Wednesday, August 15, 2007
Dr Reddy’s Labs
Research: ABN Amro
CMP: Rs 633
ABN Amro maintains its ‘buy’ rating on Dr Reddy’s Laboratories (DRL). DRL reported lower-than-expected sales on lower Ondansetron sales and supply constraints in contract manufacturing. DRL’s subsidiary, betapharm, returned to its usual sales levels at $51 million, and lower selling, general & administrative (SGA) expenses led to better-than-expected operating margin adjusted for one-off opportunities.
The surprise was the 600 bps improvement in betapharm’s active pharmaceutical ingredients (API) margins, which the management attributed to a better product mix, citing Amlodipine Besylate as one of the key products being sold. The key R&D product, Balaglitazone, is in Phase III trials and can provide news flow that may increase its valuation, given the recent listing of Sun Pharma’s R&D business at $500 million.
ABN Amro values DRL’s Balaglitazone at $100 million (Rs 24/share) and cut its FY08 earnings forecast to reflect the lower-than-expected Q1 FY08 result. ABN Amro also lowers its profitability assumption for the contract pharma business, but leaves API profitability untouched.
Research: HSBC Global
CMP: Rs 1,548
HSBC Global Research has downgraded Kalpataru Power Transmission from ‘overweight’ to ‘neutral’, with a potential total return of 13%. Kalpataru has a presence in the infrastructure sector. In FY07, the company increased investments in its three subsidiaries, which will add value to the stock.
To strengthen its balance sheet, it invested Rs 42.9 crore in JMC Projects, a construction company with an order backlog of Rs 1,200 crore, 2.4x FY07 sales. Further investments were made in Shree Subham Logistics and Energylink, another construction company. Kalpataru’s Q1 FY08 sales grew 23% YoY to Rs 370 crore, while net profit was up 28% YoY to Rs 37.1 crore.
EBITDA margin improved to 16.4%, an increase of 40 bps YoY, due to higher margins in infrastructure (transmission and distribution margins were lower). HSBC Global has reduced its EPS forecasts by 5% for FY08E and FY09E to Rs 70 and Rs 96.9, respectively, based on higher depreciation and interest cost.
Research: Enam Securities
CMP: Rs 432
ENAM Securities initiates coverage on Patel Engineering (PEL) with ‘outperfomer’ rating. PEL’s Q1 FY08 results were above expectations, driven by some large transportation projects reaching the threshold revenue booking level. On a consolidated basis, PEL reported revenues of Rs 410 crore (up 43% YoY) and adjusted profit after tax (PAT) of Rs 25.8 crore (up 29% YoY). During the quarter, PEL bagged its first order worth $153 million for a dam project from the high-margin market of Africa.
The order backlog stands at a robust ~Rs 5,300 crore (up 8%YoY). The management has stated a guidance of 25% revenue growth in FY08; it expects operating profit margin (OPM) to sustain at ~13%. PEL has a substantially higher intake capacity and is pre-qualified for new projects worth over Rs 6,000 crore. Going by its historical bid-to-success ratio of ~25%, Enam believes that intake may gain traction, going forward.
Factoring in higher-than-estimated interest cost and a lower tax rate of 25%, compared to 33% factored in earlier, the FY08E and FY09E EPS stand revised at Rs 18 and Rs 21.4, respectively. At current market price, adjusted for value of real estate and build, operate & transfer (BOT) investments of Rs 271 per share, the stock trades at an EV/ EBIDTA of 5x FY09E.
CMP: Rs 27
CITIGROUP has downgraded Tata Teleservices (TTML) to ‘sell’ as the current stock price appears to fully reflect the sustained trend of operational improvement witnessed over the past six quarters. Estimates have changed slightly, incorporating the recent subscriber additions and cost structure trends.
TTML’s Q1 FY08 EBITDA growth of 3.8% QoQ at Rs 100.4 crore was 12% below expectations. Even EBITDA margin, at 25.5%, remained flat QoQ. Low tariffs, in addition to a cumulative share of ~8% in Mumbai/Maharashtra, remain sub-optimal and constrained by CDMA network.
Given that TTML is likely to break-even only in FY09, the financial milestones which could drive the next round of re-rating may not be achieved immediately. EBITDA margin improvement of 10% during FY07-09E will be critical for earnings. Citigroup expects Tata group to eventually consolidate its telecom holdings, i.e. VSNL, TTSL and TTML. However, the Tatas lost out on the opportunity to hike their stake in VSNL by forgoing the call option in the latter.
Research: JP Morgan
CMP: Rs 512
JP MORGAN initiates coverage on Unitech with an ‘overweight’ rating. The company focuses on developing mixed-use townships in city suburbs. This helps it to acquire land at relatively lower cost and generate better realisations/margins as price increases occur due to occupancy and land price inflation.
Unitech’s key area of operations has been the suburbs of the National Capital Region (NCR), but the company has recently entered Kolkata. Unitech has also acquired large chunks of land in South India, which are likely to come under development soon. The FY08E and FY09E P/E of 31.9x and 15.7x, respectively, are supported by 103% earnings CAGR over FY08-09E.
CMP: Rs 267
MASTEK has been downgraded by Edelweiss from ‘buy’ to ‘accumulate’, due to the absence of near-term triggers that signal an uptick in growth rates. Mastek’s Q4 FY07 revenues were slightly lower than expected, though net profit was above expectation. Revenues, at Rs 180 crore, were down 6% and net profit, at Rs 23.7 crore, was flat QoQ on a like-on-like basis.
However, higher other income of Rs 6.5 crore reduced this impact at the net profit level. Mastek continues to suffer from several issues that limit its expansion. Its sales and marketing engine is investment-heavy, direct client relationships are few, slowdown in the government sector drags down growth, and the new client acquisition pace is lethargic. The company seems to be highly dependant on acquisitions to meet its stated revenue growth guidance of 35% (in USD) for FY08.
Edelweiss believes the company may come up short of its guidance. Also, its efforts to rationalise its high-cost sales and marketing cost model are unlikely to bear fruit in the near term, due to its investments in expanding solutions footprint in the US insurance segment. At current market price, the stock trades at a P/E of 7.4x and 6.5x its FY08E and FY09E earnings, respectively.
Asian and European shares dipped Wednesday as markets continued to battle jitters over a credit crunch started by problems in the US subprime credit sector and as broader concerns emerged about the US economy.
In Asia, Tokyo and New Zealand benchmarks tumbling to their lowest closes in nine months. In Europe in early trade, the UK's FTSE 100 index fell 0.9 per cent shortly after the market opened. France's CAC 40 benchmark fell 1.21 percent, and Germany's DAX fell 0.8 per cent.
In Asia, some economists and dealers said the gyrations on Asian stock markets were short-term. Some issues could even be good bargains, they said, given the strong growth and earnings data from China, Japan and other regional economies.
The Nikkei 225 stock index, the benchmark for Asia's biggest stock market, plummeted 369.00 points, or 2.19 per cent, to 16,475.61, its lowest since Dec. 8, as financial issues got hammered by the nervousness about a fallout from the US subprime mortgage crisis.
Japanese export issues also took a battering from the strong yen. Worries have been growing about a slowdown in the US economy, fueled by faltering profit forecasts by major retailers.
Weak American spending would be a blow to the Japanese and other Asian economies, which are all still heavily dependent on exports to the US.
In New Zealand, the benchmark NZX-50 index slipped below the psychological 4,000 barrier before ending down 1.5 per cent at 4,004.46 its lowest closing since December 2006.
``It's not a particularly pretty day for the market. World markets are all just following each other at the moment and they're quite skittish,'' said UBS equities director Paul Nicolson in New Zealand.
Midafternoon, Hong Kong's Hang Seng Index was down 3.0 per cent and Singapore's Straits Times Index was down percent.
The benchmark index in the Philippines closed 4.1 per cent lower and Taiwan's Weighted Price Index fell 3.6 per cent.
``We remain confident that things can calm down,'' said David Cohen, director of Asian forecasting at Action Economics in Singapore. ``There is enough momentum in the global economy it should ultimately sustain the solid growth in world GDP through the middle of the year.''
In the short term, though, Cohen warned more bad news could be expected about troubled hedge funds, which could set off another drop in regional stocks.
``It's going to be on a roller coaster for a little while. Clearly investors are nervous,'' he said.
Traders in Tokyo said bargain-hunting there may keep Japanese stocks from plunging too much. Some analysts also say market sentiment in Tokyo remains upbeat as worries about subprime mortgages in the US may make it less likely the Bank of Japan will raise interest rates later in the month.
Prime Minister Shinzo Abe said Japan's economy remains on a growth track. Earlier this week, the government reported that the world's second largest economy marked its 10th straight quarter of expansion April-June, although the pace of growth had moderated.
``The Japanese economy remains strong,'' Abe told reporters. ``We do need to keep a close watch.''
But fears remain about the future of the overall US economy. Tuesday, US retailers announced lower profit forecasts, including Wal-Mart Stores Inc and Home Depot Inc. A slowdown in the US economy, a key export market for Asia, could spell a more real danger for the region.
Overnight in the US, the Dow shed 1.57 per cent to 13,028.92, on the verge of falling below the psychologically important 13,000 mark, which it first crossed in late April.
Elsewhere in Asia Wednesday, Jakarta's main stock index was down 5.3 per cent, Australia's benchmark was down 3.0 percent, and Thailand 2.2 per cent.
Stock markets were closed in India and South Korea for national holidays.
Investors have cut their heavy equity positions in August and boosted cash and bonds as fears of a liquidity squeeze and a sell-off in stocks made them more averse to risk, a poll showed on Wednesday, 15 August.
Investment bank Merrill Lynch’s August survey of global fund managers, taken between 2-9 August, also showed fund managers saw the stock market sell-off as a buying opportunity and remained confident about robust economic fundamentals.
The poll, which surveyed 181 fund managers managing a total of $599 billion, is one of the most timely snapshots of fund managers’ activity during a sharp fall in risky assets, triggered by concerns about liquidity and deteriorating credit markets stemming from troubled US subprime mortgages.
“People have become more risk averse. What’s surprising is that there doesn’t appear to be a major change in their views on stocks. People still see value in equities relative to bonds and they see it almost as a buying opportunity,” said David Bowers, consultant to Merrill’s poll. “People think this is a credit or financial event but they are not positioned for a spillover to the macro backdrop.”
Forty-nine per cent of respondents were overweight equities in August, down from 69% last month. Fund managers became less bearish on bonds, with 65% underweight this month, down from 72% in July.
The cash balance rose to 4.4% from 3.4% in July, its lowest since the survey began in January 1998.
Fund managers trimmed expectations for corporate profits and core inflation, but more than 90% of them said the global economy was unlikely to experience recession over the next twelve months.
“The survey isn’t as bearish as it was expected to be. It’s not business as usual, but they haven’t thrown in their towels,” Bowers said.
Investors also kept their faith in emerging markets. More than 30% of the managers said global emerging markets offered the most favourable outlook for corporate profits, overtaking the euro zone which has been the top favourite throughout 2007.
The managers saw credit default risk and counterparty risk as top potential threats to financial market stability.
As for currencies, fund managers saw the yen as cheap, while the euro and sterling were seen as expensive. Respondents became slightly less bullish on commodities, with 17% overweight, down from 18% last month.
International rating agency Standard & Poors (S&P) has said the current problems with the subprime market will not precipitate a crisis in the financial markets. The rating agency has said safety valves in the financial system after the earlier Asian crises would prevent a global fallout. However, subprime defaults do have downside as they have shrunk market for collateralised debt obligations (CDOs), which could mean lesser flexibility for highly leveraged companies.
According to S&P, the prevalence of mark-to-market accounting, credit default swaps and other tools of finance allow risk to be repriced quickly as conditions change. “This rapid repricing, paradoxically, tends to aggravate short-term instability. But drawing attention to problems as they emerge forces managers to restructure troubled portfolios or entities before danger can reach explosive proportions and threaten a broad-based implosion of credit quality,” S&P said in a report titled ‘Putting Today’s Credit Market Risks In Perspective’.
The report comes at a time when global equity markets have been rattled over major defaults in subprime housing loans in the US. Some market participants are speculating that the difficulties in the US subprime mortgage market may yet spill over into other markets and lead to a more general deterioration in credit quality. Marketmen, who have been around since the Asian crisis in 1997, feel that the contagion may spread across countries as it did in the 1990s.
The Asian financial crisis wreaked havoc on regional economies and set into motion a far-ranging series of events that included currency dislocations, the Russian default, and, eventually, the collapse of Long Term Capital Management, a major hedge fund whose core backers included large financial institutions in the US and Europe. “There is presently no concrete evidence to suggest that problems in the subprime mortgage market will reach the magnitude experienced during these earlier crises, much less that they will evolve into more general or severe systemic instability. But it is also not possible to say with certainty that the problems are fully contained,” said S&P.
Modern markets adjust rapidly
“We believe some spillover is likely — and is already occurring to a limited extent — but we think it is important to keep the current situation in perspective when attempting to gauge the risk that widespread troubles will extend to other markets,” said S&P in its report. Pointing out to lessons from the past 20 years, the rating agency highlighted that although instability in one market can quickly spread to others, these experience from earlier crises show that modern markets adjust rapidly to crises and tend to limit the damage before uncontrollable systemic disruption takes hold. “The global markets have grown such that they are now less vulnerable to general liquidity scares triggered by isolated disruptions,” S&P said.
Comparing the problems with the subprime market to the corporate defaults in 2001, the report said despite corporate defaults touching their highest levels in decades during the 2001 recession, no major financial institutions were threatened, and the general economic recession proved to be relatively mild.
While being optimistic of a limited impact of the subprime problem, the report acknowledges that far-flung banks have been affected. “The effects of the turmoil in the US mortgage markets have already made themselves felt elsewhere; the widely publicised problems at two bond funds managed by US investment bank Bear Stearns have reverberated in other parts of the world.
In Australia, funds managed by Macquarie Bank, Basis Capital, and Absolute Capital Group have suffered severe losses, and the German bank IKB Deutsche Industriebank has forced its CEO to resign, all because of exposure to the US subprime mortgage market. No one can rule out the possibility that more such incidents will surface before the global markets have fully digested these exposures.”
Via Economic Times
The US indices tumbled on Tuesday. The Dow Jones industrial average index slumped 208 points to 13,029. The Nasdaq plunged 43 points to 2499.
Indian ADRs ended in a sea of red. Sterlite dropped nearly 4% to $14.95. Genpact shed 3.7% to $14.88, and MTNL tumbled 3.5% to $6.63. Infosys, Satyam, Wipro, Patni Computers, ICICI Bank, HDFC Bank, VSNL, Tata Motors and Dr.Reddy's were down 1-3% each.
Left may pull the rug
Says mid-term polls likely in 6 to 8 months; N-deal breaking point.
Peeved at the way the United Progressive Alliance (UPA) government is functioning, Left parties are set to distance themselves from the UPA in every possible way, a move that could culminate in a mid-term election ahead of 2009.
“An election might take place in six or eight months,” a Left leader told Business Standard.
Meanwhile, Foreign Minister Pranab Mukherjee told Business Standard, “As long as the government runs, problems will be there.”
The four Left parties hold 61 seats in the Lok Sabha and although they are not part of the government, their support is critical for the UPA, which needs 272 members of Parliament (MPs) for a simple majority in the 545-member House. The UPA has about 248 MPs in the Lok Sabha.
The major point of difference has been the civil nuclear deal with the US, commonly known as the 123 agreement after the relevant clause in the US Atomic Energy Act. “I cannot say the crisis is over. We have to wait for a few more days,” Mukherjee said.
This morning, Prime Minister Manmohan Singh and Mukherjee met Communist Party of India (Marxist) General Secretary Prakash Karat over breakfast but could not reach any concurrence on the 123 agreement.
Left leaders said the 123 agreement was too complex to be turned into an election slogan but the breach was likely to widen mostly on economic and social issues. The Indo-US nuclear deal will act as “the cap on the head”, according to a Communist party leader.
Pointers for a mid-term poll also come from the strong pressure on the Left parties from within their organisations and parliamentary parties to snap ties with the UPA.
Last night, at a meeting of the CPI(M) parliamentary board, almost all MPs told party bosses the party should exit the coordination committee, which is already defunct, and opt for issue-based support to the UPA. Karat reportedly told the MPs the four Left parties were already thinking on these lines and this decision could be taken.
A large number of the party’s Central Committee members have also told members of the party Politburo to review ties with the UPA, which they said was “more intent on publicising and pushing ahead its own policy with scant or no attention to the promises made during the formation of the UPA and Left co-ordination committee”.
The issue is likely to be discussed at a Politburo meeting on August 17 and 18, which will ultimately be followed up by a Central Committee meet in mid-September.
“We have been tolerating the UPA’s whims for the last three years. The time has come when we need to turn around and protest,” said a co-ordination committee member.
The CPI has also convened a meeting of its central executive on August 17 and 18.
Possible flash points
# The Pension Fund Regulatory and Development Authority Bill, 2005: Pending for over two and a half years in Parliament, the finance minister would like to institutionalise it but the Left will vote against it. The BJP is likely to support it but the government would not like to take the BJP’s help to pass it.
# The Banking Regulation (Amendment) Bill: The left is bitterly opposed to raising foreign investment limits and will mobilise all possible opinion against it. Once again, for its survival the government will have to take the BJP’s help.
# PF interest rates: Cannot be voted but will become a campaign issue
Having traded on the Bombay Stock Exchange (BSE) for decades, Brijmohan Sagarmal Agarwal, 85, recalls how the 132-year-old bourse has grown to epitomise corporate India's development since independence.
"The BSE at that time was housed in a four-story building and the trading ring was on the ground floor," recalls the resident of suburban Mumbai who has seen the trading system transform from loud cries by brokers to the sophisticated computer deals.
"During the 1940s, my family was a member of the cotton exchange, bullion exchange, oilseed and grain trade. All these more or less closed in 1957 and we became members of BSE. Since then we have been here," Brijmohan told IANS.
"Share trading or brokerage in those days was done on speculation where I had some experience. The trading volume was low and the number of people involved was also few with a few scrips," he remembers. Tata Steel, Century Textiles, Gujarat Fertilizer, Indian Iron, National Rayon and Hindustan Motor were among the few, he recollects, as opposed to 7,707 scrips that trade on it daily today.
"In fact, there was no television or computer to track the status of the markets. There was no system for gauging the sensitivity of the market as there was no Sensex or similar index."
Today, as India celebrates 60 years of independence, the bourse has weathered a horrific bomb blast targeted at its premises and several scams to emerge as one of the top bourses globally.
It operates one of the largest private networks in India, comprising a local area network and a wide area network connecting 417 cities by way of a V-Sat network to facilitate trading.
It has also emerged as a separate corporate entity as against a membership-based organisation earlier. On any given weekday, more than 10,000 terminals at 7,500 brokerages come alive to trade in the 7,707 scrips.
The Pheroze Jeejeebhoy Towers at Dalal Street, where the present-day exchange is located, is the most televised structure in the country-edging out the Taj Mahal and Rashtrapati Bhavan, the presidential palace. "Today every information on stock trading is available on TV and the Net and it is not difficult to gauge the market trend as the BSE has several indices," says Santkumar Agarwal, who has now taken over the reins from his father Brijmohan.
Kicking off in 1875 as the Native Share and Stock Brokers Association under a banyan tree, six people started trading in the stocks of the British East India Company and a few commodities.
In 1956, it became the first stock exchange in the country to obtain permanent recognition from the government of India under the Securities Contracts (Regulation) Act and turned into a corporate entity in 2005. The Sensex itself was born in 1986 as a representative index for Indian shares with a basket of 30 constituent stocks drawn from a sample of large, liquid and representative companies.
Today, as the country is running towards a double-digit growth, the Sensex, in many ways, has come to represent the growth of the Indian corporate in particular, and the country's overall economic development in general. Last month, the key index crossed the magical 15,000 points. And veterans like Agarwal are gung-ho on its future.
"Like the good old days India is again fast becoming a golden sparrow. I feel by the end of 2008 or even earlier, the Sensex should touch 20,000."
At the stroke of the midnight hour, when the world sleeps, India will awake to life and freedom. A moment comes, but rarely in history, when we step out from the old to the new, when an age ends, and when the soul of a nation, long suppressed, finds utterance.
Bring freedom and opportunity to the common man, to the peasants and workers of India; to fight and end poverty and ignorance and disease; to build up a prosperous, democratic and progressive nation, and to create social, economic and political institutions which will ensure justice and fullness of life to every man and woman.
All of us, to whatever religion we may belong, are equally the children of India with equal rights, privileges and obligations. We cannot encourage communalism or narrow-mindedness, for no nation can be great whose people are narrow in thought or in action
Long way to go....