Weekly Technicals, Track, Industry Trend
Sunday, September 23, 2007
|Gujarat NRE Coke|
Reco price: Rs 73.45
Current price: Rs 87
Target price: Rs 113
Brokerage: Macquarie Research
|Macquarie compares Gujarat NRE Coke with Chinese coal company Hidili, which has proposed an initial public offering, as there is hardly any comparable peer for the former in India. The brokerage infers that Gujarat NRE Coke is valued at a significant discount and has an upside potential of over 50 per cent, and rates it an outperformer.|
|Gujarat NRE Coke’s total coal resources are measured to be nearly 589 million tonne, valued at $1 per tonne. In comparison, Hidili’s resources of 217 million tonne are valued at $8.4 per tonne, Macquarie expects Gujarat NRE Coke’s production of coal to overtake Hidili’s production by FY11, as Gujarat NRE Coke’s newly acquired mines go on-stream.|
|Further, Gujarat NRE Coke clocks higher revenues ($127 million in FY07) compared to Hidili ($109 million in FY07). However, Gujarat NRE Coke commands an enterprise value (EV) of just $587 million as compared to Hidili’s EV of around $1.4-1.8 billion.|
|Based on EV/tonne, Gujarat NRE Coke trades at $2.2 a tonne, which is 20 per cent of Hidili’s $10 per tonne, considering that the fully subscribed offering of Hidili trades at the higher end of its price band. Going by price-earnings (P/E) multiples, Gujarat NRE Coke trades at a P/E ratio of 12.5 times estimated FY08 earnings, much lower compared to around 28.5 times for Hidili.|
Reco price: Rs 76
Current price: Rs 79
Target price: Rs 110
Brokerage: IL&FS InvestSmart
|Alembic, a leading player in the Indian formulations space with a 39.7 per cent market share in the macrolides segment, is expected to record a compounded annual growth rate of 23.2 per cent in revenues and 33.5 per cent in net profits through FY07-09.|
|IL& FS InvestSmart expects the revenues and net profits to be Rs 910 crore and Rs100 crore in FY08, and Rs1,060 crore and Rs130 crore in FY09, respectively, much above the expected market growth rates.|
|Alembic has restructured its product mix from anti-infective products which are at a maturity stage in their life-cycle to a high-growth life style product basket, thereby focussing more on higher profitability.|
|In order to accomplish this, in January 2007, Alembic acquired the non-oncology division of Dabur for Rs159 crore, with full rights to market 24 brands in the high-growth, life-style therapeutic segments. At Rs 76, the stock traded at a price-earnings ratio of 10.5 times and 8.5 times estimated FY08 and FY09 earnings respectively. The brokerage recommends a “buy”.|
Reco price: Rs 44
Current price: Rs 43.75
Target price: Rs 65
Brokerage: Anand Rathi
|Banking on the favourable industrial environment and buoyant auto sector, Anand Rathi expects demand for steel and castings to remain robust. As a result, the brokerage expects Kirloskar Ferrous to be able to register a strong growth in its revenues and expand its margins.|
|Kirloskar Ferrous has lined up Rs 330 crore as capital expenditure for the next two years, expanding both the molten metal and castings capacity from the present 240,000 and 84,000 tonne, respectively, to 425,000 and 130,000 tonne. It has initiated cost savings in coke by setting up a hot stove and a turbo blower.|
|This is expected to save nearly 10-15 per cent in coke cost, a major raw material in producing pig iron. It is also putting up a sinter plant, which would aid in cost reduction in iron ore production.|
|The rise in castings capacity and cost reduction measures are likely to be key drivers for better margins. For FY08 and FY09, the brokerage expects a top line growth of 20 per cent and 11.6 per cent, respectively from Rs 525.1 crore in FY07 to Rs 632.3 crore in FY08 and Rs 705.7 crore in FY09.|
|An operating margin expansion of 220 basis points in FY08 and 100 basis points in FY09 is likely. At Rs 44, the stock is valued at 13.5 times estimated FY08 earnings and 10.6 times estimated FY09 earnings.|
|Larsen & Toubro|
Reco price: Rs 2621
Current price: Rs 2783
Target price: 2921
|Edelweiss estimates Rs 14 trillion to be spent on infrastructure in India, across segments over FY07-12. As a result, with its broad-based and deep presence, Larsen & Toubro (L&T) is expected to witness a noteworthy momentum in order intake.|
|Over FY08-09, Edelweiss expects L&T’s order intake to be Rs 61,400 crore in the infrastructure space, in addition to Rs 13,100 crore order intake from the process vertical.|
|In the core engineering and construction segment, the order accretion is expected to be around Rs 74,600 crore over FY08-09, and there could be positive surprises with large orders accruing from verticals like ship building, dredging, defence, power and railways.|
|Also, given that both defence and ship building/dredging have better profits compared to L&T’s current portfolio, the company’s overall consolidated margins are expected to expand over the next three-four years.|
|Led by stellar performance of L&T’s key subsidiaries like L&T Infotech, L&T Finance, L&T Oman, and its transportation arm, the subsidiary portfolio contributed 21 per cent to overall profits of the company, last fiscal.|
|Edelweiss expects the growth trajectory for its subsidiary portfolio to further improve and contribute 20% to consolidated revenues and 30% to consolidated profits by FY09. At Rs 2621, the stock traded at a price-earnings multiple of 28.6 times estimated FY08 earnings and 21.5 times estimated FY09 earnings.|
|Beaten down after the Budget, cement stocks are back in the reckoning.|
|From experience, people in the corridors of power have realised that even an onion can shake the foundations of a strong government. Cement, as it is, turns out to be stronger than an onion. When cement prices rose for over a year by about 15 per cent, the Ministry of Finance considered meddling with the uptrend by imposing fiscal disincentives for high-priced bags of cement.|
|Budget 2007 brought along a revamped excise duty structure with higher duties for expensive domestic cement as well as cuts in domestic levies on imported cement. In January, the import duty on cement was cut down to zero from 12.5 per cent in order to encourage import of cement to resolve the seemingly perennial demand-supply mismatch.|
|After the Budget, cement manufacturers and the government engaged in long running discussions over holding the prices, in vain. Cement prices, however, have continued to rise. Owing to such an uncertainty over the industry dynamics, investors penalised cement stocks, and the sector has continuously underperformed the broader markets over the past ten months.|
|The rise in the prices has been around 15 per cent y-o-y as on August. Considering the demand-supply deadlock, the infrastructure and real estate boom, as well as with the overall macroeconomic conditions looking good, it doesn't look like the scene is changing anytime soon.|
|We therefore, look into the various reasons why umpteen numbers of market players have once again turned bullish on the sector. Almost all foreign brokerages, including Deutsche Bank, JP Morgan, Macquarie and UBS are bullish on the sector recommending a 'buy'. Only Citigroup is an exception, which has recommended otherwise.|
|Price puzzle |
The past one year has witnessed cement prices rising by almost 15 per cent across the country. The national average price per bag of cement was Rs 200 in July 2006, which was around Rs 230 a bag in July 2007, and analysts estimate that it has gone up further to around Rs 235-240 now.
|If it were just for the mismatch between demand and supply of cement across the country, the equation would have been simpler. However, the rise in cement prices over the past 12-15 months has more to it.|
|Apart from growth in supply lagging behind demand growth, there are factors such as rising costs of raw materials, of which in turn, the industry is running shortages. Imports could have been a solution, if there was enough supply available. On digging a bit further, the outlook that emerges for the industry is bright enough for investors to start looking at the sector.|
Between April and August 2007, cement consumption grew nearly 10 per cent y-o-y, which is quite unusual, considering that in monsoons construction activity is subdued. Normally, demand during monsoons is much lower, and cement prices too drop marginally.
|However, this year, prices too have gone up. This is mainly due to the incessant demand from the infrastructure and real estate sectors. Analysts are in unison that the growth in production has fallen short of the growth in demand, which has resulted in higher prices. As monsoon comes to a close and construction activities pick speed, the demand for cement is set to take off further.|
|The boom in domestic cement consumption becomes evident from the fact that the exports of cement and clinker have declined from an average of about 10 million tonne a year in 2004-05 to nearly 8 million tonne a year now.|
|Burgeoning order books of infrastructure and engineering companies and huge project outlays of real estate players guarantee strong growth in demand for cement for the next couple of years.|
|The past year has demonstrated that in spite of fears of a decline in real estate prices and the resulting concern that real estate developers may postpone their projects, cement demand has only increased. Therefore, demand is expected to continue to grow at a compounded annual rate of 10-11 per cent over FY07-FY10.|
Over the past year, capacity utilisations at cement manufacturers have scaled to an all-time high of over 90 per cent, at times over 100 per cent. This becomes evident from the demand converging with supply over the past couple of years.
|In FY08, cement production and consumption are estimated at around 163 million tonne. Last fiscal, the production was 155 million tonne, while domestic consumption was at 154 million tonne. A deficit of approximately 15-25 million tonne is expected to set in over FY09-FY10.|
|Collectively, cement majors have plans to add about 150 million tonne capacity by FY10. However, analysts expect just around 75-80 million tonne to actually go on-stream by FY10 due to lack of capacity at the equipment manufacturers' and project implementers' ends to finish the projects in time, as well as due to regulatory hurdles.|
|However, considering the growing demand, this is unlikely to suffice. Citigroup alone fears pricing pressure due to a supply surplus in the sector owing to capacity additions as well as imports.|
Cement is a highly perishable commodity, with a shelf life of less than 90 days. This factor alone reduces the geographical radius of possible destinations to source cement. Some manufacturers of Pakistan have applied for approvals from Bureau of Indian Standards, as Pakistan is likely to have a cement surplus of nearly 15 million tonne in FY08.
|The landed cost of this cement in India is estimated to be around Rs 205 a bag, around 15 per cent lower compared with domestic prices. Add in the logistics cost to transport the cement from port to its destination, and the imported cement should be about 5-10 per cent cheaper.|
|However, this route is fraught with bottlenecks. As Indian ports are running at near-full capacities, there are hardly any facilities to handle bulk of cement at ports, resulting in high demurrage. Ports in Pakistan too, are constrained by their loading capacities according to analysts.|
|A September 13 report in Pakistan's Daily Times focused on another problem: despite surplus production of cement, the industry faces an acute crunch in procuring sufficient plastic bags to pack and despatch their product!|
As cement companies shuffle their raw material usage from expensive imported coal to cheaper domestic coal, go for captive power plants and improve efficiencies on their logistics front, the resulting savings in various costs are likely to give a boost to their operating profit margins. For instance, a large part of coal is sourced domestically by ACC, as compared to the rest of the players.
|Among the large-caps, Grasim and UltraTech are in the midst of commissioning captive power plants of over 90 MW each, while mid-cap players like JK Lakshmi and Mangalam too, have recently commissioned 36 MW and 17.5 MW captive power plants respectively.|
|Already, major players clock operating profit margins in the vicinity of 30 per cent and more. Going forward, this is likely to range at around 35 per cent, by FY09. Top lines will be bolstered by the string of capacity additions that every player is engaged in, as well as firm prices.|
The sector has underperformed the broad markets since February, and is now showing signs of recovery. At present, the sector trades at an average price-earning multiple of 10 times trailing twelve month earnings.
|Going by consensus, the sector is likely to trade at estimated FY08 EV/EBITDA (earnings before interest, tax, depreciation and amortisation) multiples of around 7-9 times, and price-earnings multiples of 12-15 times estimated FY08 earnings. Larger players like ACC, Grasim and Ambuja are already trading at higher multiples compared to the industry, commanding a premium and are scaling newer highs.|
|On an EV/tonne basis, ACC, Ambuja and UltraTech appear slightly expensive. This will change, as new capacities are added resulting in higher production. On this parameter mid-caps appear attractive, as almost all players have their capacity additions going on-stream. Analysts foresee a scope for higher realisations for Ambuja as well as UltraTech.|
|Expect strong volume growth for ACC, Grasim and Shree Cements over FY08-FY09. Although growth appears assured for all the counters, Grasim among the large-caps and Shree Cements among the mid-caps appear the least expensive stocks, both by earnings and asset based multiples. Those who hold the sector are fortunate. Those who do not, may want to ride the rising trend. Investors may buy on dips.|
Amid the growing demand for trained talent in aviation sector, training schools for air hostesses and other airline staff are planning to raise funds by selling shares to the public and private investors.
Bernanke lets the bull out
Bulls across the world and across asset classes cheered Federal Reserve chairman Ben S. Bernanke's surprising 50 basis point cut in its benchmark interest rate, pushing stocks, bonds, oil and metals sharply higher. But, the dollar tumbled to a new low against the euro, falling below the $1.40 mark. Global investors had been literally bagging for aggressive rate cuts from the US central bank to prevent a recession in America and revive confidence in financial markets. Markets have been in a state of flux over the past couple of months owing to the sharp slowdown in the US housing sector, especially the subprime mortgages. The weakness in US housing sector and the consequent crisis of confidence in the credit markets had raised concerns about the health of the global economy, prompting central banks across the world to swing into action. Even the usually hawkish central banks in Europe and Japan had to climb down from their stated positions and help stem the slide. Still, that was not enough and the world was looking towards the Fed to rescue the sinking ship. And, though Bernanke himself was against helping those investors who made wrong calls, in the larger interest of the US and the world economy, it didn't have much of a choice, but to slash rates.
The better than expected Fed move (in addition to cutting the federal funds rate, they also cut the discount rate by 50 bps to 5.25%) and the pledge to do more if need arises sent investors into a buying frenzy. The Dow Jones Industrial Average ended the day up 336 points, a 2.5% gain, and the biggest one-day jump since April 2003. The broader S&P index rose 2.9%. Equity markets rallied across the globe, with the Hang Seng breaching past the 25,000 mark, and India's Sensex and the Nifty climbing to a new lifetime highs. The Sensex crossed the 16,500 mark and had its biggest weekly gain in absolute terms. The Morgan Stanley Capital International Asia-Pacific Index jumped 3.9%. The Nikkei surged the most since March 2002, climbing 3.7%. European stocks climbed the most in more than a year. The risk of owning European corporate bonds dropped to the lowest in two months.
Not everyone was happy, though. Some experts expressed concerns that the Fed had bailed out Wall Street and compromised its inflation-fighting credentials. The central bankers left themselves plenty of room for manoeuvre. The statement accompanying the Fed's decision made clear that the rate cut was intended to help forestall the adverse effects on the economy from financial-market disruptions. But it made no commitment that more cuts would be coming. Even though the US economy has not worsened dramatically on the back of the slump in housing prices, the risks of a truly nasty surprise have escalated. A bold cut now was aimed at reducing those risks. By acting boldly now, Bernanke must hope to avoid hasty inter-meeting cuts.
Rupee hits 9-yr high; tops 40 level
The bolder than expected Fed rate cuts lifted the Indian Rupee to a nine-year peak against the US Dollar. The Indian currency rose above the psychological 40 rupees per dollar mark amid continuing optimism that the Fed rate cuts will spur foreign capital inflows into high-yielding markets like India. The rupee gained 1.4% this week to close at 39.8875 per dollar. This was the rupee's fifth straight weekly advance and was its biggest weekly gain since April. The currency strengthened beyond 40 per dollar for the first time since May 1998 and climbed as high as 39.84 in intraday trading on Friday.
The rupee is Asia's best-performing currency this year, rising well over 10%, on the back of aggressive buying of local shares by overseas investors. The benchmark BSE Sensex rose to a record 16,564.23 today, gaining for a fifth week and is up over 5% since the Fed rate cuts. Overseas funds pumped in US$607mn in Indian shares on Sept. 19, the most since July 6, according to capital market regulator SEBI. The rupee may gain further in the medium term from these flows as well as dollar sales by exporters, according to currency strategists.
A stronger rupee means bad news for exporters. Shares of IT companies tumbled amid fears of margin contraction and lower profits. Individuals can benefit as they can spend more while traveling abroad. Also, with the economy still growing rapidly, a strong currency can counter the impact from record crude oil prices and import of other key inputs. Foreign investors will get more from their local investments. The toughest job will be that of the RBI, who will have to manage a deluge of overseas capital inflows into the stock and other assets.
Commerce Minister Kamal Nath said the appreciation in the partially-convertible currency was a matter of concern and that the Government would look at steps to protect exporters. "It is a new situation and it needs a new response," Nath told reporters in New Delhi. The Government ruled out scaling down the export target of US$160bn for 2007-08. "Rupee appreciation is a concern. We a re going to look at steps to help exporters," Kamal Nath said. The Government has a target to increase merchandise exports by 20% in the current financial year ending March 31. Exports have risen by 18.2% in the first four months of the fiscal.
The 'R' factor (Reliance) dominated the proceedings for the week, especially on Friday. The indices are perched at new highs and the coming week may see it kiss yet another high before some consolidation starts. The sun outage coupled with the F&O expiry will keep bulls and bears on tenterhooks. Volumes could see a drop for the next couple of days except during Wednesday and Thursday.
Punters are banking on some move from the RBI in terms of a rate cut. But we haven't heard anything concrete so far. Should such a development take place, the laggards in recent times will skyrocket to dizzy heights. The quarterly earnings are the next hope for positive triggers. But there is still some time. Most of the positives on the earnings front have been factored in the price. Companies will have to come out with more bullish outlook to keep the sentiment intact. If all else goes against the market, the liquidity factor in terms of FII flows can give bulls reason to widen their smile.
2007: The world population surpasses 6.6 billion as more people now live in cities than in rural areas, changing patterns of land use.
2008: Global oil production peaks between 2008 and 2018, triggering a global recession, food shortages and conflicts between nations over dwindling supplies.
2020: Flash floods increase across Europe. Less rainfall reduces agriculture yields by up to 50 percent in some areas. Population reaches 7.6 billion.
2030: As much as 18 percent of the world's coral reefs are lost as a result of the changing climate and other environmental stresses
2040: The Arctic Sea is ice-free in the summer, and winter ice depth shrinks drastically. Some say this won't happen until 2060 to 2105.
2050: Large glaciers shrink by 30 to 70 percent as a quarter of the plant and vertebrate animal species on the planet face extinction.
2070: As warmer, drier conditions lead to more frequent and longer droughts, electricity production for the world's existing hydropower stations decreases.
2080: Between 1.1 and 3.2 billion people experience water shortages and up to 600 million go hungry.
2085: The risk of dengue fever from climate change increases to 3.5 billion people.
2100: A quarter of all species of plants and land animals -- more than a million total -- are driven to extinction.
2200: An Earth day is 0.12 milliseconds shorter, as rising temperatures cause oceans to expand toward the poles, speeding up the planet's rotation. Source: Intergovernmental Panel on Climate ChangeAll this because of Global Warming
The other day, the driver of the auto that we hired demanded a tariff which was twice the “normal fare”. His justification for extortion was that the traffic was heavy. In one way, extortionist auto-drivers like him may be the reason for the traffic congestion in Chennai city. How?
All of us prefer to have somebody drive us around. If you have a car, you may want to employ a driver or take the auto or taxi. If you ride a motor-bike, you may prefer to take an auto, provided the driver asks for an honest fare.
Ferrying at ‘normal’ fare
So, picture this. All autos in Chennai ply on “normal” metre. You and I will, hence, prefer to take the auto instead of driving a car or riding a bike. That would also mean that the traffic may not be as congested as it is now, for there will be considerable reduction of cars and bikes on the road.
But the very assumption of “normal” meter begs for a question. Why should auto drivers ply on meter when they can get away with extortion? If all of us journey by auto, the demand for hiring autos will be high. That means an auto driver can earn more money by ferrying people at “normal” fare.Working out the arithmetic
It is simple arithmetic. If an auto-driver transports 20 people every day for an average of Rs 100 per person in a high-fare regime, he earns Rs 2,000 per day. What if we have a “normal” fare regime? Perhaps, he may able to ferry 50 people at an average of Rs 50 per person. That would be Rs 2,500 per day.
You may argue that transporting 50 people instead of 20 would be tedious. It need not be. The reason? If lesser cars and more public transport ply on the road, the traffic may be less heavy and, perhaps, more orderly. And that may considerably reduce the strain on the auto-drivers. But who will convince them that it is their own interest to charge “normal” fares and not demand extortion from their customers?
Investors can give the initial public offer of Supreme Infrastructure the go-by. Lack of a focussed strategy, a very small revenue base that could depress earnings even in a mild slowdown and presence in businesses such as quarrying that carry regulatory risks do not augur well for growth prospects. The company’s business also does not have high entry barriers.
The offer price (Rs 95-108) is at 8-10 times the company’s earnings for FY 2006-07 and on the current equity base. While the valuations are in line with similar companies, the risks associated with Supreme Infrastructure appear high relative to small-sized companies such as Tantia Constructions or PBA Infrastructure.
Within the infrastructure space, there are already superior listed plays which offer high earnings visibility backed by requisite technical qualification. Our recommendation for Supreme, however, does not factor in the possibility of gains on listing.On the company and offer
Supreme Infrastructure is a construction company that builds roads and also executes projects involving widening and strengthening of roads and highways. The company also operates a ready mix concrete plant for internal consumption and for sale.
The Rs 33-38 crore raised through this offer will be utilised for purchase of plant and machinery for its construction activity, including specified machinery for real-estate construction and for long-term working capital requirements.
Post issue, the market capitalisation of the company would be Rs 132-150 crore.Risky propositions
Supreme Infrastructure has been in the business of executing concreting orders in the roads and highway segments. The company has now been named a contractor for an upcoming IT park to be built by a group company recently incorporated by the promoter.
This company, with no previous experience in real estate development, will develop an IT park in Mumbai, on land for which development rights have been granted by the promoter for a consideration of Rs 44 crore. We foresee the following risks to this venture: For one, neither the group company nor Supreme have prior experience in developing and marketing real-estate. This is a project awarded by a start-up group company, which is likely to have limited financial and marketing resources.
There have been previous instances in other groups where transactions of realty companies with associates have posed problems of realisations.
Two, this order (for which the company is yet to enter into an agreement with the group company) of Rs 90 crore forms 30 per cent of Supreme’s total order backlog of Rs 300 crore, thus adding risks to earnings growth.
Three, about 20 per cent of the offer proceeds is to be utilised for procuring machinery for real-estate construction. As the company has not laid out any specific plans (in the offer document) on its venture into real-estate construction, there could be underutilisation of the equipment bought for this purpose, resulting in lower return from investment.Attractive margins but….
Supreme Infrastructure has enjoyed double-digit operating profit margins despite being in the low-margin road business.
We attribute the relatively high margins to its owning a ready mix concrete (RMC) plant as well as a quarrying and stone crushing unit.
These activities of the company in Powai were stalled by the State Pollution Control Board and the High Court recently, although the RMC was later allowed to function.
The company will also have to get various approvals for another RMC to be installed in Karnataka and for quarrying activity near Mumbai.
With increasing environmental and public outcry with regard to such activities, the company may face regulatory risks to these businesses efficiently. Any such disruption may cause a reduction in profit margins from current levels.
While infrastructure growth does provide earnings visibility for a good number of construction companies, we are not sanguine about Supreme’s prospects, given that its small turnover base of Rs 82 crore (FY 2006-07) and narrow range of businesses provide little cushion from the above risks.Governance issues relating to the structure of the real-estate construction business and high unsecured loans from group companies are concerns too. The offer is open during September 21-26. Karvy Investor Services is the lead manager
It was a stellar show which put the Nifty futures within a striking distance of the 5000-mark. It closed last week at 4852.6 against the previous week’s close of 4513, a whopping gain of 7.52 per cent. The Nifty futures moved into a premium zone; it now commands a premium of 14.95 points over the Nifty close of 4837.55, mainly due to a short-covering especially on Friday.
There was smooth rollover on the open interest front also. Open Interests, which had hit an all-time high of Rs 1,02,077 crore on July 28, improved to Rs 93,177 crore from last week’s position of Rs 84,447 crore. The rollover of the Nifty futures is about 25 per cent; however, interestingly quite a few new counters from mid-cap space such as RNRL, S.Kumar’s, Tata Chemicals, RPL, JP Hydro, Petronet LNG and Triveni Engineering saw huge accumulation of open interest positions, indicating action shifting to new sectors/stocks.
Outlook: The Nifty futures now faces crucial support at 4760. As long as it stays above this mark, there is no threat to the bull party. However, if it dips below that point, it faces a minor support at 4610 and then at 4534.Recommendation
We expect the Nifty to begin the week on a positive note. However, we feel the market is in an extremely overbought position. Investors can consider shorting October futures if the Nifty futures dips below 4760 (October futures, On Friday, closed at 4832.65). Keep the stop loss at 4760 and trail the Nifty so as to maximise profits in case Nifty futures dips below that level. This recommendation is for a slightly longer period. Hold the position for at least two weeks.
This recommendation is valid only for those who are willing to assume some risk, this week being settlement week for the September series. Generally during settlement week, market tends to experience high volatility.Implied volatility
Puts implied volatility (IV) increased to 27 per cent even as call IV slumped to 19 per cent (24 per cent). This indicates that a lot of call positions were squared off when the market surged on Friday.Put/call ratio
While volume wise put call ratios (PCR) dipped to 1.20 (1.80), open interest PCR improved to 1.67 (1.51); this also suggests that a lot of calls were squared off on Friday. The increase in open interest positions is mainly due to carrying over of fresh short positions.Stock futures
RNRL (76.85): The stock witnessed a sharp surge on Friday along with rise in open interest positions. While it faces a resistance at 80, (the high it touched on Friday), RNRL enjoys support at Rs 50 level. Consider shorting of RNRL October future keeping the stop loss at Rs 80. Investors may also consider buying RNRL October 60 put at Rs 1.40. The possibility of RNRL touching its support level appears bright, if it dips below 71.5. Market lot is 7150 units per contract.
FII trends: The cumulative FII positions as a percentage of gross market positions in the derivative segment as on September 6 was 35.03 per cent. FIIs pumped in significant money particularly on Wednesday (Rs 4254.83 crore). Friday figures will be available only on Monday. They hold index futures of Rs 18,407 crore against last week’s level of Rs 18,278 crore and stock futures of Rs 30,790 crore (Rs 28,112 crore). Position wise, they currently hold 7,74,926 contracts (8,06,334 contracts) of index futures and 9,34,356 contracts (8,96,185 contracts) of stock futures. This indicates that while they are not betting on index future, FIIs are accumulating individual stock futures. They also increased their positions in the options market as a hedge.
An alert investor/trader would know intuitively when the markets are nearing a peak or about to form a significant bottom. For instance, I would know that the market is about to form a long-term top when my sedate, academically oriented neighbour would start waylaying his friends to share his latest stock market triumphs. Since watching the antics of neighbours is not always this fruitful, here are a few other pointers that can be monitored by novice investors to scent out a peak or a trough.
New fund offerings (NFOs) from mutual funds always pick up steam close to market peaks. When investors are bombarded with a plethora of schemes with themes that outdo each other in vagueness, it is a sure sign of trouble. The reason why the NFOs cluster near the market peaks is simple.
As more and more investors watch their neighbours flaunting the wealth that they have made in the stock markets, the feeling of being left-out grows. Since many new entrants prefer taking their first step in to the world of stocks through mutual funds, the demand for mutual funds grows. A case in point is the way Reliance Equity Fund creating history by collecting over Rs 5,000 crore in March 2006, just after the markets buckled under in May 2006.
Another indication of an overheating market is an increase in the number of initial public offerings (IPOs). The quality of these IPOs and the valuations would further signal if the promoters are exploiting the investor optimism. The IPO boom just before the Harshad Mehta scam broke out in 1992 is an unforgettable phase in our stock markets’ history. Investors went berserk over the deluge of public issues in this period. The third indicator that we want to dwell on is the rally in long-forgotten stocks and penny stocks. Any-time you see the dud stock in your portfolio that has not budged an inch over the last five years, being recommended by an ‘expert’, you can know that a crash is around the corner.
The above-mentioned are the signals of over heated markets. The reverse would be true near market troughs. Investor apathy would make fund managers and promoters postpone their public offerings. There would be no takers for even bluechip stocks leave alone penny stocks.
Shareholders of Deccan Aviation can tender their shares to the open offer being made at Rs 155 per share by Kingfisher Radio, UB Overseas and UB Holdings. Deccan Aviation has achieved impressive revenue growth on the back of strong expansion in passenger traffic and a rising share of low-cost carriers in the domestic aviation market. However, the company’s losses at the operating level have continued to widen due to aggressive fleet and network expansion amidst a highly competitive environment.
There is little clarity at this juncture on when the company may turn in positive per share earnings. There is also considerable uncertainty about the likely business model and strategy that may be pursued for Deccan Aviation, after its acquisition by the UB group. It may, therefore, be prudent for shareholders to use the open offer to encash their holdings.Profitability under pressure
As India’s leading low-cost airline, Air Deccan connects over 65 domestic destinations through 332 flights with a fleet of 43 Airbus 320s and ATRs. The airline has about a 22 per cent share in the domestic passenger traffic. Deccan Aviation’s revenues have grown from Rs 62.9 crore in 2003-04 to Rs 1,627 crore in the nine months ended March 2006-07. Over the same period, profitability has deteriorated, with the company moving from marginal profit of Rs 6 crore to loss of Rs 173 crore at the operating level. High fixed costs on account of fleet acquisition and a sharp spike in fuel costs, amidst pressure on air fares with the advent of new entrants are key reasons for the company’s deteriorating profitability.
In this context, the recent consolidation moves in the sector, with Jet Airways acquiring Air Sahara and the Indian Airlines- Air India merger, could endow domestic carriers with greater pricing power. However, the benefits from such consolidation to Air Deccan could be restricted on two counts. Relying as it does mainly on price-sensitive travellers to drive growth and maintain viable utilisation levels, Air Deccan may have limited headroom to hike fares without impacting its yields. Intense competition from new entrants such as IndiGo and Go Air and aggressive capacity additions among low cost carriers could also set a cap on very sharp or sustained fare hikes in this segment.Early turnaround?
Though the preferential allotment of equity to the UB group will bring in cash of Rs.545 crore, it also expands the equity base required to be serviced. Any savings on fixed/maintenance costs due to synergies with Kingfisher Airlines and a route rationalisation exercise between the two providers could also aid an early turnaround of Air Deccan’s operations. However, Kingfisher Airlines is itself a recent entrant to the sector and its latest available financials (March 2006) show significant operating losses. Therefore, it is difficult to say if, and when, the benefits of synergies from its alliance with Kingfisher, will flow to investors in Deccan Aviation.
Shareholders should, however, note that the offer price does not seem to factor in possible gains from a turnaround in Deccan Aviation’s operations. The offer price of Rs.155 is at a 8.3 per cent premium to the stock’s current market price and values the company at an enterprise value of about Rs 2,800 crore, which is about 1.7 times yearly revenues.
The medium-term prospects for Zee Entertainment (ZEEL) appear bright, as its flagship channel, Zee TV, closes in on Star Plus for the leadership status in broadcasting. Operating from a position of greater strength, ZEEL has recently hiked advertising rates, which will sustain the advertisement growth momentum over then next year. Continuing penetration of DTH (direct-to-home) and CAS (conditional access system) will increase domestic subscription revenues, which has till now been a small contributor to overall subscription revenues.
However, sustainability of this growth over a longer period is uncertain, as competition in the broadcasting space hots up. The current market price values the stock at about 36 times its likely 2007-08 consolidated per-share earnings, factoring in sustained momentum in advertising and subscription.
Given the high valuations, the stock may be vulnerable to downside in the event of a disappointing earnings performance. Shareholders can, therefore, retain the stock and wait for greater clarity to emerge on the impact of channel launches on market share and advertising revenues.Closing the gap on Star
Over the past year, the company’s flagship channel, Zee TV, has seen a steady rise in its viewership rating. According to recent data from audience-measurement agency TAM (week ending September 9), it has 29 programmes in the top 100 programme rankings, only slightly behind Star Plus at 34.
Ratings have been driven by the Sa Re Ga Ma Pa challenge, which has been consistently topping the programme charts for the last couple of weeks. It has a 36 per cent market share in the prime time slot and is only 23 gross rating points behind Star Plus in the prime-time weekday slot.
ZEEL’s other channels are also faring well. English entertainment channel, Zee Café, has overtaken Star World in recent ratings. Zee Cinema, which has been the No.1 Hindi movie channel, has managed to take on competition from Max, which has been gaining strength on the back of its cricket telecasting rights.
The continuing improvement in performance has helped ZEEL initiate two rounds of ad rate hikes in 2007. Advertising revenues grew close to 40 per cent in the first quarter. The share of advertising in overall revenues, now at 55 per cent, could further increase on the back of recent hikes.
Operating margins have also improved from 23 per cent to 31 per cent during the quarter. If Zee TV manages to overtake Star Plus and sustain its top slot , it might be able to command significantly higher ad rates than its competitors, new entrants included.Competition hots up
Even as it aims for the No.1 slot in channel share ZEEL might lose some of its well-earned market share to new entrants in the general entertainment category. The competition is formidable with Viacom18, NDTV and INX Media lining up their entertainment channels for launch over the next couple of quarters.
The share of general entertainment in the overall television advertising pie is also reducing, which adds to the concern. Although ZEEL targets a larger audience through its movie and sports properties, much of its current strengths are supported by Zee TV’s performance.Preparing for fresh onslaught
Admittedly, ZEEL is on a much stronger footing now to tackle competition. This is evident from the fact that Zee TV was able to increase viewership amidst intense competition from Star Plus and Sony Entertainment. Both channels have tried to wean away Zee TV’s viewers through Star Voice of India and Indian Idol respectively, but have not succeeded in displacing SaReGaMaPa from the top slot.
Secondly, the success formula for general entertainment channels continues to be driven by family soaps. This may limit the potential for the new entrants to significantly differentiate themselves from the incumbents.
However, establishing leadership may come at a price, with higher content and marketing costs. Also, even if ZEEL manages to capture and retain its leadership position in the general entertainment category, there is the risk of migration of some of the advertisement spending to youth and lifestyle channels as these genres have a more specific target audience. ZEEL’s response to this has been its plans to launch Zee Next, a channel targeted at a younger audience. But breaking from the clutter of channels now aiming at this space will be a challengeOther initiatives
ZEEL does not have any significant investment plans. Except for Zee Next and the proposed new channel launch of Zee Arabic Hindi movie channel for the West Asian market, ZEEL has not lined up any other launches. This will limit the pressure of operational costs from new channel launches on its profitability.
The management expects its sports business to turn profitable by the end of the year. The promoters have floated the Indian Cricket League as a parallel to BCCI-controlled league. It expects to start a twenty20 tournament in the next quarter, which will be telecast on Zee Sports. While the idea of an alternative league has evinced interest from some advertisers, the stiff opposition from BCCI’s Indian Premier League could pose challenges to ICL. ZEEL may have to continue to rely strongly on recently acquired Ten Sports to generate advertising revenues in the near-term.
Aside from competitive pressures, the risk to ZEEL’s earnings includes delays in extension of CAS, which could limit growth from subscription revenues. There could also be some re-negotiation on channel pricing with DTH operators, effective December, as new regulations allow operators to pick channels on a-la-carte basis. An inability to market the entire bouquet to DTH operators could limit the upside from subscriber additions.
Investments with a two-year horizon can be considered in the Satyam Computer Services (Satyam) stock, considering its strong growth prospects and reasonable valuation. At the current market price (Rs 418), the stock trades at 19 times its trailing 12-month earnings. This is at a significant discount to its top-tier peers. Satyam appears capable of delivering the earnings growth factored into the valuations.
Concerns about the US sub-prime crisis impacting the company’s earnings may be overblown given that non-BFSI verticals contribute about 75 per cent of revenues. Satyam has a relatively high foreign equity holding and has probably experienced greater volatility in phases of profit-booking on the back of global cues. However, the business fundamentals and growth drivers remain strong, providing scope for possible capital appreciation of its stock.Business Analysis
New engagements hold promise: Satyam’s engagements in recent times stand out for the sectors and companies and the associated IT services that have been added to Satyam’s portfolio. To cite a few examples, FIFA, the Zurich-based apex football body, has signed up the company to develop a customised event management system and build new intranet and extranet infrastructure. Nestle has extended its contract, estimated to be worth $75 million, with the company for SAP and other customised software implementation. A multi-year contract with a retail major, estimated to be worth $100 million, has been concluded recently.
These engagements augur well for two reasons. One, they help Satyam develop domain expertise in new sectors such as FMCG, event management and retail. Second, these businesses, by their nature, offer relatively secular and non-cyclical growth, thus opening up stable revenue streams for Satyam.
Solid Partnership and leadership in EAS: The company has a leadership position among top-tier players for its Enterprise Application Services capabilities, which has been a key contributor to revenues and is growing at a healthy pace. This stems from the fact that the company has solid partnerships with product software majors such as SAP, Oracle, and Microsoft. This association, over time, has given the company execution capabilities that enable it to customise its solutions to wide ranging client requirements and win new clients of high value.
Strong Global Delivery Model: Satyam delivers its services from 57 countries around the world, spanning six continents, a geographic spread which is more than any other top-tier IT player in India. This allows the company to deliver services through a healthy mix of near-shore, onsite and offshore locations of clientele. The company has about a 50:50 onshore-offsite mix. Although this results in high-cost revenues, this mix seems to have helped the company tap high-value, information-sensitive clientele. That the company has won key IT outsourcing contracts of the US and Singapore governments testifies to this. Through its near-shore presence, Satyam is able to acquire and cater to clients which are hesitant to outsource to offshore locations.
Operating Metrics and Geographical de-risking: High-value services such as engineering and infrastructure management have grown by 52 per cent and 19 per cent respectively over the past year. Improved contribution from these services is expected to aid profit margins. The manufacturing and telecom verticals have also contributed to revenues significantly. Satyam may stand to gain as IT spending by aerospace, manufacturing and telecom businesses is seeing an increasing trend, especially in Europe.
Satyam appears well-placed to tap this market. Europe and the Asia Pacific region now contribute 39 per cent of revenues and are showing an increasing trend over the past year. This reduces its dependence on North America and helps tide over risks associated with rupee appreciation relative to the dollar.
Risks: Though about $750 million of revenues hedged at Rs 42, earnings do face some risks from the recent appreciation in the rupee. The company has no direct exposures to the US sub prime segment. However, any indirect impact from market concerns on other BFSI clients and any slowdown in IT spends by the company’s US clientele are potential risks to earnings.
Investors with a 3-5 year perspective can consider taking exposure to the Nagarjuna Construction stock. Expansion into high margin segments, higher net worth that would help bid for larger sized projects and the traction gained by subsidiaries in the real estate and BOT segments, augur well for the company’s earnings growth. On an expanded equity base (due to shares/warrants to be issued to Blackstone), the current market price discounts expected earnings for FY 2008-09 by 19 times. With the company making headway in the industrial infrastructure space, which offers significant potential, this valuation appears quite reasonable.
The equity overhang that threatened Nagarjuna’s stock has ended after the company announced equity placement to the Blackstone Group. We believe that this infusion of equity would be beneficial over the long term as it would ramp up the net worth and improve the company’s financial qualification to bid for larger orders. The entry of Blackstone may also have benefits for Nagarjuna’s real estate subsidiary, as the private equity player is known to have expressed interest in Indian real estate.
Nagarjuna has made a big leap in the industrial ijnfrastructure space after the recent order win (worth Rs 1,558 crore) of a blast furnace complex in consortium with POSCO E&C. With this, the company is making a transition from being a civil structure contractor to a provider of complete plant works (such as electrical and mechanical works). This move may be margin accretive and takes the company to a less-competitive domain. Nagarjuna’s venture with POSCO E&C to bid for more such projects appears to be a positive as the latter is well placed to provide the necessary technology.
The company also plans to bid for ‘balance of plant’ in power projects, wherein it would provide complete solutions for the unit around the key power technology. Success in bidding for these projects could help it capitalise on the huge capex spending expected in the power sector. The company’s interest costs as a percentage of its sales has seen a 103-basis points increase in the quarter ended June, compared to the previous year. This, combined with the withdrawal of tax benefits under Section 80 IA, has slightly dented net profit margins in the recent quarter. However, a healthy debt service ratio and a waning of the one-time tax effect by FY 2009 are likely to ensure that profit margins recover over the medium term.
Employee stock options (ESOPs), a compensation tool long followed in the IT sector, are gradually becoming a part of the salary package in media, retail and other high-growth sectors. What is so special about ESOPs and are they any replacement for hard cash?
An ESOP is, quite literally, an option but not an obligation to buy the shares of the company you work for. An agreement is signed with the employer that gives the employee the right to buy a specific number of shares of the company’s stock, during a specific period, and at a price that the employer specifies.ESOP Ownership
Owning options is not the same as owning the company’s shares. It simply confers the right to buy shares of the company. The price the company sets on the stock is called the grant or exercise price. Since this must appear rewarding to the employees, it is usually lower than the market price of the share at the time the employee is given the options. Converting options into shares by paying the exercise price is known as exercise of options. Most companies have tie-ups with brokerage firms to enable this conversion process.
If your company does well and its stock price rises beyond your exercise price, you now have the option to buy shares at the exercise price and sell it at the market price for a profit. Incentive enough for you to work harder, got it?
The plus side is if the stock price goes down, then you need not really exercise the option. Nothing lost, nothing gained. . ESOPs, therefore, simply offer the carrot of potential capital gains in addition to your regular salary. To illustrate, suppose one has options to buy 100 shares of the company at an exercise price of Rs 100. The stock is currently trading in the stock market at Rs 125.
You have the choice of converting options into shares by paying Rs 100 per share and selling them at Rs 125 in the market. Voila! You have made a profit of Rs 2,500. On the other hand, if the market price of the share is Rs 75, you can choose to not exercise the option at all.
Also if you want to maintain a ‘wait and watch’ approach, in anticipation of further gains in stock price, you can sell, say 50 shares now and the remaining 50 shares later.Timing and quantity restrictions
Another important concept with regard to ESOP is that of vesting. Vesting has two associated aspects, vesting period and vesting percentage. Vesting percentage is the portion of total options granted to the employee which he is eligible to exercise.
Vesting period is the period on completion of which the said portion can be exercised. Both of these are decided by the company and are part of the original agreement on ESOPs. So, as in the previous case, if you have been allotted options to buy 100 shares of the company, you may have a vesting period of, say, four years. There may also be a vesting percentage of 25 per cent per year.
This means that you can buy 25 shares of the company by paying the exercise price, at the end of the first year, 25 shares at the end of the second year and so on until the end of the fourth year when your options will be fully vested.
Lapse of options
It is important to know that ESOPs have an expiration date. That is, even within the vesting period, one can exercise his options only within a particular time window specified in the agreement.
If the options are not exercised within that period, they lapse. This period is called the exercise period.
If the employee decides to leave the company, he can exercise only the vested options, but all future vestings will be void.ESOPs of unlisted companies
In unlisted companies, there is no ‘market price’ or a grant price available for an employee. The company here fixes an internal value to its shares. This is decided by the board of directors of the company through a voting system.
This value is reviewed and re-set periodically. In such cases, an employee can exercise the option if he finds it advantageous and sell the shares back to the company.Variations of compensations
Employee stock purchase plan: The company issues shares to employees after a specific time period in the job.
A predetermined amount is withheld from the employee’s salary towards the share purchases.
Restricted stock units: This entitles the employee to receive stock or cash equivalent of the stock after a vesting period.Tax Implications
In India, ESOPs are taxable as a fringe benefit.
Earlier, we saw how several adverse factors — fragmented landholding, low level of input usage, inadequate irrigation, antiquated agronomic practices, poor rural marketing infrastructure and tardy flow of market information — combine to frustrate the efforts of the average Indian farmer. The result: unsteady output, non-standard quality, low yields and often, unremunerative prices. The table reveals the extent of year-to-year variation in major field crops output.
With rising incomes and population growth, demand for food products has been rising relentlessly in recent years. However, food output has failed to keep pace with the demand. As a result, shortages have begun to appear in some commodities (wheat) and in some cases, extant shortages are becoming chronic (pulses, oilseeds). Having looked at production and the challenges associated with it, let us examine the nature and characteristics of the agri-produce markets.
In India, given the varied agro-climatic conditions, agriculture is seasonal and regional. There are two seasons in which planting and harvesting take place — Kharif season is when planting takes place in May/June/July and harvest in September/October. Major kharif crops are rice, (paddy), coarse cereals (maize, bajra, jowar), pulses (mainly tur/arhar), oilseeds (mainly groundnut, soyabean), sugarcane, cotton and jute/mesta. For Rabi season, planting takes place in October/November and harvest in March/April/May. Major crops of the season are wheat, rice, pulses (mainly gram) and oilseeds (rapeseed/mustard, groundnut).
It may be seen that different crops are grown in the two seasons. But some crops, such as rice and groundnut, are grown in both seasons. The two seasons mean farming activity goes on for most part of the year. This raises land use intensity and ensures near-continuous supply of food grains and oilseeds throughout the year.
There are also regional differences in agricultural production. Crops such as paddy (rice), groundnut and cotton can be termed national crops as they are grown in a large number of States across the country. Fruits and vegetables may also be termed as such. There are crops with regional orientation.
For instance, wheat and rapeseed/mustard are grown almost exclusively in the northern parts of the country while soyabean is grown in central India. Coffee is grown in South India only, while tea is grown in both Southern and Eastern India. While production is seasonal and/or regional, consumption is round the year and the consuming market is national, in most cases. This creates huge market opportunities for all the stakeholders in the agricultural system.
Agricultural produce markets are either national or regional, depending on the geographic dispersal of cultivation/production. The seasonal and regional nature of agricultural production and the need to market the crop across the country and round the year are key determinants of market prices. The Indian agri-produce market is highly fragmented and decentralised. There are a large number of small producers, traders and trade intermediaries.
Inefficient supply chain
The supply chain for agri-produce is rather long and inefficient. Too many intermediaries add to the cost but little to the value. From the primary producer to the retail consumer, there are no less than seven intermediaries. As a result, the primary producer ends up obtaining only a small part of the price paid by the retail consumer, with the intermediaries eating away a large share of the profit.
Primary processing, or even minimal grading and sorting, is largely absent because of poor infrastructure (warehousing facilities, cold chains) in rural areas. Because of varietal differences in the seeds planted, the quality of the produce is non-standard.
Non-standard items get mixed in the market place and depress prices. These are some of the challenges that players in the agri-produce market have to consider.
The markets began the week on a soft note, but ended with a bang, thanks to the bold 50 basis points rate cut by the US Federal Reserve.
The Sensex started with a loss of 200 points, but it ended with a hefty gain of 960 points. In the process, the index crossed a new landmark of 16,000 and also registered its biggest-ever, single-day gain of 654 points during the week.
The index swung in a broad range of 1,149 points — from a low of 15,467, it touched a new all-time, intra-day high of 16,617, before ending at 16,564.
Backed by the momentum, the Sensex is likely to target 17,000 this week. In case of a downside, the index is likely to find significant support around 15,800-16,000. This week, the Sensex may face resistance around 17,000-17,140-17,280, while on the downside, it is likely to find support around 16,125-15,990-15,850.
As against a 6 per cent gain on the Sensex, the Nifty zoomed 7 per cent (320 points) to 4,838. The NSE index moved in a range of 374 points and touched a lifetime high of 4,856.
The Nifty is close to its yearly (R3) resistance level of 4,866. Hence, some profit-taking at these levels cannot be ruled out. Further, the index has soared nearly 18 per cent (730 points) in the last five weeks.
The Nifty 9-day Relative Strength Index (RSI) is in overbought zone above 85 per cent. The slow stochastic is simply the normal stochastic smoothed via a moving average technique.
The slow stochastic indicator calculates the current price in relation to its period range (14 days). It is currently at 96 per cent, which indicates an overbought level. A value of more than 80 per cent is considered overbought, while a value of less than 25 per cent is oversold. This week, the index may face resistance around 4980-5025-5070, while on the downside, it is likely to find support around 4695-4650-4605.