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Sunday, August 19, 2007

Stock Market Crashes and more..

We live in times when the indices scaling up 500 points in a single session does not raise an eyebrow! Nevertheless, when the opposite happens, participants and pink papers term it as a "crash". While we would beg to differ on this point, we certainly share the concerns of investors on the magnitude of possible repercussion of the global meltdown on the Indian markets.

Investor irrationality, has more than once in the past, given evidences of how the 'herd mentality' can lead to unfathomable market appreciation without the support of sufficient value in the underlying assets. Such phenomena have led to 'market crashes' that eroded investor wealth and dissuaded market participation for a considerable duration. The reasons for the same have been as varied as speculative investment in tulip bulbs, currencies, software and real estate. This time, the culprit is one of man's "basic" needs - housing, which no longer is perceived such.

As is the oft-repeated scenario in market rallies, investors followed the 'herd' and valued housing prices beyond any accurate or rational reflection of its actual worth. Infact, the lenders themselves, caught by their greed, extended their arms to those who could not afford the expensive housing. This created a situation, wherein, once the correction set in, the majority of investors tried to flee the market at the same time and consequently incurred massive losses. Having failed in their attempt to sell their subprime securitised mortgage assets at a huge discount, the housing financers themselves are at the brink of bankruptcy. We herein reproduce the tales of some of the biggest crashes in history that have been the best 'learning lessons' for investor vigilance.

The Tulip bubble (1634-1637, Holland)
In 1593, tulips were brought from Turkey and introduced to the Dutch. The novelty of the new flower made it widely sought after and therefore sought a premium price. Soon, prices were rising so fast and high that people were trading their land, life savings, and anything else for tulip bulb futures. Needless to say, the prices were not an accurate reflection of the value of a tulip bulb. At the peak of the market, a person could trade a single tulip for an entire estate. However, once the correction set in, dealers refused to honor contracts and the government attempted to step in and halt the crash by offering to honor contracts at 10% of the face value.

The South Sea bubble (1711, United Kingdom)
In the early 1700s, when the British investors enjoyed prosperity and had enough liquidity to invest, the South Sea Company had no problem attracting investors to its IPO because of an MoU signed with the government (worth £10 m) for purchasing the 'rights' to trade in the south seas. Stocks in the South Sea Company were traded for 1,000 British pounds (unadjusted for inflation) and then were reduced to nothing by the later half of 1720. In the aftermath of this crash, the British government outlawed the issuing of stock certificates, a law that was not repealed until 1825.

The Florida real estate bubble (1926, Florida)
In 1920, Florida became a popular US real estate destination because of its climate. The supply of housing, eventually, could not match the demand, causing prices to multiply several times. The land that could be bought for US$ 0.8 m could, within a year, be resold for US$ 4 m (5 times higher), before the prices came crashing back down to pre-boom levels.

The Great Depression (1929)
Despite the Florida real estate crash, after the win in the First World War, the US investors continued to be bullish on the stock markets, which lead to a bubble. The ensuing correction led to more than 40% drop in the benchmark indices from the beginning of September 1929 till the end of October 1929. In fact, the markets continued to decline until July 1932 when it bottomed out, down nearly 90% from its 1929 highs.

The crash of 1987 (19th October 1987)
In early 1987, in the wake of the stock market rally, the US stock market regulator, SEC, made aggressive investigations into insider trading. The barrage of SEC investigations, rattled investors and by October, investors decided to move out equities and into the more stable bond market. The Dow plummeted 508 points (22.6%) on October 19th and investor wealth to the tune of US$ 500 bn got eroded on a single day. Finally, the Fed chief, Alan Greenspan, had to intervene to help fight off a depression by preventing the insolvency of commercial and investment banks.

The Asian crisis
In the later half of the 19th century, the Japanese economy gained momentum after its long recovery from the war and the atomic bombs. The Japanese economy, coupled with the other emerging Southeast Asian economies, formed an unstoppable economic force. Between 1955 and 1990, land prices in Japan appreciated by 70 times and stocks increased 100 times over. The government sought to halt the inflammatory growth of stocks and real estate by raising interest rates. Nevertheless, this did not have the desired impact and instead, the subsequent correction plunged the Nikkei index down by more than 30,000 points.

The dotcom crash (2000 - 2002)
Commercially the internet started to catch on in 1995 with an estimated 18 m users worldwide. The rise in usage meant an untapped international market. Soon, the public issues of new dotcom companies started getting oversubscribed several times over on the very first day of bid. This frenzy also perpetuated to the Indian markets and one may recollect Infosys trading at a multiple of 300 times earnings during this bubble. At the end of the crash, the Nasdaq composite lost 78% of its value.

Lessons to learn...
The above instances are cautionary admonitions for investors to stay out of irrational behaviour. This is not to say that stocks cannot legitimately enjoy a huge leap in value, but this leap should be justified by the prospects of the underlying companies, and not just by a mass of investors following each other. The unreasonable belief in the possibility of getting 'rich' quick is the primary reason people burn their fingers in market crashes. One tends to neglect the fact that there is a direct correlation between high risk and high returns. While the history of market crashes do not in any way foretell anything dire for the future, the best thing an investor can do is keep himself / herself educated, well-informed and well-practiced in doing research

Motilal Oswal IPO Analysis

Motilal Oswal Financial's issue is attractively priced and provides scope for price appreciation.

Players engaged in equity broking business are having a party. Thanks to India’s fast-growing economy, foreign institutional investors (FIIs) registered with SEBI have almost doubled in the last six years pumping in billions of rupees in Indian equities.

Further, retail and corporate investors are getting more interested in stocks as their investible surplus is rising. Consequently, stock prices of equity broking players like Indiabulls, India Infoline and Geojit Financial services are soaring on the bourses.

This is encouraging players such as Motilal Oswal Financial Services (MOFS) to go public. Also, as the broking business gets more competitive, customers demand better services such as margin financing, which needs more capital for the broker.

The company, which is the holding company, offers equity broking, commodity broking, mutual fund investments, private equity, investment banking and portfolio management services (PMS) through its subsidiaries namely Motilal Oswal Securities (MOSL), Motilal Oswal Commodities Brokers (MOCB), Motilal Oswal Venture Capital Advisors and Motilal Oswal Investment Advisors.

The objects of the issue are to grow each of these businesses. The company is offering about 2.9 million shares in the price band of Rs 725-825 per share out of which around 0.14 million will be reserved for employees.

The issue will collect between Rs 216-246 crore, and constitute 10.5 per cent of the post issue equity capital. About 50 per cent of the issue proceeds will be used for margin financing for its clients. The rest of the money will be spent on expanding the broking business by meeting higher working capital requirements, office space and technology.

Worth investing

Market experts feel the pricing of the issue leaves enough money on the table due to reasonable valuations amid great opportunity. Besides valuations, the company’s issue looks attractive on various other business parameters and offers several triggers for the future.

It has a strong distribution network, research capabilities, experienced promoters and a wide basket of products, all of which are required for a successful broking operation.

MOFS has a wide distribution network spread across 1,200 business locations in 377 cities and towns through its own operations and 815 business associates. Besides pursuing inorganic growth strategies, the company is also tying up with leading banks (the recent tie-up with State Bank of India) for their online broking services.

MOFS acquired three companies in the past one year. As a result of these initiatives, the company’s clientele is increasing and its market share is rising. At the end of March 2007, the company’s retail client base in the equity broking business grew 50 per cent to 2.38 lakh, while the same in the commodity broking business tripled to 4,718 clients.

Further, the company was empanelled with 251 institutional clients including 165 FIIs. As a result, the company’s market share in the cash equity market has risen consistently over the last few years from 1.05 per cent in FY03 to 5.15 per cent in FY07.Similarly its market share in equity derivatives has jumped 322 basis points to 3.72 per cent in the same period.

But acquiring clients is not enough; providing them value added service is a bigger requirement, says the company management. And this is possible through its strong research focus to generate ideas (its research has won awards from Asiamoney. In March 2007, the company had 25 equity research analysts covering 221 companies in 26 sectors and nine analysts covering 26 commodities.

The company’s future strategies also instill confidence. MOFS plans to increase its market share further in retail and institutional broking businesses and offer new products and services.

The company is also open to inorganic expansion. It plans to boost its fee based income by growing its investment banking, portfolio management services, venture capital and entering distribution of insurance products in addition to mutual funds.

Some risks though

Investing in equities involves high risk. So does investing in the equity broking business. The most common risk is that equity broking business is susceptible to market volatility especially in a emerging market like India. Further, there is a risk in terms of delinquencies by customers if markets fall too fast.

Customers have to pay an initial margin for their investments, but if the value of the investments falls a lot quickly, and if the margin is not enough to defray the losses, then the broker has to cough up the balance in case the customer defaults. Further, in services-led industry, the ability to retain good talent especially for a research-focused organisation like Motilal Oswal is a challenge.

Relatively safe

However, MOFS is well-placed to survive and flourish even if the operating environment deteriorates. Its client base is hedged between institutional and retail business.

Besides, equity broking, it is also foraying in other areas such as wealth management, PMS, private equity and investment banking which are less cyclical and are fee-based businesses.

Plus, it has the India growth story to boot. According to Motilal Oswal, chairman and managing director, MOFS, “Indian equity markets will remain attractive as the GDP growth shows no signs of slowing down and for the next two years corporate profits are expected to grow at a robust 20-25 per cent.”

Further a low equity participation of about two-three per cent (including investing through mutual funds) means that opportunity will be huge. Based on this, the broking industry should do well.

Promoters Motilal Oswal and Raamdeo Agrawal are veterans in the equity broking business with two decades of experience each in the financial services industry and are qualified chartered accountants. The company is ranked first and second in some of Asiamoney

Moreover the company is not facing any problem on the employees front. Says Oswal, “Our strategy is to give promotions to the internal staff and recruit people more at the junior level, which takes care of attrition and employee costs.”

Growth ahead

Moreover, the company is debt-free, which gives it enough scope to leverage and grow in future. In FY07, the company’s consolidated revenues jumped 39 per cent to Rs 379 crore with equity broking business constituting about 80 per cent.

Even as the company grows its new businesses, equity broking will still form a significant portion of its revenues. Emkay Share expects 80 per cent growth in MOFS’ revenues in FY08, 60 per cent of which will be contributed by its retail broking business.

On the other hand, profits grew at a lower rate in FY07 as is the case with most broking companies due to competitive brokerage rates offered on the one hand and higher employee and other operational costs.

Reasonable valuations

At the given price band, MOFS’ market capitalisation stands third at Rs 2050-2340 crore after Indiabulls Financial Services and India Infoline in line with its revenues and profits. The issue is priced at 20.7-23.6 times its consolidated earnings for FY07.

While MOFS at both the lower and upper price band is cheaper than India Infoline, it is cheaper than Indiabulls Financial Services only at the lower end. Kashyap Jhaveri from Emkay Shares and Stock Brokers recommends subscribing to the issue as he expects investors money to double in less than a year.

Adds Kshitij Prasad of Anand Rathi Securities, “The issue looks attractive as there are few listed broking companies available in the market.” For investors, MOFS should be a good long-term bet.

Punj LLoyd !

A healthy order book and improving margins put Punj Lloyd on a strong wicket.

Since its listing in 2006, the Punj Lloyd stock did not perform too well on the bourses mainly because its valuations were considered expensive. On current value basis (adjusting for the recent five-for-one split), it made a low of Rs 108 in July 2006 as compared to its listing price at above Rs 213.

However, the stock is once again on the radar of most analysts and investors due to sustained higher earnings in the recent past. Also, the company is aggressively expanding its business offerings and spreading its reach in the newer markets through inorganic and organic route to grow.

Further, a vibrant domestic infrastructure industry, the ongoing global energy capex and rising industrial capex poise for the higher growth. Moreover, considering its strong consolidated order book of Rs 16,500 crore, the company’s earnings are expected to grow over 40 per cent annually over the next few years.

Punj Lloyd (PLL), which started as a pipeline laying company has today become one of the largest EPC (engineering, procurement and construction) contractors with a focus on oil and gas sector. PLL also has significant presence in the growing infrastructure projects such as roads, airports and power utilities.

Though it still generates about 43 per cent of its total revenue from laying pipelines, other segments are seeing an increase in their contribution to revenues– 23 per cent comes from infrastructure projects followed by 17 per cent from process plants, 7 per cent from tankages and 17 per cent from others different segments.

In terms of geographies as well, its business is spreading globally catering to energy and construction clients and moving into other verticals with acquisitions abroad and JVs with global players.

Global reach

PLL generates about 66 per cent of its consolidated revenues from its overseas operation. The company has a strong foothold in major oil producing countries such as the Middle East, Europe, Africa and South East Asia. The diversification in these markets has helped the company capitalise on the opportunities in the growing oil and gas capex.

According to estimates the Gulf Cooperation Council earned $1.5 trillion between 2002 and 2006. Moreover, with rising oil prices, these countries are flush with financial resources, which are further invested into oil and gas capex such as offshore and onshore oil exploration activities, laying pipelines and developing other supporting infrastructures. Analysts forecast an additional investment of $500 billion over the next few years in the Gulf region.

With the intention of strengthening its position further and grabbing opportunities in the energy and infrastructure segments, PLL has recently invested in new companies and a few joint ventures.

The company acquired 100 per cent stake in SembCorp Industries’ engineering and construction business Sembawang Engineers, Singapore in June 2006.

Sembawang has presence in 35 countries, including China, India, Mexico and the UK focusing on civil engineering, process engineering and in constructing buildings. This has enabled PLL to strengthen its presence further and improved the pre-qualification strength to bid for larger and complex projects.

After the acquisition, the company has won some large projects such as the Rs 5,400-crore residential community construction in Bahrain, Rs 864-crore EPC order for hydrocracker at Haldia in India and the Rs 666-crore Sentosa , Singapore construction project.

In addition, the purchase has also helped PLL to enter new areas such as airport construction, jetties, tunneling, sewerage and petrochemicals to its portfolio. The acquisition has already started resulting in flow of new orders where the company will be able to act as main contractor and leverage its existing capabilities.

Domestic market

The company’s domestic business is also growing as well, especially in the oil and gas sector and infrastructure. It has worked with almost all the oil and gas majors in India as the main contractor or as a sub-contractor. The company has the experience of laying maximum kilometers of pipelines in the oil and gas sector.

It will also invest Rs 403 crore to acquire 25.1 per cent stake in Pipavav Shipyard (PSL). Globally as well as in India there is a huge shortage of fabrication capability. With this investment, PLL, will be able to support the growth of its business in the offshore sector.

Considering the high oil prices and the substantial E&P activities in the country, there would be more opportunities for revamping existing offshore platforms and deploying new platforms by upstream oil and gas companies.

According to industry estimates about Rs 80,000 crore is expected to spent on offshore developments including platforms. The proposed investment in PSL will provide the company with required capabilities to serve this market more effectively.

PSL will give access to fabrication facilities for platforms, rigs and jackets. Punj Lloyd is currently executing the Heera field redevelopment project for ONGC. The facility at Pipavav Shipyard can also be used for fabrication of vessels for petrochemicals and refineries.

Real estate

Along with this growth opportunity in the oil and gas sector, the company is also active in the other infrastructure projects such as road and infrastructure projects from NHAI, Delhi Metro, UP State Highway and L&T.

PLL also announced its foray into real estate through a 50:50 JV with Ramprastha group for the development of multi-storied residential housing in Ghaziabad over 29 acres of land in the first phase.

In the second phase, substantial real estate development is proposed in Indrapuram and Gurgaon, where Ramprastha group holds a large land-bank of about 160 acres. In this venture Punj Lloyd will also leverage on the capabilities of Sembawang, which specialises in handling larger real estate projects. However, it will still take three-four years for the company to develop and sell the apartments and reflect into its top line.


PLL is investing in different verticals and businesses to leverage its existing capabilities and integrate its offerings. Sembawang has an order book of about Rs 3500 crore, almost 1.6 times its FY07 turnover.

Sembawang, which contributes 42 per cent of consolidated revenues, is expected to improve its profitability. Its operating margin has improved from just 0.5 per cent when PLL acquired it, to about 3.5 per cent now.

The improvement in the margin will be key for the consolidated numbers. Punj Lloyd’s operating margin is expected to improve from 7.3 per cent in FY07 to about 9-10 per cent over the next two years. At the current market price of Rs 266, the stock is trading at 20 times its FY08E earnings and 15 times FY09E earnings, and can be bought at declines.

Small cap picks!

Akar Tools (Rs 37.10): Quick, if you were being offered for Rs 22 crore a company with the possibility of earning Rs 9 crore in EBIDTA (earnings before interest, depreciation and tax) during the current financial year, would you yawn or call your merchant banker by reflex action?
And this is my pitch for this Aurangabad-based hand tool and leaf spring manufacturer, which surprised with a double digit EBIDTA margin in the first quarter of 2007-08 on a total income of Rs 17.83 crore and an equity of Rs 5.40 crore.
If you don’t trust these numbers, consider this: hand tool capacity increased from 2,400 tonne per annum (tpa) to 3,600 tpa last December and leaf spring capacity will increase from 3,600 tpa to 12,000 tpa by the last quarter of 2007-08 – all financed through internal accruals and debt.
Scale will address the growing demand of leaf springs from OEMs, and the product mix will evolve from conventional leaf springs to value-added parabolic springs. At full blast that could be a top line of Rs 140 crore at slightly better margins in 2008-09. Now reach for your calculator.
Indag Rubber (Rs 42.65): The biggest pre-cured tread rubber brand in India is the venerable Elgi, right? And the second biggest? Pakde gaye na? The industry leader enjoys a market capitalisation of around Rs 100 crore and the number two? A mere Rs 22 crore. And that is the mother of all my arguments for Indag, the crown prince.
The numbers come later: Indag’s first quarter EBIDTA in the current year was the fifth straight quarter-wise increase, peaking at Rs 2.51 crore this latest quarter; EBIDTA margin increased across each of the last four quarters; Elgi enjoyed an EBIDTA margin of around 10 per cent for 2006-07, whereas Indag’s was 14.57 per cent in the first quarter of this year; interest cover increased across each of the last five quarters peaking at 6.44 this latest quarter.
This is the nugget I like: its weight-mileage ratio is considered among the best in the industry; its technology, developed in-house, enabled it to more than neutralise the disadvantage of moving out of collaborator Bandag’s shadow (now a Bridgestone company); its export exposure is increasing now that the collaborator is out of sight; its low asset utilisation of only around 62% in 2006-07 is what my friends in the market call a high operating leverage; it can enhance overall capacity by 50 per cent at a negligible cost through a transfer of assets from its erstwhile Rewari plant.
This is what I like about its industry: roads are improving and truck overloading is declining so tyres are being protected enough to deserve a retread instead of being chucked; expensive radialisation means that users would rather retread tyres than throw away; large transporters are more likely to go in for organised retreaders for enhanced reliability and mileage; decline in sales tax in some states to 4 per cent is narrowing the differential between the organised and unorganised players, widening the market and strengthening Indag’s margins.
Jhunjhunwala Vanasapati (Rs 80.80): Welcome to the next edition of Battle of Biases. If I told you that this company makes vanaspati and mustard oil, you are likely to turn up your nose and say, “Sunset business”.
But if I told you that the name of the company was Sterling Foods or something and that it was likely to report a turnover of Rs 1000 crore-plus in the current year, your first reaction would be, “What a franchise!”
If I told you that this is a 3 per cent EBIDTA business, you are likely to pass some uncharitable remarks about the intention of the management. But if I told you that the worst interest cover in the last five quarters was still a little over 8, you would be tempted to say, “Cash rich”.
If I told you that the company was headquartered in Benaras, your first reaction would be “Governance konni!” But if I told you that EBIDTA has increased across every single quarter of the last five quarters and the company quotes for a mere market cap of around Rs 65 crore against a projected EBIDTA of around Rs 30 crore for the current year, you are more likely to sheepishly concede “Accha, chalo aap bolte hain toh…
Sree Rayalaseema Hi-Strength Hypo (Rs 21.05): The rewarding thing about trawling the papers day in and day out is that one day god may smile and say, “Bachcha, I am pleased with your devotion. I shall grant you a bargain penny stock that shall be hidden from public view as long as you want it.”
The moment manifested in the form of SRHSH. Looks at its 2006-07 financials: equity of Rs 10.18 crore, EBIDTA of Rs 13.2 crore, tax paid at 34 per cent, EPS of Rs 5.61, market cap of Rs 22 crore. First reaction: oh, one-off. Then SRHSH surprised with its first quarter: an EBIDTA of Rs 3.49 crore and an interest cover of 9. Nine!
SRHSH manufactures calcium hypochlorite and monochloroacetic acid; the former is being increasingly preferred as an environment-friendly alternative for chlorine in swimming pools and water purification the world over.
The company exports nearly all of this product so the results that you see in the first quarter of this year is after the impact of the rupee’s appreciation. The company manufactures the product through the specialised sodium route, developed in-house, mastered only by a few companies in Asia.
This is my turn-on: SRHSH has embarked on an expansion of its sodium hypochlorite capacity by 50 per cent and its monochloroacetic acid capacity by more than 100 per cent; out of internal accruals and debt, if you please; these will translate into reality by the end of 2007; enhanced utilisation should translate into revenues of Rs 160 crore for 2008-09. If margins are maintained, shareholders could be laughing all the way to the AGM. Provided it is not in Kurnool, Andhra Pradesh!
WS Industries (Rs 82.05): Suddenly, half of India including my mother-in-law is bullish on this porcelain insulator company.
The reasons: India’s considerably-under-provided power transmission sector is the next big thing, the country’s transmission lines are graduating towards higher voltages, Power Grid’s next mega tender is around the corner, global opportunities are emerging in East Asia, Latin America, North America, North Africa and Europe (going through aggressive line refurbishment) and the insulator industry growth of 12-15 per cent over the last three years of the Tenth Plan is going to lead to an average 20-22 per cent per year in the Eleventh Plan.
So what does all this mean for dear WS? An order book for more than a year, a new plant under commissioning which will enhance capacity from 16,000 tpa to 27,000 tpa, additional capacity to go on stream in the first quarter of the next fiscal, project funded through a private placement (equity already diluted) and enriched product mix (first to develop products for the 800 KV line and is working on the 1200 KV line) will strengthen margins, a debt-equity ratio of less than 1 will translate into improving interest cover and the company possesses a full-blast revenue potential of around Rs 350 crore.
Now look over your shoulder. A company with large exports, WS Industries reported its highest ever EBIDTA margin in the quarter when the dollar slumped, interest cover rose almost every quarter over the last year; the company reported five quarters of back-to-back EBIDTA growth into the first quarter of the current fiscal; revenues of the first quarter of the current fiscal were better than the last quarter of 2006-07!
What is not widely public is that the business has a high fixed cost but once that is covered, it recruits people to count the money. But that’s only between you and me.

Ceat India

Ceat has brought in cost efficiencies in operations and its investment arm demerger and land sale will bring in a cash pile.

After reeling under rising cost of raw materials and attendant competitive cost pressures which had whittled margins, tyre majors are reaping benefits of cost optimisation and dipping natural rubber prices.

One such tyre company that has seen its operating margins move from under 4 per cent five quarters ago to a healthy 9.2 per cent in the current quarter is Ceat. With short-term triggers coming from non-core areas such as sale of land and demerger of its investment arm, the stock could see a rerating.

Unlocking value

Ceat wants to shift its 31-acre manufacturing facility located in Bhandup, Mumbai to a new location and sell the land to real estate developers. As a first step, the company has identified 6.5 acres which will be sold by the third quarter of the current fiscal. At Rs 14 crore an acre, the land is expected to fetch Rs 91 crore.

By FY09 when the entire facility will be shifted out to Patalganga and the entire land is sold, the company is expected to pocket nearly Rs 400 crore. The company is also demerging its investment arm, CHI Investments into a separate listed entity and this too is expected to boost the stock price.

Investment gains

CHI Investments has exposure to stocks of RPG group companies and has an investment value of Rs 127 crore. The current market value of these investments is put at nearly Rs 400 crore. According to the financial restructuring, existing shareholders will get one share in CHI Investments and three shares in the new Ceat for every four shares held in Ceat holding in the new entity.

In addition to these, the company is also expected to make an octroi saving of Rs 28 crore (in the event octroi is abolished), and has received refunds from income tax and Sicom to the tune of Rs 15 crore and Rs 8 crore respectively.

These are all windfall gains, and are mostly of a one-time nature. But besides these, the company has put in place plans to move into higher value-added products and improve realisations.

Value-added portfolio

To tackle increasing cost pressures and cut-throat competition, Ceat adopted a three-pronged strategy to improve margins. Ceat’s vice president Amit Kumar says that the company changed its product mix, went up the product value chain and outsourced low-end manufacturing activities.

Of Ceat’s three segments, OEM, replacement and exports, realisations from supplies to auto manufacturers historically were 15-20 per cent lower than Ceat’s largest revenue earning segment - the replacement market which accounts for 62 per cent of sales. High demand and lack of supply has put Ceat at an advantage and the difference is now only 5-10 per cent, which has boosted margins in the past quarter.

The company is aggressively scouting for more opportunities in the export markets which account for 20 per cent of sales and come with higher realisations of Rs 18 per kg. The company’s focus on exports and replacement could not have come at a better time, according to Kumar as Ceat’s OEM sales are expected to dip by 20 per cent because of the slowdown.

The company is also trying to shake off the tag that it caters primarily to the economy segment by including high-end products in its portfolio. Says Kumar, “Ceat is looking at speciality tyres -- be it radials which have realisations of Rs 100 per kg or off-the-road tyres where it has doubled its capacity with a investment of Rs 47 crore in the last fiscal and saved on costs with in-house mixing.”

In line with its aim of moving up the value chain, the company is outsourcing low-end tyre manufacturing activity for scooter, motorcycle, auto rickshaw and agricultural application tyres. This has freed up capacity to focus on high margin products and at the same time reduce costs.

The company is planning to relocate its 240-tonne Bhandup plant to Patalganga which will have an enhanced capacity of 300 tonne of which 100 tonne would be for manufacturing specialty tyres. The capacity at its Nashik facility has been enhanced to 180 tonne from 140 tonne.

The cost of the Patalganga facility is expected to be Rs 300 crore which is to be funded by internal accruals and debt in a 1:1 ratio. To make deeper in-roads in the radials business, the company plans to set up a greenfield facility to manufacture passenger car radial facility along with truck and bus radials. The production facility, the location for which has not been finalised, is expected to come on stream by FY11.

Efficiency gains

The company’s focus on cost cutting is paying off. Interest, depreciation and manpower costs are down from nearly 20 per cent of sales to half that number over the last seven years even though the top line has nearly doubled during this period.

Says Kumar, “Costs are down thanks to value engineering which involved the use of low weight tyres and material substitution based on natural and synthetic rubber prices.”

The key raw material for the company is natural rubber which accounts for 46 per cent of its raw material cost while crude oil by-products synthetic rubber (8-12 per cent), carbon black (20 per cent) and nylon cord fabric (15 per cent) account for the rest.

The company changes this mixture and uses arbitrage opportunities between domestic and international prices to bring down its raw material costs. This helps balance the cost differential as natural rubber is seeing a declining trend while crude prices are going up.


Since most holding companies trade at a 50-70 per cent discount to their investment value, Ceat’s holding arm, which has investments of Rs 400 crore, would work out to Rs 26 per share. After deducting Rs 12 per share of the land value as well, Ceat’s core business trades at a P/E of about 9.8 times estimated FY08 earnings.

With a 40 per cent net profit growth, analysts say the P/E of the core business could get re-rated up to 12 times, thus valuing the share at Rs 170. If its invested companies like KEC International, CESC and Phillips Carbon Black rise further or if the holding company discount is not as low as 70 per cent, there could be further upsides.

Analysts corner

Firstsource Solutions
Reco price: Rs 79
Market price: Rs 74.60
Target price: Rs 97
Broking firm: Man Financial
Man Financial put a “buy” on Firstsource Solutions, a pure play business process outsourcing (BPO) vendor. The company has delivered strong performance in the past and has a focused approach in key business verticals balanced across geographies. Due to the blended offshore-onsite mix, Firstsource enjoys a natural hedge which its competitors with an India-based delivery model may lack.
The company boasts of an attractive clientele, and has a privileged access to its stakeholder Metavante’s business. Further, the company is eyeing acquisitions in overseas markets. Man Financial expects Firstsource’s revenues, EBITDA and net profit to grow at a compounded rate of 39, 41 and 46 per cent over FY07-09E. At the target price of Rs 97, Firstsource is valued at 21.6 times estimated FY09 earnings.
Hero Honda
Reco price: Rs 660
Market price: Rs 630
Broking firm: Prabhudas Lilladher
Rated “outperformer”, Hero Honda’s results were a dampener as its profits declined y-o-y over FY07. Rising commodity prices, mounting competition and cost hikes to usher in new-engine-technology products created margin pressures for the company. Prabhudas Lilladher believes that slowed down sales will gain momentum in the coming festival season again to a double-digit growth.
Further, in spite of major upheavals in the industry, the company has been able to maintain its market leadership with a 41.4 per cent share in the last three years. At Rs 660, the stock traded at 13.8 times and 10 times estimated FY08 and FY09 earnings per share of Rs 47.8 and Rs 66.2, respectively.
Jindal Drilling Industries
Reco price: Rs 754
Target price: Rs 1,056
Market price: Rs 755
Broking firm: Religare
Jindal Drilling Industries offers good prospects as new rigs are being acquired and its pricing environment changes for better. The company offers varied services to oil exploration and production majors including offshore drilling, directional drilling and mud logging and derives 85 per cent of revenues from offshore drilling.
The company has plans to acquire new-build jack-up rigs through its Singapore-based subsidiaries for $35 million. These new rigs will start operation from the fourth quarter of FY09, and the company has already entered into a contract with ONGC for one rig at $148,000 a day for five years.
Due to strong crude prices which fuel higher price realisations in rigs and adding to the number of rigs, Religare expects Jindal Drilling’s net sales increase at a 56 per cent CAGR over the next two years. At Rs 754, the stock is valued at 46.3 and 29.7 times estimated FY08 and FY09 earnings, respectively.
Bharat Forge
Reco price: Rs 275
Target price: Rs 416
Market price: Rs 263.60
Broking firm: Emkay Shares
Bharat Forge delivered a strong export growth in the quarter ended June 2007 at about 32 per cent y-o-y despite the rising rupee. Further, even though the domestic commercial vehicle industry, which is the key growth driver for Bharat Forge-- remained subdued during the quarter, the company’s domestic revenue grew 9 per cent y-o-y.
Exports to European Union markets almost doubled to Rs 93.3 crore compared to Rs 46.9 crore in the corresponding quarter previous year. On the other hand, US exports grew by 4.3 per cent y-o-y to Rs 122.3 crore, and Asia Pacific market witnessed growth of 37 per cent y-o-y to Rs 8.1 crore. Following a slowdown in the US business, the management expects a recovery in early 2008.
Going forward, Bharat Forge also expects a revival in its Chinese operations with further inventory corrections. The stock currently trades at 17 times and 12 times estimated FY08 and FY09 earnings respectively.
Ranbaxy Laboratories
Reco price: Rs 368
Market price: Rs 352.20
Broking firm: Edelweiss
Edelweiss upgraded its rating on Ranbaxy from “accumulate” to “buy” as it foresees the branded generics segment’s contribution to the company’s revenues increasing significantly. Being a high margin business, branded generics business is a lucrative area.
Further, with the announcement of settlement of patent litigation for Valtrex, Edelweiss believes there is a higher possibility of similar announcements for monetising another Para IV opportunity in CY08. The stock has underperformed the healthcare index by more than 12 per cent over the last one year.
This was primarily driven by the issues in approval of facilities at Paonta Sahib and the USFDA raid on the company’s offices in the US. Due to these, Edelweiss believes that all the adverse news are already factored in the price and there is limited downside to the stock going forward. At Rs 368, the stock traded at 17.6 times estimated FY08 earnings.

Warren Buffet - Investment Wisdom

Warren Buffett, Chairman of Berkshire Hathaway, is arguably the world's greatest investor and the third richest man with a net worth exceeding $52 billion. He is also a great philanthropist: last year he declared plans to give away over $37 billion in charity, to the Bill & Melinda Gates Foundation.

But he is not just a man with a large heart and a matching wallet. Also known as The Sage of Omaha, he is also full of wisdom and wit.

Here are some of his gems of advice for investors who look at the stock market to make a fortune, culled from various publications, his speeches and writings:

• 'Never invest in a business you cannot understand.'

• 'Always invest for the long term.'

• 'Remember that the stock market is manic-depressive.'

• 'Buy a business, don't rent stocks.'

• 'Price is what you pay. Value is what you get.'

• 'Stop trying to predict the direction of the stock market, the economy, interest rates, or elections.'

• 'I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years.'

• 'Wall Street is the only place that people ride to in a Rolls-Royce to get advice from those who take the subway.'

• 'Buy companies with strong histories of profitability and with a dominant business franchise.'

• 'It is optimism that is the enemy of the rational buyer.'

• 'As far as you are concerned, the stock market does not exist. Ignore it.'

• 'The ability to say 'no' is a tremendous advantage for an investor.'

• 'If you're doing something you love, you're more likely to put your all into it, and that generally equates to making money.'

• 'My idea of a group decision is to look in the mirror.'

• 'Most people get interested in stocks when everyone else is. The time to get interested is when no one else is. You can't buy what is popular and do well.'

• 'The smarter the journalists are, the better off society is.'

• 'Success in investing doesn't correlate with IQ once you're above the level of 25. Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing.'

• 'Diversification is a protection against ignorance. It makes very little sense for those who know what they're doing.'

• 'You're neither right nor wrong because other people agree with you. You're right because your facts are right and your reasoning is right - that's the only thing that makes you right. And if your facts and reasoning are right, you don't have to worry about anybody else.'

• 'There seems to be some perverse human characteristic that likes to make easy things difficult.'

• 'In the short run, the market is a voting machine but in the long run it is a weighing machine.'

• 'It's only when the tide goes out that you learn who's been swimming naked.'

• 'Somebody once said that in looking for people to hire, you look for three qualities: integrity, intelligence, and energy. And if they don't have the first, the other two will kill you. You think about it; it's true. If you hire somebody without the first, you really want them to be dumb and lazy.'

• 'There are three kinds of people in the world: those who can count, and those who can't.'

• 'It takes 20 years to build a reputation and five minutes to lose it.'

• 'The first rule is not to lose. The second rule is not to forget the first rule.'

• 'Wide diversification is only required when investors do not understand what they are doing.'

• 'Only buy something that you'd be perfectly happy to hold if the market shut down for 10 years.'

• 'We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.'

• 'Our favourite holding period is forever.'

• 'If past history was all there was to the game, the richest people would be librarians.'

• 'Why not invest your assets in the companies you really like? As Mae West said, 'Too much of a good thing can be wonderful.''

• 'Your premium brand had better be delivering something special, or it's not going to get the business.'

• 'You are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right.'

• 'We do not view the company itself as the ultimate owner of our business assets but instead view the company as a conduit through which our shareholders own assets.'

• 'Accounting consequences do not influence our operating or capital-allocation decisions. When acquisition costs are similar, we much prefer to purchase $2 of earnings that is not reportable by us under standard accounting principles than to purchase $1 of earnings that is reportable.'

• 'Unless you can watch your stock holding decline by 50% without becoming panic-stricken, you should not be in the stock market.'

• 'The critical investment factor is determining the intrinsic value of a business and paying a fair or bargain price.'

• 'Risk can be greatly reduced by concentrating on only a few holdings.'

• 'Much success can be attributed to inactivity. Most investors cannot resist the temptation to constantly buy and sell.'

• 'Lethargy, bordering on sloth should remain the cornerstone of an investment style.'

• 'An investor should act as though he had a lifetime decision card with just twenty punches on it.'

• 'An investor needs to do very few things right as long as he or she avoids big mistakes.'

• 'Turnarounds' seldom turn.'

• 'The advice 'you never go broke taking a profit' is foolish.'

• 'It is more important to say 'no' to an opportunity, than to say 'yes.'

• 'It is not necessary to do extraordinary things to get extraordinary results.'

• 'An investor should ordinarily hold a small piece of an outstanding business with the same tenacity that an owner would exhibit if he owned all of that business.'

• 'It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you'll do things differently.'

• 'In the business world, the rearview mirror is always clearer than the windshield.'

• 'A public-opinion poll is no substitute for thought.'

• 'It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price.'

• 'The business schools reward difficult complex behavior more than simple behavior, but simple behavior is more effective.'

• 'Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it.'

• 'The investor of today does not profit from yesterday's growth.'

• 'Of the billionaires I have known, money just brings out the basic traits in them. If they were jerks before they had money, they are simply jerks with a billion dollars.'

• 'I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years.'

• 'I don't look to jump over 7-foot bars: I look around for 1-foot bars that I can step over.'

• 'I always knew I was going to be rich. I don't think I ever doubted it for a minute.'

• 'We enjoy the process far more than the proceeds.'

• 'You do things when the opportunities come along. I've had periods in my life when I've had a bundle of ideas come along, and I've had long dry spells. If I get an idea next week, I'll do something. If not, I won't do a damn thing.'

• 'I buy expensive suits. They just look cheap on me.'

• 'Let blockheads read what blockheads wrote.'

• 'I do not like debt and do not like to invest in companies that have too much debt, particularly long-term debt. With long-term debt, increases in interest rates can drastically affect company profits and make future cash flows less predictable.'

• 'My grandfather would sell me Wrigley's chewing gum and I would go door to door around my neighbourhood selling it. He also sold me a Coca-Cola for a quarter and I would sell it for a nickel each in the neighbourhood, so I made a small profit. I was always trying to do something like this.'

• 'A public-opinion poll is no substitute for thought.'

Unknown Source

No Celebration for Market

Monday started on a positive note as central banks moved to ease a credit crunch. The European Central Bank pumped in billions of dollars to the monetary system. The Bank of Japan also did so. The Fed too injected billions in reserves to the nation's banking system. Subsequently, European shares posted a substantial gain as investors took heart from central banks' moves to calm money markets. In India too, the market closed in positive territory.

But since that day, the market fell all through the week. Not only was that evident in the main indices but even in the BSE sectoral indices. Tuesday the market closed flat but there was blood on the street on Thursday. The US sub-prime mortgage worry continued to haunt global markets after reports that the biggest mortgage lender in the US was on the brink of bankruptcy. The next day the slump continued. Of course, we also had to contend with relations between the Left parties and the Congress-led government going sour.

Nevertheless, though the situation will remain volatile and even negative in the short-run, the long-term outlook is fairly positive with inflation under control, the general perception of interest rates peaking and fairly robust quarterly results. In the short-term, global liquidity supply will affect the market. Brokers went on record saying that they don't think the Sensex will fall to below 13000 to 14000.



ICICI Bank Ltd

ICICI Bank Ltd

Jaiprakash Associates, Ranbaxy

Jaiprakash Associates, Ranbaxy

Gujarat - the top investment destination

Gujarat has edged out Maharashtra to become India's top state in terms of investment commitments during 2006-07, cornering over 25 per cent of the total spending proposed by corporates across the country.

Gujarat received investment proposals to the tune of Rs.74,988 crore in 86 projects, while Andhra Pradesh was at a distant second with investment intentions worth Rs.25,173 crore, Maharashtra Rs.24,330 crore and Tamil Nadu Rs.24,229 crore, the Reserve Banks said in an analysis of 'Corporate Investment: Growth in 2006-07 and prospects for 2007-08.'

ICICI Bank ADR zooms 13%

The surprise US Fed move to cut discount rate by 50bps spurred a strong rally on Wall Street yesterday.

While the Dow jumped 233 points to 13,079, the Nasdaq Composite zoomed 54 points to 2,505.

Indian ADRs, too, logged sharp gains on Friday. ICICI Bank zoomed 13% to $42,92. HDFC Bank gained over 8% to $83.95. Infosys, Wipro and Satyam also rallied.

WNS, which had reported a subprime crisis, slumped over 16% to $20.45. Genpact also declined 2% to $14.

Recovery on the way...

Having lost close to USD 100 bn in last 15 sessions on sub prime mortgage concerns, Dalal Street may hope for happier times ahead with improving global cues after US Federal Reserve cut the rate at which it lends to banks, even as some feel more steps were needed to tackle the crisis.

Indian bourses lost close to Rs 4,00,000 crore -- nearly 10 per cent in overall market capitalisation -- in just a fortnight of trading since July 27 after the credit crunch in the us economy spread across the globe.

While the Fed's decision to cut the primary credit rate by 50 basis points to 5.75 per cent came as a reprieve for us and European markets on Friday, domestic bourses, which were declared closed before the rate-cut was announced, will react only tomorrow.

Multiple crashes since July 27 have wiped off nearly all gains made by BSE in the past six months, while taking the benchmark Sensex back to January-February level. Analysts at global brokerage giant Merrill Lynch said the rate cut would not necessarily bring a sustained stability in the markets.

"Prior two asset and credit bubbles that unwound from 1990-92 and again from 2001-03 show that Fed cut interest rates 100 basis points, the central bank believed that it acted in time to prevent a recession or bear market," Merrill Lynch's North American Economist David A Rosenberg wrote in a research note after Friday's rate cut.

"But, recessions did follow the initial Fed rate cuts back then, and so did a cyclical bear market in equities. Not even the Fed could stand in the way of nature taking its course and expunging the bad credits out of the system," Rosenberg said.

On market turbulence and its genesis

What is the genesis of the ongoing turbulence linked to the US markets?

The easy liquidity policy — with US Fed rates touching 40-plus year lows about four years ago has led to a steep rise in property prices in the US markets. In several regions, prices were reckoned to be akin to bubble-like territory even early this year. The low-interest rate policy led to a boom in mortgage financing. As lenders exhausted high-quality clients, they gradually started moving down the credit curve of borrowers. This gave rise to sizeable loans to borrowers who figured low on credit quality. The boom in these loans — has been on an unprecedented scale.

What led to a change in the US housing market and its financiers?

The home buying spurred by low interest rates led to prices going way of out of line with realistic levels. The sharp price rise had an in-built trigger to snowball into a problem at some stage unless the period of extraordinarily low interest rates sustained. This was never going to be the case.

As the US Federal Reserve moved to raise rates — there were 17 successive hikes of 25 basis points each, from June 2004 to June 2006 leading to the Fed Rate moving from a low of 1 per cent to 5.25 per cent — the impending crisis in US property markets got fast tracked.

What has happened in the sub-prime segment?

As interest rates rose, so did payment obligations (EMIs or their equivalent in the US) linked to variable rates and this started account for a larger proportion of income, leaving borrowers vulnerable. As US consumers are also highly leveraged, the rising payment obligations make things more difficult. This has triggered defaults on a rising scale, especially at the lower end of the credit curve. What is the linkage to movements in the financial markets?

Lenders who provided sub-prime loans packaged them together and sold it to investors as securitised assets. As such loans and risk appetite to buy securitised assets based on such loan pools increased, more exotic versions were added. Investors in such assets also included hedge finds that are usually leveraged significantly. (They also borrow and invest that money, too, over and above the capital to enhance returns).

It is this structure that gained critical mass that has become the root of the problems in the financial markets. Hedge finds that have taken a hit in sub-prime need to unwind exposures in other asset classes to compensate and ensure that they stay in tune with the fund mandate.

What has happened in the market for these assets?

There has been a significant decline in liquidity. Trading levels for some asset-backed bonds have declined dramatically and these include bonds with AA or AAA ratings (high investment grade). There are few buyers even for such assets. The lack of liquidity has ensured that valuation and ratings have been left at uncertain levels and without any meaningful linkage. It is even harder to trade risky high-yield bonds, junk bonds and loans for borrowers with high debt. As this is also the vacation season, liquidity has been further affected in these markets.

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Folks, its the best buying opportunity !

A report on the website of Fool says the P/E - the price of stocks divided by their last 12 months of earnings - in the S&P 500 are cheaper as a group today than they have been for 12 years.

Year Q2-Ending S&P 500 P/E
Today 16.62
June 30, 2007 17.34
June 30, 2006 17.05
June 30, 2005 18.80
June 30, 2004 20.32
June 30, 2003 28.21
June 30, 2002 37.02
June 30, 2001 33.28
June 30, 2000 28.02
June 30, 1999 33.46
June 30, 1998 29.10
June 30, 1997 21.83
June 30, 1996 19.21
June 30, 1995 15.82

"Mid-2003, when the large caps in the S&P 500 had a trailing P/E of 28, was actually a pretty good time to be making investments because the earnings in the denominator were so depressed that the ratio was misleading without taking normalised earnings levels into account.

"So, today's low prices for a dollar of the past year's earnings could be an indicator that it is an especially good time to invest new funds in the market,"the report said.

As the table shows, net profit margins can move dramatically on a company-by-company basis. Also, buying and selling established businesses on the basis of a temporary spike or decline in profit margins can be worth your while. Getting out of Yahoo! in 2005 would have worked out pretty well. The same goes for folks who picked up shares of General Motors after its disastrous 2005.

Today's S&P 500 profit margins are probably not indefinitely sustainable -- even given the significant productivity improvements across the economy. At the very least, investors cannot expect further improvements in profit margins to mirror the improvements over the past five years.

2. Contribution from energy and financials.
A second argument frequently voiced against putting too much reliance in today's S&P 500 P/E level is that if you subtract the financial and energy companies from the totals -- two sectors that show particularly low P/Es, coupled with high earnings -- the P/E for the rest of the companies in the S&P 500 moves up significantly.

It is true that an energy company such as ExxonMobil (NYSE: XOM) has a P/E of 12, and Citigroup (NYSE: C) trades for 11 times its earnings. And with the ongoing and justified concerns about subprime lending and the effects on earnings that have yet to be revealed, we could see earnings for financials moving down instead of up over the next few quarters.

Anybody who wishes to forecast the profits of energy companies over the short term is welcome to try, but such profits are cyclical, and at peaks shouldn't be accorded high P/Es.

Still, excluding the best performers from a group and declaring that the rest of the group isn't priced quite as cheap is always going to be true. I don't put that much faith into this attack on today's lower P/E levels.

Shift your focus
It's well worth noting that today's large-cap P/E levels are more attractive than they have been for years, and that there are reasons why the simple bottom line doesn't tell the whole story.

It's also worth noting that Wharton professor, best-selling author, and leading market historian Jeremy Siegel has said that given the low trading costs and ease of diversification today, P/E levels of around 20 are probably justified for the future. If that turns out to be the case, today's levels are certainly one of the better buying opportunities you'll find.

But at The Motley Fool, we've always been far more focused on individual companies than the stock market as a whole. That's helped our leading newsletter, Stock Advisor, turn in stock recommendations that have produced 66% returns over its five-year history vs. 28% returns for the S&P 500.

Rakesh Jhunjhunwala - Believe in India..

The biggest bull of them all Rakesh Jhunjhunwala, says that India is likely to benefit from its strong fundamentals in the long term but only after a tough intermittent transition period.

He feels that high degree of complacency has set in as too much easy money has been made too quickly and world equity markets are bound to get shaken in the near future.

Mr Jhunjhunwala was speaking at the convocation ceremony of IIT Mumbai last week. In what should be called a rare glimpse of bearishness - he bet that the US economy is bound to slow down sometime after a 25 year bull market.

Corporate profits as the engine

But this has not changed his faith in the Indian economy. “India has got all ingredients that markets value,” he quipped. In a presentation made to students, he said that corporate earnings will grow at over 18% (faster than unorganized sector) the sustained earnings expansion driven by growth and productivity.

India has a favourable framework for equity investing with high standards of corporate governance, transparency, effective regulation, electronic trading, dematerialisation and tax paradise for equity investing under the STT regime. “Good balance between domestic consumption and global outsourcing opportunities coupled with rising savings, yet low equity ownership offer a significant potential,” said the legendary investor.

Mr Jhunjhunwala also sang an ode to India’s economic resilience by proving that its being a country with least volatile economic growth. He calculates that the difference between the maximum and minimum GDP growth is least as compared to other Asian countries like Taiwan, South Korea, Singapore, Hong Kong and Malaysia.

Indians everywhere?

Mr Jhunjhunwala says that its people are the country’s biggest assets. One of his slides said that 38% of doctors in America are Indians, 12% of Scientists in America are Indians and similar numbers for Nasa, Microsoft and IBM employees are 36%, 34% and 28% respectively.

He sums up by saying that Indian skills and Indian enterprise have now got a global level playing field and a much superior platform than India Inc has ever had before.

A tough period for equities

He, however, also spoke of scenarios under which the Indian economy could lose way temporarily. Slowdown in US economic growth, tanking of global economy, politicians messing up figure prominently this list.

Turmoil in debt markets, rising oil prices, rising interest rates, China slowdown and global currency realignment are some of the other factors. But the impact on India could be lesser as here interest rates may soften and India’s domestic consumption could see it through. Having said that he warns that the next few months will be tough for stocks.


India has now changed from a deficit to surplus economy with emergence of first generation entrepreneurs. The growth in the airlines industry, mobile phone, increases in tax to GDP ratio and changing attitudes where wealth/profit no longer a dirty word, is a tribute to India’s growing prowess.

Grey Market - Take Solutions, Motilal Oswal, Indowin Energy

Grey Market Premiums are coming down, think twice before applying in substandard IPOS

Take Solutions 730 310 to 320

Motilal Oswal 725 to 825 240 to 250

Magnum Venture 27 to 30 3 to 4

Indowind Energy 55 to 65 5 to 7

Puravankara Projects 400 Discount

KPR Mills 225 Discount

Refex 65 5 to 7

Central Bank 102 32 to 33

SEL Manufacture Ltd. 80 to 90 2 to 3

Asian Granito 97 5 to 7

Weekly Watch - Aug 18 2007

Weekly Watch - Aug 18 2007

Divi's Laboratories - Aug 17 2007

Divi's Laboratories - Aug 17 2007

Cement Sector

Cement Sector

Most expensive real estate in the world

The list of cities that top property price chart reads as follows: London, Monaco, New York, Hong Kong, Tokyo, Cannes, St. Tropez, Sydney, Paris and Rome.

As signified by the list, London has emerged as the most expensive real estate market of all with prime property registering a cost of 2,300 pounds per square foot. The increase in the region is believed to be more than 14% on an average in 2006 as compared to 9% rise for the mainstream properties in the market.

It is followed by Monaco with 2,190 pounds per square foot.

Rising property prices in London imply that many people can sell properties here, buy a bigger property overseas and still have a scope for change.

New York comes close to third position with an average rate of 1,600 pounds per square foot. Property prices in this city have soared at an unbelievable rapid pace over the past few years, surpassing many other foreign destinations.

The fourth position has been grabbed by Hong Kong with 1,230 pound square foot.

The data has been showcased by the ‘Wealth Report 2007’ compiled by estate agent Knight Frank and Citi Private Bank. Likewise, it shows similar trends in other 70 locations to come up with the list.

Such a rapid rise in real estate prices has been attributed to a large economic development. The ownership of immovable property is one of the best indicators of wealth. It also makes the space for a stiffer competition to own properties. This trend is estimated to grow over the next 4-5 years.

Signs of cooling down

“Hot money" is one of those phrases that can mean many things. Sometimes it's earnings from illegal activity. It could be counterfeit. Most of the time however, it means cash deployed by traders; heavily leveraged and liable to switch direction at moment's notice. Nobody quite knows how much of the cash in Indian markets is "hot". You cannot get a complete picture. All one can say with confidence is that there is lots of it.

One indicator could be the delivery ratio - that is, the volume of delivery as a percent of the total trading volume. This varies. Delivery ratios range from 5 per cent to over 50 per cent in different stocks.

Obviously all non-delivery trading is done with "hot money". But quite a lot of deliveries are "hot" as well. Some deliveries are on borrowed cash. At other times, delivery is offered by somebody who has borrowed stock. There is no means of checking.

Then again, there are the Foreign Institutional Investors (FIIs). All FIIs take delivery, including the hedge funds and participatory note (PN) players. But the hedge-funds and PNites will exit at a moment's notice. Their cash is borrowed overseas. Nobody has a break up of hot versus "cold" FII funding. The RBI and the Ministry of Finance steadfastly avoids calculating and releasing such details for fear of spooking PN players - not that it would be easy to make such calculations in any event.

Hot money is usually deployed in tandem with the prevailing trend,whatever that may be. It tends to emphasise and underscore directional movements. If the market or given scrip is up, it attracts momentum traders. When they book profits or losses and head for the next fashionable trade that too, lends emphasis to bearishness .

The hot money is obviously exiting Indian stocks at the moment. In fact, it's exiting every global stock market. That's because the hot money depends on leverage and leverage depends on willing lenders. Given a crisis of confidence in US mortgages, lenders are extremely conservative at the moment. They need to know the butchers' bill in US subprimes before they regain a measure of confidence. That means highly-leveraged hot money must cut its exposures.

We saw a similar scenario during the Asian Flu of 1997-98. Last year as well, the crash in the global metals market caused a stampede out of stocks. The good thing about hot money is that it moves fast. We won't know the dimensions of the FII selling until it's actually over but the bulk of exits may be complete by end-August.

We can have an inkling of FII mindsets by examining gross derivative exposures. FII derivative exposures have shot up. They have a vast number of open short positions in stock futures and a very large number of open short positions in index futures as well. In index options, they have bought a massive number of calls. The long calls are presumably hedges against the market jumping. The shorts are Texas Hedges whose positions shot on top of net sales in the spot market, under the assumption that prices will drop because of spot-selling. If that mix of FII exposure changes, either before the August settlement is through, or early into September, there will be reason to believe that all the hot FII money is out.

The stocks that will be hit hardest during this exit-phase will be the F&O group and top-ranked mid caps. These are the counters where FII positions are close to limits. The mid caps are high-beta counters where hedgers have pumped up the prices over the past two years and also neared the FII-limit.

Post-exits, only the "cold" money of non-leveraged, long-term investors will be left in the stock market. The rupee will probably soften quite a lot as FII flows reverse. There is also likely to be a large fall in liquidity across the entire spot and F&O markets. That will retard fast price recovery in most counters. However, there will be little downside left and that is a perfect situation for long-term players.

The stocks that get hit hardest by hot money exits are also some of the best businesses available. Valuations would be very attractive if the Nifty dropped to say, 3500. That would be roughly 25-30 per cent correction. It happened in 2006, it could likely happen again. If you start buying now for the long-term, stagger purchases to ensure averaging down. If you use "hot money" yourself, wait till the FII derivative exposure mix changes and the rupee drops before you go long.

It's time for a pull-back

Bang on target! The BSE index, Sensex, touched a low of 13,780 – the exact level mentioned in this column last week. The index, however, witnessed a sharp pull-back from the level, thanks to renewed buying interest in the market.

If the Sensex is able to hold the 13,780 support this week, the index may attempt to scale the 14,650-level, at least in the immediate future, though there may be some resistance around the gap-down level of 14,585.

On the downside, a break of 13,780-level can spell more trouble for the markets with the possibility of the Sensex crashing down to the 11,800-level in the coming months.

The 13,780-level is important for two reasons — other than being the yearly level, the mark is also the 38 per cent re-tracement of the June quarter index swing (of 2,258 points).

Last week, the index began on a positive note but could only manage to touch a high of 15,070 (22 per cent re-tracement of the previous week). Post-Independence Day holiday, the index opened with a huge negative gap (416 points) at 14,585, and just could not recover as the global markets went into a tailspin. The index tumbled to a low of 13,780, and eventually ended with a loss of almost 5 per cent (727 points) at 14,141.

The NSE index, Nifty, swung in a range of nearly 400 points. The index touched a high of 4394 and a low of 4002 before settling with a loss of 5.2 per cent (225 points) at 4108.

The Nifty may drop to 3950-odd levels in case of fresh selling. This week, the index may find support around 3960-3910-3865, while, on the upside, the index is likely to face resistance around 4255-4305-4350.

Another key factor to watch this week will be the Nifty’s trading close to its 200-DMA (daily moving average), which is placed at 4067. So far this year, the index has managed to bounce thrice from the 200-DMA — in the beginning of March, in mid-March and at the start of April. If the index remains below the 200-DMA for a long period (say more than three days), one may see more pain in the future.

Confident opening likely

The market is likely to open up on Monday, thanks to the positive global cues on Friday. The Dow Jones, Nasdaq and the FTSE were up on Friday when the US Federal Reserve cut its discount rate, or the rate at which it lends to member banks, by 50 basis points to 5.75 per cent.

There was a smart pull-back rally on Friday with the Nifty closing above the 4100 levels after testing the 200-day moving average level of 4050. The BSE Sensex also fell below the 14,000 levels at 13,780 before closing comfortably above the 14,000 levels.

On the upside, the Nifty would face resistance at 4,150 while the Sensex may face resistance at the 14,650 levels. The high implied volatility, which has been there for the last two sessions, indicate caution. The Nifty’s Friday close of 4,100 happens to be a 61.8 per cent retracement of the rally from 3,555 to 4,650.

On Friday, the Nifty settled, creating the Hammer pattern, indicating the possible bottoming out of markets in the short term.

The foreign institutional investors were net sellers in both the cash and index futures to the tune of Rs 12,035 crore. The FIIs were net sellers in the cash segment to the tune of Rs 8,278 crore, while the net selling in F&O was worth Rs 3,737 crore.

The market-wide open interest increased by Rs 5,000 crore to Rs 83,800 crore, with the FIIs’ share at 35.54 per cent. The rise in open interest indicates the creation of fresh short positions.

Indowind Energy : Avoid

Investors can avoid the initial public offer of Indowind Energy, which generates wind power and develops, operates and maintains windmill projects for others. A stiff valuation, absence of a focussed business strategy and governance issues, negate the bright prospects that the wind power business otherwise holds.

At the offer price of Rs 55-65, the price-earnings multiple is at 30-36 times the company’s earnings for the year ended June 2007. Even after considering the company’s 9 MW expansion plan, the valuation is at about 35-40 times on the post-offer equity base. The asking price appears ambitious when compared to the valuations of power generation companies.

The premium enjoyed by Suzlon Energy arises out of its size, more integrated business (manufacturing equipment and developing wind farms) and global presence. We believe that Indowind Energy, with a relatively small turnover (of Rs 24 crore may be unable to deliver earnings commensurate with the valuation it is asking for.
Business and objects of issue

Indowind Wind Energy company has 16.8 MW of installed capacity, the power generated from which is sold to the Tamil Nadu Electricity Board and to some corporates in Karnataka.

The company has also developed 17.9 MW of wind farms for others which it also operates and maintains. Indowind Energy now plans to raise Rs 70-80 crore through this IPO. The proceeds are to be used primarily to set up a 9 MW wind plant in Karnataka, acquire second-hand wind energy generators (WEGs) and foreclose windmill operating leases with Axis Bank and ICICI Bank.
Lacking focus

Indowind Energy appears to lack a focussed business strategy. In the power generation business, it has not had a profitable deal either with the TNEB or with third-parties. While the sale rate with TNEB is lower than that offered by a few other State governments, the sale to corporate clients in Karnataka also appears to be less attractive as the wheeling charges for sale to third parties is higher in the State. Hence, the returns from the power generation segment appear lack-lustre compared to the projects segment.

Despite this experience, the company had again initially planned to set up the new 9 MW plant in Tamil Nadu but later decided to shift the same to Karnataka and sell power to the Bangalore Electricity Supply Company (BESCOM)

This not only resulted in delaying the project but also in the company withdrawing its public offer document on an earlier occasion. That the company is yet to enter into a power purchase agreement with BESCOM (as stated in the offer document) further suggests lack of a planned business approach.

The company has earmarked close to Rs 40 crore for acquiring second-hand WEGs that banks recover from defaulting clients. Windmills, in general, are subject to higher repairs and breakdown. The efficiency of the mills, especially the second-hand ones, remains doubtful, given that they would not have been used after the banks recovered them. This may result in reducing the plant load factor for the company, now at about 23 per cent.

As for foreclosing the operating leases with a couple of banks — neither the company nor the banks have initiated steps for such foreclosure. In this initial stage, it is unclear whether it would be a profitable proposition. The company’s projects division (developing and running wind farms), however, appears to have returned well. If the company is able to focus on this segment, earnings visibility may be higher. However, it may require more skilled manpower than the present 95 (of which 64 are contract labourers).

The company’s corporate promoter, Subuthi Finance (listed in the stock market), has a track record of non-compliance with certain listing requirements. It has also received notices from the RBI for certain irregularities.

Indowind itself has in the past derived a chunk of income from ‘other sources’. While this has gradually declined, the company has stated that it deploys surplus funds for providing loans and earns interest income. This as a poor and risky business practice. The above governance issues do not inspire confidence.

Offer details: The IPO is open from August 21-24. UTI Securities is the book running lead manager. The market capitalisation (on the price band) post listing would be Rs 270-320 crore.

Motilal Oswal Financial Services: Invest at cut-off

Investors can subscribe to the book-built initial public offering from Motilal Oswal Financial Services being made in the price band of Rs 725-825. The company offers a quality exposure to the domestic equity broking and financial services market, which has impressive growth potential.

The asking price for the offer also appears reasonable in the light of the company’s growth prospects and valuations enjoyed by peers such as India Infoline and Geojit Financial Services. At an offer price of Rs 825, the company would be valued at a price-earnings multiple of about 30 times the trailing and 26 times the forward earnings (on a fully diluted equity base). The company’s market capitalisation at this price would be about Rs 2,300 crore.

However, this stock is suitable only for investors with a high-risk appetite. With a high dependence on equity broking, Motilal Oswal’s earnings are inherently cyclical and pegged to the fortunes of the equity markets. Recent global developments may lead to a contraction in valuations for financial services players, which will have a bearing on the response to and post-listing performance of this IPO.

Motilal Oswal Financial Services (MOFS) is a NBFC, deriving its revenues mainly from four subsidiaries that offer stock broking (retail and institutional), commodity broking, venture capital and investment banking services. MOFS’ consolidated operations generated a net profit of Rs.69.5 crore on revenues of Rs.379 crore in 2006-07.

The equity broking business is currently the key revenue driver, accounting for 89 per cent of consolidated revenues. Contributions from the investment banking and venture capital arms, which commenced operations in 2006, are as yet marginal. Proceeds from this offer are to be used mainly to offer margin financing facilities to retail clients, augment working capital needs and purchase office space.

Earnings prospects for the wealth management/equity broking business hinge mainly on the level of trading activity in the stock markets and MOFS’ ability to garner a larger share of transaction volumes amidst competitive pressures. Due to its early mover advantage in the traditional broking business, Motilal Oswal has managed strong growth rates in the wealth management business over the past four years.

While transaction volumes routed through the company in the equities (cash) market have grown at an annualised 93 per cent between FY-03 and FY-07, volumes in the derivatives segment have grown at 235 per cent per annum. Assets managed by its portfolio management services have expanded at an annualised 114 per cent over this period.

Given the very low retail participation in equities in the Indian context, there exists significant potential for expansion in the size of the broking and wealth management pie.

However, the relentless pressure on brokerage commissions due to entry of competitors with deep pockets (read private banks and foreign firms) and the growing popularity of online trading, are key challenges to be managed by traditional brokerages. Motilal Oswal has made a relatively late start in the online trading business (with its initiative) and, today, has a smaller online presence than some of its peers.

However, a healthy ramp up in clients over the past year and a recent strategic alliance with SBI to offer online trading services to the bank’s clients hold promise for an expansion in its online presence. An expansion in margin funding, financed by this offer, could generate additional revenue streams by way of interest receipts.

MOFS’ research strengths (a 34-member equity/commodity analyst team) and its extensive geographical reach covering 1200 locations in 377 cities, which enables it to tap into under-serviced markets, are key advantages over some of the company’s peers in the listed space.

The potential for expansion in MOFS’ earnings from its non-broking businesses is also substantial. The company’s large retail (2.43 lakh clients as of March) and institutional (251) client base offer considerable opportunities for cross-selling of products and services.

Businesses such as portfolio management and advisory services and distribution of third-party mutual funds/insurance are highly scalable and offer scope for substantial earnings growth at relatively small additional investments in infrastructure.

Offer details: Motilal Oswal Financial Services is offering 29.8 lakh shares (face value of Rs 5) at a price band of Rs 725-825. Citigroup Global Markets is the lead manager to the offer.

Zen and the trader

We recently met a very successful trader. In his office hung a Zen Koan “Do not just do something. Sit there”. If you are unfamiliar with a Zen Koan, it is a paradoxical statement that is meant to push the Zen disciple beyond everyday reality and to open his or her mind. The trader, a Zen follower, attributed his success to the Koan that hung in his office. There is, indeed, a message in that Zen Koan for anybody wanting to become a successful trader. What is it?

We always continually trade in the market. If you are a confused trader, you may choose to buy shares for intra-day trading. Usually, the stock fails to move up on the day that you buy them! So, you decide to hold it for another day. And the process continues the next day and the day after. Everyday, you buy shares, hoping to sell them at a higher price sometime in the future. Soon, you are saddled with a 30-50 stock portfolio. Have you experienced such behaviour?
Breaking habit

If so, you are not alone in the market. Most of us tend to over-trade. The reason we do that is because we are continually chasing profits. Some of us do out of compulsive habit. If you are heavy smoker, you will know how difficult it is to break such habit. The Zen Koan is a remainder about our shortcoming. As Zen Koan states, not doing anything in the market is sometimes more profitable!

The trader we met adopts a simple approach to get over the urge to over-trade. He takes positions intra-day, 5-10 days and 1- 3 months. Since he is busy buying in one time-horizon and selling in another, he does not feel the urge to chase profits. Importantly, he does not take any position unless the upside is at least three times more than the stop-loss level.

Next time you have the urge to trade, think about the trader and the Zen Koan that hangs in his office.

Trader's Corner

The stock markets have an undeniable influence on the thoughts of the men/women related to it. Traders and full-time investors can think of little else in their waking moments, and in their sleep too. The fascination that the bourses hold for the observers who stand on the periphery, is no less.

They see the movement of the stocks emulated all around them. Elliott waxed eloquent about the similarity in the patterns of stock markets to the movement of the planets in the solar system. Benoit Mandelbrot, who is also known as the father of fractal geometry likened markets to oceans when he recently said that "markets, like oceans have turbulence’.

This opinion has already been voiced by Charles Dow almost a century ago. His famous article in the Wall Street Journal on 1901 in which he used the example of tides in the ocean to explain the trend reversal process in stock markets is truly unmatched to this day.

To the uninitiated, his words ran thus, “A person watching the tide coming in and who wishes to know the spot which marks the high tide, sets a stick in the sand at the points reached by the incoming waves until the stick reaches a position to where the waves do not come up to it, and finally recede enough to show that the tide has turned. This method holds good in watching and determining the flood tide of the stock market. The average (of stock prices) is the peg, which marks the height of the waves. The price-waves, like those of the sea, do not recede all at once from the top. The force, which moves them checks the inflow gradually, and time elapses before it can be told with certainty whether high tide has been seen or not.” Dow’s method of determining a market top should be used on front-line indices. As per this theory, the long-term bull market will stay intact as long as the indices keep making a new high every few months. But there will come a time when the indices will struggle to record a new high even though the level of optimism remains high. That should alert an analyst regarding an impending bull-market top.

CMC: Hold

Shareholders can continue to hold the CMC stock (Rs 1,020) considering the possible gains it may offer over a one-to-two-year period on the back of reasonable growth prospects. With significant fall in technology stocks recently, any weakness in CMC’s price can be used to consider fresh exposures.

The stock trades at 20 times its trailing 12 -month earnings on the current equity base. This is at a premium to its peer, HCL Infosystems, but CMC’s operating profit margin of 11 per cent is significantly higher than the former. This may indicate better cost-management and operating efficiency. It also shows that the company’s dependence on low-margin equipment sales is decreasing and the services contribution to revenues is on an uptrend.

CMC is an IT solutions company and manages turnkey projects by providing solutions and services across the entire gamut of infrastructure components — computers, servers, routers and systems and application software. Its customer services and system integration SBUs (strategic business units) handle most of these activities and are also the highest revenue contributors (85 per cent of revenues).

CMC also, has an ITES division, which handles back-office processes, call-centre services and an education and training division, which provides IT education services to college graduates and corporates.
Business Analysis

Solid Partnership: CMC has been able to partner with some of the finest names in the IT space — Microsoft, IBM, Cisco, HP, Sun Microsystems and Oracle. This has helped it gain expertise over a wide range of IT products and servic es enabling it to serve as a value-adding entity for clientele with diverse requirements. This association has also helped CMC secure more business, in addition to client mining from its US subsidiary.

Strong client base: The company has, over the years, been increasingly engaging itself in turnkey projects rather than in small projects. It has won large-sized deals, some on its own, others in partnership with Tata Consultancy Servi ces.

Providing the entire spectrum of IT services not only ensures revenues upon completion of a project, but also locks in future revenue streams by way of services such as maintenance and support. Another favourable factor for the company is that it has been able to tap big public sector undertakings (PSU) as clients, helped by its previous status as a PSU . Indian Railways, ONGC, GAIL, IOC are some of CMC’s clients. Increasing IT spends by the government is likely to translate into business opportunities for CMC. It has significant private sector clientele as well; thus ensuring a healthy mix of PSU and private sector clients.
broad-basing offerings

The company is increasing its focus on education and training business. CMC has been able to tailor its programs to corporate needs and has gained significant presence in the IT education space, partly due to its own expertise developed over the years and partly due to synergies created by the TCS association.

The company is working out an interesting business model with Reliance Money as a client, wherein the latter would be allowed to open outlets at CMC’s franchisee units. Here, CMC would handle the IT infrastructure and management and provide education and training services to Reliance Money’s personnel at these outlets.

This would provide it with twin revenue streams from IT infrastructure support and training services. CMC’s ITES revenues have also grown significantly with an increasing overseas client base. It appears well-placed to provide technical support services through its call-centre units. Both are relatively high-margin services and higher growth and contribution to revenues from these services could augur well for earnings.

With prominent PSUs in its client base, CMC’s debt recovery cycle tends to be long and may expand its working-capital requirements. The company’s increasing overseas client base also exposes it to currency appreciation risks.

These are key realisation risks. Wage increases, estimated to be about 10 per cent annually, may also affect margins. Finally, competition from other players such as Wipro Infotech, HCL Infosystems and Datacraft are also potential challenges.

Power Finance Corporation: Buy

Investors can consider buying the Power Finance Corporation (PFC) stock at the current price of Rs 175 with a two-three-year investment horizon.

PFC had an exceedingly good first quarter ended June and appears set for exciting times ahead with huge investments projected to be made in the power sector in the next five years.

A strong balance-sheet with almost nil non-performing assets (NPA), focussed business model and lean cost-structure, lend confidence in the company. The stock has more than doubled from its February IPO price of Rs 85 and has risen by 68 per cent from its listing price of Rs 104.
Unique player

PFC is a unique player in the finance sector that specialises in lending to power projects and also offers non-fund-based services. The company mainly lends to thermal and hydel power generation and transmission and distribution projects. It also has a minor exposure to renovation and modernisation projects of existing power stations.

Its borrowers are predominantly State electricity boards and public electricity utilities; it has a minor portfolio of private borrowers who account for 8.4 per cent of gross outstanding loans.

The company is also the lead agency promoting the government’s ambitious ultra mega power projects (UMPP) where it is responsible for securing appropriate clearances to enable the successful bidders to implement their projects.

The positive offshoot of this is a fee for the services that it renders and the possibility of securing business from the UMPP players.
Strong financials

Despite being a lender to some of the most problematic borrowers in the country — state electricity utilities — PFC boasts of a strong balance-sheet with NPAs almost non-existent. The company employs different methods to ensure prompt repayment from borrowers such as a rebate for on-time repayment and an escrow mechanism to protect itself from potential default.

PFC also directly pays the suppliers of its borrowers rather than route the money through the latter. This ensures that the loan is used for the stated purpose of asset creation and is not used by the borrower for other purposes.

The company also closely monitors the financial health of its state-sector borrowers and has the ultimate option of the State government guarantee to encash if the borrowing utility defaults.

All these have helped reduce NPAs to 0.6 per cent of gross outstanding loans of Rs 45,200 crore in the first quarter. This is lower than the 0.10 per cent recorded in 2006-07. PFC is not required to follow RBI norms in this respect and, as per its own prudential norms, any loan where instalment and/or interest remain due for over six months is classified as an NPA.

The company has done extremely well to beef up its net interest margin (a measure of profitability for those in the financing business) at a time of great volatility in interest rates during the first quarter of this fiscal. Net interest margin, at 3.67 per cent during the first quarter, was 0.36 percentage points higher than the same period last year.

Similarly, the spread between borrowing and lending costs has also been widening; it was 1.93 percentage points in the first quarter against 1.71 per cent in the same period last year.

A substantial quantum of PFC’s loan assets is scheduled to come up for interest rate reset in the next couple of quarters and this is likely to increase the spread as also the net interest margin.

Presently, 61 per cent of PFC’s loan assets are subject to reset clause while 34 per cent is on fixed rate basis and a very minor 1.3 per cent is on floating basis.

Net interest income rose by 38 per cent during the first quarter to Rs 414.7 crore while disbursements were higher by 13 per cent at Rs 3,215 crore.
Growth acceleration

The Eleventh Plan envisages a capacity addition of over 68,000 MW from the central, state and private sectors by 2012.

Given the past, this may appear an ambitious figure but it looks attainable because projects adding up to about 31,000 MW are under construction.

Funding for these projects under construction is already tied up but PFC can hope to garner a slice of the remaining 37,000 MW of projects that have been committed. These would require about Rs 1,45,000 crore and those implementing them need to tie up the funds in the next few months.

Even a small slice of this would cause a substantial addition in its loan assets; PFC though, is hoping to fund about 20-25 per cent of this huge fund requirement.

The challenge will be in accessing funds at cheap rates especially because of the new RBI norms that curb banks from lending to non-banking finance companies more than 15 per cent of their (the bank) capital.

Term loans from banks account for almost half of PFC’s rupee borrowings and the new guideline could force the company to borrow from higher-cost sources. In the medium-term, this could cause a compression of spreads, especially if PFC is unable to on-lend at higher rates. This apart, the dependence on a single sector for business causes a concentration risk for the company but what lends confidence is the huge investment that is projected to be made in the power sector and the opportunity arising for PFC from that.

Investors can buy the stock with a medium-term perspective.