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Sunday, September 30, 2007

Cement Sector Update

Cement Sector Update

Investing in the bull market

The stock markets are brimming with optimism. Money is pouring into the market like never before. The index has embraced unimaginably new highs. For now, it appears that the bull-run is at the horizon. For a true bull market, at least 20-25 per cent of the stocks must be on an increase and that too for a sustained period say two years. An upswing market is considered a good time for the investor.

What sort of a strategy must investors adopt to make it rich in a bull run? It is not unusual to find some stocks faring poorly in a bull market and some doing exceptionally well in a bear market. A bull run implies a booming economy, low unemployment rate, high production of goods, and low inflation.
The market ups and downs follow cyclic patterns.

For now, it is the time of rising index and increasing volatility. In a bull run, investors follow the formula 'buy low and sell high'. It is now time for investors to sell their stocks and book profits. Investors need to make well-educated and investigated investments in the markets.

Mere speculation can prove costly. Suppose in a bear market one stock fares poorly. An investor who has done enough research will know the reason for its fall. There may be something fundamentally wrong with the stock and the company policies.

Or the slide in the stock's price will be a reflection of general pessimism pervading a bear market. If an investor knows that it is the latter, he will stay calm and may be even add more stocks of the company to his portfolio. On the other hand, if he believes that something is fundamentally wrong with the stock, he may decide to sell it and stop further loss.

The scenario holds much the same in a bull market. Some stocks may become highly overpriced. An overpriced stock in a heated market is sure to burst when the bull run ends. Some investors prefer to sell all their shares and make profits. Another strategy is to sell some of the shares and buy back the stock when the price falls back to reasonably low levels.

The value of equities tends to rise fast in a bull run. Predictably, the equity investments in your portfolio will become disproportionately higher. Depending upon your age, objectives and financial obligations, you would have arrived at an asset allocation plan.

In order to stick to the asset allocation, make a judicious down-sizing of the equity component. This will provide ample cushion in case the bubble bursts and markets fall. In a bull run, investigate the real value or worth of the stocks. Do not invest in overpriced stocks. It is advisable to sell overvalued stocks. Exit immediately if you feel the prices have gone up adequately.

Invest regularly. The power of compounding and systematic investment plans goes a long way in wealth accumulation. Finally, bear in mind that there are no permanent bull and bear markets. Disciplined investing and avoiding speculation will help investors.

Weekly Technicals

Weekly Technicals

Weekly Technical Analysis

The amazing bull-run continued for yet another week, with the benchmark BSE index, Sensex, gaining over 727 points last week. During the week, the index logged its fastest-ever 1,000-point gain, that is, in five trading days, the index moved up from 16,000 to 17,000.

The index touched a new all-time intra-day high of 17,361 on Friday. The Sensex was up 727 points at 17,291 for the week, and nearly 13% (1,973 points) up for the month.

The Sensex has gained a whopping 22.3% (3,150 points) in the last six weeks. While Reliance and select banking counters continued to lead the rally, beaten-down technology stocks, too, surged in the latter half of the week.

Currently, the Sensex is in unchartered territory and the upmove will continue as long as the index stays above the 15,800-16,000 band.

However, the index is now in overbought zone and hence the chances of a short-term pause or decline are on the higher side. The 14-day RSI (Relative Strength Index) is at 73, a RSI of above 70 is overbought, while a RSI of less than 30 is oversold.

This week, the index may face resistance around 17,580-17,670-17,760, while on the downside the index is likely to find support around 17,000-16,820-16,820. The NSE Nifty, too, was not to be left far behind. The index crossed a major landmark of 5000 during the week.

The Nifty touched a life-time high of 5056, and finally ended the week with a gain of 184 points at 5021. The index gained 12.5% (557 points) in September.

The Nifty is likely to face resistance around 5105-5130-5155, while on the downside the index may find support around 4935-4910-4885.

Illegal VoIP

Internet telephony is great. Download free software, like Skype, get a headset and you can talk to anyone in the world from your PC.

However, internet telephony, estimated at 200 million minutes a month, has become a battle ground between Internet Service Providers (ISPs) and internet companies backed by India’s two largest internet associations. The Internet Service Providers Associations of India (ISPAI) — on one side and the Internet and Mobile Association of India (IAMAI), on the other. The issue is unlicensed use of net telephony — estimated at 100 million minutes a month.

ISPAI with its members like Worldphone, Webtel, Sify, Net4India is alleging that large MNC players like Skype, Vonage have eaten into their market share by offering unlicenced net telephony illegally. ISPs also allege that voice chat through Google, MSN and Yahoo is resulting in revenue leak for the government and posing grave security concern.

MSN and Yahoo, however, denies such claims. IAMAI, the association supporting Yahoo, MSN and others, says, that since these companies offer free service there is no question of levying a service tax through licencing.

"We will abide by whatever the government asks us to do. On the service tax front, we don’t accrue any revenue as our PC to PC telephony service is free. We offer PC to phone service globally, but not in India as it’s not permitted,” said Microsoft India country manager (online services business) Jaspreet Bindra.

Internet companies offering chat services also say that security checks are random and they cooperate whenever government ask them to do so. But ISPAI disagrees, saying that it’s a grave security risk as call data records under voice chats are not saved by unlicenced providers.

“Apart from the revenue leakage, these sites pose a threat to security as they don’t provide surveillance or monitoring. In India, companies like Skype, Vonage, Packet 8, Go2call, Lingo, Impetus, Dialpad and Net2Phone have been offering unlicenced net telephony services, which is mostly illegal. If they don’t opt for a licence the government should block them,” said ISPAI president Rajesh Chharia.

Vonage refutes these claims. “We have zero revenues from India. Nevertheless, we applied for a licence in March 2006. Moreover, only US and Canada credit cards work on our site so their claims are baseless,” said Vonage’s India representative Janki Raman. Internet companies claim that since no calls are terminated in India, there is no illegal play.

Meanwhile, ISPs like Worldphone who have taken a licence and pay about 18.36 per cent in taxes alone, say that they are being disadvantaged as more than half of the net telephony market has been captured by illegal players as it’s cheaper.

The net telephony market is estimated to be about 200 million minutes per month, at present. Almost half of which is estimated to be captured by unlicenced players. There are an estimated 10 lakh users of which only about two lakh are legal users of net telephony.

"We pay about 12.5 per cent service tax alongwith a 6 per cent tax on our gross revenues. Add to it the cost of maintaining call data records (CDRs), overheads, marketing, reseller/retailer’s share and the difference between our and their price becomes 25 per cent. We want a level-playing field,” said Worldphone chairman Aditya Ahluwalia.

Eveninger - Sep 28 2007

Eveninger - Sep 28 2007

YES Bank Ltd

YES Bank Ltd

Sun Direct to increase rates

After last week’s launch of direct-to-home (DTH) service for Rs75 in Tamil Nadu, Sun Direct might hike its monthly subscription, facing pressure from cable television operators.
Sun Direct officials have given an assurance that they will increase the price of subscription by two-thirds to Rs125 per month after the current offer ends this month, said D.G.V.P Sekar, coordinator of the Federation of Cable TV Associations (TFCTA).
Sun Direct is an 80:20 joint venture of Sun TV Networks promoter Kalanithi Maran and Malaysian company Astro All Asia Networks Plc.
When implemented, this would address the concerns of the cable TV operators, Sekar said. Sun TV Network and Sun Direct officials declined to comment.
Cable operators in Tamil Nadu, united in protest against the introduction of the low-priced DTH service by Sun Direct, appeared to have split over the issue of setting up their own facilities to distribute satellite TV channels.
All the associations have expressed willingness to work with the government’s proposed distribution arm, Arasu Cable TV Corp. Ltd. They are demanding that Sun should either offer cable TV or DTH, and should not be permitted to offer both.
At present, Sumangali Cable Vision (SCV), a cable TV distribution arm of Sun Group enjoys a near monopoly position in most parts of Tamil Nadu.
Thamizhaga Cable TV Operators General Welfare Association and Tamil Nadu Cable TV Urimayalargal Sangam (Tancus) have decided to set up their own control room to receive and distribute channels in the state.
“We want to protect our interests and don’t want to depend on Sun for signals to run our operations,” said Kayal R.S. Elavarasu, president of Tancus.
However, TFCTA objects to this move, claiming assets worth Rs50 lakh were destroyed in Nagercoil, a southern district of Tamil Nadu, and a member-run control room was forcibly taken over in Madurai. “We too oppose Sun’s entry into DTH service. But, setting up operations through violence is condemnable,” said Sekar.
Elavarasu of Tancus rejected these charges, saying infrastructure was set up through voluntary collection from individual cable TV operators.
He added it would close operations when Arasu begins operations, and termed its current strategy a temporary move to protect its interest.

Centurion Bank of Punjab: Buy

Among mid-size private sector banks, Centurion Bank of Punjab (CboP) presents a good investment opportunity for investors with both short and long holding time horizons.

The stock is currently quoting around Rs 45 (face value of Re 1) and at these levels, the valuation is out of tune with multiples for banks in this or other categories.

The latest per share earnings, for instance, is around 85 paise and the book value per share is around Rs 8.

Therefore, the valuation multiples (price-earnings multiple of 60 and price-book value of 6) based on historic earnings are stiff indeed.

But by entering the stock now, investors could be well placed to reap the rewards of all the efforts of the past four years in first stabilising the bank’s business and then rendering it fit for growth.

After the almost headlong rush into impaired assets in the second half of the 1990s and consequently the stabilisation/recapitalisation in the first years of the new decade,

CBoP appears quite well positioned now to capitalise on the large and rapidly growing business opportunities.

Vote of confidence

The fact that the Reserve Bank of India has approved the merger of the loss-making (but well-networked in a particular region) Lord Krishna Bank with CBoP can be taken as a strong vote of confidence in the strength and growth prospects of CBoP’s underlying business.

It is proof that the bank’s balance sheet is now strong enough to absorb a loss-making bank and also that its business model is robust enough to make good use of the merging bank’s branch network for further expanding geographical and business reach.

Lord Krishna Bank will add about 120 branches with more than 80 per cent of them in Kerala/other southern states where business prospects traditionally have been good.

The earlier merger of Bank of Punjab with Centurion Bank in October 2005 also appears to have been successful, if the growth in key parameters such as deposits, advances in the past two years is any indication. Long-term investment prospects, therefore, look good.

The strong foundation, the return to sustainable profitability and the scalable business model also mean that a bank such as Centurion could be a key takeover target when the banking sector is opened up for more foreign participation in 2009.

Investors in the Centurion Bank stock may benefit from such a development, even in the short/medium term.

Business operations

The bank seems to have developed a niche in retail lending/distribution of financial products and at the same time has substantially stepped up corporate lending. This overall balancing could stand it in good stead as it seeks to scale up business.

Retail loans (two-wheeler loans, commercial vehicle financing, personal loans, housing loans, etc), which formed as much as 90 per cent of total advances in 2005, have declined to around 70 per cent currently. Corporate loans have increased their share of total advances from 8 per cent to around 30 per cent in the same period.

While the wholesale/corporate/SME relationships provide stability to the revenue stream though margins could be lower, some retail segments generate higher margins.

The bank has a relatively high net interest margin of around 4.6 per cent. The non-lending activities — distribution of financial products such as mutual funds, insurance — provide a platform for capturing income flows from high growth financial services activities.

Non-interest income accounts for around 25 per cent of the bank’s total income, which is high for a bank of Centurion’s size. It is notable that only ICICI Bank, with its much bigger scale of operations, has such a high share of non-interest income.

While such high non-interest income is welcome in one sense, it could also add volatility to the overall earnings in a business downturn.

Also, such fee-generating activities imply a higher operating leverage generally for banks — evidenced by higher employee costs.

Centurion’s employee costs, for instance, are relatively much higher at 16 per cent of total expenses against around 10 per cent for comparable banks.

Business growth, Risks

Advances have grown at an annual average rate of 125 per cent in the past two years. Deposits also have largely kept pace growing at around 105 per cent.

The bank appears to have contained growth in NPAs despite such rapid asset build up with net NPAs at around 1.3 per cent in March 2007 down from 2.5 per cent in March 2005.

Provisioning coverage for NPAs has come down from 65 per cent in March 2005 to 55 per cent in March 2007.

The increased focus on corporate lending has probably helped in lowering net NPAs despite lower provisioning coverage.

Nevertheless, net NPAs remaining above 1 per cent is a cause for concern. A higher CASA share in total deposits (around 30 per cent now) also would provide more comfort.

Kalindee Rail Nirman: Buy

Investors with a high-risk appetite and a three-four year investment horizon can consider buying the stock of Kalindee Rail Nirman, a leading turnkey project execution company in the railway sector.

Involved in the field of signalling, telecommunications, gauge conversion and track-laying for the Railways, Kalindee is likely to emerge as a leading beneficiary of the increasing capex by the Railways in recent years.

For the financial year 2008, the Railway Ministry has proposed the largest-ever Annual Plan of Rs 31,000 crore dedicated to modernisation, development and investment in new railway lines.

The company’s solid earnings growth, growing order-book and robust business outlook inspire confidence. At the current market price of Rs 298, the stock trades at about 17 times its likely FY-09 per share earnings.

However, given the volatility in the broader markets, investors can consider buying the stock in lots.

Investment rationale

The increased focus on improving railway infrastructure is likely to have a direct impact on the growth prospects for Kalindee, which derives most of its revenues from projects executed for the Railways.

One, given Kalindee’s expertise in laying rail tracks, it is likely to reap significant benefits from the proposed expansion in network by the Railways.

Two, the introduction of metro rail projects in cities such as Mumbai, Chennai and Bangalore could open up new sources of revenue.

Notably, Kalindee had, with the help of technology from its foreign partner, laid the tracks for the Delhi Metro Rail project. Kalindee’s established market presence backed by its execution skills could give it an edge in bagging orders.

The recently-won repeat order from Delhi Metro Rail for the construction of 33 km of track in Phase-II of its expansion, could also serve as a reference point for future orders.

In terms of order flow, the government’s decision to convert most of the existing metre gauge rail lines to broad gauge by the end of the Eleventh Plan could also translate into a healthy order book for this company, as it has experience in already completing about 450 km of gauge conversion

Besides, revenues could benefit from incremental business due to the setting up of the eastern and western dedicated freight corridors. Notably, the Government has allocated a sum of Rs 30,000 crore for this project.

Foray into rail sidings

While Kalindee’s foray into building rail sidings for steel and cement plants may not contribute to revenues in a big way now, it has the potential to be scaled up, given the ongoing capex investments undertaken by leading companies in these sectors.

Kalindee has already undertaken projects for companies such as Vedanta and Dalmia Cement, and is in talks with other players to get more such business.

For the quarter-ended June 2007, Kalindee reported a three-fold growth in earnings backed by a 148 per cent growth in revenues. Operating margins dipped marginally to 11.55 per cent. Its order-book, pegged at Rs 500 crore, is about 2.6 times its FY-07 revenues.

However, the management expects a chunk of the orders to be executed by 2008, with the rest spread over 2009.

Any delay in the rollout of the expansion plans charted out by the Railways could pose a risk to our recommendation. Also, since Kalindee is a small-cap stock, it enjoys limited liquidity. Purchases must be carefully timed and made in lots to obtain better prices.

Hanung Toys: Buy

An investment can be considered in the stock of Hanung Toys and Textiles (Hanung). The company t continues to record strong order flows amid an uncertain export environment. It has so far handled the rupee appreciation well, with its realisations actually improving in recent times. Hanung’s toy export business may also benefit from the possible backlash on Chinese toy manufacturing following Mattel Inc’s recall of 18 million defective products. At the current market price of about Rs 160, the stock trades at about 10 times its likely 2007-08 earnings per share.

Long-term contracts

Entering into a long-term contract with buyers is not a standard practice in the textile industry, as international retailers tend to alter their sourcing plans based on changing fashions. Hanung has managed to enter into two-three year contracts with its clients. It recently bagged a Rs 600-crore order from IKEA, Sweden, with whom it has a long- standing relationship, for exporting soft toys/children’s furnishing. This order is likely to deliver a steady revenue flow over the next four years. It also received a Rs 200-crore order from a US buyer for exporting home furnishings, which is to be completed by December 2009.

In the backdrop of concerns of a slowdown in US imports and an appreciating rupee that might render Indian textile exports uncompetitive, the long-term nature of the contracts provides greater visibility to Hanung’s revenue stream.

Hanung is also well-placed now to cater to these orders. With the help of the proceeds from its IPO in late 2006, it has integrated backward into fabric manufacturing. The new facility has come on stream in July.

Rupee rise

The sharp appreciation of the rupee in the early part of 2007 did not have a significant impact on Hanung’s operating margins on the back of improving volumes. Operating margins in 2006- 07 were up 2 percentage points at 17 per cent.

In the first quarter of the current fiscal as well, margins have improved on the back of improving utilisation levels. Rising contribution from domestic operations and raw material imports, which have provided a natural hedge against the rising rupee, have helped limit the impact of currency appreciation on margins. Imports account for about 30 per cent of revenues.

Hanung has been able to negotiate with its buyers for better prices. About 20-25 per cent of its order from IKEA has been priced in rupee terms.

Higher domestic share

Besides, Hanung’s domestic operations may begin to take up a greater share of revenues from the current 25 per cent. Hanung sells soft toys to retailers such as Lifestyle, Shoppers’ Stop and other departmental “lifestyle” stores. These stores are on a rapid expansion path and are increasingly targeting the children’s segment.

Revenues from domestic operations jumped eight-fold in 2006-07 and increased by 50 per cent in the first quarter of 2007-08.

With the licence to use Disney characters for the manufacture of its toys and home furnishings, Hanung hopes to capitalise on the growing spends in the children’s segment.


A slowdown in the import of home furnishings following any decline in housing activity in the US or Europe is a key risk to our recommendation. The company has a high client concentration, with IKEA contributing a chunk of its revenues.

Finally, while the recent product recalls from China may have a beneficial impact on Hanung in the near term, toy manufacturers and retailers in the US are under pressure to raise safety standards.

Complying with stiffer norms may come with higher costs for Hanung, which also imports a significant amount of its materials for manufacturing of soft toys from China and Taiwan.


An investment can be considered in the stock of leading news broadcaster NDTV with a three-year perspective. The stock trades at a valuation discount to rivals such as Global Broadcast News, which operates the competing English news channel CNN-IBN. There is also potential for unlocking of value in the company’s subsidiaries, which are set to launch a network of channels over the next year or two.

Admittedly, NDTV has disappointed on the earnings front in recent quarters, as the company invested heavily in talent, with one-time bonuses and salary increments, significantly increasing personnel costs. There have also been signs of pressure on advertising revenues as rival channels CNN-IBN and Times NOW dent its market share. To maintain its market share, NDTV has had to step up marketing and promotional spends.

However, performance is likely to improve as NDTV launches new channels targeted at the entertainment and lifestyle genres. Over the medium term, these forays could reduce its dependence on flagship channel NDTV 24X7 and on the news segment, where competitive pressures from new channels continue to build up. Advertisers may also seek out niche channels as viewership gets increasingly fragmented.

The company recently launched NDTV Good Times, targeting lifestyle and consumption trends, with programmes on travel, food, fashion, technology and luxury. The format is still relatively unexplored in India and could attract high value advertisers targeting the premium segment. The channel has a co-branding arrangement with Vijay Mallya’s Kingfisher group; the latter has already taken up some of the commercial slots. Good Times’ shows on cooking, fitness and fashion do appear to have appeal and are likely to find favour with the women’s segment, a key target audience for advertisers.

NDTV also has plans to launch city specific channels and has made a start with MetroNation in Delhi. It plans to launch four other channels in the metros of Mumbai, Kolkata, Bangalore and Chennai. The focus on metros may also prove lucrative from an advertising revenues perspective, as these cities are more mature retail markets.

While the company is likely to face competition from entrants such as INX Media and Viacom 18, NDTV has networked with the big names in the entertainment business. As the talent crunch builds, NDTV’s investments in personnel might finally pay off.