have been left with no choice except to get creative, as borrowing from other informal sources for funds could mean paying rates of well over 30%.

Spurred by easier home loans and a greater push towards home ownership rather than tenancy, the real estate market in India has grown at a frenzied pace in the last three years with values doubling and even tripling in that period.
But “it has become difficult for the speculative real estate developers to borrow from banks,” says U.S. Bhargava, former chief general manager of Punjab National Bank, who retired in May after 36 years in banking.

To offset that and collect funding, some developers are also offering discounts on larger down-payment plans.
For instance, Shipra Group, another small real estate developer, has an offer for its flats in Indirapuram, near Delhi, where the rate per square foot is discounted when the buyer makes the entire down payment within 45 days of booking.

Under the plan, for a flat of 1,200 sq.ft which costs more than Rs36 lakh, if the customer makes the full down payment the rate comes down to Rs3,015 whereas, if it is paid in instalments the rate works out to Rs3,150 per sq. ft.

Another real estate company, OSB Group, launched a money-back scheme for its plots in Jaipur. “We used to have a similar scheme which we discontinued in April as all our plots were sold,” said Bharat Thakran, assistant manager, sales and marketing at OSB.

Under its plan, if the buyer cancelled the plot within a year of paying the booking amount, which ranged from Rs45,000 to Rs1 lakh, the company would return the entire booking amount to the buyer with 25% interest. OSB now plans to offer the scheme on some of its future projects.

Infosys CEO - Kris Gopalakrishnan

Kris Gopalakrishnan loves books on courtroom dramas, history and fiction, but will have less time to read after taking over as chief executive on Friday of India’s showpiece software services firm Infosys Technologies Ltd.

Nasdaq-listed Infosys has grown from humble beginnings to a $27.5 billion global company with annual revenues set to hit $4 billion as more Western firms outsource operations to lower-cost India.

But Gopalakrishnan -- Kris to his colleagues -- faces a stronger rupee, spiralling wages, a shortage of skilled workforce and fierce competition from global giants IBM, Accenture and Electronic Data Systems Corp.as he takes the helm at India’s No.2 software exporter.

The softly spoken 52-year-old is one of the seven founders of Infosys that was set up in 1981 with $250 contributed mostly by their spouses. He takes over from Nandan Nilekani, who moves to co-chairman.

“It’s exciting, but there will be a lot more responsibility. The focus will be on me. In that sense, the responsibility increases,” Gopalakrishnan told Reuters earlier this month.
Analysts say the new chief will be under pressure to cut costs and improve efficiency to boost margins at a time when annual wage hikes of 10-15% are threatening to pinch earnings. Infosys had a payroll of more than 72,000 at end-March.

“Although he doesn’t appear to be as charismatic as his predecessors, he is the right person to lead in this scenario with his knowledge of the back-end,” said a sector analyst, referring to his expertise in handling project delivery.

“The company is anyway on auto-pilot, with a strong management team in place, but there is a requirement to enhance focus on the cost side rather than on the business side,” said the analyst, who asked not to be identified.

“Kris is gentle but firm, consultative yet decisive, thoughtful yet action-oriented,” said Infosys Chairman N.R. Narayana Murthy.
India’s big software services firms -- Infosys, Tata Consultancy Services Ltd. and Wipro Ltd. -- get over 60% of their revenue from overseas, and margins are being squeezed by an 8.5% rise in the rupee against the dollar this year on strong capital inflows.

Steady hand

Gopalakrishnan, a Masters in Computer Science from the Indian Institute of Technology, began his career at Mumbai-based Patni Computer Systems Ltd. in 1979 -- opting to stay home rather than follow many of his compatriots heading West for better pay.

Two years later, he joined Murthy, Nilekani and four others to set up Infosys, whose clients now include ABN AMRO and Goldman Sachs.

This took him to the United States, where he worked on programming for clients and doubled as salesman for deals. He returned to India in 1994.
Gopalakrishnan, son of a small businessman from the southern Indian state of Kerala, is married and has one daughter.

“He is very down-to-earth and has often rolled up his sleeves to help the team meet critical deadlines,” Srinivas Uppaluri, associate vice-president of corporate marketing at Infosys, said.

While he may have less time for his books, Gopalakrishnan will have plenty of opportunity for his other indulgence, picking up the latest electronic gadgets on his overseas trips.

ICICI's growth & value offer

Stripping off the value embedded in its subsidiaries, ICICI Bank is available atleast 40 per cent cheaper than its closest private rival HDFC Bank .

India's largest private sector bank is finally here with another mega share offering. With a market-capitalisation of Rs 81,000 crore, the highest among listed banks, ICICI Bank is planning to raise Rs 8750 crore with an option to accept an additional Rs 1300 crore in the domestic market.

Simultaneously, the bank would also raise a similar amount in the international market through issue of American Depository Shares (ADS) taking the total money garnered to nearly a quarter of its current market value. The money collected will go as essential capital to fund its rapidly growing assets and adhere to the new banking regulations.

Coming a week after a similar sized issue from real estate developer DLF got a lukewarm response from investors, investment banking sources suggest that several global investors abstained from the DLF offer considering a relatively more attractive deal from ICICI Bank.

Whatever be the response to this issue, ICICI Bank appears to be a long term story with an aggressive growth strategy that would now focus on the country's poor on the one end and overseas operations on the other, apart from the traditional segments like urban retail and corporate banking. Over the next two years, the bank should be able to achieve an asset growth of 28 per cent and profits some 35 per cent, according to analysts' estimates.

Despite the accelerated growth if anyone is complaining it is because ICICI Bank has been knocking at the capital market more often than its peers thus earnings a lower return on equity (ROE). Much to the dismay of analysts, ICICI Bank raised roughly Rs 10, 000 crore over the past three years.

Being in a business which requires money to make money, not all of the additional capital were to further its core business. A significant part went into feeding its babies, particularly the insurance subsidiary. According to analyst estimates, the additional capital committed towards its subsidiaries and the increased capital requirement (risk weights) for certain assets are roughly 50 per cent of the capital raised. But this is set to change.

Since its insurance and asset management businesses have grown big enough to stand up on their own feet, the bank is bundling them into a separate subsidiary ICICI Financial Services. Housing ICICI Prudential Life Insurance company (where it holds 74 per cent stake), ICICI Lombard General insurance (74 per cent) and ICICI Prudential Mutual Fund (51 per cent), this company would take care of their future funding needs.

"The money raised by the bank would be used to fund the capital requirements of the bank and not of the subsidiaries", says Vishaka Mulye, group CFO of the bank.

ICICI Bank intends to hold 94 per cent in the new subsidiary and has got definitive offers from various investors for a six per cent stake for Rs 2650 crore. And here is the clincher: the deal spells an implied valuation of Rs 44,600 crore for the holding company, or more than half its current market value.

On the face of it, ICICI Bank seems to reflect the characteristics of both a value and a growth stock, considering the embedded value in its holding company and its own growth potential.

The pertinent question is whether ICICI Financial Services’ current valuations would be sustained when the company goes for listing about 12-24 months from now. Otherwise, investors may not realise the value made out to be built into the stock.


The value within
No doubt, the subsidiaries are in fast growing businesses and enjoy leadership in their respective segments. While general insurance market has been growing at 25 per cent, life insurance market is almost doubling every year. Also Indian mutual fund industry has been growing at 30 per cent per annum over the last couple of years.

While ICICI Prudential Life Insurance and ICICI Lombard General insurance are market leaders among private players in the respective segments with a market share of 28 per cent and 34 per cent respectively, Prudential ICICI Asset Management is among the top three players with assets of over Rs 50,000 crore. Last year, the premium income in both life and general insurance grew at 98 per cent and 89 per cent year-on-year respectively.

Assigning the best valuation of about eight per cent of net asset value for Prudential ICICI Asset Management, the value works out to approximately Rs 2000 crore or Rs 18 per share of ICICI Bank. Similarly, analysts estimates the value of the general insurance business at Rs 35 per share applying an earnings multiple of 15 on next year earnings, assuming a 75 per cent earnings growth.


The value of the life insurance business however is estimated by analysts at not more than $5-7 billion. Putting all this together, and the value of ICICI Venture Capital and ICICI Bank UK, which are not part of the holding company, and the value of its non-strategic stakes like in NSE, MCDEX, 3i Infotech and Firstsource Solutions, the fair value estimate for ICICI Financial Services averages over Rs 250 and Rs 330 for the coming year and the next.

This means that, the bank is available for a market-cap of less than Rs 60,000 crore, based on a conservative estimate. Though there are certain concerns on ICICI bank's quality of earnings compared to say HDFC Bank, given the growth potential in its core business, the valuation seems justifiable with good scope for appreciation.

Hinterland to foreign soil
With a strong franchise, the parent bank has its growth drivers firmly in place. Offering a wide range of products from credit card to mortgages, the bank is a clear market leader in the retail segment, which constitutes about 65 per cent of its loans.

While the retail market has grown in the range of 30-40 per cent over the last three years, ICICI Bank has consistently beaten the industry with a 60 per cent growth each in 2004-05 and 2005-06, and 39 per cent in the last fiscal, a slowdown mainly due to fluctuation in interest rates.

The retail market is expected to grow at 20-25 per cent in next few years and going by the past track record ICICI Bank should outpace the industry growth rate. Brushing aside the rising interest rate impact on loans, Kalpana Morparia, Joint Managing Director, said that the bank expects to grow its retail business profitably.

After making its presence felt in the urban retail segment, the bank is turning to opportunities in the rural sector. Though the urban retail segment will continue to be the bank's growth engine, ICICI Bank wants to reach the consumers in the hinterland, not serviced by banks currently.

"We feel that if properly serviced, rural areas can offer greater opportunities than even retail," says Mulye. To grab this opportunity, the bank has formed a multi-product and multi-channel strategy primarily by partnering with various micro-finance organisation, self-help groups and even corporate targeting the retail as well the SME customers.

Also, looking at the big volumes of cross border M&As, growing aspiration of Indian companies to have a global size and to meet the needs of the NRI population, the company is looking forward to enhance its international presence. Currently, the bank has the largest international business among Indian banks with presence in 18 countries outside India.

Currently, this forms 19 per cent of its total consolidated balance sheet. Going forward, the bank will also focus on the international retail i.e. fees and liability (deposits) generation business. It already has a 25 per cent market share in inward remittance market of $28-30 billion.

Returns -- low or high?
The bank's profitability ratios have been declining gradually since FY2004 owing to a host of reasons. While intense competition in retail lending has meant that the bank has to constantly offer best (lower) rates to maintain or gain market-share, a deterioration in retail asset quality too has increased the cost of credit. Besides, the bank's cost of funds is higher and it only got worse during the past couple of quarters when there was liquidity squeeze in the market.

While its net interest margins (NIMs) are fluctuating and lower than competitors due its higher cost of funds, return on assets have been declining due to rising credit and operational costs. Though the latter is true for every other bank, ICICI Bank has been particularly hit.

According to Morgan Stanley, between FY2004-FY2007 ICICI Bank's return on risk-weighted assets dropped from 1.8 per cent to 1.2 per cent while the same metric for HDFC Bank declined from 1.9 per cent to 1.6 per cent, signalling a significant gap in profitability.



More importantly, the bank’s ROE, which is a function of ROA and leverage, has been depressed since it has raised capital more often. Since the bank will have excess capital for the next two years, its ROE would continue to suffer. Analysts expect the bank to report an average ROE of 13 per cent till 2011, roughly the time period for which the additional capital is estimated to last.

Going forward things would change. While the bank would not be forced to raise high cost funds from the market after this public issue, its proportion of low cost deposits (CASA) would also go up with expansion in branch network, especially after its latest acquisition Sangli Bank comes under its fold.

In the longer term, things could be even better when a structural shift happens in its portfolio with a greater proportion of rural and international business. While the rural business would bring in low cost deposits, the international business can be profitable because of low cost of servicing.

“Even though the servicing cost and delinquencies would be higher on the rural portfolio, it can be offset by a higher interest rates chargeable on borrowings,” says Mulye.

In FY07, while net interest income grew 41 per cent and other income grew 39 per cent to Rs 6,636 crore and Rs 5914 crore respectively, operating profit jumped by 51 per cent to Rs 5,874 crore.

However net interest margins contracted by eight basis points to 2.66 per cent due to cost push. Net profit grew only 21 per cent to Rs 3109 crore due to higher provisioning requirements on the retail portfolio.

At the price band of Rs 835-900 for retail investors (Rs 50 per share less than the actual price band of Rs 885-950), the bank is available at 2.1-2.2 times and 1.9-2 times its earnings for FY08E and FY09E respectively, excluding the value of its subsidiaries.

Closest private peer HDFC Bank trades at 4.8 times and 3.9 times for the same period. Valuations thus seems attractive. Moreover, though HDFC bank’s quality of earnings is much better, ICICI bank seems to be more than compensating for it by way of faster growth.

Going by the past record, whenever the bank has raised capital its price performance has been poor for next six months. But ICICI Bank is a stock for the long haul, and gains could be substantial when the holding company goes for listing.