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Monday, August 06, 2007
Sensex drops by 235 points
The Sensex ended the day with a loss of 235 points after crashing to a low of 14,706 during intra-day trades. The market crashed by over 400 points in line with the other major global indices as US subprime fears played on the investors’ sentiment. Despite gaining over 150 points in Friday's trades, the Sensex resumed 245 points lower at 14,893. It tanked by another 187 points to touch the day's low of 14,706 on relentless selling in metal, IT, capital goods and tech stocks. The Sensex managed to recover around 200 points in late trades, but still ended with a loss of 235 points at 14,903. The Nifty shed 1.41% or 62 points to close at 4,340.
The market breadth was negative. Of the 2,662 stocks traded on the BSE 1,493 stocks declined, 1,103 stocks advanced and 66 stocks ended unchanged. Among the sectoral indices the BSE Realty Index tumbled 3.16%, the BSE IT Index slipped 2.26%, the BSE Teck lost 2.06% and the BSE CG Index was down 1.82%. However, the BSE FMCG Index gained marginally.
Several index heavyweights came under selling pressure and ended in the red. Hindalco was the major loser and tumbled by 3.05% at Rs157. ICICI Bank at Rs888, Maruti Udyog at Rs825, Reliance Communication at Rs532, L&T at Rs2,449, Infosys at Rs1,867 and Wipro at Rs458 slumped around 2-3% each.
Select counters logged significant gains on fresh buying support. SBI bucked the downtrend and gained 2.80% at Rs1,682. ITC was up 1.77% at Rs172, Ranbaxy, Dr Reddy's Lab, TCS and M&M gained marginally.
Over 3.69 crore IFCI shares changed hands on the BSE followed by Alpa Laboratories (90.64 lakh shares), Reliance Natural Resources (80.94 lakh shares), Nagarjuna Fertilizers (53.11 lakh shares) and Manglore Chemicals & Fertilizers (50.59 lakh shares).
IFCI registered a turnover of Rs227 crore on the BSE followed by SBI (Rs219 crore), Orbit Corporation (Rs157 crore), Reliance Industries (Rs146 crore) and GMR Infrastructure (Rs124 crore).
Heavyweights help limit damage
After staying weak throughout the day on continued selling pressure in index pivotals tracking weak global markets, the market recovered some ground at the fag end of the trading session on value buying. State Bank of India surged and Reliance Industries and Tata Steel came off lower level.
European markets recovered from their initial weakness. London's FTSE 100 was up 0.29% to 6,242.20 and DAX rose 0.23% to 7,452.94. Back home, all the sectoral indices on BSE settled lower, except BSE FMCG index.
The BSE 30-share Sensex lost 235.37 points or 1.55% at 14,903.03. It had opened with a sharp 245.80-point downward gap at 14,089.60 and slipped further to touch a low of 14,705.58 in early trade, a fall of 432.82 points for the day. The Sensex hit a high of 14,928.80 at 15:27 IST
The benchmark index oscillated in a range of 223.22 points for the day
The S&P CNX Nifty lost the Nifty lost 62.05 points or 1.41% at 4339.50. The Nifty August 2007 futures settled at 4322, a discount of 17.50 points as compared to spot closing
The market saw high volatility in the week ended 3 August 2007. The benchmark index lost 96 points, or 0.63%, to 15,138.40 in the week ended 3 August 2007. The S&P CNX Nifty lost 44 points, or 0.96%, to 4401.55. Despite the market gaining in 4 out of 5 days of the week, it settled lower for the week.
The market breadth was weak on BSE with 1,486 shares declining as compared to 1,151 that advanced, while 70 remained unchanged.
The BSE Mid-Cap index lost 0.79% to 6,552.93 while the BSE Small-cap Index slipped 0.62% to 7,842.59
The total turnover on BSE amounted to Rs 4256 crore as against to Rs 4186 crore on Friday, 3 August 2007
The NSE F&O turnover was Rs 37564.99 crore as compared to Rs 33935.22 crore on Friday, 3 August 2007.
Among the Sensex pack, 23 pivotals were trading in red, while 7 were in green.
State Bank of India, the country’s largest commercial bank, recovered sharply from its low of Rs 1592.60, and settled 3.75% higher to Rs 1697.30. It was the top gainer from Sensex pack. SBI today, 6 August 2007, announced a reduction as well as hikes in deposit rates based on maturities effective 9 August 2007. The bank has cut the deposit rate for one year to less than two years to 8% from 8.25%.
The bank has hiked the rate on deposits for 271 days to less than a year to 6.75% from 6.50% from the earlier time frame of 180 days to less than a year. The bank has introduced a new band - three years and up to 10 years - with an interest rate of 8.50% as against the earlier five years and above rate of 8.25%
However the BSE Bankex lost 1.06% to 8,055.14. ICICI Bank, the country’s largest private sector bank, slumped 2.97% to Rs 888.10 on 5.10 lakh shares, on fears the housing boom in India may cool in the wake of the US mortgage crisis. It was the top loser from the Sensex pack.
RBI deputy governor Rakesh Mohan said on Friday, 3 August 2007, excluding energy prices, whole price based inflation still continues to be above 6%, which is not acceptable. In its policy review on Tuesday, 31 July 2007, RBI said holding inflation within 5% in the fiscal year 2007/08 assumes priority in the policy hierarchy, while the medium-term goal was to reduce it to 4% to 4.5%.
HDFC bank (down 1.76% to Rs 1132), Federal Bank (down 1.53% to Rs 362.50), and Allahabad Bank (down 0.88% to Rs 90.55), were the other losers from banking pack
Tata Consultancy Services (TCS), the country’s largest IT services exporter, rose 0.94% to Rs 1107, off its low of Rs 1071.20. It has reportedly inked a multi-year deal with Geneva-based International Organization for Migration (IOM). Under the deal, TCS will build and implement an integrated financial management solution to meet the resource management challenges of IOM.
However the BSE IT Index lost 2.26% at 4,597.82. The rupee today, 6 August 2007 reacted sharply to the bearish equity market and moved downwards to 40.48/49 against the US dollar in morning deals.
Wipro, India’s third largest IT services exporter, slipped 2.14% to Rs 460.20. It is in talks to acquire US-based Infocrossing. The deal is likely to be about $450-500 million. Infocrossing is NASDAQ listed outsourcing solutions company.
Infosys (down 2.81% to Rs 1865.50) and Satyam Computers (down 1.81% to Rs 463.30) also edged lower.
India’s largest pharma company by sales Ranbaxy Laboratories rose 1.45% to Rs 371.55. On 30 July 2007, the company said it had started the production and sale of its first authorised generic drug Isoptin SR (Verapamil Sit) in the US. The generic market for Verapamil SR is worth $122.2 million.
ITC (up 1.39% to Rs 171.70) and Mahindra & Mahindra (up 1.20% to Rs 686) were the other gainers from Sensex pack.
The BSE Capital Goods Index declined 1.82% at 12,739.99. Suzlon Energy (down 3.43% to Rs 1198), Larsen & Toubro (down 2.60% to Rs 2455), Siemens (down 1.54% to Rs 1235), and Bhel (down 1.70% to Rs 1691), edged lower.
The BSE FMCG Index rose 0.37% to 1,945.26, and was the lone gainer among the sectoral indices on BSE. Dabur India (up 1.83% to Rs 102.85), Colgate Palmolive India (up 1.77% to Rs 410), ITC (up 1.40% to Rs 171.70) and Nestle India (up 1.31% to Rs 1260) advanced
Tata Steel, the world's sixth-largest steel maker, was up marginally by 0.05% to Rs 652. India's top private steel maker said on Friday, 3 August 2007, it would spend $85.7 million to buy a 35% stake in a Mozambique coal project run by Australia's Riversdale Mining. It would source coking coal from the project for Corus' plants in the UK and Europe, and also for its Indian units.
India's largest private sector company Reliance Industries was down 0.62% to Rs 1790. The stock recovered from its low of Rs 1752.10. As per reports, it plans to invest up to nearly $14 billion (Rs 56000 crore) in oil exploration and production business and laying transportation pipelines in the next two to three years.
Alpa Laboratories settled at Rs 55.60 on BSE, a discount of 18.25% over the IPO price of Rs 68. Its shares were listed on BSE at Rs 60, hit a high of Rs 65 and a low of Rs 54 during the day: 90.62 lakh shares were traded on the counter on BSE.
Shares from the refinery pack gained on market talks that the government may increase petrol prices by Rs 2 per litre and diesel prices by Re 1 per litre this week. Hindustan Petroleum Corporation (HPCL) moved up 0.75% to Rs 249.80 and Bharat Petroleum Corporation (BPCL) gained 1.02% to Rs 310.90. However Indian Oil Corporation slipped 0.49% to Rs 399.10
Real-estate stocks declined on fresh selling today, 6 August 2007. The BSE Realty index was down 3.16%, to 7,377.22. It was the top loser among sectoral indices on BSE. Unitech (down 2.96% to Rs 521.55), DLF (down 3.39% to Rs 581.90), Sobha Developers (down 3% to Rs 840) and Indiabulls Real Estate (down 3.08% to Rs 521.35) edged lower
Housing Development and Infrastructure (HDIL) slumped 5.32% to Rs 500.50 on media reports that the firm is planning to enter into a joint venture that would develop a 1.2-million sq ft property at Pune. HDIL would hold a 66% stake in the joint venture.
Mumbai-based digital post-production and VFX specialist Prime Focus rose 1.52% to Rs 830 on reports that it is gearing up for another acquisition. This time though the buzz is that the company promoters are targeting a facility in the United States of America.
JSW Steel declined 5% to Rs 645.50 on reports it is planning to raise around Rs 3,400 crore in the international markets. JSW is raising around $250 million through a debt market issue and has also lined up a $400 million-equivalent rupee loan. The company will also mop up another $200 million through equities from the international markets.
Ahluwalia Contracts India spurted 3% to Rs 525 on bagging Rs 88-crore orders from various companies.
Industrial Finance Corporation of India (IFCI) advanced 5% to Rs 63.75 after its board of directors in a meeting on Saturday, 4 August 2007 set a deadline of 14 September 2007 to receive expressions of interest (EOI) for offloading a 26% equity stake in the form of new shares to a strategic partner. Meanwhile, NSE has lifted the ban on building fresh derivatives positions in the counter.
Public sector Hindustan Copper (HCL) jumped 5% to Rs 103.95 on reports that it may be revived without any cash support from the government. A financial restructuring package worth Rs 637 crore is proposed by the ministry of mines that includes waiver of loan, interest, preference share capital, guarantee fee and reduction of capital. The combined measures are expected to substantially reduce HCL’s accumulated losses.
Orbit Corporation jumped 8.26% to Rs 396.65 on reports Reliance Retail, an unlisted arm of Reliance Industries, and JSW Steel were in race to buy its land and building in Mumbai for about Rs 800 crore.
TRF gained 3.84% to Rs 1000 after it bagged a Rs 115-crore order from National Mineral Development Corporation, Hyderabad, for the Bailadila iron ore project in Chhatisgarh. The company made the announcement on Saturday, 4 August 2007.
Prism Cement jumped 4.93% to Rs 59.65 on buying by domestic funds. As on 31 July 2007, Reliance Mutual Fund held 50.78 lakh shares, Sundaram BNP paribas Mutual Fund 25 lakh shares and SBI Mutual Fund 9.22 lakh shares in Prism Cement.
Nalco rose 1.89% to Rs 256.80 on reports of government finding a final solution to the company’s coal crisis. Reportedly, the coal ministry, in consultation with Indian Railways, Nalco and coal companies, has decided to provide coal to Nalco from other coal companies and sources to tide over shortages.
GMR Infrastructure rose 0.93% to Rs 939.95 on entering into a memorandum of understanding with Tamil Nadu Industrial Development Corporation for the development of a multi-product special economic zone in Krishnagiri District, Tamil Nadu.
Fortis Healthcare (FHL) gained 0.45% to Rs 89.95 on reports that the healthcare provider will float new company focusing on medical education with an investment plan of Rs 5000-6000 crore. Reportedly, FHL is planning to float a new company which will focus on medical education in its upcoming 10 medicities spread across the country.
Everest Kanto Cylinder declined 2% to Rs 1021 despite chalking out a major expansion and modernisation plan with a total project outlay of about $50 million.
Zuari Industries rose 2.35% to Rs 206.50, off its high of Rs 209, on entering into joint venture agreement with Israel Chemicals for establishment of water soluble NPK fertiliser plant with an initial capacity of 10,000 tonnes per year. Israel Chemicals (ICL) is a global group engaged in the development, manufacture and marketing of fertilisers, industrial products and metallurgy.
Videsh Sanchar Nigam lost 3.64% to Rs 432.50 on reports that the firm is planning to invest close $700 million in the submarine cable projects of a South African entity Infraco.
Anant Raj Industries rose 0.15% to Rs 1290 after it scheduled a meeting of board of directors on 10 August 2007 to mull stock split. The company made this announcement after market hours on Friday, 3 August 2007.
Jindal Steel & Power dropped 2.36% to Rs 3895 after it said it plans to seek shareholder approval on its proposal to start operations in the aviation business.
Asian stock markets slumped today, 6 August 2007, after downbeat US economic data, including the influential non-farm payrolls report, adding to fears of the US subprime mortgage crisis snowballing. Japanese shares also were hit hard by declines in exporters such as Canon Inc. and Sony Corp. as the yen strengthened against the US dollar. Nikkei fell 0.39% to 16,914.46.
Hong Kong's Hang Seng (down 2.67% at 21,936.73), Taiwan's Taiwan Weighted (down 1.28% at 8,841.73), Singapore's Straits Times (down 3.70% at 3,308.90) and South Korea's Seoul Composite (down 1.16% at 1,855.05) all edged lower.
However, Shanghai Composite was up 1.48% to 4,628.10 after surpassing 4,600 points in the morning session, to strike a record high of 4,629.74.
Wall Street shares plunged on Friday, 3 August 2007, after comments from a major investment bank fuelled the market's fears of a widening credit market crunch. The Dow Jones shed 281.18 points to 13,182.15. Broader stock indicators also fell sharply Friday, 3 August 2007. The Standard & Poor's 500 index dropped 39.14 points to 1,433.06, and the Nasdaq Composite index fell 64.73 points to 2,511.25.
Oil prices fell on Monday, 6 August 2007 in Asia, extending a decline prompted at the close of last week by news of a cooling US job market. Light, sweet crude for September delivery lost 68 cents to $74.80 a barrel in Asian electronic trading on the New York Mercantile Exchange, midmorning in Singapore.
FII inflow in the month of July 2007, totaled Rs 23,872.40 crore. FII inflow for the calendar year 2007 stands at Rs 41,836.10 crore, till 2 August 2007.
Time to turn cautious
Time to turn cautious—it's not only global
"When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you've got to get up and dance. We're still dancing." - Citigroup CEO Charles Prince
We feel it is time to turn cautious on the equity market (and stop dancing!). There is too much complacency about India/Asia being immune to the sub-prime lending crisis as well as the continued strong growth in the domestic economy and corporate earnings. We feel this complacency is not warranted given (a) the market's high dependence on foreign fund flows; (b) the mounting evidence that the economic growth is slowing down; and (c) the signs that the earnings growth momentum has peaked. The complacency is not restricted to investors or TV commentators but, more worryingly, is also present among the policy makers and central bankers who feel that strong domestic growth is a given and are only fighting mythical inflation battles.
We are worried about:
- High dependence on foreign institutional investor (FII) inflows
- Slowdown in all economic growth indicators
- Sharp deceleration in exports
- Likely worsening of the current account deficit
- Slowdown in earnings: For the first time in several quarters the earnings of the Sensex companies were below expectation after stripping out the foreign exchange (forex) gain. This slowdown in the earnings momentum would become more visible from the second quarter onwards when the forex gains will not be there. A slowdown in the earnings growth would itself lead to a derating of the market's price/earnings (PE) multiple—investors would be OK paying 17-18x for a market growing at 30% but would they do the same if the growth were 15%? We discuss these factors in more detail.
Market may remain cautious
The market is likely to remain shaky as global markets fell sharply and the FIIs continued to remain net sellers of equities in the local market. The sentiment is likely to remain bearish on weak global indices. Among the key domestic indices, the Nifty may get support at 4370 and has a resistance at 4440. The Sensex has a likely support at 15000 and may test higher levels at 15250.
US indices ended another rollercoaster week with the Dow industrials plummeting about 280 points Friday amid continued credit market fears, sparked by Wall Street bank Bear Stearns and the Nasdaq declined 65 points on weak tech stocks and closed at 2511.
All the Indian ADRs ended with sharp declines. MTNL plummeted over 7% while Rediff and VSNL crashed over 5% each. Infosys, Satyam, Wipro, HDFC Bank, Tata Motors and Patni Computers dropped over 1-4% each.
Crude oil prices edged slipped marginally, with the Nymex light crude oil for September series losing by $1.38 to close at $75.48 a barrel. In the commodity segment, the Comex gold for December delivery advanced by $7.80 to settle at $684.40 an ounce.
Intraday Calls
NIFTY (4402) SUPP 4365 RES 4425
Buy Voltas (139) SL 135 Target 145, 147
Buy HPCL (248) SL 244
Target 256, 259
Sell Bharti Airtel (872) SL 879 Target 862, 859
Sell M&M (678) SL 685
Target 667, 664
Sell RCom (548) SL 553
Target 539, 536
Global cues and morning blues
Ninety percent of the clients I see, if they get a raise, the first thing they say is 'I can bet a bigger house or a better car.' Not 'I can pay off (the mortgage and car loan) I have now.
That more or less sums up the situation as far as sub-prime lending is concerned. After a remarkable rescue act by the bulls for two days in a row, another weak start is in store. No prices for guessing the reason. Its the same old problem with the US housing market, especially the subprime mortgages. Wall Street got another battering on Friday. Markets in Europe, Latin America and other emerging markets also took a beating. Asian markets, barring China, have opened sharply down. As a result, we expect a gap-down opening in our market as well.
The fact that the sell-offs have come on higher volume and the subsequent rebounds have seen lower volume remains a cause for concern. Another worry is the withdrawals from the FIIs. There are also no major catalysts on the horizon, as most of the positives have been factored in. The market should remain weak in the near term purely due to the global meltdown.
One should exit weak scrips and stick to the strong ones. Fresh buying is not called for at this stage. One should endure the current volatility and decide on the next course of action once things stabilise a little. A rebound later in the day is always possible. But don't get tempted. Invest only if you can hold on for long.
There are fears that the trouble in the US credit markets could be worse than earlier thought. S&P has cut its outlook on Bear Stearns to negative after two of its hedge funds collapsed last month owing to the subprime contagion. The Wall Street firm's CFO says the US fixed-income market is as bad as he has seen in 22 years. In fact, Bear Stearns' President has had to step down, due to the credit market crisis.
Global investors pulled out $1.4bn from global emerging markets funds during the week ended August 1, according to Emerging Markets Portfolio Funds Research. European markets were down on Friday. All emerging markets equity funds had outflows of $2bn in the latest week versus net inflows of $2.4bn in the week ended July 24.
One event to keep a close eyes and ears on is tomorrow's Federal Reserve meeting. The US central bank is most likely to hold its key interest rate steady at 5.25%. However, a school of thought believes the turmoil across global stock markets and concerns about credit markets should force the Fed to change its stance shortly. But, rising oil prices could still keep the Fed on inflation watch for the foreseeable future.
Mphasis and Torrent Gujarat Biotech will announce their results today. Shares of Alpa Laboratories will get listed on the bourses today. Airlines might gain amid reports that most carriers have hiked fuel surcharge in the wake of an increase in jet fuel prices.
Punj Lloyd could advance after its recent announcements. ICI India is likely to be in focus. Akzo Nobel and a German partner have reached a tentative agreement to buy Imperial Chemical Industries (ICI), the parent of the Indian arm. If the deal goes through there is likely to be an open offer for ICI India as well.
SBI is another stock that may rise amid reports that the Government is expected to fund the banking major's growth plans. RPG Transmission and KEC International will attract attention as the two companies' boards will meet today to discuss a merger.
TRF could gain as the company has received an order worth Rs1.15bn from NMDC, Hyderabad.
European markets declined on Friday. The pan-European Dow Jones Stoxx 600 index lost 1.3% to 372.03, with oil & gas companies among the weakest performers following the drop in crude oil prices. The UK's FTSE 100 slipped 1.21% to 6,224.30, the German DAX 30 slid 1.31% to 7,435.67 and the French CAC-40 dived 1.48% to 5,597.89.
In Brazil, the Bovespa plunged 1,845 points, or 3.4%, to end at 52,846.38. Mexico's IPC index crashed 723 points, or 2.4%, to shut shop at 29.671.77. The Bovespa shed 0.14% for the week, while the IPC was down 1.9%. Chile's IPSA erased earlier advances to end down 0.9% at 3,297.74. It shed 0.2% during the week.
Among the other emerging markets, the RTS index in Russia was up 0.7% at 1970 while Turkey's ISE National-30 index in Istanbul was down 903 points or 1.4% at 63,365.
Indian shares climbed anew on Friday, as investors continued their shopping spree after the big crash of August 1. The sentiment has improved over the last couple of days with the Dow Jones Industrial Average gaining more than 200 points despite the ongoing crisis in the subprime mortgage market.
The benchmark BSE Sensex jumped by 153 points or 1% to end at 15,138.40 after touching a high of 15,235.51 and a low of 15,061.13. The NSE Nifty too advanced by 1% to shut shop at 4401.55.
The BSE Small-Cap index and the BSE Mid-Cap index gained 1.1% and 1.4%, respectively. Among the sectors, Real Estate (2.15%), Consumer Durable (2.1%), Capital Goods (1.4%), Metals (1.4%), Banking (1.3%), FMCG (1.3%), IT (1.2%) and Auto (1%) stocks were the big gainers. Oil & Gas and Pharma shares posted modest gains.
Within the Sensex, the top gainers were SBI (2.7%), NTPC (2.3%), HDFC (2.2%), ACC (2%), Tata Steel (2%), Grasim (1.8%), Hindalco (1.75%), Wipro (1.7%), Maruti (1.7%) and ICICI Bank (1.65%). Among the notable losers were Ranbaxy (1.4%), Dr. Reddy's (1.3%) and Ambuja Cements (1%).
Technology stocks recorded smart gains. Wipro gained by 1.7%to Rs470, Satyam Computer advanced by 1.1% to Rs471 and Infosys added by 0.8% to Rs1915. Mphasis, Financial Technology and Patni were the major gainers among the Mid-Cap stocks.
Metal stocks were also trading firm led by gains in index heavy weights like SAIL surged by 3% to Rs148, Sterlite Industries gained by 1.6% to Rs631, Hindalco advanced by 1.6% to Rs162 and Hindustan Zinc added 2.1% to Rs723.
However, US stocks plummeted anew on Friday as the worries surrounding the subprime mortgage market and its fallout on the American financial sector continued to cast a spell on the market.
Fund Activity:
FIIs were net sellers of Rs1.43bn (provisional) in the cash segment on Friday. At the same time, local institutions were net buyers of Rs591mn. In the F&O segment, FIIs were net buyers at Rs17.73bn.
On Thursday, FIIs offloaded Rs4.19bn from the cash segment.
Major bulk Deals:
Capital Research and Management has picked up J&K Bank while Vontobel Funds Inc sold the stock; DSP Merrill Lynch Capital has sold India Infoline; Fin Brains Securities (India) has sold Simplex Projects.
Insider Trades:
Shringar Cinemas Limited: Balkrishna Shroff, Director bought from market has bought 10000 equity shares of Shringar Cinemas on 1st August 2007.
Lower Circuit:
Rama Pulp Paper and Balasore Alloy
Upper Circuit:
Goldstone Tech, Ganesh Forgings, Easun Reyrolle, Zuari Industries, Prism Cements, Era Constructions, Accentia Technologies, Maxwell Inds and Sulzer India.
Delivery Delight (Rising Price & Rising Delivery):
ABB, Alstom Projects, Ballarpur Industries, Dishman Pharma, ITC, Jaiprakash Associates, Mphasis BFL, Praj Industries, Punj Lloyd and Reliance Petroleum.
Abnormal Delivery:
Reliance Capital, Ultratech Cement, Unitech, Chennai Petro, SBI, Rolta, Reliance Industries, Hindalco, Tata Tea, Kesoram, GSK Pharma, Aurobindo Pharma and HDFC.
Major News & Announcements:
Inflation rate was 4.36% in week ended July 21 vs expectations of 4.37%
Govt approves FDI proposals worth Rs5.75bn
Apar Industries gets export order of Rs1.11bn
Govt allows TV 18 group to buy stake in MTV India for $50.5mn
Punj Lloyd form JV for Real Estate development
Infosys in multi-year services accord with Canadian Pacific
Parsvnath gets nod for Indore IT SEZ
Goldstone Technologies to foray into business intelligence
US Market amid immense trepidation
Good economic data fail to fight the credit crunch debacle
US Market’s witnessed its third consecutive weekly loss for the week ended Friday, 3August, 2007. Though the market tried to make a strong start on Monday, 30 July, 2007, concerns about deteriorating credit market and the overall economy weighed heavily on investor sentiment for the rest of the week. Market witnessed extreme volatile trading during the whole week.
A sense of negative thinking that a possible credit crunch will substantially slow the record pace of M&A activity swept the Wall Street during the week. As a reminder, last week, the Dow Jones Industrial Average had witnessed its worst ever weekly loss in last four years in percentage terms.
During the week, the credit markets concerns and bad-home loans once again resurfaced after news that American Home Mortgage Investment (AHM) might liquidate its assets after failing to meet margin calls. AHM said that it is unable to borrow on its credit facilities and is struggling to raise money, including "the orderly liquidation of its assets."
The comment from Bear Stearns on Friday, 3 August, 2007 reinvigorated concerns about a credit crunch and prompted a late, broad-based sell-off in the market. Reports that another Bear Stearns hedge fund has halted redemptions had already tensed investors earlier during the week.
The Dow Jones Industrial Average lost 85 points for the week. Tech - heavy Nasdaq lost 51 points while S&P 500 lost 26 points.
Among economic data that hit the market during the week, the Core Personal Consumption Expenditure (CPE) index, showed moderating price pressures, while Consumer Sentiment rose in July to its highest level in nearly six years.
Also, Chicago Personal Manufacturing Index (PMI) checked in with reading of 58.5. Since any number over 50 still reflects growth, market reacted positively to the figure. The Institute of Supply Management (ISM index) fell to a lower than expected 53.8% in July.
On the earnings front, Dow components - General Motors, Verizon, Walt Disney and Procter & Gamble all reported strong earnings results.
Among major corporate news, Boeing 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.
Executive Summary
For the week, all the three indices once again registered moderate losses. DJIx is down by 0.7%, S&P 500 is down by 1.8% and Nasdaq is down by 2%. Though market kicked off the week with a strong start, good economic data failed to fight the credit crunch problem and indices slipped at the week’s close.
Crude prices soared beyond $78/bbl and closed at an all time high of $78.21 on Tuesday, 31 July. Treasury yields continued to fall. The yield on the benchmark 10-year note fell to 4.71% from 4.79% last week. Investors shifting away from equities was mainly the reason for this drop.
For the year, Dow is up by 5.8%. Nasdaq is up by 3.8% and S&P 500 is up by 1.3%. Second half of the year generally remains dull. With earnings taking a backseat now, news related to credit market and housing markets will definitely try to take the centre stage in the coming weeks.
GEI Industrial Systems
One of the popular investment portals recommends GEI Industrial Systems
For FY’08, we expect the company to register net sales and net profit of Rs 175 crore and Rs 11.73 crore. This gives an EPS of Rs 8.2 on equity share capital of Rs 14.13 crore. Current market price of Rs 82 discounts this only 10 times.
Weak US jobs data worries Dalal St
Sub-prime worries in the US pulled the Sensex sub-15000 once last week. On Monday morning, they might succeed again as weak US jobs data released on Friday compounded the Dow’s worries, pulling it down by 281 points.
Market men feel that domestic stocks will react to the US July non-farm jobs data and open with a negative gap. The US economy added only 92,000 jobs last month, down from 126,000 in June and the unemployment rate ticked up to 4.6%.
Job growth in July is the slowest in months. The latest decline capped a volatile two weeks on Wall Street in which the stock market has swung wildly from day to day, reflecting rising uncertainty about the outlook for markets and the risks plaguing the economy.
“The sentiments in the market have become very negative in the face of sub-prime concerns in the US and the poor jobs data. Since the investors are worried about the global volatility in the next few days, you may not see much buying even in attractively priced stocks,” said Ajay Pandey, assistant vice-president, institutional sales, Networth Stock Broking.
Most brokerages sent notes to their clients advising them to be cautious. Domestic brokerage Sharekhan warned investors its time to “stop dancing”. It saw reasons beyond the reigning fear of sub-prime worries. It raises questions about the fundamentals of the market.
“For the first time in several quarters the earnings of the Sensex companies were below expectation after stripping out the foreign exchange gain. This slowdown in the earnings momentum would become more visible from the second quarter when the forex gains will not be there. A slowdown in the earnings growth would itself lead to a de-rating of the market’s price/earnings (PE) multiple-investors would be OK paying 17-18x for a market growing at 30% but would they do the same if the growth were 15%?” questions Sharekhan in a note to investors.
But a few optimistic voices could also be heard as players cash rich domestic institutions will lend the crucial buying support in case of a heavy cut. “Sub-prime funds are hardly a part of Indian market. Whatever funds we have received from that market would be pulled back. I don’t see a major crack as the stocks become attractive buys at lower levels,” said Gaurang Shah of Geojit Securities.
Shah said though he expects volatility to continue in the face of global worries, he expected the Nifty to trade within a 100-point range taking support at 4325 and resistance at 4430.
Markets will also closely watch out of US Federal Reserve’s policy meeting on Tuesday, August 7, 2007. Any soothing comments from the US central bank about the health of the world’s biggest economy may support global equities.
Global cues likely to direct Dalal Street
Domestic stock markets are likely to pursue a wait and watch policy in the week ahead with investors taking cues from global markets, analysts say.
Last week was marked by the third biggest meltdown of over 600 points at the benchmark Sensex, following the US mortgage crisis which had made investors and traders jittery.
However, the market recovered in the next of the last two sessions ending the week on a sober note.
The bellwether index ended the week at 15,138.40 points after adding 122.51 points during the week despite the sharp plunge of 615.22 points on August 1.
The direction to be taken by domestic markets may depend on global trends, which in turn would take cues from the outcome of the US federal reserve's policy meeting scheduled for Tuesday, a market observer said.
The outcome of the proposed US federal reserve meeting would most probably continue to have a direct bearing on the functioning of domestic bourses, an analyst said, adding that investors may see the same situation which they witnessed in the previous week.
The Indian bourses have been closely tracking global markets for the past few days after US subprime worries heightened. Other Asian markets have also been rocked by fears that the fallout from the US subprime mortgage crisis and tighter lending conditions would ultimately hit the US economy.
However, a report from the global credit rating agency Moody's said that the US subprime mortgage crisis has 'limited' impact for Asian banks due to their lower exposure in the American market.
Foreign Institutional Investors made a net purchase of Rs 23,872.40 crore on the bourses in July, while for the first three days in August they have made a net sale of Rs 968 crore.
The Reserve Bank in its July 31 review of monetary policy raised the Cash Reserve Ratio from 6.5 per cent to 7 per cent, but kept other key rates unchanged. However, the Central Bank warned that "inflationary pressures remain and are more persistent than before, along with high commodity and asset prices."
Inflation fell to 4.36 per cent during the week ended July 21 from 4.41 per cent the previous week due to decline in prices of food items like pulses and fruits.
RBI Deputy Governor Rakesh Mohan advised bankers that inflation concerns remain and vigil must continue. He said the RBI is not comfortable with high prices as inflation, excluding energy prices, is at 6 per cent, above the 4-4.5 per cent medium-term target of the bank.
IPO Grey Market Premiums
Closed IPOs
Simplex - Rs 160.
Alpa Labs - (Discount. The IPO was subscribed only 1.1 times.)
Omaxe - Rs 100.
Omnitech Info - Rs 100.
Zylog - Rs 330.
IVR Prime Urban - Rs 14.
Central Bank - Rs 38.
SEL - Rs 5.
Asian Granito India - Rs 10.
Current IPOs
Puravankara - Rs 40.
Take Solutions - Rs 220.
KPR Mills - Rs 25.
It’s time to reappraise global economy risks
The current spotlight on hedge funds has inspired many comparisons with the collapse of Long Term Capital Management in 1998. There are plenty of differences between 1998 and now, but perhaps the biggest of them is that in 1998, the contagion spread from East Asia via the Asian crisis initially to Russia and from there to the US, leading to the collapse of the Nobel Laureate-run hedge fund. This time, it’s the US mortgage and credit system that is the epicentre of the disease and the contagion is spreading to the rest of the world from the US.
That change illustrates the transformation in the world economy in the 10 years since the Asian crisis. Emerging markets have always been seen as risky places to do business and fund flows to emerging markets have tended to rush back to the developed countries at periodic intervals. That’s what happened in 1994, when interest rates started going up in the US, and in 1997, as a result of the Asian crisis. Forget emerging markets, even Japan was suspect after the market there blew up in the late eighties. In the 21st century, however, things seem to have changed substantially. First, the tech bubble was a US-centric, specifically Nasdaq-centric, phenomenon that spread to other markets.
The bursting of that bubble affected the US the most—the Nasdaq is still nowhere near the heights it scaled at the time. Next, in the current four-year-old bull run, every wobble originated in the US market, the effect of either slowing US growth or higher interest rates. And the current panic is an exclusive made-in-USA affair, arising out of bad loans originating there and the result of falling house prices in that country. Instead of emerging markets, it turns out that the origins of latter-day risk lie in the US.
Whether it is dodgy US companies, like Enron or WorldCom, or a sluggish economy, or problems in the financial sector, the US is now more risky for investors than many emerging markets. As for growth, of the 56 countries whose GDP is tracked every week by the Economist magazine, only three are forecast to have a growth rate lower than that of the US this year.
That doesn’t yet translate into emerging market immunity from whatever happens in the US. In the last few days, many emerging stock markets have been hit badly by the withdrawal of foreign investors. With so much money originating from the US and with the received wisdom still of the firm view that emerging markets are high-risk assets, funds flow out at the slightest hint of a panic, regardless of where it originates. And with global markets so closely correlated these days, that’s hardly surprising. As a hedge fund manager pointed out, the Nifty is nothing but the Dow on steroids. Of course, not all emerging markets are equal. In India, the fact that our markets are far more diversified than other Asian markets has long been an argument for justifying the premium in valuation. And several emerging markets boosted by the carry trades have very vulnerable current accounts, Turkey and several East European countries being examples.
But the last few years have, in general, seen plenty of improvement in the fundamentals of emerging economies, a fact brought out clearly by the higher sovereign ratings they now command. Fiscal deficits have been cut and current account surpluses built. A mountain of foreign exchange reserves has been accumulated. Domestic savings rates have increased. At least a part of the compression in spreads of emerging market bonds can be justified by these improvements. And, despite the slowdown in the US economy, growth has been very strong in the emerging markets.
These factors have led to many voices being raised in defence of the emerging markets asset class. Guillermo Mondino, head of emerging markets strategy at Lehman Brothers, for instance, writes in a research note that “in a few weeks, emerging market investors may emerge reflecting that news about their market’s decline were greatly exaggerated.” And further, “Fundamentals in the asset class remain, by and large, very solid, as reflected in the long string of positive rating actions during the past six months. “Medium- to long-term probabilities of default are lower and declining. Our own balance of payment crisis indicator, `Damocles’, also suggests low risk and an improving trend. Furthermore, very few countries are critically dependent, for the financing of their fiscal needs or their balance of payments, on market access in the short term.”
CLSA’s Christopher Wood, in the latest issue of his newsletter, Greed & Fear, writes that the problems in US-originated credit will in the longer term be a gigantic buying opportunity for Asian equities, although there will inevitably be pain in the short term. Wood says that “such a primarily US-focused financial panic will do nothing to unwind the secular asset reflation story in Asia” and that “Asia and other emerging markets will be the likely bubble beneficiaries of the coming Fed easing.” The reference to “bubble beneficiaries” is interesting and refers to the theory that the world has seen a series of financial bubbles in recent times, as money flows shift from crisis centres to other asset classes and other parts of the world. For instance, it was the flight of funds from Asia back to the US after the Asian crisis that is credited for creating the tech bubble there. It’s unlikely that the reverse will happen as a result of the current panic. But the time is now ripe for a reassessment of where the risks in the global economy lie.
India Knowledge: Two sides of a rising rupee
India’s rupee, which once traded for 47 or 48 to the US dollar, has been rising rapidly. It now stands at 40 to the US dollar. As a result, the revenues of India’s exporters—which include IT firms such as Infosys, Wipro and TCS—have been affected and earnings have been squeezed. At the same time, though, consumers are benefiting from cheaper imports. How should India manage this trade-off?
According to Wharton finance professor Jeremy Siegel, although Indian firms will need to watch their export costs more carefully, the 10% to 15% savings on imports should be passed along to consumers. “My feeling is that India should not move against this,” Siegel said in a recent interview. “The exporters have had it really good. Let’s give the Indian consumer a break and continue to make sure that the exporters are going to have to stay on their toes as far as competitiveness is concerned.”
Despite the pain to exporters, currency appreciation can curb foreign capital inflows which can have a crippling effect on markets in the long term. “By letting (the currency) appreciate, people are a little bit more cautious,” Siegel said, citing the era of fixed exchange rates in Thailand, Taiwan, Indonesia and the Philippines that precipitated a crisis in 1997. “All of the capital that came in—they couldn’t deploy it favourably, and the result was over-consumption, deficits and then finally devaluation.”
According to Siegel, balanced economic growth “requires not just pushing exports, but also developing your middle class. And you develop your middle class by passing on some of those price gains that you get through strong currency, to lower their cost of living.”
Pre-announcing vs a surprise unveiling
When it comes to rolling out new goods and services, companies tend to choose one of two strategies as a way of generating interest in their products, whether it’s Apple’s iPhone or Microsoft’s latest operating system. One is pre-announcing the product to give customers, partners and even competitors advance notice of what’s to come. The second approach is the surprise unveiling, where a company hopes to make a big splash by giving few hints about an upcoming release. Which approach is better?
“It’s not a clear-cut situation,” says Wharton marketing professor Jehoshua Eliashberg. “What matters more is a company’s position in an industry. If a company is a dominant monopolist, it has reason to pre-announce because it doesn’t fear a competitive reaction. If the company is smaller, the negatives of announcing a product early outnumber the positives.”
Sensex could face selling pressure
The markets could start the week on a positive note, with the Sensex expected to climb to around 15,380-15,400 and the Nifty to around 4,480-4,500. However, we expect selling pressure to set in at higher levels, and this could push down the major indices to levels of around 14,900/4,300. These levels could act as strong support as they did during the major sell off last week.
Technical Parameters: In the weekly charts of the week before last (week ended July 27) there was a downward bar reversal. This pattern at the top is a bearish sign and means that the ongoing rally can be halted and some correction is likely to occur in the subsequent period. This was also accompanied by weakness displayed by the oscillators (RSI).
The RSI (relative strength index) also displayed negative divergence, which means that prices continue to make higher tops, but the corresponding oscillator levels make lower tops. This occurring in the overbought zone indicates that selling pressure is likely in the coming days. Last week, there was heavy selling, which had pulled down the indices from their highs of 15,569/4,534.
However, they have taken strong support at the levels of 14,900/4,300. Further weakness is likely to continue only when these levels are broken and then the next support is at around 14,680-14,700/4,280-4,300 levels. A close look at the sectoral indices suggests that most of them, despite showing a weak trend, are near their support levels and are likely to bounce back from the current levels.
This is the reason why we see the markets bouncing upwards for the initial part of the week. The weakest among the indices are BSE Auto/BSE IT and BSE Healthcare and the ones displaying strength are BSE FMCG and BSE Bankex.
Conclusion: To conclude, the market in the coming week or two may witness a move in the range of 14,680-15,450/4,300-4,530. For long-term investors any correction around 14,700 to 14,800 will be an excellent opportunity to accumulate good stocks as our long-term (12-to-15 months) target for the indices is around 16,500-16,750/4,700-4,780. However, short-term investors may use any rally to book profits and wait for an opportunity to buy back at lower levels. Directional traders can sell short around 15,400-15,450 levels with a strict stop-loss of 15,600 for a target of around 14,700.
FMCG cos log better profit margins
The 10-15% price hike undertaken by most consumer goods companies in the past two quarters has begun showing positively in their profit margins and toplines. FMCG majors such as Hindustan Unilever (HUL), GlaxoSmithKline Consumer Healthcare, Dabur India, Godrej Consumer Products and ITC have reported healthy margins and topline growth for the April-June quarter, aided to a large extent by price hikes.
Anand Shah, FMCG analyst at Angel Broking, said, “Price hikes undertaken by FMCG companies have begun reflecting in their performances. Margin expansions have been aided by buying efficiencies.” High-margin products are doing well and companies are able to protect margins.
HUL, which posted topline growth of 13% year-on-year to Rs 3,481 crore during the April-June quarter, saw its operating margin expand by 15%. Analysts attribute that to judicious price increases across categories. HUL had hiked prices of Knorr soups and certain SKUs of Surf Excel Blue, Rin Advance, Ponds, Lux and Sunsilk over the past few months. HUL’s foods business grew 25% while soaps and detergents grew 14.6% during the quarter.
“The full impact of price hikes done over the previous two quarters is showing now,” said Rajan Verma, CFO, Dabur India. Dabur posted a consolidated net profit increase of 31% in April-June quarter at Rs 62.08 crore compared to Rs 47.37 crore in the previous corresponding quarter. Its consumer care and foods divisions posted a healthy growth of 19% and 39% respectively. Dabur’s price hikes, too, were scattered ranging from honey (10%), to Anmol hair oil (5%), and baby care products (4%).
GSK, which effected a 4-5% upward revision of prices for Horlicks and Boost, posted year-on-year topline growth of 17% at Rs 316 crore, beating analyst expectations of 12% growth. Analysts say volume growth of 12% and value growth of 6% was aided by 4-5% price hikes the company undertook for Horlicks and Boost. Said Zubair Ahmed, MD, GSK, “
Growth has come partially because of the price rise which happened on account of rising milk prices, but more so because we leveraged marketing opportunities for our brands with 360 degree campaigns. Also, consumption of Horlicks and Boost is now spreading across the entire family instead of just children or the elderly.” Mr Shah said, “The Godrej’s soaps portfolio was not doing well last quarter, but this quarter, they have shown a 29% growth in soaps.
While 17-18% of this growth is accounted for by volumes, the remaining growth has happened because of higher prices.” ITC posted a topline growth of 17% in the quarter at Rs 3,325 crore, which, analysts say, is among the company’s strongest performances in the recent past. The recent price hikes helped the company to expand margins.
Investment Nuggets
Driven to the brink of personal and business bankruptcy in 1991, the story of New York real-estate magnate Mr Donald John Trump has ups and downs that are unexpected for someone born with a silver spoon. He is the CEO of Trump Organisation, an American-based real-estate developer, and the founder of Trump Entertainment, which operates several casinos. In the 1990s, in a bid to make his mark, he expanded from real-estate to airline industry and then to the lucrative casino business. With the real-estate crisis gripping the US, the effects of recession left the Wharton graduate handling mounting debt on the one hand and an erratic personal life. After the initial shock, Mr Trump re-structured his debt with help from lenders, ultimately triggering a resurgence in his financial situation and fame. Real estate still remains his obsession. A few investment thoughts from him:
“Well, I see less of a (real estate) bubble than the newspapers do. I think that as long as interest rates remain where they are — now the market is not as good as it was two years ago but it is still a pretty solid market. And if interest rates do not go up too much I think the market is going to be just fine. You need the right location, you need the right product and you have to know what you’re doing.”
“I carefully consider the complete environment — 40 Wall Street is a good example. When I bought the building, everyone advised me to turn it into a residential property. But I did not feel that was such a great idea, and I stuck to my instincts. Today it is thriving as a commercial building with world-class tenants, and I made the right decision. It’s been a sensational success and is worth many times over the $1 million I paid for it.”
“Experience taught me a few things. One is to listen to your gut, no matter how good something sounds on paper. The second is that you are generally better off sticking with what you know. And the third is that sometimes your best investments are the ones you do not make.”
“Well, the stock market is a very tricky game and I have always said and will say it again, I love real-estate. But when you have people like a Terry Lundgren at Federated who has done, as you know, a fantastic job with Macy’s and Bloomingdales and everything else or Jeff Immelt at General Electric. I think their stock is probably low. It is probably going to go up. I invest in people. I think Immelt is good. I think Terry Lundgren is great. You see some of the people at the Wall Street firms like Bear Stearns, I think that you invest, if you’re going to invest in it, you have to look at the people running the company. But I like real-estate better.”
KPR Mills — IPO: Avoid
Investors can avoid the initial public offer from KPR Mills as the offer price appears stiff. At the price band of Rs 225-265, the offer is valued at about 12-14 times its 2006-07 per-share earnings. On an expanded equity base, the multiple works out to 15-17 times. Although the company’s large scale and better margin profile are positives, a weak export environment, the strong rupee and persisting pricing pressures pose challenges to its ability to significantly ramp up its garments business. There are also superior investment options already available among listed textile companies.
Knitwear exporters constitute the bulk of the company’s domestic customers. Thus, any further pressures on the export front could affect KPR’s domestic business as well. Investors can, therefore, wait for the cloudy picture on the export front to clear up, before considering exposure to the stock.
Business
The Rs 500-crore KPR Mills is located strategically at the Tirupur belt, making it well-placed to cater to the demands of knitwear exporters in the area. KPR has a presence in spinning, knitted fabric and garments. Yarn contributed close to half its FY-07 revenues, while garments accounted for about 25 per cent. KPR attributes its superior operating profit margins, at close to 25 per cent, to efficient sourcing of cotton and the use of captive wind power plants that have substantially cut its power costs.
KPR is raising about Rs 150 crore from the market to fund an expansion project at Arasur near Coimbatore that it initiated in 2005. About Rs 90 crore from the offer proceeds will be deployed chiefly to expand its garmenting and fabric processing facility, and invest in a new knitting facility. The project, expected to be completed by the end of the fiscal, is set to double the company’s capacities across segments.
Foray into US
Post-expansion, KPR plans to foray into the US, which is likely to be a competitive market. India’s knitted apparel exports to the US have been increasing, although the growth has come at the expense of realisations. KPR hopes to cater to volume buyers, which could entail some sacrifices on pricing and, thus, on margins. An appreciating rupee would compound margin pressures. With the company also heavily leveraged, we expect profit growth to trail revenue growth.
The offer closes on August 7. The lead manager is Kotak Mahindra Capital.
Take Solutions — IPO: Invest at cut-off
Investors with a high risk appetite can subscribe to the Initial Public Offer from Take Solutions, a business solutions provider. At a price band of Rs 675-730 per share, the price-earnings multiple works out to 25.5-27.5 times trailing 12-month earnings, based on fully diluted equity. At this valuation, given the company’s relatively small size, the asking price is stiff. However, Take Solutions’ products business in the supply-chain management and life sciences segments faces few direct competitors. The company’s focus on niche sectors and good management strengthen the case for investment.
Business
Take Solutions is a business technology company with products focussed on the Supply Chain Management (SCM) and Life Sciences verticals. The company now has 16 products in the former and six products in the latter. To aid a foray into new verticals and geographies, the company has relied mainly on acquisition-led growth. The company has seen a substantial ramp-up in its revenues and profits in FY-07, from a relatively small base in the preceding years, making for a limited track record to evaluate its sustainable prospects. Consolidated revenues have seen a jump from Rs 48 crore in FY-06 to Rs 182 crore in FY-07 due to integration of a US-based life sciences business acquired earlier.
Profit margins have been consistently higher than similar-sized peers; but have witnessed moderation to 26 per cent in FY-07, from 33 per cent the previous year. This can probably be attributed to the change in business mix, due to the integration of acquired businesses. Net profits have scaled up to Rs 33 crore from Rs 10.8 crore the previous year.
The share of product licence revenues to the total has grown to 43.21 per cent in FY-07 from 28 per cent two years ago, indicating expansion of product base and market acceptance of products. Increased new product installations as compared to customisation, has seen the share of service revenues decline from 67 per cent to 42 per cent of the total over the same period.
Prospects
Take Solutions scores high on the two factors that would give any company a competitive advantage — business platform strength and domain knowledge. Take’s products are developed on an emerging Service Oriented Architecture (SOA) platform which will support seamless collaboration of the company’s processes with those of external stakeholders. The company’s strength also lies in its domain centricity which could serve as an entry barrier.
In today’s environment where manufacturing and consumption have become highly dispersed, the demand for supply chain execution and collaboration solutions is on the rise.
Take’s product suite in this vertical is well placed to meet this demand. Besides, the recent acquisition of Clear Orbit, USA in June this year, may also strengthen the company’s presence in this vertical. In the life sciences segment, the company offers cost-effective solutions catering to clinical trial planning and management process where 40-50 per cent of the R&D spends occur. Products for regulatory compliance, to aid risk management and governance in this vertical are also being developed.
Risks
A limited track record of operations on the current scale and execution risks associated with the company’s acquisition-led strategy are the key risks associated with this offer.
The aggressive acquisition strategy may lead to difficulties in integrating personnel and operations. Though the company’s intention is to remain strongly product-centric, services still bring in substantial revenues and new product launches were limited in FY-07. Any future shortening of the product life-cycle will also require greater efforts on product development.
Offer details: The company is issuing 21,00,000 equity shares of Rs 10 each to the public out of which 1,00,000 shares is reserved for subscription by eligible employees.
The issue is open from August 1 – August 7, 2007. The company plans to raise Rs 141.7 crore – Rs 153.3 crore through the issue, out of which Rs 83.5 crore is for repayment of debt utilised for acquisitions.
The rest is to be used towards further acquisitions, product development, for developing infrastructure and for prepayment of term loan.
Tech Mahindra: Buy
Investors can buy the Tech Mahindra stock with a two-year horizon considering the healthy growth prospects for its service offerings in Europe, its blue-chip clientele and status as an integrated telecom software player.
The stock was marked down significantly during the recent meltdown in mid-tier IT stocks; investors can use this opportunity to buy.
The stock trades at 23 times its current year’s earnings and is at a discount to other telecom software companies such as Sasken, as well as larger IT companies such as HCL Technologies and Wipro, making it a reasonable investment option.
Tech Mahindra broadly caters to three sets of clientele — telecom service providers (TSP), telecom equipment manufacturers (TEM) and independent software vendors (ISV). Its IT services offerings include application development and maintenance, system integration, product engineering, managed platforms and services, consulting, testing and BPO services, among others.
Business Analysis
Integrated business model: Starting with a one-off client — British Telecom— Tech Mahindra (TechM) has over time broad-based its service by catering to other telecom service providers and equipment-makers and independent so ftware vendors. Together, these three segments along with associated services cover the entire gamut of IT/network operations for any telecom company. This makes TechM a fully integrated player, a model not easily replicable even by Tier-1 software players, providing it with a significant competitive advantage.
In the Business Support Systems and Operations Support Systems segment (areas where a lion’s share of telecom-software outsourcing happens), TechM is among the top ten players in the world.
The company’s telecom equipment revenues have grown nearly five times over the past year, pointing to growth prospects for its other businesses.
Blue-chip clientele: The client base of TechM comprises, among others, AT&T, Motorola, Alcatel-Lucent, Convergys, Vodafone, and O2.
This elite clientele has helped it build complex telecom network-related and telecom business-related IT service delivery capabilities. This has also helped it to tap newer high-value clients, through partnerships and tie-ups.
Opportunities from European telecom players: The company derives three-fourths of its revenues from European clientele.
Most telecom service providers (including BT, Vodafone and O2) there are grappling with falling realisations and are looking to innovate through value-added services and converged products (networks and devices that can support voice, data and video) to increase revenues.
Europe is also the biggest telecom market, home to top service providers and equipment makers (such as Ericsson, Alcatel, Nokia-Siemens) and the largest market for value-added services. TechM already works with some of these players.
With increased spending on IT and network infrastructure by these players, the company can achieve deeper penetration of this market ahead of other vendors.
In North America, the engagement is more with ISVs such as Convergys, Oracle and Microsoft.
This can help it penetrate telecom billing software markets in the US. With Lucent and AT&T, it has managed to penetrate equipment-makers as well as the service provider space.
Together, TechM’s presence in these two locations and the increasing levels of engagement, point to robust prospects.
Operational metrics: BT, as a client, contributes about 64 per cent of the company’s total revenues. Although this is a concentration risk, this percentage has been coming down steadily as the company works with new clientele.
Restructuring at BT has resulted in the slowdown of revenues from this source, but the management has indicated that these issues are likely to be sorted out and reasonable growth can be expected from BT from the third quarter.
In the June quarter, the company added four million-dollar clients, including a $5 million and a $15 million-dollar client, underlining its ability to mine its clients.
Risks
A significant exposure to the dollar enhances currency risks. With Infosys seeing a significant ramp up in its telecom vertical’s operations (with BT as a key client), and other Indian IT vendors on BT’s shortlist, TechM may be faced with heightened competition, leading to pricing pressures.
The attrition rate, at 18 per cent, is on the high side and represents an execution risk; while an annual wage increase of 15 per cent is also a source of margin pressure.
The company hopes to mitigate some of this by hiking fresher recruitments to about 70 per cent.
The utilisation rate at 67 per cent is on the low side and suggests that the company has been unable to capitalise fully on volume-driven growth in a turbulent quarter (with factors such as rupee appreciation playing a role)
Crompton Greaves: Buy
Power equipment maker Crompton Greaves is beginning to reap the rewards of its restructuring strategy set in motion after the company reported losses in 2000 and 2001. The strategy has not only led to robust growth of its domestic operations but also expanded the product range and geographical reach. The company has also demonstrated its ability to turn around loss-making operations of acquired companies, housed in subsidiaries.
The sizeable business opportunities in the domestic market supplemented by increasing contribution from overseas subsidiaries lead to high-earnings visibility for the company. Investments can be considered in the stock with a three- to five-year perspective. With the stock market going through a volatile phase, investors can consider buying in lots taking advantage of market dips. At the current market price, the stock trades at 18 times its expected consolidated earnings for FY-09. This is at a discount to peers such as ABB and Siemens.
Valuation re-rating
Crompton Greaves could not command comparable valuations because of a limited product range, especially in the power systems segment. With the three acquisitions made over the past couple of years, the company has not only widened its product basket but has also qualified itself to become a fully integrated player in the power distribution and transmission business. Hence, a narrowing of the valuation gap between the company and its peers appears justified at this stage.
Well-structured turnaround
After substantial losses in 2000-01, Crompton Greaves undertook a series of restructuring measures, including cost-cutting and exiting unrelated businesses. Consequently, net profits grew at a compounded annual growth rate of 115 per cent between 2002 to 2007. The company has not only managed to capitalise on the surging order flows in the transformer business, but has also ramped up contribution from other segments. In 2006-07, industrial systems and the consumer products division have generated returns of 77 and 112 per cent respectively on the capital employed. These segments accounted for 40 per cent of the consolidated operating profits.
Acquisitions add muscle
The next phase of Crompton Greaves’ turnaround strategy was to gain a global presence by acquiring companies that had strong business expertise but were cash-starved. Acquisition of the Belgium-based Pauwels has brought with it business opportunities in the West European and North American markets. The Ganz acquisition widened the company’s product basket by adding high-end technology switch gears and other support services. While Pauwels has turned around to generate profits, Ganz is expected to register profits (from operations) by 2007-08. Profits (before interest and taxes) of both the companies put together have grown by over 50 per cent in 2006-07.
The recently-acquired Microsol Group provides automation services for new sub-stations and retrofitting services for existing ones and has operations in the UK, the US and Ireland.
While the first two acquisitions expanded the company’s geographic reach and product range, the third, though small in terms of revenue, appears to be a move up the value chain. However, once integrated with the other businesses, this is likely to convert the company from a mere power equipment-maker to a total solutions provider. That Crompton Greaves has managed to acquire the above companies mostly with its internal accruals provides comfort. The company continues to remain cash-rich and may possibly look for more acquisitions.
Strong core operations
Crompton Greaves has also witnessed strong organic growth and improvement in operating profit margins. Higher volumes led to an increase in the latter by 2 percentage points to 11.7 per cent for the quarter ended June 2007 for standalone operations.
The power segment is the key growth driver with huge order flows as a result of the Government’s spending in T&D (transmission and distribution) infrastructure.
The company’s entry into latest generation value-added products has elevated it to the league of players such as ABB and Areva T&D. The government’s ambitious plans to add latest generation sub-station capacity augurs well for Crompton Greaves as it has few competitors here. The company’s has already ramped up its capacity ahead of peers.
While standalone earnings visibility remains high, subsidiaries are likely to emerge as major contributors to the business in terms of technical knowhow and revenues. As of June 2007, Pauwels and Ganz accounted for 56 per cent of the total order book of Rs 4,870 crore. Further, with the products and services of the subsidiaries likely to complement standalone operations, consolidated operations may capture the big picture.
The key challenge for Crompton Greaves would be to successfully integrate the operations of all the acquired companies and turnaround their operations. While the initial signs appear encouraging, any slowdown/failure may subject the stock to some de-rating.
Steel and copper, which are the key raw materials, have witnessed volatility in prices. Considering that overseas orders do not have a price escalation clause any steep rise could dent margins.
Indian Hotels: Buy
An investment can be considered in the stock of Indian Hotels, trading at a price earnings multiple of 26 times its trailing per-share earnings (on a stand-alone basis). The valuation is more attractive on a consolidated basis (22 times 2006- 07 earnings). While we expect some moderation in average room rates over the next year, volume growth from room additions is likely to contribute to strong revenues, helping sustain profit growth. Indian Hotels has reported another strong set of numbers for the June quarter, with a performance that is vastly superior to its peers. The diversified presence of the Taj chain has helped it counter the impact of declining occupancy rates and flat average room rates in cities such as Hyderabad and Bangalore. The good earnings numbers are despite an appreciating rupee; a substantial portion of the company’s earnings are in forex.
Indian Hotels has now decided to adopt a universal “rupee” tariff across its properties in India, in line with the global practice of charging a uniform rate to domestic and foreign customers. This shift to rupee tariffs will stem the impact of an appreciating rupee on earnings, though it may reduce the premium charged to foreign guests. In our view, a single tariff may find favour with foreign tourists and stimulate demand. Competitors too are seriously considering the shift to a single tariff structure. With rooms continuing to be in short supply over the next one year, room rates could thus remain firm (although the growth is likely to moderate considerably from the 30 per cent recorded in 2006-07).
Over the longer term, fresh supply of rooms is expected to moderate room rates. However, Indian Hotels is leading the supply growth in the business and luxury hotels segment, as it continues on a heavy capex phase. This makes it better placed than its peers to counter the decline in average room rates expected in 2009.
Indian Hotels has been aggressive with its overseas acquisitions. Its international properties contributed 25 per cent to its overall revenues in 2006-07, up from 11 per cent in the previous year.
Having completed the first phase of its foray into the US, it is now setting its sights in the Asian hotel market, which appears more promising from a growth perspective. A rights offer proposal is under consideration for funding growth, this may present a good opportunity to accumulate the stock.
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