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Tuesday, July 31, 2007

Reliance Comm Q1 net jumps, beats forecast

Reliance Communications, India's second-largest mobile firm, said on Tuesday its June quarter net profit more than doubled, beating forecasts, as it added more users in the world's fastest-growing mobile market.

Reliance Communications, which had more than 32 million mobile users at end-June, said net profit for the June quarter rose to Rs 12.21 billion, from 5.13 billion reported a year earlier.

Revenue rose 32 per cent to Rs 43.04 billion from 32.50 billion reported a year earlier. The firm gets more than 65 per cent of its revenue from wireless subscribers.

A Reuters poll of ten brokerages had forecast a rise in net profit to Rs 11.11 billion on revenue of 42.56 billion.

Larger rival Bharti Airtel last week reported that its quarterly net profit had doubled to Rs 15.12 billion.

Shares in Reliance Communications, India's fifth-most valuable firm, gained 23.1 per cent during April and June, outperformimg a 12.1 per cent rise in the benchmark index.

RBI raises reserve requirements, holds rates

The Reserve Bank of India took steps on Tuesday to drain surplus cash from the banking system stemming from strong capital inflows, knocking bonds and stocks lower, but it left its key interest rates steady, as expected.
The Reserve Bank of India (RBI), still sounding a fairly hawkish note after five rate increases since June last year, raised the proportion of cash banks have to keep with it on deposit to mop up funds that could fuel inflation.
“Monetary expansion has to be curbed,” said Saumitra Chaudhuri, economic adviser at credit rating agency ICRA.
The central bank raised banks’ cash reserve ratio (CRR) to 7% from 6.50% with effect from August 4, the fourth increase announced since early December, taking it to its highest level since November 2001.
It also scrapped a Rs30-billion ($740 million) limit on its daily money market operations to drain cash from the system, enabling banks to park more funds with it.
The yield on the 10-year government bond spiked up 12 basis points to 7.87% soon after the decision on worries these measures would leave less cash to buy bonds.
The stock market shed its 1 percent gain in a few minutes after the decision, with banks and auto stocks hit particularly hard on concern that loan growth would fall, but the market rebounded strongly in afternoon trade.
The partially convertible rupee inched towards last week’s nine-year high of 40.20 per dollar after the decision.
The RBI left its key lending rate, the repo rate, unchanged at 7.75% and its reverse repo rate, at which it absorbs excess cash from banks, steady at 6%. The bank rate, used to price long-term loans, remained at 6%.
Other Steps
India’s move came a day after China, inundated with cash from its current account surplus, raised the level of deposits banks must hold in reserve for the ninth time in 13 months.
India’s banking system has been awash with cash in recent months due to robust capital inflows into Asia’s third-largest economy, particularly into the record-breaking stock market.
“Recent financial market developments in India and potential uncertainties in global markets warrant a higher priority in the policy hierarchy for managing appropriate liquidity conditions,” the RBI said in a statement.
It scrapped one of its two daily money market operations from Aug. 6, and said it could use variable or fixed rates in repo and reverse repo auctions and conduct longer-term operations.
The central bank has been intervening to cap the rupee’s gains, buying dollars in a policy that has generated excess cash in the money market.
As a result, overnight call money rates have hovered near zero for weeks, complicating monetary policy.
HSBC economist Robert Prior-Wandesforde said intervening to suppress the rupee while fighting inflation with firm interest rates was unsustainable, and he saw another reserve requirement increase later in the year along with more rupee gains.
“If inflows continue the way they have been, we will be witnessing a similar situation a couple of months later,” he said.
The central bank said although headline inflation, which has eased below its 5% comfort ceiling, had slowed, upward pressures persisted, with risks from high and volatile crude prices, demand-supply gaps and firm food prices.
It warned banks and financial institutions to be prepared for higher volatility than before in financial markets worldwide.
But it said domestic economic activity continued strong and the base appeared to be broadening, and it retained its 8.5% growth forecast for 2007-08.

CRR hike fails to dampen market spirit

Positive global cues, enthusing quarterly numbers and a strong bullish sentiment helped the market scale up in the early hours of trades. Buying was witnessed in select banking and FMCG stocks, while auto, information technology and pharma stocks remained out of favour. The market turned choppy after the announcement from Reserve Bank of India to hike the cash reserve ratio (CRR) by 50 basis points to 7%. The Sensex slipped immediately into the red and touched the day's low of 15,225. But it was quick to recover on the back of gains in capital goods, metal and FMCG stocks. All around buying saw the Sensex touch the day's high of 15,569. The Sensex finally closed the session at 15,551, up 290 points. The broad based Nifty ended the session at 4,529, up 89 points.

The breadth of the market was positive. Of the 2,717 stocks traded on the BSE 1,706 stocks advanced, 937 stocks declined and 74 stocks ended unchanged. Among the sectoral indices the BSE CG index flared up by 4.90% and the BSE Realty index gained 2.40%. While the other sectoral indices were up around 1% each, the BSE IT index and the BSE Auto index ended with moderate gains.

The recovery in the market was led by L&T, which shot up by 7.29% at Rs2,624. Among the major gainers HDFC advanced by 5.72% at Rs2,018, BHEL moved up by 5.48% at Rs1,734, Ranbaxy added 3.64% at Rs390, SBI scaled up by 3.60% at Rs1,636 and Reliance Communication jumped 3.57% at Rs560. Select index stocks witnessed selling pressure. M&M was the major loser and dropped 2.86% at Rs731. HUL fell by 1.32% at Rs206, Tata Motors declined by 1.16% at Rs699, Infosys and Dr Reddy's Lab closed with the moderate losses at Rs1,973 and Rs635 respectively.

Capital Goods stocks witnessed sharp buying support. Greaves Cotton jumped 8.75% at Rs364. Crompton Greaves vaulted by 7.23% at Rs293, ABB advanced 6.96% at Rs1,147, Kirloskar Brothers flared up by 6.83% at Rs445 and Punj Lloyds gained 5.20% at Rs283. Alstom Projects, Lakshmi Machine Works, Bharat Electrical were up 3-4% each.

Over 1.31 crore RNRL shares changed hands on the BSE followed by IFCI (83.97 lakh shares), Bella Steels (65.12 lakh shares), IKF Technologies (60.90 lakh shares) and Harig Cranks (59.36 lakh shares).

SBI was the most actively traded counter on the BSE and registered a turnover of Rs277 crore followed by L&T (Rs168 crore), Reliance Industries (Rs138 crore), Reliance Energy (Rs125 crore) and Housing Development & Infrastructure (Rs120 crore).

Bias may remain cautious

The market is likely to witness cautious trend as major Asian gauges like the Hang Seng index, the Kospi index and the Jakarta index have gained marginally but the Nikkei index is trading in the red in current trades and US Market ended with a positive note. Although the domestic indices gained marginally on Monday as intense selling backed by strong volatility saw the index swing over 300 points during intra-day trades. Today, RBI will announce its first quarter review of the annual credit policy, which is likely to weigh on the market sentiment. Among the local indices, the Nifty could test 4400 on the down side while on the upside it could find support at 4550. The Sensex is likely to get support at 15000 and may face resistance at 15450.

Key announcements like Alok Industries, Aurobindo Pharma, Bhajaj Hindustan, Cadila, Godrej Consumer, Hindalco, Indian Hotels, Jindal Saw, Shipping Corporation of India and Tata Motors are expected to announce their figures.

US indices closed on Monday with a positive note, helped by cooling credit markets fears and a bit of deal making on Wall Street. The Dow Jones gained 92 points at 13358, the Nasdaq was up 21 points at 2583.

Crude oil prices slipped marginally, with the Nymex light crude oil for September delivery fell by 19 cents to close at $76.83 a barrel. In the commodity space, the Comex gold for December delivery gained $4.30 to settle at $676.60 an ounce

Market to swing based on outcome of RBI's monetary policy review

The market will take direction from the outcome of RBI's monetary policy review today, 31 July 2007. The BSE 30-share Sensex rose 26.34 points to 15,260.91, on Monday, 30 July 2007, amid mixed trend in pivotals.

The Reserve Bank of India (RBI) is likely to leave its key benchmark rates untouched in its first quarterly review of the annual policy statement today, 31 July 2007. According to experts from money market, the central bank is likely to shift its focus to the problem of excess liquidity in the money market system, evident from the softening of interest rates in overnight call money market.

The RBI had pushed its benchmark repo rate to a four-year peak of 7.75% in its drive to tame inflation, raising the repo, its key short-term lending rate, 5 times between June 2006 and March 2007. India's inflation accelerated to 4.41% for the week ended 14 July from 4.27% the previous week.

Asian markets gained in volatile trade today, 31 July 2007. Hong Kong's Hang Seng (up 1.01% at 22,970.70), Taiwan Weighted (up 2.10% at 9,263.10), Singapore's Straits Times (up 0.84% at 3,555.80) and South Korea's Seoul Composite (up 0.78% at 1,921.65), edged higher.

Japanese stocks were mixed as losses in electronic parts maker Kyocera Corp. were matched by gains in Mitsubishi Electric and Sharp Corp. Nikkei slipped 0.22% at 17,251.10.

Wall Street found a foothold yesterday, 30 July 2007 as investors, still anxious that a credit crunch could crimp US growth, took advantage of low prices after last week's steep losses. The Dow Jones advanced 92.84 points, or 0.70%, to 13,358.31. Broader stock indicators also posted gains. The Standard & Poor's 500 index added 14.96 points, or 1.03%, to 1,473.91, and the Nasdaq Composite index advanced 21.04 points, or 0.82%, to 2,583.28.

As per provisional data, foreign institutional investors (FIIs) sold shares worth a net Rs 1117.25 crore, while domestic institutional investors (DIIs) were net buyers of shares worth Rs 854.32 crore on Monday, 30 July 2007.

Oil prices were little changed on Tuesday, 31 July 2007 with US crude still within sight of its record high as traders feared further declines in hefty US crude stocks. US crude eased 16 cents to $76.67 a barrel. London's Brent crude slipped 14 cents to $75.60 a barrel.

Result Updates - July 31 2007

BHEL: Misses expectations led by sharp yoy margins decline

Indian Oil Corporation: Good 1QFY08 results despite nil oil bonds; Retain IL

Mahindra & Mahindra: 1QFY08 net profit declines 6% yoy

Sun TV: Strong 1QFY08 results; fine-tuned estimates; Retain U on rich valuations

Jindal Steel & Power: Volumes drive earnings; maintain OP

Asian Paints: Robust growth in domestic as well as international operations, retain In Line

Great Eastern Shipping Company: Strong operating performance; raise target price, maintain In-line rating

Maharashtra Seamless: 1QFY08 results: Feeling the rupee brunt; maintain rating, raise TP

Andhra Bank: NII disappoints, lower provisions and higher non-interest income drive profits

Kalpataru Power Transmission: 1QFY08 result update: Inline with estimates; maintain rating, raise TP

Educomp Solutions: Better-than-expected results; raise target to Rs2,650

Nagarjuna Construction: Strong operating margin expansion possibly led by shift of execution towards more profitable segments helps meet expectations

Motherson Sumi Systems: 1QFY08 net profit declines 11% yoy

Monnet Ispat: 1QFY08 results: Strong growth in revenue and earnings; maintain OP, raise TP

Jyoti Structures: 1QFY08 result update: Inline with estimates; raise TP


Bank of Baroda: Solid operational performance

Result Updates - July 31 2007

Intraday Stock Ideas

NIFTY (4440) Supp 4411 RES 4470

Buy Gateway Distriparks (184) SL 180 Target 191, 194

Buy HCC (132) SL 128
Target 139, 141

Buy Crompton Greaves (273) SL 269 Target 281, 283

Sell IOC (395) SL 400
Target 386, 383

Sell Reliance Capital (1171) SL 1179 Target 1153, 1149

Bulls expect credit from policy

It is only the poor who pay cash, and that not from virtue, but because they are refused credit.

It wasn't just another Manic Monday as most people had expected. The bulls survived a volatile start to the week, thanks largely to the rebound in Asian markets as nagging fears related to the US credit market ebbed. A few index bellwethers such as HUL and SBI helped prop up the main indices.

Banking stocks had a field day amid growing expectations that the RBI won't hike its key short-term lending rates in its first quarter review today. However, some steps are in the offing to contain the relentless inflow of foreign money.

This morning, global indicators are much more encouraging, though oil prices are still a cause for concern. We expect a higher opening given the improvement in the sentiment across global markets. But, the volatility will continue and some more pain may be left in the near-term. As a result, aggressive buying should be avoided at this stage, especially if it is for the short term. Long-term investors should buy fundamentally strong scrips at dips regardless of the market cap. A stock specific approach is the right way to deal with the current uncertainty.

Whatever the outcome of the policy, it's not worth borrowing much to buy in these markets. So stay less leveraged and ride the tide if any in the short term.

Tata Steel may be in action as the company has decided to raise its contribution (including that of Tata Steel Asia) from US$6.7bn to US$7.4bn. Reliance Industries will remain in the thick of action amid lots of news on the company in the newspapers.

Speciality steel maker Mukand may attract some attention as a financial daily reports that the Bajaj Group firm may offer equity stake to auto component manufacturer, Bosch India. Tata Tea could gain amid reports of a price hike in the mid to premium segment.

Hindalco's Board will consider a Scheme of Arrangement with Indian Aluminium Company. Lots of result-oriented action will also be seen as the earnings season approaches its end.

US stocks rebounded from the worst two-day fall since 2003 after Wall Street's biggest securities firms, led by Citigroup, Goldman Sachs and Bank of America asked investors to buy banks, homebuilders and retailers.

The Standard & Poor's 500 Index added 14.96 points, or 1%, to 1473.91. The Dow Jones Industrial Average rallied 92.84 points, or 0.7%, to 13,358.31. The Nasdaq Composite Index rose 21.04 points, or 0.8%, to 2583.28.

US stocks struggled at the start of the session, but moved higher after recent fears about the housing and credit markets subsided. Market breadth was positive.

The Chicago Board Options Exchange's Volatility Index (VIX), an indicator of market volatility that traders follow, fell nearly 13% after closing at its highest level in more than four years on Friday. The VIX and the market tend to move in opposite directions.

Treasury prices fell, lifting the yield on the 10-year note to 4.80% from the 4.77% level reached after bonds rallied Friday in reaction to the selloff in equities.

Oil prices fell with US light crude for September easing 22 cents to $76.80 a barrel on the New York Mercantile Exchange. The front-month contract was quoting 15 cents lower at $76.58 a barrel.

The dollar was lower against the euro and gained versus the yen. COMEX gold for December gained $4.30 to $676.60 an ounce.

European shares traded in a tight range in a volatile session. The pan-European Dow Jones Stoxx 600 index inched 0.1% lower at 372.48. The German DAX 30 closed up 0.1% at 7,456.31, while the French CAC-40 hovered close to the unchanged line at 5,646.36 and the UK's FTSE 100 slipped 0.2% late in the session to 6,206.10.

In Brazil, the benchmark Ibovespa stock index closed 3.1% higher at 54,572.61, up from Friday's close at 52,922, as local blue-chip shares gained. In Mexico City, the IPC index of the 35 most-traded shares rose 2.2%, or 666 points, to close at 30,900.68, after falling 5.3% last week. The RTS index in Russia fell 0.3% to 1961.

Barring Japan, most Asian markets were trading mostly higher this morning. The Nikkei in Tokyo was down 38 points at 17,251 while the Hang Seng in Hong Kong surged 244 points to 22,984. The Straits Times in Singapore rose 28 points to 3555 and the Kospi in Seoul climbed 15 points to 1921.

A volatile trading session ended on a flat note as bulls were unable to sustain their gains. Benchmark Sensex index gyrated over 200points and NSE Nifty over 50points. After opening with a negative bias, markets bounced back as Asian markets recovered to close in positive terrain lifting the benchmark Sensex to hit an intra-day high of 15451. However, selling pressure in the heavyweights like RIL, ITC, Infosys and TCS dragged the key indices lower from their days high.

Finally, BSE 30-share Sensex gained 26 points to close at 15260. NSE-50 Nifty closed flat at 4440.

Bajaj Auto ended lower by 1% to Rs2294. The company announced that they were in talks to build vehicles in India with Renault SA. The scrip touched an intra-day high of Rs2345 and a low of Rs2250 and recorded volumes of over 20,00,000 shares on NSE.

HUL surged by over 6.5% to Rs208 after the company posted a 29% gain in Q2 profit. Net income rose to Rs4.93bn from Rs3.8bn, a year earlier. Sales rose 13% to Rs34.8bn. The board also has approved the company's first share-buyback program; it would offer Rs230 a share to buy back its stock. The scrip touched an intra-day high of Rs212 and a low of Rs202 and recorded volumes of over 62,00,000 shares on NSE.

Reliance Industries was down by 1% to Rs1848. The company posted a 28% growth in Q1 profit, beating estimates. Net income rose to Rs32.6bn. According to reports the company may scrap its $5.2bn project to extract natural gas from the nation's east coast because of a government delay in approving the price at which the company can sell the product. The scrip touched an intra-day high of Rs1898 and a low of Rs1840 and recorded volumes of 27,00,000 over shares on NSE.

SBI spurred by over 5.5% to Rs1578 as the nation's biggest lender profits beat estimates. The company’s Q1 net profit surged more- than-expected. Net income surged to Rs14.3bn gaining 78%. Revenue rose by 27.7% to Rs122.3bn. The scrip touched an intra-day high of Rs1614 and a low of Rs1509 and recorded volumes of over 25,00,000 shares on NSE.

Grasim advanced by 3% to Rs2945 after India's third-biggest cement maker, posted a better-than-expected Q1 profit which gained 54%. Net income rose to Rs6.7bn beating analyst estimates. Sales rose 26% to Rs40.63bn. The scrip touched an intra-day high of Rs2979 and a low of Rs2812 and recorded volumes of over 1,00,000 shares on NSE.

Tata Steel pared its gains as the scrip lost 1.3% to Rs643. The company declared its Q1 result with net profit at Rs12.22bn (up 28%) and net sales at Rs41.97bn (up 7.6%). The scrip touched an intra-day high of Rs675 and a low of Rs635 and recorded volumes of over 32,00,000 shares on NSE.

Banking stocks gained momentum ahead of the RBI meet on Credit Policy. ICICI Bank advanced by 1% to Rs923. Andhra Bank, Bank of India and Syndicate Bank were the major gainers among the Mid-Cap stocks.

NTPC gained by 1%t o Rs163 after India's biggest power producer, signed an agreement with Nigeria to source about 3mn metric tons of liquefied natural gas a year. The scrip touched an intra-day high of Rs163 and a low of Rs160 and recorded volumes of over 33,00,000 shares on NSE.

Cement stocks were in momentum led by gains in the frontline stock Ambuja Cement as the scrip surged by over 3.5% to Rs129; JP Associates was up by over 3% to Rs808 and Shree Cement advanced by 2.1% to Rs1243.

Metal stocks lost their shine. Nalco plunged by over 10% to Rs255 after the company’s Q1 profit at Rs4.47bn (down 28%) and net sales at Rs11.65bn (down 21.6%), Hindalco was down by 4.2% to Rs165 and SAIL slipped 1.3% to Rs146.

Power stocks were in action led by gains in frontline stock, REL advanced by 2.2% to Rs779 after the company won the bid for Sasan project, Tata Power spurred by over 2.5% to Rs721 and NTPC added 1.2% to Rs163. However, Suzlon lost by over 4% to Rs1251.

Results Today:

Aurobindo Pharma, Bajaj Hindusthan, BEL, Bombay Rayon Fashions, Cadila, Cinemax, FT, Fortis Healthcare, Gammon India, Godrej Consumer, Hindalco, HT Media, Indian Hotels, IVRCL Infrastructures, Kesoram, MICO, Nestle India, RCOM, SCI and Videocon Industries.

Fund Activity:

FIIs were net sellers of Rs11.17bn (provisional) in the cash segment on Monday. On the other hand, local institutions were net buyers at Rs8.54bn. In the F&O segment, FIIs were net sellers at Rs630.5mn.

On Friday, FIIs pulled out Rs12.22bn from the cash segment. Mutual Funds were net buyers of Rs2.52bn.

Major bulk Deals:

Barclays Capital has bought Alok Industries; Merrill Lynch has purchased Fact Enterprises while selling Goldstone Technologies.

Lower Circuit:

Anant Raj Industries and BF Utilities.

Upper Circuit:

United Breweries, Bartronics, Ganesh Forgings, Jai Corp, Jaybharat Textiles, Raj Tele, Genus Overseas and Kalindi Rail.

Delivery Delight (Rising Price & Rising Delivery):

BILT, Cipla, Colgate, Dabur India, GAIL, HCC, Kesoram and SREI Infrastructure.

Abnormal Delivery:

Orchid, Gammon, McDowell, Amtek Auto, CEAT and United Phosphorous.

Major News & Announcements:

Punj Lloyd ventures into integrated drilling services

Jet Airways Q1 profit at Rs308.8mn against loss of Rs449.8mn and revenue at Rs18.07bn (up 11%)

Ranbaxy to sell Authorized Version of Generic Isoptin in US

Tata Steel Q1 profit at Rs12.22bn (up 28%); net sales at Rs41.97bn (up 7.6%)

BHEL Q1 net profit at Rs2.89bn (up 22%), revenue at Rs34.4bn (up 23.7%)

BEML Q1 profit at Rs235.9mn (up 57%) and net sales at Rs3.93bn (up 17.3%)

Swaraj Mazda Board to consider right issue on August 27th

GE Shipping Q1 profit at Rs4.21bn (up 74%) and net sales at Rs8.7bn (up 59%)

REL wins bid for Sasan power project

Vijaya Bank Q1 profit at Rs1.11bn (up 54%), revenue at Rs9.67bn (up 38.9%)

IOC Q1 profit at Rs14.68bn (down 17.5%) and net sales at Rs528.62bn (up 8.5%)

Elecon Engineering secures Rs3.78bn order

I-flex Q1 group profit at Rs367mn (up 4.5%), revenue at Rs5.13bn (up 27%)

JSW Steel to buy steel plate mill in its first US acquisition

M&M Q1 profit at Rs1.91bn (down 6%), net sales at Rs26.13bn (up 16.8%).

Daily Technicals - July 31 2007

Daily Technicals - July 31 2007

Bulls back in action in a volatile US Market

Boeing and General Motors together with financial stocks help in turning around investor sentiments

US Market succeeded in getting back some of its confidence today, Monday, 30 July, 2007 after suffering its worst weekly loss in four years last week. Bulls were back in action today after Financial sector, which was worst hit last week, provided bulk of support today. The Dow, S&P 500, and Nasdaq had plunged 4.6% on average last week on problems related to credit crunch and housing sector.

A sense that such a sizable sell-off was overdone last week prompted some bargain-hunting interest today. But after some volatility and initial few hiccups, a surprise upgrade on Morgan Stanley�s credit rating, was the initial catalyst restoring confidence on Wall Street.

The Dow Jones Industrials Average today rose by 92.84 points to close at 13358.31. Tech heavy Nasdaq rose 21.04 points to close at 2583.28. S&P 500 added 14.96 points to its kitty to close at 1473.91.

Twenty-four out of the thirty Dow stocks closed in green today. General Motors, Home Depot, Boeing and Caterpillar headed the list of the Dow winners. Verizon and IBM were a couple of the Dow laggards.

Boeing was up almost 2% today after the company raised its estimate of the potential for airliner sales in India and said it sees India orders reaching $86 bln over the next 20 years. It accounted for almost 17 points in Dow�s gains.

All investment banking stocks close higher

After opening modestly higher across the board, stocks turned negative as investors thought that a possible credit crunch will substantially slow the record pace of M&A activity.

The absence of leadership from the next two most influential sectors - Technology and Health Care also contributed to the market's lack of direction.

But Standard & Poor's upgrade of Morgan Stanley helped investment banking stocks considerably today. Morgan Stanley, together with competitors Goldman Sachs, Merrill Lynch, Lehman Brothers, Bear Stearns closed higher today.

A turnaround in the Financial sector, despite a modest increase in bond yield, had the most noticeable impact on the market's improved stance today. JP Morgan and Citigroup also closed higher.

GM, the main Dow winner today, to announce earnings tomorrow

Crude oil futures registered modest loss today and closed below $77/bbl after crossing $77/bbl during intra day trading hours. Prices fell on speculation that U.S. fuel stockpiles increased last week. Crude-oil futures for light sweet crude for September delivery closed at $76.83/barrel (lower by $0.19/barrel or 0.25%) on the New York Mercantile Exchange.

On the NYSE, advancing issues topped those declining by nearly 2 to 1, and 17 to 13 on the Nasdaq. More than 2 billion shares were traded on the NYSE, while 2.3 billion were exchanged on the Nasdaq.

A host of economic data will set the tone of trading for tomorrow. Personal Income, Spending, and the Core PCE Price Index are to be released tomorrow. Also garnering notable attention will be the Q2 Employment Cost Index. That will be followed by Chicago PMI at 9:45 ET and Construction Spending and Consumer Confidence at 10:00 ET.

Among earnings reports expected tomorrow, Dow component General Motors is the most important name among a host of other names.

Taj GVK, Subex Azure, Marico, Glaxo

Taj GVK Q1FY08 Result Update (Buy)
Subex Azure Q1FY08 Result Update (Buy)

Marico Q1FY08 Result Update (Buy)
GlaxoSmithkline Pharmaceutical Q2CY07 Result Update (Hold)

Eveninger - July 30 2007

Eveninger - July 30 2007

Reliance Q1FY08 Result Update (Accumulate)

Reliance Q1FY08 Result Update (Accumulate)

SAIL Q1FY08 Result Update (Accumulate)

SAIL Q1FY08 Result Update (Accumulate)

Foreign investors line up with big money

Foreign investors are once again queuing up to pour money into India’s red hot property market, with the government relaxing some of the norms. At least half-a-dozen deals worth $1billion are being finalised by Citigroup, Deutsche Bank, The Carlyle Group and Blackstone, among others, with unlisted real estate companies, as pre-initial public offering (IPO) placement.

A clarification issued by the department of industrial policy & promotion (DIPP), under the ministry of commerce and industry, has cleared the air for investments by foreign institutional investors (FIIs), foreign venture capital funds (VCFs) and private equity players.

FII investments in companies pre-IPO will be treated as foreign direct investment (FDI), as per the clarification, and the investment will have to be channelled for FDI-compliant greenfield projects only.

This has settled the differences arising from views aired by the finance and commerce ministries, and financial sector regulators. Now foreign investors will have to wait three years before exiting the company completely. DIPP has clarified that the investor will have to lock in a minimum of $5 million, in case of a joint venture with an Indian real estate player, or $10 million, in case of a wholly-owned subsidiary of a foreign investor.

The existing rules for foreign investors regarding the lock-in period is applicable for real estate sector as well. Hence, investments by FIIs, foreign VCFs and PE investors will have a minimum lock-in period of one year, if the investment occurred during the preceding 12 months before the IPO date.

This has paved way for a large number of foreign investments at the entity level. This is a complete departure from the past, when equity investments used to be all project-specific. Industry officials said leading property players are sewing up equity deals at the entity level, with greater clarity in foreign investments in the sector.

A majority of real estate companies planning an IPO are currently in talks with foreign investors. The leading players planning an IPO are Hiranandanis, Lodha Developers, Runwal group, Kolte Patil Developers and Paranjpe Schemes (Construction). “There used to be some kind of confusion in the market as far as FIIs’ pre-IPO investments in real estate companies are concerned.

With the clarification issued by the government, foreign VCFs and PE funds can now invest in the real estate firms with a lock-in period of minimum one year. It will definitely boost investments in the sector,” said Akhil Hirani, managing partner of Majmudar & Co.

According to investment bankers, the change in rules would pre-empt any further speculation in the real estate market, and that FIIs would not be allowed to cash in immediately in the IPO.

Earlier, DIPP and the stock market regulator Sebi were not in favour of a lock-in period and had instead suggested pre-IPO placements by FIIs be considered as portfolio investments. However, the recommendation was not accepted by the finance ministry, which, in turn, asked Sebi to put in place the lock-in on FII investments in real estate.

Leading real estate players, eager to cash in on investors’ appetite for realty stocks, were seeking FDI status for their pre-offer placement since many of their existing projects were not meeting the tough FDI norms. For instance, a project needs to be at least 25 acres to be notified FDI-compliant.

Insanity out, anxiety in

The International Monetary Fund (IMF) updated its forecast for global growth this year and next. It projects growth at 5.2% for both these years. This is an impressive number and hence runs the risk of being spectacularly wrong, particularly for 2008. Further, financial market action last week suggests that the forecast upgrade could not have been more ill-timed.
Stocks in the US declined by 2-3% on Thursday and most Asian markets, including India, responded in sympathy on Friday. Many expected US stocks to recover on Friday. They did not. That would have caused some nerves to fray. The questions are how long will this run and how deep would the correction be.
Investors might find it injurious to their financial health to draw solace from the sunny answers of most investment strategists on Wall Street. They did not warn us on the spillover from US mortgage borrowers, lenders, brokers to securitized products, to leveraged buyouts, to credit markets and to Wall Street banks and brokers. Investors would look for clues in fundamentals to decide if this would last or prove to be shortlived.
They would then turn to forecasts such as the one that IMF made recently, the strength of corporate balance sheets, growth rates in most emerging economies, and to what they see as reasonable valuations in many stock markets. In doing so, they would be committing a mistake. The rally of the last five years was not about fundamentals, but about a rose-tinted view of the economic fundamentals of most countries in the world and abundance of liquidity provided by banks to hedge funds, hedge funds to private equity managers, banks to private equity managers and now sovereign wealth funds—funds set up to manage the foreign exchange reserves - investing in risky assets.
A friend who co-manages a hedge fund incubator, while demurring at my sober outlook for global asset markets in the coming years, did admit that banks were ready to provide leverage to the extent of 49 times and, in some cases, even 99 times to start-up hedge funds with no track record either in investment performance or in risk management. That sums up the problems with global finance. It has been all about returns, nothing about risk.
Some segments of this assembly line of liquidity are now shutting down. Readers should appreciate that this assembly line was lubricated with multiple layers of leverage. A hedge fund uses leverage as mentioned above to buy assets. Securities packaged out of mortgages are leveraged and they are repackaged further. Hedge funds buy the lower-rated tranches of these double-packaged debt securities. Some hedge fund investors, too, are leveraged. Hence, a decline in asset value is like a spark that runs through the wires to the final explosive quickly. Here, the leveraged funds explode rather quickly and that hurts a lot of investors because they have used debt and quickly face margin calls. Credit tightens or seizes up at many levels.
That is the difference between 2006 summer and now. The correction then was triggered by cyclical tightening concerns. Now, it is the bursting of the credit bubble and, repeat, not just housing finance. Therefore, its path would be relatively more volatile, unpredictable, prolonged and punctuated by large rallies and false dawns over the next few years.
Optimists will point out that sovereign wealth funds would step in to provide stability to markets. It is possible. However, in doing so, they would be playing the role of Greenspan who always stepped in to help stabilize financial markets with interest rate reductions. That spawned bubbles in Internet and technology stocks and in housing finance. But that did not prevent the technology bubble from bursting. It probably made the bubble bigger. That is what sovereign wealth funds would be doing if they prop up markets. They might be able to delay the inevitable, not make it disappear.
Into this mix, one must throw the volatility that the price of crude oil would cause to economies, to the inflation outlook and asset prices, particularly in Asia. Asian economies have only been superficially strong. Now that the tide of liquidity has withdrawn, the rising price of oil would reveal that many Asian economies and markets were swimming naked.
Mohammed El-Erian, the president and chief executive of Harvard Management Co. and a faculty member of the Harvard Business School, in an excellent article in the Financial Times on Thursday succinctly observed that we may be exiting the world in which “individual investors’ performance was essentially a function of the degree of their exposure to the most illiquid and leveraged asset classes”. In the coming years, however, investors’ performance would be a function of the degree of their composure.

Sun Pharma

Sun Pharma



EXCLUSIVE - Equibrain Report - July 31 2007

EXCLUSIVE - Equibrain Report - July 31 2007

Market Close: Gains outshined ahead of RBI meet.

Jittery start but Heavyweigths supporting the the rally. Indices with SBI results, REL, Cement majors and HUL rallied over 200 points. REL Energy won the Sasan ultra Mega Power, Cement majors rallied fuelling Indices to cover losses made in the previous session. As we mentioned in the outlook market did bounce but fell at the final hours as investors traded cautious to close marginally up. Banking stocks surged ahead of the quarterly monetary policy as Reserve Bank of India (RBI) is scheduled to meet tomorrow. Asian markets recovered at the close while Europe opened on a positive note tracking Asia.

Sensex ended up by 26 points at 15260.91. It was helped up by gains in HLL (208.75,+6 percent), SBI (1579,+5 percent), Guj Ambuja (129.3,+3 percent), Grasim (2946.8501,+3 percent) and ACC (1022.6,+2 percent). Restricting the gains were Hindalco (166.15,-4 percent), ITC (167.3,-3 percent), TCS (1137.75,-1 percent), Bajaj Auto (2292.5,-1 percent) and Dr Reddys (635.95,-1 percent).

Hindustan Unilever (HUL) surged 6% up after the board of directors considered and approved a share buyback up to an aggregate amount of Rs 630 crore at a maximum price of Rs 230 per share which is subject to shareholders approval and also it has reported a 23.9% increase in second quarter net profit before exceptional items. The growth was boosted by increased prices of some key brands and better sales in other categories such as foods. HUL formerly Hindustan Lever posted a profit of Rs 472 C after adjusting for the profit on the sale of land in Maharashtra. The shares are proposed to be bought from both the exchanges through open market purchases from time to time. It has also recommended a dividend of Rs 3 per share. The maximum buyback price is at a premium of 17%. The share capital would be reduced by 1.24% if the buyback value is at Rs 230 and the shareholding of Unilever which holds a little over 51% would increase by about 0.6%.

GAIL (India) Ltd. has recorded an impressive growth in Q1. Profit After tax has increased by 16% to Rs.685 crore in Q1 as against Rs 592 crore in the corresponding quarter in the previous year. Turnover (excluding Excise Duty) has increased by 4% to Rs. 4,246 crore in the first quarter of 2007-08 as against Rs 4078 crore in the first quarter of the previous financial year. The PBT has also increased by 14 % to Rs 969 crore in the first quarter of the current financial year as against the Profit before Tax of Rs 852 crore in the corresponding quarter the previous year. The increase in revenue is mainly due to higher per unit realisation from petrochemicals, the increase in production of Petrochemicals by 29% and increase in LPG transmission by 19% during the quarter. During the quarter polymer sales were 105000 MT up by 29% from 81,000 MT in the corresponding quarter in the previous year. The results were in line with market expectations which set in motion market sentiments as the stock ended the day up by 5.8% after the results.

The government on Monday awarded the 4,000 MW Sasan ultra mega power project to Reliance Energy. REL submitted the lowest bid of Rs 1.19616 per kilo watt hour. Initially, Lanco had outbid REL with a tariff bid of Rs 1.196 per unit. The consortium later broke after Globeleq sold its stake to Lanco and Jindal Steel and Power Ltd. Sasan Power Ltd, the special purpose vehicle set up by Power Finance Corporation for setting up the project, had asked three other bidders - RPL, NTPC and Jaiprakash Associates - to submit fresh bids. NTPC and Jaiprakash Associates, however, did not change the prices. Lanco also rallied to close up by 10%.

Technically Speaking: A volatile day which continued to trade between an intra day high of 15,452 and low of 15,135. Volume stood at Rs.5031 Cr. Advances outnumbered the Declines where Advance was 1360 and Declines stood at 1367. Sensex has broken the key short term support of 15550, which has turned its short term trend to down. Support range1 of 15110 to 15160 is a key gap support which remained unfilled for quite sometime. As the short term trend is down, the market will look to sell off from very rally. Currently the second resistance range is most important, which if fails to hold the up move then will negate the short term downtrend in the market.

Big money pumps out few barrels of oil

The world’s three largest fully publicly traded oil firms are investing billions of dollars more this year and the extra spending has yet to result in higher production. Exxon Mobil, Royal Dutch Shell and BP posted falling second-quarter output, even though they plan up to a total of $61 billion in 2007 capital spending, up 5.5% from 2006.

“We’re in a transition for the super majors where they are spending an awful lot to reinvigorate their portfolios,” said Jason Kenney, Euro-pean oil analyst at ING in Edinburgh. “It takes time.”

The drop in supply reflects declining output from fields in mature oil regions like the North Sea, violence by militants in Nigeria that has cut output for some companies and slow access to big sources of new reserves. Oil firms get some production from countries in the Organisation of the Petroleum Exporting Countries (OPEC), but top exporter Saudi Arabia keeps its oil fields off-limits to foreign investors.

OPEC’s members, whose oil industries are run by national oil compa-nies, sit on three-quarters of the world’s proven reserves and 10 of the 12 members pump crude at agreed levels to bolster prices.

Besides disruptions in Nigeria, which have trimmed output for Shell and other companies, Venezuela and Russia are grabbing more cash and control from firms that work their oil and gas fields. Resources are increasingly located where extraction is technically harder, such as beneath seas that ice over in winter off Russia’s Sakhalin Island, or in politically volatile regions like the Middle East.

“Access to easy oil and easy gas... there’s less access and less of those hydrocarbons around,” said Shell chief executive Jeroen van der Veer when the company reported earnings last week. “The new supplies will come out of more complex projects — far away, very cold, different political regimes. They’re usually large-scale projects, with risks.”

Shell last week posted a 2% drop in oil and gas output to 3.178 million barrels of oil equivalent (boepd) in Q2. Exxon, the only one of the three to raise output last year, had a 1% fall in production to 4.12 million boepd and BP’s supply fell by 5% to 3.8 million boepd. Exxon said supply fell because of declines at mature oil fields, OPEC produc-tion cuts and lower European demand for natural gas. Shell lowered its sights for full-year production, saying it would be at the lower end of a previously given range of 3.3-3.5 million boepd this year.BP expects full-year output to fall. New chief executive Tony Hayward is working to turn the company around, saying last week its current operational performance is “not good enough”.

Companies are lifting spending after years of under-investment and rising demand helped send prices skyrocketing. Much of the boost is being soaked up by rising costs for rigs, steel and wages. Brent crude hit an 11-month high at $78.40 a barrel earlier in July, within sight of the record high $78.65 touched in August last year. It has since eased to around $76.

Exxon expects capital investment to remain little changed, up around 0.5%, in 2007 while Shell and BP plan larger in-creases of up to 9.5% and 6.5%, respectively. Total, the fourth-largest non government-controlled oil firm, may buck the trend among its larger rivals by reporting an increase in Q2 production because of new fields in Angola, ING’s Kenney said.

Equity boom to aid soft landing for Indian firms

Indian companies seem surprisingly well placed to handle any contagion from credit-related turbulence in the global markets.
The main worry in the markets has been that banks which hold the debts of over-leveraged companies, market players and individuals will see a piling up of bad debts which, in turn, will affect their future loans and investments. But in such a scenario, companies that have strong balance sheets and low debt are unlikely to be affected.
A Mint analysis of 217 Indian listed firms with market capitalization of more than Rs1,000 crore finds that their debt-equity ratio, a measure of their level of borrowing and their financial soundness, was a low 0.97 as on 31 March. This essentially means that for every Rs100 worth of equity, these firms are borrowing Rs97.
Commercial banks and information technology companies have been left out of this analysis, the former because the ratio of debt to equity is not a valid metric in analysing them, and the latter because they typically do not borrow.
Furthermore, despite the sharp rise in bank credit in the last few years and in the amounts raised abroad by way of external commercial borrowings, there has been hardly any change in the debt-equity ratio in the past five years.
That’s not all.
A sample of 1,427 listed companies with market capitalization below Rs1,000 crore, too, shows an improvement in their debt-equity ratio.
For this group, the ratio has fallen from 1.73 as on 31 March 2004 to 1.42 in 2007. During this period, the debt-equity ratio of large-cap firms with market capitalization of over Rs1,000 crore has moved only marginally by a few basis points—from 0.94 to 0.97.
How has this occurred in spite of the large external loans taken by companies?
“Don’t forget that stock markets have been booming in the last few years and Indian firms have raised a large amount of equity. This has lowered the debt-equity ratio,” says Veena Mishra, senior business economist with Mahindra & Mahindra Ltd (M&M). “Corporate profits have soared and companies have a lot of free cash flow and this has strengthened their balance sheets.” she says. Adds Vinay Patel, economist with ICICI Securities Ltd: “The stock of external debt hasn’t really gone up too much.”
Raman Uberoi, senior director at rating agency Crisil Ltd, points out the sharp improvement in the finances of companies rated by his agency.
“Our AAA-rated companies had a debt-equity ratio of 0.5 in 2001, which improved to 0.21 by 2006,” he says. For A-rated companies, adds Uberoi, the ratio improved from 1.5 in 2001 to 0.9 in 2006.
A recent Reserve Bank of India study on the finances of 1,064 non-financial, non-government large public limited companies showed that the percentage of debt to equity of these companies fell from 47.9% in 2003-04 to 36.4% in 2005-06.
The improvement has occurred because Indian companies have only recently started expanding capacity, which means they didn’t really need much funding. Also, they have become far more efficient in managing their working capital, which again reduced their demand for loans.
Interest rates, too, came down during the period, as a result of which they were able to service their debt more easily.
Points out Uberoi: “for Crisil-rated AAA borrowers, the interest cover (the number of times interest payments were covered by profits before interest and tax) improved to 19.75 in 2006, from 6.85 five years ago. For A-rated borrowers, the improvement in interest cover was from 2.48 to 5.36.”
Most brokerages remain sanguine to concerns that the recent tightness in the credit markets will hurt Indian companies.
Says Ajay Parmar, head, Ideas Research at Emkay Securities in Mumbai: “Corporate earnings growth remains strong and foreign investors will continue to flock to India. The strength of the rupee is an added attraction.” But Mishra of M&M is less sure. “It will hurt those companies that have taken bridge loans from banks, say for funding an acquisition,” she says.
Mukarram Bhagat, CEO and managing partner, broking services, of ASK Securities in Mumbai, says markets are worried about the possibility of higher costs of funding and of acquisitions abroad. “There’s no truth in the story that emerging markets are decoupling from the US,” he says. “If the US gets hurt, so do emerging markets.”
It’s true that the big-ticket acquisition deals of Indian corporates have been funded by foreign banks, which might suggest that if they face a liquidity crunch, acquisition financing could get affected.
However, Uberoi does not believe so, underlining the fact that while the debt-equity ratios of Indian firms will rise in the future on account of capacity expansion, they will still be at very low levels.
Adds Patel, “Although spreads on junk bonds in the US have gone up, they remain at historically low levels. Also, even in the US, most of the big companies are unlikely to be affected by any credit squeeze. As for the impact on Indian companies, it’s likely to be very manageable.”

United Spirits

United Spirits

Motilal Oswal - Bharti Airtel

Motilal Oswal - Bharti Airtel

Investor's Eye - July 30 2007

Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs216
Current market price:

Price target revised to Rs216

Result highlights

  • Ceat's Q1FY2008 results were in line with our expectations. The net sales have risen by 7.8% to Rs536.4 crore, mainly driven by strong realisation growth due to price hikes and product mix changes. In line with the industry slowdown, the original equipment manufacturer (OEM ) sales declined by 11% year on year (yoy), but the effect of the same was mitigated because of strong growth in the replacement and the export markets.
  • The operating margins expanded 550 basis points to 9.2% during the quarter as a result of lower raw material cost, price hikes, improved product mix and other efficiencies. As a result, the operating profits grew by 166.3% to Rs49.4 crore.
  • Adjusting for the impact of tax provisioning on the extraordinary gain, we estimate that the quarterly profits have grown to Rs20.4 crore against Rs0.2 crore same quarter last year. The quarter's results contain extraordinary items relating to refund from excise and income tax and reversal of export benefits granted in earlier years. Profit after tax (PAT) after extraordinary items have grown to Rs30.4 crore.
  • Last few quarters have been pretty exciting for Ceat, as it has effected a smart turnaroud during the period and now its margins are comparable with the best in the industry. We expect this strong growth to continue, particularly driven by the replacement and the exports segment. We also expect the company to maintain its margins at these levels going forward. On the basis of strong performances by Ceat, we are raising our earnings estimate for Ceat by 6% to Rs16.9 for FY2008 and are introducing our FY2009 estimates of Rs21.1.
  • The slowdown in the OEM segment is expected to continue for another couple of quarters. To counter the same, the company has already put in place strategies to concentrate more on the exports and the replacement markets.
  • The land sale is expected to be finalised by the third quarter of the current fiscal, while the demerger process is expected to be completed by the end of this fiscal.
  • At the current market price of Rs177, the stock is trading at 8.4x its FY2009E earnings and at an enterprise value (EV)/earnings before interest depreciation and amortisation (EBIDTA) of 3.9x. We maintain our Buy recommendation on the stock with a revised price target of Rs216.

State Bank of India
Cluster: Apple Green
Recommendation: Buy
Price target: Rs1,780
Current market price: Rs1,579

Strong operating performance

Result highlights

  • State Bank of India’s (SBI) results have been way above the market’s and our expectations with the profit after tax (PAT) growing by 78.5% year on year (yoy) to Rs1,425.8 crore compared with our estimate of Rs1,147 crore. The results are significantly above estimates due to a higher than expected write-back in investment provisions and subdued operating expenses.
  • The net interest income (NII) was up by 15% yoy to Rs4,497 crore. The reported net interest margin (NIM) remained more or less stable on a sequential basis but declined by six basis points yoy. Most of the public sector banks have reported a sequential decline in margins whereas SBI has maintained its NIM and grown its NII by 15.8% yoy which are commendable.
  • The non-interest income grew by 18.7% yoy to Rs842.6 crore driven by good growth in the core fee income, which rose by 16.3% yoy, and a higher trading income, which increased by 30.5% yoy due to the gains recorded in the National Stock Exchange stake sale for around Rs150 crore. “Others” reflect a net negative figure due to amortisation expenses and one-time shifting losses booked through the non-interest income category as per new Reserve Bank of India (RBI) directives.
  • The operating expenses grew by only 5.8% yoy to Rs2,978.5 crore mainly due to lower staff expenses, which grew by 5.3% yoy and remained almost unchanged on a sequential basis at Rs2,026.4 crore. A good net income growth of 15.6% yoy coupled with lower operating expenses helped the operating profit to increase by 30.8% to Rs2,361.5 crore. The core operating profit growth was at 15.8% yoy to Rs2,691.5 crore.
  • Provisions declined by 36.4% yoy mainly due to a write-back in investments provisions for Rs376 crore. The bank made a Rs200-crore non-performing asset (NPA) provision during the quarter over and above the RBI’s requirements, which helped it to improve the provision coverage by 140 basis points to 48.8% on a sequential basis.
  • Business growth was strong with net advances up 29.3% yoy and deposits higher by 19% yoy. However, the asset quality showed deterioration with the gross NPA up by Rs760 crore in absolute terms and the net NPA up from 1.56% in Q4FY2007 to 1.62% in percentage terms.
  • The operating performance has been strong with stable margins and robust business growth. However the margins are likely to be under pressure going forward as the bank has a net effective negative spread on the combined statutory liquidity ratio (SLR) and cash reserve ratio (CRR) book. On the other hand, it has reduced its interest rate risk significantly, with only 24% of its investment book under the marked-to-market category with a duration of 1.7 years. A lower provision coverage and the non-provision of transitional Accounting Standard (AS)-15 expenses (as it awaits the RBI’s guidelines on this front) are the only concerns. Hence, we have not upgraded our numbers as we feel the AS-15 related provisions could restrict the earnings growth of the bank in FY2008 despite earnings being significantly above estimates. At the current market price of Rs1,579, the stock is quoting at 14.4x its FY2009E earnings, 5.9x pre-provision profits and, 1.9x stand-alone and 1.5x consolidated FY2009E book value. We maintain our Buy recommendation on the stock with a price target of Rs1,780.

Bank of Baroda
Cluster: Apple Green
Recommendation: Buy
Price target: Rs366
Current market price:

Price target revised to Rs366

Result highlights

  • In Q1FY2008, Bank of Baroda's (BOB) net profit increased by 102.5% year on year (yoy) and 34.7% quarter on quarter (qoq) to Rs330.8 crore. The profits of the bank more than doubled on year-on-year (y-o-y) basis mainly because of a decline in provisions during the quarter on account of a write-back in the investment provisions on its marked-to-market investment portfolio.
  • During the quarter the bank's net interest income (NII) increased by 15.5% yoy but declined by 8.9% on a sequential basis. The Q4FY2007 NII was adjusted for Rs30 crore for the cash reserve ratio (CRR) from the interest income and Rs22 crore interest income related to BOB Housing. The margins have remained stable on a y-o-y basis but have shown a six-basis-point decline at 3.2% on a quarter-on-quarter (q-o-q) basis.
  • The non-interest income was up by 64.4% yoy mainly due to a higher treasury income component of Rs130 crore which included Rs90 crore from the National Stock Exchange (NSE) stake sale; the fee income was up by 13.5% yoy to Rs107.7 crore.
  • The operating expenses were up 24% yoy to Rs684 crore as both the staff expenses and the other expenses increased by 17.6% yoy and 38.6% yoy respectively. The staff expenses were high because of higher retirement benefits while the other expenses increased due to higher depreciation on the assets (mainly technology). Although the operating profits improved by 28% yoy, the core operating profits (ie operating profits adjusted for treasury) declined by 6%.
  • The bank's loan growth moderated to 27.5% yoy as in June 2007 from the high of 40% y-o-y growth in FY2007. The retail and foreign advances continued to be the main drivers of the growth with 38.5% and 44% y-o-y rise respectively. The deposit growth also moderated to 22.7% yoy from 33.4% registered in FY2007. The moderation in the overall business growth to a more comfortable level of 22-25% would help the bank conserve precious capital, maintain the margins and reduce the likeliness of higher defaults going forward.
  • We have seen a marginal deterioration in the asset quality with the gross non-performing asset (NPA) level up 5.5% qoq and the net NPA level at 0.67% compared with 0.6% in March 2007.
  • Although the margins were not under severe pressure, the core operating performance was dismal as the operating expenses remained high mainly due to technology implementation and providing retirement benefits for the staff. We expect higher operating expenses in FY2008 because of technology implementation and the Accounting Standard (AS)-15 provisions. We also expect the margins to remain under pressure as the bank plans to grow significantly its international operations (margins are comparatively lower in the international business). However the bank has comfortable capital adequacy and asset quality levels with a strong management focus to improve profitability. Due to its low return on equity (RoE) the bank trades at a much lower price to book value (BV) multiple than its peers. But with its RoE expected to improve to 15% plus going forward, we feel at the current valuations the bank is one of the most attractively valued among the public sector banks. We have introduced our FY2009 estimates in this report. At the current market price of Rs293, the stock is quoting at 6.8x its FY2009E earnings per share (EPS), 3.4x pre-provision profits (PPP) and 1x BV. We maintain a Buy recommendation on the stock with a revised price target of Rs366 at which it would trade at 1.25x FY2009E BV.

Grasim Industries
Cluster: Apple Green
Recommendation: Buy
Price target: Rs3,250
Current market price: Rs2,947

Price target revised to Rs3,250

Result highlights

  • The Q1FY2008 net sales of Grasim Industries (Grasim) grew by 30.3% year on year (yoy) to Rs2,450 crore, mainly due to a pick-up in its viscose staple fibre (VSF) volumes as well as realisation and higher sponge iron prices. The VSF revenues grew by a robust 59% yoy to Rs700 crore on the back of a healthy 34% growth in the volumes and a 20% growth in the realisation yoy. The cement revenues improved by 25% yoy to Rs1,390 crore driven by a 12% growth in volumes and a 13% growth in realisations yoy.
  • On the back of a higher top line growth, the operating profit grew by 54% yoy to Rs792 crore whereas the earnings before interest, tax, depreciation and amortisation (EBITDA) margin improved by 510 basis points to 32.4%.
  • The interest expenses rose by 21.1% yoy to Rs28.5 crore on account of higher borrowings in the quarter whereas the depreciation provision increased by 14.7% yoy to Rs85 crore mainly due to part commissioning of the additional VSF capacity in FY2008.
  • The other income jumped by 81% yoy to Rs67.7 crore on account of a high interest income from the profitable deployment of surplus cash from operations.
  • Consequently, the net profit rose by 64% yoy to Rs512 crore, much ahead of expectations.
  • The company has slightly modified its capital expenditure (capex) plans. As against expanding the capacities at Kotputli and Shambhpura by 4 million metric tonne (MMT) each as planned earlier, the company is now expanding the capacities at these two locations by 4.4MMT each. The Shambhupra capacity is expected to come up by Q4FY2008 whereas the Kotputli plant is expected to be commissioned by Q1FY2009.
  • The company is also augmenting its VSF capacity at Kharach, Gujarat from 45,625 tonne to 63,725 tonne. The company is also in the process of getting regulatory clearance for expanding the capacity at Harihar by 31,000 tonne.
  • Considering the optimistic outlook for the VSF business, the higher realisations from the sponge iron business and the higher earnings of UltraTech Cement, we are upgrading our earnings per share (EPS) estimate for FY2008 by 8.2% to Rs264 and for FY2009 by 12.6% to Rs234.

Tata Elxsi
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs370
Current market price: Rs288

Price target revised to Rs370

Result highlights

  • For Q1FY2008, Tata Elxsi has reported a growth of 3.6% quarter on quarter (qoq) and of 45.7% year on year (yoy) in its revenues to Rs92.4 crore. The performance was ahead of expectations in view of the seasonal weakness in Q1 (especially in the system integration [SI] business) and the steep appreciation in the rupee during the quarter.
  • However, the performance on the margin front was disappointing. The operating profit margin (OPM) plummeted by 670 basis points sequentially to 17.6%, which is among the lowest in any quarter during the past two years. The same can be attributed to the cumulative impact of the rupee's appreciation, wage hikes (given to a small part of its employee base; wage hikes are being effected since January for most of the employees), intake of fresh graduates (under training and not billable) and seasonal weakness in Q1 in case of the SI business. Consequently, the operating profit declined by 25.1% qoq to Rs16.2 crore
  • In line with the operating profit, the earnings declined by 24.5% qoq and grew by 18.4% yoy to Rs12.1 crore, which was lower than our expectations of Rs12.6 crore.
  • In terms of segmental performance, the sequential growth of 7.3% in the software development service (SDS) business was ahead of expectations. However, the profitability declined by 470 basis points sequentially to 17.5% during the quarter. On the other hand, the SI revenues declined by 13.8%. The segmental margins plummeted to 12.6% as compared with 29.4% in Q4FY2007 but were far better than 1.6% in Q1FY2007.
  • To factor in the higher than expected pressure on the margins, we have revised downwards the earnings estimate for FY2008 and FY2009 by 4.5% and 3.4% respectively. At the current market price the stock trades at 14.2x FY2008 and 11.3x FY2009 estimated earnings. We maintain our Buy call on the stock with a revised price target of Rs370 (14.5x FY2009 earnings).

Apollo Tyres
Cluster: Apple Green
Recommendation: Buy
Price target: Rs425
Current market price: Rs375

On a fast track

Result highlights

  • Apollo Tyres rendered a brilliant performance in Q1FY2008 on the back of a strong top line growth and an improvement in the operating profit margin (OPM).
  • The top line grew by 15.4% to Rs874.1 crore, led by a volume growth of 5% and a realisation growth of about 9.9% during the quarter. Though the original equipment (OE) business witnessed a slowdown during the quarter, the replacement business remained strong.
  • The OPM improved to 11.5% from 7.5% Q1FY2007 on the back of softer raw material prices, improvement in price realisations and increasing operating efficiencies. Consequently, the operating profit increased by 77% to Rs100.4 crore. The net profit for the quarter grew by 187.6% to Rs46.8 crore.
  • On a consolidated basis, the net revenues rose by 22% to Rs1,150 crore while the net profit improved by 369% year on year (yoy) to Rs54.6 crore, indicating a sharp improvement in the performance of its subsidiary, Dunlop South Africa.
  • Dunlop South Africa is performing very well as its earnings before interest, depreciation, tax and amortisation (EBIDTA) margin reached the level of 11% during the quarter. It recorded a growth of about 40% in its net sales to about Rs275 crore in the same period. However, the same was achieved on a low base due to a very low-key performance in the same quarter last year.
  • Though the sales volumes of Apollo Tyres would be affected in the current fiscal as a result of the slowdown in the OE sales, we believe that the replacement sales for tyre makers would continue to remain strong, considering that the automobile industry, especially the commercial vehicle segment, has been recording a good growth for five straight years. Also, the fall in rubber prices augurs well for the tyre makers as it should help them maintain the high levels of margins.
  • At the current market price of Rs375, the stock discounts its FY2009E earnings by 10.5x and quotes at an enterprise value (EV)/EBIDTA of 4.8x. We maintain our Buy recommendation on the stock with a price target of Rs425.

Mahindra & Mahindra
Cluster: Apple Green
Recommendation: Buy
Price target: Rs913
Current market price:

Q1FY2008 results: First-cut analysis

Result highlights

  • The Q1FY2008 results of Mahindra & Mahindra are below our expectations. The stand-alone net sales of the company grew by 16.8% to Rs2,612.8 crore in the quarter. This growth was led by an overall volume growth of 13.6% in the same period. The automotive segment recorded a volume growth of 24%; the sales volume of the farm equipment (FE) segment was flat.
  • On a segmental basis, the automotive revenues rose by 21% to Rs1,504.5 crore. The FE division reported a revenue growth of 9.7%. The profit before interest and tax (PBIT) margin in the automotive segment was affected by 110 basis points due to the strengthening of the rupee and the consequent lower export realisation that affected the profit during the quarter. The FE division was able to maintain the PBIT margin at 13.4%. Consequently, the overall operating profit margin (OPM) declined by 150 basis points to 10.6%, leading to an operating profit growth of only 2.5%.
  • On account of an increase in the interest expenditure and higher depreciation the adjusted net profit grew by 6.8% to Rs192.75 crore. After taking into account the extraordinary items (voluntary retirement scheme expenses, special dividend income) the reported profit after tax (PAT) declined by 6.4% to Rs191.16 crore.
  • On a consolidated basis, the gross revenues grew by 40.7% to Rs5,879.2 crore in Q1FY2008 while the profit before tax (PBT) and exceptional items grew by 11.7% to Rs535.7 crore.
  • We expect FY2008 to be the year of consolidation for the company as new product launches would take place only in FY2009. We will present our full result update on the company after attending the post-result conference call of the company. At the current market price of Rs753, the stock discounts its consolidated FY2009 earnings estimate by 9.3x. We maintain our Buy recommendation on the stock with a sum-of-the-parts price target of Rs913.


Hindustan Zinc

High zinc price improves overall performance

Result highlights

  • In Q1FY2008, the revenues of Hindustan Zinc (HZL) grew by 22% year on year (yoy) to Rs1,970 crore on the back of higher zinc prices and increased volumes. However in terms of sequential growth, the sales of the company dropped by 3% mainly because of the fall in the production of refined zinc refined metal by 4% quarter on quarter (qoq) to 92,631 tonnes. The company sold 54,835 tonnes of zinc concentrates and 13,651 tonnes of lead concentrates during the quarter. The concentrate sales revenue at $80 million during the quarter was higher than that of Q4FY2007 when the concentrate market was tight.
  • The earnings operating profit soared by 15% yoy and 3% qoq to Rs1,436 crore mainly due to increased realisation and improved efficiency. The company is in the lowest decile of the cost curve across the globe. The operating margins contracted by 437 basis points yoy to 73% mainly because of a 92% increase in selling and other expenses due to the rising freight cost.
  • The interest outgo declined by 74% yoy whereas the depreciation cost increased by 22% yoy, as the company commissioned a 38.4 megawatt (MW) wind energy plant in the last quarter.
  • The profit of the company grew by 36% yoy because of the other income of Rs130.48 crore on account of one time reversal of earlier year liability relating to royalty payments to the government. The adjusted net profit grew by 21% yoy to Rs1,055 crore.

Great Eastern Shipping Company

Capex plan of $470 million in the next two years
We attended the conference call of Great Eastern Shipping company (GESCO) to discuss the Q1FY2008 results. We present the key takeaways from the call

Investor's Eye - July 30 2007