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Saturday, June 30, 2007

Indian stocks fairly priced

Investors are set to witness the Bombay Stock Exchange's benchmark 30-share idex, the Sensex, hitting the 15,000 point level amid cautions upon pricey valuations of Indian stocks.

However, Indian securities markets, at present levels, are fairly valued, while its competitors from the emerging world such as Brazil and China are witnessing overstretched valuations, global investment outlook for July by ICICI Bank's private banking research division has said. By 2007 end, the Indian markets should not be very high from their current levels.

Indian equity markets are trading at price-earnings (P/E) ratio of around 18 times FY08 earning.

"We are of view that 2007 could be year of the stock markets. Equity markets could consolidate at current levels and witness some corrections in short to medium term. At current levels, the markets seems to have discounted the FY08 earnings and any negative news on the earnings front could trigger a correction in the respective sector," it said while attributing rising current account deficit, reforms backlog and demand slowdown in the developed economies as major risk factors.

"Equities remain an attractive avenue over the long term on the backdrop of robust economic growth. Investors are advised to stick to their risk profiles and not get swayed by short term market volatility," it added.

The Sensex is nearing its all-time levels. On June 29, it was short of two points to 14,650, against its all time high of 14,652.09 points. The index, which has been range bound in recent times, has grown nearly 18% in the last three months.

The report rated Chinese shares as most expensive, as the stocks are sitting over a P/E ratio of 50, and average of over 37 in recent times, which is quite higher than other markets.

Despite rating the Brazilian markets overvalued than other markets, the report said, "Excluding currency, political and other shocks, Brazil's equity markets may lave less downside risk, but its upside potential versus the others, in our view, may be limited by some current fiscal and monetary restraints."

It also warned investors in Latin American of political risks, following radical policies employed by Brazil's neighbouring countries. Brazilian markets have given upto 36% returns in the last quarter.

Sun TV shines bright

The results were announced after market hours on Thursday 28 June 2007.

The scrip had touched a high of Rs 1,641 and a low of Rs 1,545 during the day so far. Its 52-week high was Rs 1,849 on 8 February 2007 and 52-week low Rs 950 on 28 June 2006.

On BSE, 36,925 shares were traded on the counter. The average daily volume in the stock was 28,210 shares on BSE in the past one quarter.

Sun TV Network’s share price rose from Rs 1,322.15 on 8 June 2007 to Rs 1,620.85 on 26 June 2007. The stock had declined since then to Rs 1,527.35 on 28 June 2007.

The stock had gained 9.14% in the past one month to 28 June 2007 versus the Sensex's 0.65% rise. It had underperformed the market in the past three months, rising 0.96% as against the Sensex's 10.96% appreciation.

The current price of Rs 1610 discounts its FY 2007 EPS of Rs 39.02 by a PE multiple of 41.26.

Sun TV Network’s net profit surged 310.9% to Rs 118.86 crore in Q4 March 2007 as compared to Rs 28.93 crore in Q4 March 2006. Sales spurted 382.2% to Rs379.04 crore in Q4 March 2007 as against Rs 78.60 crore in Q4 March 2007.

Net profit jumped 106.42% to Rs 268.82 crore in the year ended March 2007 (FY 2007) as against Rs 130.23 crore in FY 2006. Sales advanced 110.29% to Rs 676.95 crore in FY 2007 as against Rs 321.91 crore in FY 2006.

Along with the Q4 results, Sun TV Network also informed stock exchanges that the register of members & share transfer books will remain closed from 28 July 2007 to 6 August 2007 (both days inclusive) for the purpose of payment of final dividend, stock split, bonus issue.

The company had earlier announced a stock split from face value of Rs10 each to face value of Rs5 each and bonus in the ratio of one equity share of Rs 5 each for every share held. Thus bonus will be issued after giving effect to the stock-split.

Sun TV announced on 14 June 2007 it signed an exclusive cable and satellite channels agreement with Nimbus Communications to broadcast live feed of the one day international (ODI) matches of the Ireland Series between India, Ireland, South Africa and Pakistan, to be held between on 23 June 2007 to 3 July 2007.

The company launched its FM Radio Station in Bhubaneshwar under the brand 'S FM' from June 28, 2007 through its subsidiary South Asia FM .

Sun TV's integrated growth strategy is to build a dominant presence in south India. It is a leading television broadcaster in all southern states of India. It offers four Tamil language channels including Sun TV, Sun News, Sun Music and KTV as also two Malayalam channels Surya TV and Kiran TV, apart from Telugu and Kannada channels.

Sun TV also operates leading Tamil radio stations, Suryan FM in Chennai, Coimbatore and Tirunelveli. The two subsidiaries of the company, Kal Radio and South Asia FM, jointly hold 41 FM radio licences for FM radio stations across India.

Allied Digital Services IPO Analysis

Founded in 1995 by Amit Shah, a first-generation entrepreneur with 30 years experience in the Indian IT industry, Allied Digital Services (ADS) is a provider of IT infrastructure management and technical support services. Operating across a network of 92 locations in 25 states with a team of around 1250 employees countrywide, the company follows a direct approach.

ADS operates through six strategic business units (SBUs) spread across the services and solutions space. The solutions segment includes information technologies solutions (SBU-1) including IT infrastructure, storage solutions, information security and data security solutions, enterprise management solutions and telecom solutions. The second SBU comprises networking/communication Solutions. The third SBU provides integrated solutions to set up security & safety devices, asset tracking devices, intelligent building management system and energy management solutions. The fourth SBU’s services cover software solutions in the enterprise management system (EMS) and enterprise resource planning (ERP) for manufacturing; retail; banking, financial services and insurance (BFSI); and telecom.

In the services segment the fourth SBU provides information technology services including test and repair/service centre, technical BPO, incident-based support, annual maintenance contract (AMC), facilities management services, enterprise management services and infrastructure/professional services. SBU-6’s services include remote management services (RMS) including network operation centre (NOC) offering enterprise IT helpdesk, remote desktop management, and server and network management. The security operation centre (SOC) offers 24x7 information security surveillance services.

Solutions contributed 79% of the revenue and services 20% in the year ending March 2007 (FY 2007), Services contributed about 50% of the earning before interest, tax, depreciation and amortisation (EBITDA). The top client contributed 12%, top 5 clients 34% and top 10 clients 47% of the revenue. International business accounted for only 6% of the operating revenue.

The net proceeds of the present issue would be utilised for setting up a global service delivery centre comprising a 250-seater technical BPO, IT service delivery centre, remote management service centre, software solution unit, data centre and centre of excellence. Other uses of the funds would be for upgradation and expansion of existing infrastructure such as increasing the warehouse space, expanding geographically, and setting up the NOC/SOC business facility. ADS would also go for strategic acquisition. It has identified three companies: one an Oracle services provider in India addressing India, the US and the Middle East; a security services provider in India addressing India and the Middle East; and a technical BPO services provider in Canada addressing US and Canada.


  • ADS is collaborating with e-Cop to enter remote management services through the NOC/SOC initiative. This is still not a competitive segment as it is in the nascent stage. Its partnership with e-Cop, the leader in SOC with more than 90% market share in the Far East market, will be a big positive. The SOC facility would be operational by July 2007. There is possibility of transfer of work from e-Cop to the partnership due to competitiveness of Indian operations.
  • Due to its direct-customer and neutral-vendor approach and national presence across 92 locations and 25 states, ADS enjoys a strategic advantage to capture the fast growing market opportunity.
  • Through its acquisitions, ADS will expand clients and geographically, enabling it to cross-sell services and solutions.
  • Currently, ADS has an order book of Rs 107.81 crore. Of this, Rs 54.70 crore is annuity revenue arising from services contracts and Rs 53.11 crore from the solutions business. These would be executed within 8-10 months.


  • ADS is operating in a highly competitive market. This could affect its cost advantages, and reduce its share of business from clients.
  • Growth is dependent on manpower. The industry suffers from high attrition rate.


From FY 2004-FY 2007, the operating income of ADS recorded a CAGR of 58.5% and net profit zoomed from Rs 32 lakh to Rs 22.93 crore due to focus on infrastructure management services, storage and security services.

At a price band of Rs 170-Rs190, FY 2007 EPS on post-issue equity works out Rs 13.3, and P/E 12.8-14.3. Paradyne Infotech and Accel Frontline, companies in similar businesses and size (revenue), are trading around 9 times their consolidated FY 2007 EPS.

Industry Trends and Technical Futures

Industry Trends and Technical Futures

Monthly Technicals

Monthly Technicals

Brokerages give thumbs-up to BEML issue

Brokerages Prabhudas Lilladher and Anagram Stock Broking have recommended ‘subscribe’ to the follow-on issue of Bharat Earth Movers Ltd. At the price band of Rs 1,020-1,090, the stock is available at a discount of 8.2%-15.7% against the closing price on Tuesday.

The issue is attractively priced trading at 19.6 times 2006-07 (Apr-Mar) earnings based on the upper band, Prabhudas Lilladher says in a report dated June 26.

“There is strong investment taking place in infrastructure building. Moreover, there is huge capacity addition coming up in mining industry in the country. We believe that the company has a significant opportunity to cater to and recommend ‘subscribe’ to the issue,” the report says.

Bharat Earth Movers is one of the major manufacturers of mining and construction equipment in the country. It deals in three segments, namely mining & construction equipment, defence products and railway & metro products.

It caters to various sectors such as mining, steel, cement, power, irrigation, construction, road building, defence, railway and metro transit system. The company recently crystallised its offshore plans by entering into a memorandum of understanding with Companhia Comercio E Construcoes of Brazil to manufacture and supply rail wagons and bogies, mining and construction equipment and spares for the Brazilian market.

Bharat Earth also has plans to enter the contract mining business and have tied up with a mining company for the same.

The company reported net sales of Rs 24.2 billion in FY07, an increase of 18% over the previous year. Operating profit margin was up 20 basis points to 11.5%. However, other income for the year has been lower by 17.6% leading to an 11.7% growth in profit after tax to Rs 2.04 billion, the report says.

Anagram Stock Broking expects Bharat Earth Movers to grow 18-20% CAGR for the next two years.

“Considering the huge capital expenditure in the next 3-4 years in railways, mining and defence sector, we recommend subscribe to the issue,” it says in a report dated June 28.

“At upper price band of Rs 1,090, the issue is priced at 22.2 times and on the lower band of Rs 1,020, it is trading at 20.8 times its trailing 2007-08 (Apr-Mar) earnings of Rs 49.2 on post-FPO equity base.”

According to industry estimates, total investment in mining will be worth Rs 14,500 crore in the next five years. The brokerage sees huge investment opportunities for BEML in the mining and construction industry, where the company currently commands 20% market share.

BEML has also tied up with two Indian tyre manufacturing companies to invest in production facilities to manufacture off-the-road tyres.

Railway Minister Lalu Prasad Yadav proposed the largest-ever annual capital expenditure of Rs 31,000 crore in the Rail Budget 2007-08. This will translate into an opportunity of about Rs 9,000 crore for BEML.

But the brokerage has certain investment concerns. Change in government policies and rising raw material prices could hamper revenue flow, it feels. The government accounts for 40% of its sales. Delay in payment and implementation could hurt the company’s financials.


Through the FPO, Bharat Earth Movers is offering 4.9 million shares of which 2.2 million (45%) are reserved for qualified institutional buyers, 1.54 million (13.5%) for retail, 0.66 million (31.5%) for retail and rest for employees. At the upper end, the company would be raising Rs 5.3 billion and at the lower end would raise Rs 5 billion.

Subscribe to HDIL say brokerages

Among the housing and construction companies making a bee line for the capital market, Housing Development and Infrastructure Ltd made a splash on Thursday. It is the biggest among three IPOs that opened this week.

HDIL has priced its shares in the range Rs 430-Rs 500, against DLF’s recent offering at Rs 500-Rs 550 per share. The 2.97 crore-share 100% book build offer closes Tuesday.

The issue was subscribed 0.26 times on the first day of the offer. The issue received bids for 76.91 lakh shares against total issue size of 2.97 crore shares. Qualified institutional investors bid for 65.81 lakh shares, subscribing 0.37 times, while the non-institutional investors subscribed their portion 0.32 times by bidding for 9.33 lakh shares. Retail investors bid for 1.7 lakh shares.

Networth Stock Broking has ‘subscribe’ on HDIL, saying the stock would be valued at profit to earnings ratio of 14.1-16.4 times the earnings per share of 2007-08 (Apr-Mar).

“The company has an enterprise value of Rs 823-Rs 954 per square foot of developable area of 112.1 million square foot, which is at substantial discount to DLF’s valuation of Rs 1,680 per sq ft and Unitech’s valuation of Rs 680 per sq ft,” says the Networth report.

Keynote Capitals, too, has ‘subscribe’ on HDIL with a medium term view (over 6-8 months after listing).

As per the brokerage’s estimates, the IPO valuation comes to 11.7 times the current financial year and 6.4 times 2008-09 earnings.

“However, our net present valuation is Rs 443 per share. The IPO pricing, thus, translates into a discount of 2.9% to NPV (based on the floor price) and premium of 12.8% to NPV (based on the cap price),” the report says.

In view of the projects to be completed over next 2-3 years, the brokerage expects HDIL’s sales and net profit to grow at compounded annual growth rate of 55.5% and 57.5% respectively, during FY07-10.

However, Keynote is concerned about the volatility in revenue, as HDIL recognises revenue on the basis of completed projects method.

“Also, with 40% of land reserves being utilised in ongoing projects, HDIL is exposed to the risk of price declines in the balance 60% of land reserves,” says the Keynote report.

HDIL is a real estate development company with significant operations in Mumbai, focusing on residential, commercial and retail projects.

More recently, the company forayed into slum rehabilitation and development. The company is also into land development.

Duty free for India Gold Jewellery scrapped

The US has terminated the duty-free tariff regime for India’s exports of gold jewellery and brass lamps.

The US President, Mr George Bush, issued a proclamation on Friday ending the ‘generalised system of preference’ (GSP) – a tariff regime that allows the US Government to extend preferential tariff arrangements for select countries, according to reports from Washington.

Consequently, these exports would attract import tariff applicable for exports from other countries engaged in the same trade.

Duty-free imports into the US under the GSP accounted for $32.6 billion worth of goods from developing countries in 2006, according to the reports.

India shipped gold jewellery worth $1.6 billion and $20 million worth of brass lamps under the GSP programme in the first 10 months of 2006, the US Trade Representative stated when initiating the review last year.

Along with India, Brazil and some other developing countries have also been targeted under a programme revamped late last year by the US Congress.

On paper, the reason for such termination could be that such duty-free access is no longer required for these products as the countries in question have reached a specified threshold level from where they could compete without the aid of concessional tariff.

A Bill approved by Congress in December last stipulated new guidelines for determining whether a particular product is eligible for duty-free treatment under the GSP programme.

But trade policy analysts here attribute the US decision to terminate GSP benefits for particular products of India and Brazil to their joint stand against the continued heavy farm subsidy payout by the US and their refusal to cut tariffs on industrial goods as demanded by developed countries during the recent G4 trade talks held in Germany.

Indian jewellery exports will now attract 6.5 per cent duty in the US.

Out of the total jewellery purchased by US from various countries, Indian jewellery accounts for 33.2 per cent, according to GJEPC News, published on the Gem and Jewellery Export Promotion Council (Council) Web site.

The effect of this could be that Indian jewellery may lose some business to China, said Mr Vasant Mehta, Vice-Chairman of the council.

However, the extent of the actual effect will only realised by the end of the year, he added.

With the applicability of import duty, Indian jewellery now comes on par with and will compete against products from China, Hong Kong, Thailand, as these nations do not enjoy duty-free imports either.

Representatives of the export community do not see the levy of 6.5 per cent as a serious threat to the business.

If the burden is evenly shared between the Indian supplier, US importer and the end-consumer, then the real impact is negligible, according to manufacturers.

Ultimately, it all boils downs to the product itself, i.e., the quality and the design, said Mr Rajesh Mehta, Chairman of Rajesh Exports.

YV Reddy - Inflation at 3% is ideal

The Governor of the Reserve Bank of India (RBI), Dr Y.V. Reddy, has said that inflation in the country should ideally be brought down to 3 per cent to align it with global standards.

Speaking to newspersons at the College of Agricultural Banking (CAB), Dr Reddy said, “Our objective is to contain inflation to below 5 per cent in the current year and to keep it between 4 and 4.5 per cent in the medium term. But I tell you optimally we should be closer to 3 per cent over a period of time so that global integration is far smoother."

Financial Crisis

Earlier, delivering the valedictory address at an international workshop on ‘Use of surveys by central banks’, at the CAB, Dr Reddy emphasised that in a deregulation regime, surveys become more important. “With increased globalisation and liberalisation of financial system, informed decision holds the key to successful implementation of policy,” he said.

Dr Reddy pointed out that in some economies, the control systems in financial and external sectors (regulation of fund and trade flows in an economy) were dismantled without putting in place appropriate monitoring mechanism. This led to a vacuum in information on ongoing economic activity.

“Deregulation must be accompanied by appropriate monitoring systems, or by surveys to make up for the loss of information due to removal of controls. In fact, many analysts hold the view that the financial crisis that hit the Asian economies about ten years ago was partly occasioned by inadequate data on the activities of the banking system.”

Monsoon Update - Less than expected rainfall

Hitches in the making of a full-blown La Nina event (cold counterpart of El Nino) in the equatorial Pacific has forced India Meteorological Department to peg back the expected monsoon realisation this year to 93 per cent of the long-period average (LPA) with a model error of plus or minus 4 per cent.

The first long-term forecast made in April had assessed the rainfall to be 95 per cent of the LPA. This year’s monsoon would suffer mostly from what looks like a below-par July, the IMD said in its updated long-range forecast on Friday.

July rains have a crucial bearing on the overall performance of the monsoon, with huge stakes for farm production.

Rainfall over the country as a whole in July is likely to be 95 per cent of its LPA with a model error of plus or minus 9 per cent. Over the four broad geographical regions of the country, rainfall for the season is likely to be 90 per cent of the LPA over northwest India, 98 per cent over northeast India, 96 per cent over central India and 94 per cent over the south peninsula, all with a model error of plus or minus 8 per cent.


A deep depression that crossed the Orissa coast on Friday is expected to be active until July 5 bringing large parts of the central India and the north peninsula under wet cover. Another low-pressure system is expected to spring up in the Bay around July 6 that should hold sway over more parts of the northwest India for another four to five days.

The monsoon would have covered the entire country by then, ahead of schedule. But, going by the IMD forecast, a lull would follow, with implications for farmers who have used the ongoing and preceding rains for sowing purposes. Transplantation, which should take place after four weeks from sowing, would be mired in trouble in this manner.


But a contra view is that an active monsoon phase is always followed by a ‘break-monsoon’ situation when the rainfall is confined to the northeastern and extreme southeastern parts of the country. Monsoon revives with activity picking up next in the Bay of Bengal, which helps bring back the northwest-southeast monsoon trough to its usual alignment, and thus rainfall.

Sources in the IMD, who did not want to be identified, were even more circumspect and said they would be happy if the monsoon performance did not dip any further than the latest level forecast on Friday. They even went to the extent of drawing a parallel with the year 2004 when the deficit amounted to 13 per cent.


Most statistical models show ENSO-neutral (with no bias to either El Nino or La Nina) conditions persisting through August 2007, while most dynamical models indicate La Nina will develop within the next three months. However, for the past few months, the dynamical models have been predicting a stronger and more rapid cooling than has actually occurred.

SSKI - Jet Airways

Jet Airways (Jet) has registered a 25% growth in revenues for FY07 at Rs70.5bn. EBITDAR for the year stood at Rs3.6bn and net profit at Rs280m. While domestic operations grew at 15% to Rs57bn, international operations grew by a remarkable 100% at Rs13.5bn. Furthermore, the contribution from international operations grew to 20% in FY07 as against 12% in FY06.

In a year where the industry has lost close to $400mn, Jet has managed to turnaround its operations starting in Q3FY07. Even in a traditionally slow fourth quarter, Jet has reported a 21% growth in revenues in Q4FY07 at Rs19.8bn and an EBITDAR of Rs2.8bn, which is notable considering the losses in the industry. Jet has also registered a strong net profit in the quarter of Rs880m as against losses in the first 2 quarters of the year. The turnaround came on the back of a 120% growth in international operations and a 9% growth in domestic operations in the quarter. Further in Q4FY07, international operations are starting to turn profitable at the EBITDA level at Rs31mn.


ONGC reported Q4FY07 numbers that were marginally below our expectation. Net profits at Rs22.1bn were down 9.7% yoy, led by higher under recovery contribution (up 37% yoy to Rs 46.7bn). For FY07, consolidated profits were up 15.4% yoy to Rs 177.7bn, driven by higher crude / gas realization as well as higher production. The stock trades at a steep discount to global / domestic earnings as well as reserve valuations, which reflects highly pessimistic estimates on loss sharing, APM deregulation and growth. However, with a 21-32% increase expected in ultimate (recoverable) reserves over the next 18-24 months, low earnings sensitivity to international crude prices and falling proportion of APM gas, we see the valuation gap narrowing significantly. Reiterate Outperformer, with a revised target price of Rs1337, upside of 43% from current levels.

SSKI - Dish TV

SSKI in their report on Dish TV

Dish TV has reported revenues of Rs1916m (against our estimates of Rs1823m) on a subscriber base of 1.9m in FY07. As anticipated of heavy losses in initial years, Dish TV has reported operating loss of Rs1825m and net loss of Rs2523m, much wider than our estimates of a net loss of Rs2070m. Significant part of the bleed comes due to higher pay channel costs, ASP expenses and subsidization of Set Top Boxes. Given the interoperability of content, the only differentiator lies in service standards and subsidies (or Balance Sheet). On both counts, given the emerging competitive environment, Dish TV is unlikely to find the going smooth.

We believe that Indian television distribution is set for digitization. With DTH being less regulated and more organized, we expect DTH to outpace digital cable in near term and become a 16m home market by 2010. While we are positive over the space as also Dish TV's first mover advantage, our concern pertains to intensifying competition. Competition from deeper pocketed players like Reliance ADAG, Bharti, Tatas and Sun would only make it difficult for Dish TV to sustain its share of incremental market (from over 75% now to 32% by 2010E) as also extend the bleed period. Increasing subsidies and customer acquisition cost, besides impending dilution to fund Rs7bn of capex, leave no value for investors. Reiterate Neutral.

Investment Basics - More Common Mistakes

The other day I got a call from a friend. He wanted to know my opinion on 'Stock A', which was proposed to him by an old hand in the stock market. He was told that the stock would double in a few months and the person who had recommended the stock also had bought some. I told him that this stock was crap and unless an operator was running the stock, I did not see strong reasons on why this stock would double.

I said this not because I have the ability to spot stocks that will double in very short periods of time, but because I am yet to come across people or experts who can do this feat every time.

So in a nutshell I told him to stay away from this stock. Nevertheless he went ahead and took some exposure in the stock, as the seduction of making quick bucks was very high. Exactly 3 days down the line this stock is 18% down with 10% being knocked off in 1 day.

He was now skeptical about making equity investments with the losses suffered in a couple of days. He blamed the stock markets as well as others for his misfortune, but at the same time wanted to participate in the growth of the Capital Markets and our economy.

However, never ever did this friend ponder over the mistake he had committed. I bet there are plenty of people who are guilty of committing the same mistake or others, but never get down to really understand what went wrong and try to learn from their mistakes.

So what are the important lessons for people wanting to create wealth through equities? The cardinal rule is to make as few big mistakes as possible.

Though the list can be pretty long, here are seven common mistakes people make when investing in equities and that you should stay away from.

Mistake No 1: The first and biggest mistake is not to admit making a mistake

People stubbornly hold on to stocks where they are making sizeable losses in the belief that they can exit when the price reaches their buying price. Most of the minds are not trained to acknowledge the fact that they have made a mistake and probably the best thing is to move on.

There was this gentleman who had bought a "penny stock" at Rs 9 following a tip and hoping that it would double in a few months. The stock first rose by 20% and then declined by almost 40%. He was unwilling to let go of the position with the belief that he will do so only when the price reaches his buy price and it will happen sometime soon.

The gentleman is still holding on to the stock and the stock has lost a further 40%. He could have exited the stock with a loss of just 28% initially (considering the appreciation of 20%). Now his losses are around 56% and he is still holding the stock. This happened in October 2005. Even several blue chip stocks have actually doubled or tripled since then.

Mistake No 2: Buy on tips and khabars and wanting to make a quick buck

Technology has made our lives much easier but at the same time has caused a lot of overload as well. We are subject to SMSes , emails and flyers with lucrative offers for "buy and sell tips" , commodities trading etc. that at the end of the day leave you confused.

In this state only two things can happen, (a) One is that you procrastinate and not take any action with the fear of screwing it up and (b) Succumb to these offers for making you rich quickly.

The point that I am trying to make is that how people who are conservative or sane can take dangerous calls and sabotage their own well being. I remember having met this conservative gentleman who was targeting only 12% returns but still could not resist the stock market temptation when the broker called and showed him some tantalizing figures.

Mistake No 3: Buying a loser on its way down thinking you are averaging your costs

Mistake No 4: Ignoring Risk in the investment and looking only at the returns

Risk is an integral part of every equity investment and some equity investments are more risky than others. People however look at the returns without giving due importance to risk.

Stock Futures can give you great returns but at the same time they can wipe out your capital as well. In the mutual fund context, people look at returns when investing in the fund, but do not consider the kind of risks the fund manager has taken whether it be concentration in stocks or sectors etc. At the same time betting heavily in Futures & Options, Commodities without understanding the nuances of the same is fraught with risk.

Understand the risk, i.e, the downside inherent in every investment and volatility associated with it.

Mistake No 5: Buying penny stocks thinking they are cheaper and ignoring stocks, which are priced above a certain number like Rs 1000 thinking, they are expensive.

Mistake No 6: Exiting Winners early and sticking to Losers

Ask yourself: Suppose I have a choice of 2 boats. Boat A is strong, consistent and has traveled the sea through many rough weathers as well. Boat B is showing some cracks and leaks in certain places. Water seeped in through this boat sometime back. Which boat will I choose to safely get me from this shore to the next?

I bet all would opt for Boat A and no person in his right mind would opt for Boat B. Yet when this same logic is applied to stocks, people will stick to losers (Boat B) but exit winning stocks (Boat A) to make a small profit.

Mistake No 7: Just thinking but not doing anything

Finally doing makes all the difference. There is no substitute for action. Just knowing that exercise is good will not keep you fit. In the same vein, just knowing this stock is good is of no use unless you buy it.

I come across so many intelligent people who know many things but are simply unable to implement because of lack of time and busy schedules.

"I knew this stock would do well, wish I had put in money here" or "I missed a good time to enter this stock" are some common responses you hear. Whatever the reason be, in the end what matters is whether you did what you knew was right. A better option for people here is to put their investments on Autopilot (Automatically investing fixed amounts every month in stocks and mutual funds).

To be a successful investor and create wealth through equities, you should shun the costly mistakes outlined. And yes if you have made any one of the above mistakes, admit it and correct it. More importantly "Stop Hoping".

At the end of the day 'Hope is not a strategy in the equities market.'

World Wealth Analysis

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TCS explores merger of group firms

The country's leading information technology (IT) services provider, Tata Consultancy Services (TCS), will explore the option of merging some of its group companies.

Speaking at the company's second Annual General Meeting (AGM), Tata Group chairman, Ratan N Tata, said: "It makes sense merging some of the group companies. However, Tata Elxsi is into animation and will be a standalone business." He, however, did not specify any name. IT solutions provider CMC, Elxsi and Tata Technologies are the other IT companies of the group.

The company mangement also announced it has earmarked a capex of Rs 1,400 crore. This is an increase of Rs 235 crore from the Rs 1,165 crore spend during the previous financial year. TCS managing director and chief executive officer, S Ramadorai, said that Rs 300-350 crore would be spent on technology, while the remaining would be set aside for IT infrastructure.

On the rising rupee, Ratan Tata said "It is a matter of concern to us as to anyone who is into exports. But as offshoring is becoming a critical
business strategy among the US, European and Latin American companies there will be some balancing act." Ramadorai added: "We are looking at expansion of our Latin America centre. But this will be through organic growth."

Answering a shareholder's concern on why Indian IT companies cannot be the next Microsoft or Cisco of the world, Tata remarked: "This is something that I have been discussing with Rama (Ramadorai). But I feel that products come from markets that are close to such market places and US provides that market. We might look at creating a product group in US and treat it as a venture capitalist activity by TCS." The Tata group company, he added, is aiming to become one of the top 10 global IT companies by 2010.

India IT Services

India IT Services

Mutual Funds Report

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Weekly Stock Recommendations

CMP: Rs 131.80
Target price: Rs 162
Morgan Stanley has maintained its ‘overweight’ rating on IDFC, but increased its price target for the stock from Rs 130 to Rs 162. “

Strong infrastructure spending should enable IDFC to book healthy revenues across businesses – lending, syndication, investment banking products, private equity and proprietary trading,” the Morgan Stanley note to clients said.

“While valuations appear full – 25.3 times F2008(estimated) earnings and 3.1 times book – in line with private banks, private equity (PE) and proprietary investments are not contributing significantly to earnings but provide almost 40% of value. Hence, core valuations are lower and could rise, given strong earnings growth expectations,” the note added.

TVS Motor
CMP: Rs 60.90
Target price: na
Motilal Oswal Securities has maintained its ‘neutral’ rating on TVS Motor, saying its performance for the latest quarter has been below expectations. “In the motorcycles segment, in particular, sales have been impacted by higher interest costs and stringent norms being followed by retail financiers,” the Motilal note to clients said.

“TVS is working on putting a strong product portfolio in place, which is likely to drive growth going forward. However, pressure on margins remains a concern,” the note added. Motilal has forecast an earnings per share of Rs 7.3 and Rs 8.7 for the company for FY08 and FY09, respectively.

Nava Bharat
CMP: Rs 180.80
Target price: Rs 268
Religare has initiated coverage on Nava Bharat Ventures with a ‘buy’ rating and a price target of Rs 268. Nava Bharat Ventures has realigned its business strategy towards the rapidly growing power sector. Power generation capacity is being ramped up from 125 MW to 237 MW by FY09. Also, a 1,050 MW power plant is to be set up by 2010-11, with power purchase agreements secured for 75% of the power generated.

According to Religare, the highly volatile ferro alloy business has been derisked by power sales since the company can close down its ferro alloy operations in times of fluctuating prices and sell power instead. Religare has forecast an earnings per share of Rs 21.1 and Rs 27.8 for the company for FY08 and FY09, respectively.

Deepak Fertilisers
CMP: Rs 90.55
Target price: Rs 123
Emkay Share and Stock Brokers has maintained its ‘buy’ recommendation on Deepak Fertilisers & Petrochemicals with a price target of Rs 123. “Deepak Fertilisers & Petrochemicals is expected to be one of the key beneficiaries from the commissioning of Dahej Uran Pipeline (DUPL), a gas pipeline which will increase the availability of LNG for the DFPCL along with other players in the region,” the Emkay note to clients said.

“DFPCL at present suffers from lower operating levels at its DNA plant (capacity utilisation 71%), methanol plant (64% capacity utilisation) and ANP plant (24% capacity utilisation) due to inadequate gas availability,” the note added.

LIC HsG Finance
CMP: Rs 206.40
Target price: Rs 246
SBI Cap Securities has initiated coverage on LIC Housing Finance with a ‘buy‘ rating and a 12-month price target of Rs 246.

“The (mortgage) industry offers a great potential for growth given Indian demographics and LIC housing finance would be able to reap benefits with its marketing network and enhanced operational set-up,” the SBI Cap Securities note to clients said. SBI Cap has forecast an earnings per share of Rs 33.7 and Rs 39.8 for the company for FY08 and FY09, respectively.

Thumbs down to Infy-Capgemini deal

A few months ago, before its entry its into the elite Nasdaq-100 index, the then CEO Nandan Nilekani indicated that the first major acquisition by Infosys could well be in Western Europe or in the BPO space, in response to the oft-repeated query on its acquisitions.

On Thursday, market reports seemed to indicate that Infosys was not only eyeing companies in Western Europe but a player that’s almost thrice in revenues, Capgemini.

Indian IT companies have been trying to break into the high-margin consulting business but without much success. For Infosys, consulting revenues made up just a little over 3% of its topline in FY07. According to estimates of research firm Gartner, the global IT consultancy business today is around $55 billion, and expected to grow at a CAGR of 7% to $71 billion by 2010.

Consulting is an opportunity, no Indian IT firm with global ambitions can afford to ignore. An inorganic growth strategy may prove to be the driver and the impetus that the business needs, since none of the players have been able to crack it so far. Capgemini would provide this to Infosys.

The reactions to whether such a move will actually benefit Infosys have been mixed in the analyst and investment banking community. While the consultancy business and a strong European presence of Capgemini are clear strengths that Infosys will gain from, the likely valuation of Capgemini and the potential hit that Infosys will take in its profitability margins, are getting the thumbs down from i-bankers. Abhay Aima, head of equities and private banking group, HDFC Bank, is being cautious about the deal.

Says Aima, “While in the long term it may be a brilliant strategy, what matters to the investor is what the stock swap and the valuation will be in the short term. That is assuming the deal does indeed happen — right now, both companies have denied it.”

Harit Shah of Angel Broking is more sceptical about the deal and says, “Infosys is growing very well organically at over 40%. When it is growing at such a good rate, it doesn’t make sense for it to acquire Capgemini that is growing at 6%. Also, such a large acquisition would change its balance sheet dramatically.” He advocates that Infosys should acquire a niche consulting company in the US and Europe, if it wants consulting capability. But there are some who believe that this might in fact be a good idea. One investment banker we spoke to told ET, “It makes sense for them to acquire a consulting organisation. This apart, it also gives them a local presence in Europe.”

If Infosys were to go through the deal while it might acquire a bigger presence in the consulting space and gain a footprint in Europe it won’t be a bed of roses. It will need to address some core issues pertaining to the existing operations of Capgemini, apart from integration and cultural issues.

Capgemini’s employee base is almost as large as that of Infosys, so Infosys could well be looking at potentially laying off a significant number of people. Also, Capgemini’s operations emerged from the red only in 2005 and its margins are still at 5.8% at the EBDITA level, compared to Infosys’ 31.6%.

Some experts, though, believe such blips are only temporary. Investment strategist, Gul Teckchandani, says, “Downloading functions from the western world into India has largely been accepted. This will definitely allow for decent offshore arbitrage for the Indian companies.”

More gains likely

The markets continued to log gains as the index closed above the psychological barrier of 4300 on the Nifty spot. Traded volumes were marginally lower as the new derivatives settlement saw traders create positions afresh.

The inside day formation advocated yesterday had the desired effect as was expected. Since such formations are followed by large moves, the upmove was logical after overseas cues were positive.

The market breadth was positive as the BSE & NSE combined figures were 2145 : 1535. The capitalisation of the breadth was also positive as the combined exchange figures were Rs 11,900 cr : Rs 3,148 cr. The F&O data for the expiry session saw a 20 per cent decline in the net long positions.

The indices have closed near the intraday high of the session and surpassed the 4300 levels with a positive market breadth and above average volumes. Both are indicators of optimism and the closing is the highest ever as daily charts indicate.

That shows a prevalence of the bulls over the bears and the outlook ahead being positive. The coming session is likely to witness intraday levels of 4349 on advances and 4293 on declines. Watch the 4293 level on Monday, should this level not be violated, the strength will gain momentum.

The outlook for the markets on Monday is that of optimism as the bulls are likely to attempt to extend their hold on the sentiments and keep the bears under check. Should the overseas cues be neutral / positive, the bullishness will gain further impetus.

Derivatives - June 29 2007

Derivatives - June 29 2007

Thousands buy iPhones

Via Reuters

Thousands of U.S. gadget fans made an orderly pilgrimage to stores on Friday to be among the first buyers of Apple's iPhone, a music- and video-playing device expected to reshape the mobile industry.

Crowds outside some of Apple's outlets cheered as their doors opened at 6 p.m. local time, while smaller groups waited outside AT&T stores. AT&T Inc. is the phone's exclusive wireless carrier for the first two years.

"It's the best day of my life. It's Christmas, birthday, New Year's all rolled into one," said Kristian Gundersen, a 23-year-old graphic designer from Norway who flew to New York just to buy an iPhone.

Gundersen was one of the first to walk out of Apple's Fifth Avenue store with a device. Within two hours of opening, several hundred people had completed purchases at the outlet.

The iPhone melds a phone, Web browser and media player, and costs $500 to $600, depending on how much memory it has. Technology gurus praised it as a "breakthrough" device, but question whether users would be unhappy with its lack of a hardware keyboard and pokey Internet link.

The svelte gadget is a gamble by Apple Inc. co-founder and Chief Executive Steve Jobs to build upon the company's best-selling iPod music player and expand the market for its software and media services.

"They want to extend the dominance they have in terms of their ability to create really elegant hardware and software integration," said Mark McGuire, analyst with research firm Gartner. "This is the next big business unit for them."

Apple aims to sell 10 million iPhones in 2008, which would amount to a 1 percent share of the global market. It has not given a sales goal for the launch, but some analysts said it could sell up to 400,000 units in the first few days.

What is less clear is whether sales will hold up once the initial excitement has waned.

Piper Jaffray said this month Apple could sell 45 million units in 2009, putting the iPhone on par in terms of revenue with its two key businesses, the Macintosh computer and iPod.

Many analysts say Apple stock could rise another 30 percent in the coming year if the phone catches on, but some cautioned that the shares are already richly valued.

"Apple shares have already benefited from a powerful hype cycle," Cowen & Co. analyst Arnie Berman wrote in a report.

Shares of Apple rose 1.2 percent to $122.04 and have gained more than 30 percent since Jobs unveiled the phone in January. AT&T shares rose 1.9 percent to $41.50.


Friday's launch was seen as a test of wider U.S. demand for advanced phones, which have already caught on in parts of Asia and elsewhere.

It has already whipped technology lovers into the sort of frenzy usually associated with a new video game console.

Judging by its first customers, the iPhone seemed to draw an older generation of gadget geeks rather than young fans who may have been put off by the price, including a required service contract that starts at about $1,400 for two years.

"The phones out there are just garbage. I've gone through several phones, even the expensive ones. This is different," said Albert Livingstone in Chicago. "It's the newest toy. I'm 62 -- I don't have much time left to buy toys."

Some aimed to make a profit on the iPhone by selling it or getting paid to wait.

"I'm definitely a mercenary," said Kyle Laurentine, outside a San Francisco Apple outlet, where the doors had yet to open and about 200 people were waiting. "I am 17 years old and I don't need an iPhone. I have an iPod and a cell phone."

The phones quickly popped up for sale online at inflated prices. On online classifieds site Craigslist, most listings ranged between $750 and $1,500, with one optimist asking for $10,000. One iPhone offered on auction Web site eBay had 23 bids and a price of $1,325.

Apple's online store posted a message reading: "We'll be back soon. We are busy updating the store for you and will be back by 6 p.m. PDT."

Apple is expected to sell the iPhone in Europe later this year in the run up to the holiday season. It has not disclosed the price or carrier, though speculation has mounted it may reach a deal with Britain's Vodafone Group Plc.

Sales in Asia are expected to begin sometime in 2008.

But the iPhone's effect has rippled through the wireless industry before even a single unit has been sold.

Rival Palm Inc. has said the iPhone could hurt demand for its Treo smartphone, at least in the short term.

"It's likely that as people try (the iPhone) out, there may be some stall in our sell-through," Palm Chief Executive Ed Colligan told Reuters on Thursday.

Sharekhan Investor's Eye dated June 29, 2007

Tata Tea
Cluster: Apple Green
Recommendation: Buy
Price target: Under review
Current market price: Rs853

Eyeing Snapple

Key points

  • As per media reports Tata Tea is bidding for the Snapple range of fruit drinks, diet drinks and iced tea coming from the portfolio of Cadbury Schweppes.
  • Cadbury Schweppes, which makes a range of soft drinks and confectionary including Dairy Milk chocolate, Trident chewing gum and Snapple juice drinks, is in the process of spinning off its US beverage unit.
  • If Tata Tea is successful in acquiring Snapple, the brand would stimulate growth in its stagnating black tea business.
  • Till further clarity emerges on the revenue potential and profitability of Snapple as well as the structure of the Tata Tea-Cadbury Schweppes deal, it is difficult to form an opinion on how this deal may affect the performance of Tata Tea's stock price.

State Bank of India
Cluster: Apple Green
Recommendation: Buy
Price target: Rs1,780
Current market price: Rs1,525

Price target revised to Rs1,780

Key points

  • The Reserve Bank of India (RBI) has announced that it is going to transfer its 59.7% holding in State Bank of India (SBI) to the government for Rs35,530 crore on June 29, 2007. The transaction is revenue neutral for the government, as the RBI would declare a special dividend of a similar amount to replace the amount paid by the government for the stake sale.
  • The SBI management has said that the bank will require to raise Rs15,000 crore of capital in FY2008; of this Rs6,000 crore is likely to be in the form of equity and the balance as debt.
  • The current guidelines restrict SBI from diluting the promoter's stake below 55% and this would hinder the bank's capital raising plans. Hence the management is of the view that the follow-on offer would take place after the amendment to the SBI Act, most probably in December 2007.
  • SBI has plans to consolidate its insurance and asset management businesses into a separate non-banking financial company (NBFC). It also plans to sell a 10% stake in the NBFC to three to four investors and intends to list the arm in FY2009. All these would be significant value drivers going forward. The chairman of the bank has stated that he expects the valuation of the life insurance business to be around Rs28,700 crore ($7 billion) while we have valued the same business at Rs23,800 crore ($5.8 billion). Our valuation is lower considering the roadblocks that the bank is likely to face while unlocking the value in these investments, just as ICICI Bank is facing now.
  • After providing for the AS-15 impact (Rs900 crore of extra provision per year from FY2008-12) our earnings estimates for FY2008 and FY2009 have reduced by 4% each. We have also introduced our FY2009 estimates. Based on the current market price of Rs1,525 the stock is currently trading at 13.9x FY2009E earnings per share (EPS), 1.9x FY2009E stand-alone book value of Rs813 and 1.4x FY2009E consolidated book value of Rs1,061. The stock has run up 54% in a span of the past three months. Hence in the near term there could be some profit booking and consolidation. However, we believe the bank has entered a sweet spot as a host of policy changes in the banking sector and for SBI could unlock significant value in the stock in the medium term. We maintain our Buy recommendation on the stock with a revised twelve-month price target of Rs1,780

Sharekhan Investor's Eye dated June 29, 2007