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Sunday, September 09, 2007

Market to witness volatility

Investors on Dalal Street may see volatility in the week ahead and will wait for cues from the US markets, which might get a booster doze in the form of interest rate cut from the Federal Reserve, analysts said.

The benchmark BSE Sensex lost 168 points in the past week at 15,590.42 points on Friday. Meanwhile, US benchmark index Dow Jones Industrial Average (DJIA) fell nearly 250 points to end at 13,113.38 points, while Nasdaq-100 also closed down 49 points at 2,565.70 points.

The US markets had declined after the jobs data came in far worse than expected, threating to throw the economy into a recession. American employers dismissed 4,000 workers last month, marking a sharp change of direction from the 68,000 jobs that had been created in July.

In a research note, global financial services major Citigroup expects US Federal Reserve to lower interest rates by 75 basis points before the end of the year, with the first cut coming on or even before the scheduled meeting of Federal Open Market Committee on September 18.

"Our global strategists have concluded that Fed cuts should be supportive for equities performance, with non-US markets outperforming... Instances of Fed rate cuts have been meaningfully positive for Indian equities as well, especially on 12-24 month time horizons," Citigroup analyst Ratnesh Kumar said in the India Equity Strategy report.

Even in an extremely pessimistic scenario of a recession in the US, massive rupee appreciation and sharp slowdown in domestic growth, Citigroup does not see an earning collapse in India, "due to strong and broad-based growth momentum in the Indian economy".

Besides, Foreign Institutional Investors again embarked on a buying spree in the equities market in September after a month of net sale in August. In the first week of September, FIIs purchased equities worth Rs 2,869 crore and Rs 752 crore in the debt markets.

"The trend taken by the FIIs in the coming week could be crucial for the direction market takes," an analyst said.

Domestic mutual funds were also net buyers worth Rs 353.80 crore in equity market during four trading sessions from September 3 to September 6.

The markets would also be watching the outcome of the negotiations between the UPA government and its Left allies on the Indo-US nuclear deal.

Top Picks - September 2007

Top Picks - September 2007

Power Grid IPO - Apply or Not ?

Power Grid IPO - Apply or Not ?

Index Outlook

Sensex (15590.4)

The Sensex edged higher last week. But the conviction witnessed in the previous week was missing from our markets. The consensus is veering towards the need for a pause before we move higher. Most pivotals meandered sideways in a clueless fashion making the attention shift to small-cap and mid-cap stocks.

The laboured moves made by the Sensex last week has resulted in the deterioration of the short-term momentum. Weekly momentum indicators are, however, still signalling a buy. Another positive factor is that the Sensex is holding above the 50-day moving average line positioned at 15058.

As per e-wave counts, the movement of the Sensex last week is a running correction with another brief spurt upward to 15868 or 15950 in the offing. But the target for the move from 13780 trough, fall at either 15721, 15950 or 16215. Since the first target has already been achieved, investors should brace themselves to face another dip soon. As explained last week, the confluence of intermediate and medium term targets around the 16000 level should make investors wary as the index nears this mark. A reversal from this level can make the Sensex move back to test its August lows.

The Sensex is expected to move lower to 15296 and then 15035 in the week ahead. Fresh purchases should be avoided if the Sensex closes below 15000 as that would usher in a fall to 14500. Resistances for the week ahead would be at 15868 and then 15950.

The short-term outlook for the Sensex stays positive as long as it remains above 15000. But the presence of strong resistance zone just 400 points away, calls for a cautious approach at this juncture. Chart patterns in other global indices indicate that the third leg of the correction from the July highs could have commenced last week.

Nifty (4509.5)

Nifty reversed from our near-term target at 4553 last week. But the selling pressure encountered near intra-day highs is a negative sign. The Nifty can begin the week on a choppy note with a dip to 4429 or 4350.

There is a strong support band between 4350 and 4397 where short-term traders can look out for buying opportunity. However, fresh longs should be avoided below 4350 as the index would then crumble to 4215.

The resistance levels for the week would be 4564 and then 4635. As explained last week, the zone between 4650 and 4750 is an important level from the long-term perspective. Those holding long positions can book some profits in this band.

Global Cues

Friday’s set-back confirms that the recovery in global indices is nothing but a pull back in a bear phase. DJIA reversed from 13515. The next support for this index is at 12960. A fall below will drag the index below the recent trough at 12560. Asian markets were straining to hold higher levels. European markets have entered in to a medium term down trend once more. The CBOE VIX indicator that measures investor’s sentiment rose above 26 on Friday, indicating that investors are getting nervous again.

Nymex crude prices hit an intra week high at $77.4. Since the current rally is the fifth wave from the January low of $49.9, the short-term targets are $79.6 and $84.4.

Power Grid Corporation IPO

The grey market is offering a premium of Rs11-12 on the Power Grid Corp. of India Ltd’s IPO opening on Monday, in the price band of Rs 44–52.

That’s a decent premium on the price and reflects the quality of the issue. Power Grid Corp. has a monopoly of the power transmission business and transmits almost half the power generated in the country. It has an excellent track record and also owns a telecom backbone. So why isn’t the grey market premium higher? That’s probably because it is in a business where the returns are regulated.

According to current rules, the company is assured a 14% return on equity. But, that’s a feature that also makes it a low-risk investment, ideally suited to be a defensive stock in one’s portfolio, since the major risks are all pass-through items for the company.

In addition, in a rapidly developing country like India, power transmission could actually be a very rapidly growing business. That’s because the government seems to be serious about doing something about the power deficit in the 11th Plan (2007-12), as seen from the bulging order books of the power equipment manufacturers.
Under the Plan, the capacity of the national grid is being increased from 14,100MW to 37,150MW.

Power Grid plans to spend Rs55,000 crore in the 11th Plan towards investment in transmission projects. The rapid acceleration in capacity creation is important because when returns are assured, one obvious way to increase profits is to increase capital expenditure (capex). The company has commissioned transmission assets worth Rs2,490 crore in the first quarter of fiscal 2008 and four more projects are likely to be completed this fiscal, which would drive earnings in the short term. As the assured return on equity kicks in only after completion of a project, it’s important to have projects being completed at regular intervals.

The icing on the cake will be provided by the company’s telecom backbone, which has started to make profits from the first quarter of fiscal 2008. The company has been providing bandwidth to all the telecommunications operators on its 19,000-km network, which connects more than 60 cities.
The issue is priced at 16.9 times diluted earnings per share for fiscal 2007 at the lower end of its price band and at 20 times earnings per share (EPS) at the higher end. The upper end of the band is the valuation that NTPC gets. But, while the issue isn’t cheap, institutional investors are likely to lap it up as yet another way to get exposure to India’s infrastructure story. For retail investors, the grey market premium says it all.

Weekly Technical Analysis

The markets notched up steady gains last week. The benchmark BSE Sensex ended with a gain of 272 points at 15,590.

The index moved in a near 400-pts range during the week, from a low of 15,323 to a high of 15,716.

Though the bias seems positive, the markets may see some profit-taking at current levels as the index nears a new high.

The support levels of 14,650-14,935 mentioned last week will continue to remain crucial for the current upmove.
The index may face a resistance around 15,740-15,785-15,835, while on the downside, it is likely to find support around 15,440-15,395-15,345.

The NSE Nifty moved in a rather narrow range of 100-odd points, touching a low of 4445 and a high of 4548 before settling with a gain of 46 points at 4510.

The Nifty may find support around 4470-4455-4445 and resistance around 4550-4560-4575.

As long as the Nifty holds the support zone of 4260-4315, the bias will remain positive and the index may test new highs in the near term.

The mid-term (50-days) moving average for Nifty is currently at 4395 and the short-term (20 days) moving average is at 4321. The long-term (200-days) moving average is at 4106.

More money in emerging markets

All of the major equity and bond fund groups tracked by EPFR Global and geared primarily to developed markets posted net outflows in the week through September 5, as investors put their faith in cash and emerging markets.

They were especially comfortable with emerging Asian markets, committing $731 million to China, Greater China and Hong Kong Country Funds as part of $1.25 billion worth of flows into Asia ex-Japan Equity Funds.

Asia ex-Japan Funds have been this year’s best performers. According to EPFR Global, they have posted a collective year-to-date gain of 30.7% versus 6.3% for Global Equity Funds and a 5.4% loss for Japan Equity Funds. The $1.25 billion absorbed by Asia ex-Japan Funds was the sixth time in the past 10 weeks that they have posted net inflows in excess of $1 billion, and it brought the year-to-date total up to $4.74 billion.

Flows this week were helped by the greater freedom granted to Chinese investors, with foreign money flowing to markets such as Hong Kong that are expected to benefit. However, it is still well off last year’s pace, when these funds ended the year with net inflows of $16.7 billion.

Meanwhile, Global and US Bond Funds and US, Japan, Europe, Global and Pacific Equity Funds posted collective outflows of $8.11 billion with two thirds of that total coming from US Equity Funds.

“I think this is proof, if it was needed, that investors and fund managers are now judging emerging markets on their own merits rather than seeing them as a tail wagged by the US and Eurozone economies,” said EPFR Global Managing Director Brad Durham. “In addition to the fact these markets are now getting some of the safe-haven flows, we’re seeing a shift to quality within the asset class. And that quality, as far as investors are concerned, is in Asia.”

Optimism about emerging Asia’s prospects again translated into strong commodity prices and fresh inflows into Latin America Equity Funds. Year-to-date flows into these funds are now double last year’s total, although their performance gain of 26.4% lags the 46.5% these funds posted for all of 2006.

Among the fund groups geared to developed markets Japan Equity Funds suffered the biggest outflows when measured as a percentage of assets under management. The $445 million redeemed by investors brought year-to-date outflows up to $9.67 billion, compared to outflows of just $250 million last year and inflows of $13 billion in 2005.

Weak business investment figures and fears that a stronger yen will hobble the key export sector are but some reasons that investors refuse to buy into Japan’s slow but steady GDP growth.

Elsewhere, the diversified Global Emerging Markets (GEM) and EMEA Equity Funds both posted modest inflows for the week. The EMEA funds remain the worst performers, in both performance and flow terms, year-to-date among the fund groups geared to emerging markets.

This is largely due to the concentration of countries with large current account deficits - Hungary, South Africa, Turkey and Egypt - within this region and the fact that a string of investor-unfriendly actions has undercut sentiment towards Russia despite its huge oil and foreign exchange reserves.

The other diversified fund groups focusing mainly on developed markets, Global Equity Funds and Europe Equity Funds, also posted modest outflows as investors waited to see what the European Central Bank would do at its September 6 policy meeting. The Eurozone’s central bank left its key rating on hold, which could prompt investors to view some of the regions’ equities as oversold.

Investors in the US, meanwhile, continue to anticipate a rate cut before the end of the year — hence the paradox that, while investors continue to pull money out of US Equity Funds, the Growth oriented funds outperformed their Value counterparts across all capitalisations (large cap, mid cap, and small cap) for the seventh time in the past eight weeks.

That counterintuitive growth theme is also evident at the sector level, where Global Technology Sector Funds took in $213.9 million, the 10th time in the past 11 weeks they have absorbed fresh money. But fears about a credit squeeze battered Real Estate and Utilities Sector Funds again, with investors removing $310 million and $453 million respectively.

Energy Sector Funds were the week’s big winners as US inventories shrunk and rising tensions in the Middle East pushed oil prices close to their record highs. These funds absorbed a net $880 million.

Markets to sink ?

Friday’s news of a buckling US job market sent stock investors running for the exits, and next week promises to be no less stressful as investors grapple with the increasing possibility of an economic recession. The weekend will also give investors time to reflect on news US employers cut payrolls by 4,000 jobs last month.

However, it is unlikely that there will be much clarity ahead of the anxiously-awaited Federal Reserve interest rate decision the following week, as investors debate whether and by how much the Fed will cut key interest rates. “The pendulum is going to swing between the euphoria — we’re going to get a rate cut, things are not that bad — to the world is going to end, we’re going into a recession,” said John Praveen, chief investment strategist at Prudential International Investments Advisers LLC in Newark, New Jersey.

The Dow Jones industrial average fell 249.97 points, or 1.87 percent, to end at 13,113.38. The Standard & Poor’s 500 Index was down 25.00 points, or 1.69 percent, at 1,453.55. The Nasdaq Composite Index was down 48.62 points, or 1.86 percent, at 2,565.70.

The Dow was down 1.8 percent for the week, while the S&P 500 was down 1.4% and the Nasdaq was down 1.2%. For the S&P, it was the worst week since the beginning of August, while the Dow had its worst week since the week ending July 29. Fresh economic data will be studied warily for more signs the housing slump and subprime mess is spreading into other sectors of the economy.

“People will be nervous about all economic releases, because Friday’s jobs number showed that perhaps things are getting worse quicker than the market had previously believed,” said Eric Kuby, chief investment officer, North Star Investment Management Corp. in Chicago.

The sixth anniversary of the Sept. 11 attacks may also trigger some market unease, especially after al Qaeda leader Osama bin Laden said in a video seen by Reuters on Friday that the United States was vulnerable despite its military and economic power.

Trading volume, which has suffered from summer vacation-induced thinness in recent weeks, will likely jump as market participants return to their desks. Defensive stocks are expected to benefit as investors rejig their portfolios on the mounting evidence of a slowdown, analysts said.

“As people return they are going to be shifting to recession-resistant names such as health care, defence contractors and consumer staples,” said Thomas Nyheim, vice president at Christiana Bank & Trust in Greenville, Delaware. Among the economic data likely to garner market attention are initial jobless claims, consumer confidence, retail sales and industrial production.

As Federal Reserve Chairman Ben Bernanke said in a speech last week in Jackson Hole, Wyoming: “We will pay particularly close attention to the timeliest indicators.” Weekly jobless claims data, due on Thursday, could be more significant than usual as investors look for clues on whether the weak employment trend is here to stay.

And if Friday’s industrial production numbers come in lower and add to recession fears, Wall Street could see another negative turn, said Christiana’s Nyheim.

Dhanus Technologies (IPO): Avoid

Investors can stay away from the Initial public offer of Dhanus Technologies (Dhanus), given the high competition in its business segments and relatively high execution risks.

At the upper end of the price band (Rs 295), the offer values the company at about 17 times its trailing 12 month earnings, without factoring in the equity dilution due to the offer.

This appears stiff in comparison to stocks of smaller telecom and software services as well as large hardware companies.

At the higher end of the price band, the company will raise Rs 113 crore from the offer to finance fresh equipment for its fleet tracking business and augment infrastructure facilities in its IT and BPO divisions.

Business outlook

Calling cards division: The key revenue driver (55 per cent of revenues), this business involves reselling talk-time of international telecom operators under the company’s own brand name to Indians residing or travelling abroad. Internationally, the MVNO (mobile virtual network operator) business is dominated by companies that enjoy strong brand equity in another line of business. which they leverage in this business (egs: Virgin Mobile and Disney Mobile). Dhanus does not have comparable brand value that could be successfully leveraged.

The competition in this space is already stiff, with Bharti Airtel, Reliance Communications and VSNL aggressively promoting their international calling cards overseas, imposing margin pressures that the company may not be able to withstand in the long run.

Moreover, Dhanus’ service cannot be used with mobile telephones, giving it little uniqueness or competitive advantage. The major players in this business, which have substantial network management experience and tie-ups with international telecom operators, may be much better placed to tap this market.

There could also be legal hurdles for this leg of Dhanus’ business, as the offer document mentions that it does not possess a ‘no objection certificate’ (NOC) from the Department of Telecommunications for selling international cards in India.

Fleet Tracking: A substantial portion of the issue proceeds has been earmarked for expanding the company’s products which help track vehicle (fleet) movements. A report published last year by Frost and Sullivan has estimated the market size for fleet tracking to be $75 million by 2011; it was only $6.5 million as of 2005. This indicates that the market in India is small compared to the US where vehicle tracking is widely adopted by companies.

In the Indian context, the government is emerging as a key user of such services and is touting GPS systems for trains, local buses and even post-office vans. Players such as CMC, which have an existing relationship with government clientele, or HCL Infosystems, appear well-placed to cater to this market. Ramping up this service would involve tie-ups with VSAT (very small aperture terminal) players for provision of satellite bandwidth. The bandwidth is stiffly priced and given the expenditure it would entail, Dhanus may be forced to work with thin margins.

BPO and IT services: The company provides BPO services such as telemarketing and customer services to overseas clients. It also provides software services in the telecom segment.

Given the company’s limited experience in running a telecom network and providing software services, this division’s prospects are uncertain. Scaling up of the business may not happen at the requisite pace. Exposure to the North American market would expose the company to rupee appreciation risks. Other factors such as attrition and wage inflation also pose key execution risks.

Considering the above factors, it appears that the execution and competitive risks associated with the business are relatively high; risk-averse investors can avoid the offer.

Offer details: The offer is open from September 10-12.

Kaveri Seeds (IPO): Invest at Cut-off

Investors with a high-risk appetite can subscribe to the Initial Public Offering from Kaveri Seed Company, a producer of hybrid seeds. Long presence in the Indian market, a healthy product pipeline focussed on cash crops such as corn and sunflower and attractive growth prospects for the hybrid seeds business make this offer a reasonable investment.

However, the relatively stiff pricing and the possibility of cyclical and seasonal blips in earnings, suggest that the investment be considered only by those with a high risk appetite.

The offer is being made in the price band of Rs 150-170. At Rs 170, the offer price would discount the company’s foward earnings (estimated FY-08) by about 16 times, on the post-offer equity base. Though the company may be able to deliver to the growth expectations reflected in these valuations, the pricing appears expensive in relation to listed players in the agri-inputs space. This may cap short term gains in the stock, especially under current market conditions.

Seeds market

The Indian market for hybrid seeds has seen annual growth rate of 12-15 per cent. Certain segments have grown at a faster clip, as good yield performance from certain hybrids and the rising prices for commercial crops have contributed to rapid adoption of hybrid seeds.

The acreage under Bt Cotton, a bollworm-resistant genetically modified seed has, for instance, risen from 6 to 39 per cent of the total planted area over the past three years.

Adoption of hybrids has also been high in the case of corn at about 40 per cent of planted area. While hybrid seeds have made significant inroads into the southern states, there exists potential for penetration of the northern markets. The attractive growth potential has, in fact, prompted multinationals such as Monsanto and Syngenta to enter the domestic seeds business.

The seeds business however, carries fairly high entry barriers and therefore supports relatively few established players. Apart from R&D capabilities, production of hybrid seeds calls for access to proprietary germplasm (the genetic feedstock for creating hybrid seeds) with the required traits (qualities such as higher yields, pest resistance and drought tolerance ).

Development of each hybrid strain also requires a fairly long gestation period, usually 4 to 6 years. Hybrid strains with desirable traits command a significant pricing premium in the market.

Product pipeline

Kaveri Seeds, has a healthy product pipeline, with 40 certified hybrids in its portfolio and a few more paddy and horticultural strains under development. Kaveri’s portfolio is now tilted towards corn and sunflower hybrids, some of which command prices that are on par with the brands sold by multinational competitors.

Demand prospects for both these crops appear bright given the growing domestic deficit in sunflower oil, rising demand for corn from the biofuel and food industries and the firm price outlook for both agro products.

Supplementing its portfolio, Kaveri Seeds also has sub-licensing arrangements with Mahyco Monsanto Biotech and JK Agrigenetics for insect-resistant cottonseeds; commercial launch of its Bt cotton strain, Encounter, is slated for later this year.

The company has an established dealer network in Karnataka, Tamil Nadu, Maharashtra and Andhra Pradesh, but is attempting to expand into the northern and western markets which are under-penetrated.

The company’s net sales have witnessed a significant increase from Rs 39 crore to Rs 66 crore over the past four years; profits rose from less than Rs 1 crore to Rs 10.5 crore over the same period.

A ramp up in operating profit margins (due to product launches and backward integration into foundation seeds) and the merger of a group company have both contributed to a sharp improvement in financials.

Recent numbers may be more indicative of sustainable earnings prospects for the company. The company’s per share earnings for FY-07 stood at Rs 10.85 on the pre-offer equity base and at Rs 7.7 adjusted for the offer.

Offer details: The offer, which seeks to raise Rs 60-68 crore at the two ends of the price band, will mainly fund acquisition of farmland for seed research and production, setting up of marketing offices and expansion of seed proce ssing facilities. It closes on September 11.

Power Grid Corporation — IPO: Invest at Cut-off

Investors can subscribe to Power Grid Corporation of India Ltd.’s (PGCIL) IPO at the cut-off price. The company is a near monopoly in the inter-regional and inter-state power transmission business where earnings visibility is high and operational risks are low. PGCIL is investing in trebling inter-regional transmission capacity over the next five years and is responsible for the planning and development of the nation-wide power transmission network.

Serious competition from the private sector appears unlikely for now and PGCIL’s growth can be constrained only by its own capacity to invest. With large generation projects set to come up in different corners of the country, PGCIL will have enough projects on hand to drive revenue and earnings in the medium term.

That said, investors need to be aware of the large regulatory risk that PGCIL is subject to. Its revenues are subject to the Central Electricity Regulatory Commission’s (CERC) tariff orders which spell out the return on equity eligibility apart from listing out the expenses that it can pass on to customers.

The offer price band of Rs 44-52 per share is at a price earnings multiple of 15-18 based on fully diluted 2006-07 earnings. There is no comparative play in the market now but on qualitative factors alone, the price appears to be reasonable.

Transmission leadership

PGCIL transmits about 45 per cent of all power generated in the country. It runs the backbone transmission network for inter-regional and inter-state transfer of power from surplus to deficit regions. It also evacuates power from the generation stations and on to consumption centres for inter-state power projects. PGCIL is also responsible for the overall national grid management through the five regional load despatch centres it operates. It is in the process of setting up a National Load Despatch Centre that will coordinate the country-wide movement of power.

Inter-regional transmission capacity is projected to almost treble from 14,100 MW now to 37,150 MW in the next five years and PGCIL will be responsible for most, if not all, of the increase. It has budgeted for a capital expenditure of Rs 55,000 crore for this purpose. PGCIL is also likely to bag the rights to install transmission systems for the two ultra mega power projects of 4,000 MW each that are now in the process of implementation. It already has 45 transmission projects in various stages of implementation.

The CERC’s tariff order, which governs the revenues and earnings, also sets out incentives for keeping the transmission system “available” beyond a certain limit. Presently, PGCIL is eligible for incentives in its tariff if its alternating current system is available 98 per cent of the time and the high voltage direct current system 95 per cent of the time. Given its efficient operations, the company has earned such incentives for the last five years consistently.

Telecom and consultancy

PGCIL owns and operates a fibre optic cable network that connects about 60 cities using its overhead transmission infrastructure. The company sells bandwidth to those such as Bharti Airtel, BSNL, VSNL and Reliance Communications. The business is still small accounting for just about 2 per cent of the total income and was not profitable till 2006-07. The first quarter of this fiscal, however, saw the division post a small profit.

PGCIL also offers transmission consultancy and the income from this business was Rs 226 crore last fiscal, accounting for about 6 per cent of total income.

What we like

PGCIL is an effective monopoly in the inter-regional transmission space; though private players could enter the business, they are unlikely to dent the company’s prospects significantly. PGCIL’s valuable in-house design an d engineering expertise is a major competitive asset.

The company has been proactive in its business especially in forging tie-ups with private players. The joint venture with the Tatas for the Tata transmission infrastructure and the ones forged with the Torrent and Jaiprakash groups for evacuating power from specific generation projects are examples. PGCIL is also forming an equal joint venture with Infrastructure Leasing and Financial Services for development of transmission and sub-transmission projects at the State level and outside the country.

PGCIL’s hig h operating efficiency as proven by its system availability of over 99 per cent for the last five years allows it to earn valuable additional incentive income.

Though its leverage is on the high side at 1.81:1, the company’s financials appear sound. Interest costs are passed through to customers and, therefore, higher debt does not impact the bottomline.

The company’s plans to diversify its revenue stream by focussing on consultancy, telecom and power distribution business under the Central government-sponsored schemes augur well. PGCIL is also in the fray for the privatisation o f the National Transmission Corporation of the Philippines.

What to watch out for

The biggest concern is regulatory overhang over the business. The current tariff order of CERC ends in 2009 and there is a strong possibility of the regulator marking down the 14 per cent return on equity in the new order due then. Thi s could have revenue implications for PGCIL.

PGCIL may soon have to shift to competitive bidding mode for new projects. The CERC has been empowered to direct competitive bidding whenever it feels the ground is prepared for competition; at the latest, competitive bidding should be a reality by 2011, going by the government’s time-frame. Competitors could enter the fray once the new system is in place and PGCIL will have to change its strategies accordingly. The company’s experience and size could be formidable assets here though.

The growth prospects could be tempered by the ability to garner funds for expansion. The 70:30 debt:equity norm laid down by the CERC for funding new projects means that the company will have to leverage itself significantly over the p resent 1.81:1. The company may have to guard against leveraging beyond prudent levels.

The government, as the majority shareholder, plays a significant role in the company’s fortunes. Post-IPO, it will hold 86 per cent of the equity.

Given the experience with other listed public sector companies where the government has dabbled in business, this is a matter of concern.

Offer details

PGCIL is offering 57.39 crore shares at a price of between Rs 44 and Rs 52. The offer, which seeks to raise between Rs 2525 – 2984 crore, opens on September 10 and closes on 13 and is lead managed by Kotak Mahindra Capital.

Average Directional Index indicator

There are many among the investing fraternity who abhor stocks that meander sideways and tend to gravitate towards stocks that are trending upwards or downwards. Traders of course prefer momentum as it helps them to churn their positions faster.

One easy way of picking stocks that are in a strong up or down trend and not in a consolidation phase, is with the use of the Average Directional Index (ADX) indicator. The ADX line is plotted along with two other lines, the +DI and the –DI. The +DI line is the positive directional index and is derived by dividing the range of highs over a period by the price range over the last trading day and the previous close, smoothed over a given number of periods. For calculating the –DI the range of lows is switched with the range of the highs. ADX is the modified moving average of the difference of +DI and the –DI divided by the sum of +DI and –DI multiplied by 100.

There is no need for you to do these calculations manually since most technical software provide the ADX indicator. The ADX is plotted on a scale of 0 to 100. But the indicator scarcely moves above 40. Since ADX is plotted after taking both the +DI and the –DI in to consideration, the slope of the ADX line does not indicate bullishness or bearishness. It just helps the analyst to judge if the stock is in a strong trend or moving sideways.

Once the ADX falls below 20, it suggests that the underlying security is getting in to a sideways move. Conversely, a move above 20 from below would signal that the stock is getting ready to launch in to a strong trend, either up or down. The ADX reversing from 40-level is an indication that the prevalent trend could be reversing.

The ADX is certainly not the easiest of oscillators to interpret or use. The best way to use the ADX is to scan the charts using this indicator and select those stocks that are moving out of the 20 level as that would signal that the stock is moving out of a consolidation phase and is readying to explode upward or downwards.

Via BL

Yes Bank: Book profits

At its current price of Rs 187, the Yes Bank stock has provided annual average returns of slightly more than 100 per cent since its IPO priced at Rs 45 in July 2005.

Investors may book profits on their holdings of the stock at current levels. Further exposures to this stock may be moderated and can be balanced with other core banking stocks such as HDFC Bank or Axis Bank

The stock is currently trading around 35 times its estimated FY 08 earnings and almost 55 times its FY 07 earnings. These valuation multiples place the Yes Bank stock above that of established companies such as HDFC Bank or Axis Bank and do not seem sustainable.
Wholesale bank

Yes Bank follows a business model which is structurally different from that of HDFC Bank or Axis Bank. It is pre-dominantly a wholesale bank on both sides of its balance sheet. Corporate advances constitute almost the entire loans portfolio while wholesale borrowings — meaning higher value deposits (of Rs 15 lakh and more) as well as borrowings from wholesale market participants such as mutual funds — account for 95 per cent of its liabilities base. This balance sheet structure elevates the overall level of risk in the core banking business (in terms of interest rate, maturity mismatch and credit risks) and may not be conducive to medium term earnings stability. The earnings stream would be more vulnerable to adverse market events such as an economic slowdown, interest rate shocks or a vitiated credit risk environment.

The bank’s performance so far has not manifested any of these negative externalities. Most key banking parameters — advances, deposits, income (both interest and non-interest) and earnings — have all exhibited more than 100 per cent growth in recent quarters.

There is also no non-performing asset on the balance sheet as on date. It is clear that the bank has coasted along with the overall strength in the economy and has been able to build fairly impressive business numbers in just about two years of operation.

However, the key risks to the sustainability of this performance arise from the structural make-up of the bank’s business and the resultant balance sheet in an adverse macro-environment. Investors can consider taking fresh exposures in this stock on evidence of a move towards a more balanced business model.

Gateway Distriparks: Buy

Investment with a two- three-year perspective can be considered in the stock of Gateway Distriparks (GDL), a leading provider of logistic solutions. At the current market price of Rs 134, the stock trades at about 15 times its likely FY-09 per share earnings. GDL’s pan-India presence backed by an expansion in capacities; foray into container rail operations and presence in cold chain logistics suggest good prospects over the long term.

Strategic initiatives

A ramp up in container handling facilities and robust growth in foreign trade are likely to lead to strong volume growth in port traffic. Anticipating this, GDL has acquired the Punjab Conware facility in January 2007, consolidating its presence with a second freight station in the Jawaharlal Nehru Port Trust (JNPT) in Mumbai, which accounts for more than half of the container traffic in India.

Over the past year, there have been concerns on increasing competition and pricing pressure for freight operators in JNPT because of excess capacity. However, GDL’s presence in other locations such as Chennai and Kochi is a long term positive. While the increase in port traffic at Chennai augurs well for GDL’s freight station (CFS) at this port, Kochi could make a significant contribution if the proposal to set up an International Container Transhipment Terminal takes off.

GDL’s long-term growth prospects may also gain strength from its initiatives to tap the container rail segment. The company has, through its subsidiary, Gateway Rail Freight Pvt. Ltd., signed a concession agreement with the Indian Railways to operate container trains on the network. This apart, it has also formed a joint venture with Container Corporation (51:49) to construct and operate the rail-linked inland container depot (ICD) at Garhi, Gurgaon. This could help GDL consolidate the double-stack container business on the route between National Capital Region (NCR) and western ports (such as JNPT, Mundra and Pipavav).

The improving hinterland connectivity for GDL holds promise but Concor, an established player, will pose formidable competition. While the initial revenues for GDL may originate mainly from low-margin domestic traffic, the commissioning of two more rail-linked ICDs could help the company capture high-margin EXIM traffic. Effective contributions from the rail container operations are likely to flow in only from late FY-09 or FY-10.

Cold chain business

Given the boom in food and grocery retail, GDL’s cold chain initiative through its 51 per cent subsidiary, Snowman Foods, appears promising. While large retailers are likely to handle their own logistics, smaller players in the food retail segment could rely on established cold-chain service providers such as GDL. Revenues from this subsidiary have been growing and the management expects a turnaround in this business this fiscal.

For the quarter ended June 2007, GDL’s consolidated revenues recorded a 40 per cent growth, helped by a 25 per cent rise in throughput. Rise in transportation cost due to the acquisition of Snowman and the operation of its own container train led to a contraction in margins by about 10 percentage points to 45.6 per cent. However, with a changing revenue mix, the pressure on margins may abate over two-three years.


Given that GDL’s Mumbai facility contributes to about 80 per cent of its overall revenues, any slowdown in traffic or any regulatory changes pertaining to the JNPT port could affect GDL’s earnings. However, with the scaling up of other facilities, its dependence on this CFS would reduce. Increasing competition, delay in expansion plans and cost-overruns are downside risks to our recommendation.

Pensioners in europe reap benefits

Indian pension fund managers may not yet have the regulatory approval to dabble extensively in stocks, but the unabated rise in domestic stock prices has certainly brought smiles to pensioners in The Netherlands, Norway and Denmark. State-run pension funds of these European nations have reaped significant benefits from their investments in Indian stocks and have significant sums invested here.

Together, pension funds such as The Netherlands’ ABP (Algemeen Burgerlijk Pensioenfonds), Norway’s The Government Pension Fund – Global (Statens pensjonsfond – Utland) and Denmark’s Lonmodtagernes Dyrtidsfond (LD Pensions) have invested over $1.2 billion (nearly Rs 5,000 crore) in India.

“We have been investing in Asian emerging markets since the mid-nineties. This has been done mainly through external managers,” Mr Thijs Steger, ABP spokesperson, told Business Line. Mr Steger said ABP’s exposure to Indian equities is around €700 million (Rs 4,000 crore). He added that ABP, which caters to 735,000 pensioners, has an exposure of five per cent in its portfolio to equity investments in the global emerging markets. Its total assets under management stood at $305 billion at the end of the first half of this year and delivered a return of 9.5 per cent in 2006.

Another similar-sized player with over $200 million (Rs 850 crore) invested in India, the Norwegian fund has investment in 58 Indian stocks including 17 Sensex stocks such as Bharti, SBI, Infosys and Reliance Industries. The fund, earlier known as The Petroleum Fund, was started in 1990 for management of the country’s petroleum revenues.

The fund is run by Norges Bank Investment Management, an arm of Norway’s central bank. “The Ministry of Finance is responsible for the management of the Fund. When it comes to investment strategy, this includes setting the benchmark and risk limits for Norges Bank’s management of the Fund,” said Mr Thomas Ekeli, the Oslo-based Investment Director of the Asset Management Department, Norwegian Ministry of Finance. Since 2007, the fund’s strategic equity allocation has increased to 60 per cent and its equity portfolio gave a return of 17 per cent in 2006. Mr Ekeli said the fund’s strategic asset allocation was based on the premise that capital markets are fairly efficient, and that the fund tended to adopt a very long investment horizon. He added that Norges Bank is given the freedom to take investment risk to beat relevant benchmarks. Overall, of its total assets of $300 billion, the fund has equity investments across 20 sectors, according to the data provided by the official. Norges Bank’s Foreign Exchange Reserves and Norway Government Petroleum Fund are registered as Foreign Institutional Investors with SEBI.

Power Grid IPO, Balaji Telefilms

Power Grid IPO, Balaji Telefilms