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Saturday, October 06, 2007
US Markets rise on job data
The Dow and the S&P 500 surged to all-time highs on Friday after a solid employment report rekindled optimism about the US economy and corporate profits.
The economy added more jobs in September than economists had expected, while an earlier estimate of job losses in August was revised to a gain, quashing fears of recession.
Friday's record run-up cemented the market's recovery from a late summer sell-off when a credit squeeze and mounting housing market losses drove investors away from equities.
Shares of economic bellwethers, led by Caterpillar Inc, were the Dow's biggest advancers, along with the stocks of financial services companies, such as credit card issuer American Express Co and Citigroup Inc.
Technology and consumer-oriented issues also showed strength.
"From the jobs numbers that we got today, we saw that most of the economy is actually doing a lot better than people thought it was doing," said Cleveland Rueckert, market analyst at Birinyi Associates Inc, in Stamford, Connecticut.
The Dow Jones industrial average climbed 91.70 points, or 0.66 percent, to end at 14,066.01. The Standard & Poor's 500 Index jumped 14.75 points, or 0.96 percent, to 1,557.59 -- a record close.
The Nasdaq Composite Index finished up 46.75 points, or 1.71 percent, at 2,780.32.
During the session, the Dow reached an intraday record high of 14,124.54 and the S&P 500 hit an all-time high of 1,561.91. The Nasdaq climbed to 2,784.93, its highest level since January 2001.
On Monday, the Dow achieved its 33rd record close for 2007 by finishing at 14,087.55.
For the week, the Dow gained 1.23 percent, the S&P 500 rose 2.02 percent and the Nasdaq climbed 2.9 percent, marking the index's best weekly climb since March.
Investors also snapped up small-cap stocks, driving the Russell 2000 Index to its biggest weekly percentage gain since July 2006. The Russell 2000 shot up 1.89 percent, or 15.71 points, to end at 844.86.
On a sectoral basis, financials were the week's biggest winner, with the S&P financial index finishing up 1.2 percent. On a weekly basis, the index had its best weekly advance since March 2003 as investors bet that the worst effects of the credit market turmoil are behind Wall Street.
Transport was another stellar performer, with the Dow Jones transport average finishing up 3.3 percent, its biggest advance since Sept. 18, when the U.S. Federal Reserve cut interest rates.
Technology also shone, powered by gains in shares of BlackBerry hand-held device maker Research In Motion Ltd, a day after it posted quarterly results that beat expectations. The stock, which was the Nasdaq's biggest gainer and hit an all-time high during the session, ended up 12.8 percent at $113.37.
Google Inc was another notable gainer after Bear Stearns set a 2008 price target of $700 on the Web search leader's stock. Google finished up 2.6 percent at $594.05.
Among industrials, shares of heavy equipment maker Caterpillar ended up 2.2 percent at $80.33 on the New York Stock Exchange, while shares of 3M, the maker of Post-it notes and other products, gained 1.7 percent to $95.85.
Shares of aluminum company Alcoa Inc, another economic bellwether, climbed 3 percent to $38.79.
Among financials, Citigroup shares ended up 1.4 percent at $48.30, while American Express shares advanced 2.2 percent to $61.10.
Merrill Lynch & Co. Inc's shares closed up 2.5 percent at $76.67 after the investment bank detailed the losses it would take as a result of the recent credit market turmoil. It forecast it would post a third-quarter loss after writing down $4.5 billion in loan losses.
Among consumer-oriented stocks, shares of Wal-Mart Stores Inc, the top U.S. discounter, rose 0.8 percent to $45.37 on the NYSE. Rival Target Corp's shares jumped 3.7 percent to $67.57. The S&P retail index gained 2.5 percent.
Among transport stocks, shares of package shipper FedEx Corp climbed 1.3 percent to $106.06.
Trading was lighter than normal on the NYSE, with about 1.26 billion shares changing hands versus last year's estimated daily average of 1.84 billion. On Nasdaq, about 2.01 billion shares traded, slightly below last year's daily average of 2.02 billion.
Advancing stocks outnumbered declining ones by a ratio of about 3 to 1 on both the NYSE and Nasdaq.
TRAI recommendations to be examined by Telecom Commissions
The Telecom Commission, the policy-making wing of the Department of Telecom, met on Friday to discuss regulator TRAI's recommendations on licensing reforms including pricing for the additional mobile (2G) spectrum.
Official sources said the Commission examined all the proposals and the draft policy made by the DoT's internal committee. There was consensus among the Commission members on the decisions of the draft prepared by the internal committee. The Commission will again meet on Monday to have further discussions on the same.
The Telecom Commission's decision is not final unless approved by the Communications and IT Minister, they said.
Although no confirmation was available on the exact proposals of the internal committee, sources said on capping of the number of players, the decision is to go by TRAI recommendations of having unlimited number of operators.
But on the crucial 2G additional spectrum allocation pricing, there were various point of views -- raising the revenue share for each additional MHz of spectrum, enhancing the number of subscribers for giving additional spectrum and the entry fee to give spectrum over 10 MHz and 5 MHz for GSM and CDMA operators.
Operators currently pay certain percentage of their revenue as additional spectrum charges. The current policy for giving additional spectrum is subscriber-linked.
Other recommendations by TRAI include on merger and acquisitions where the subscriber base of the combined entity is to be reduced to 40% of the given market from the current 67%, allowing dual GSM and CDMA technology and a licensee being allowed to hold up to 20% in another telecom company in the same circle.
Wheat prices hurting poor countries
International wheat prices have hit a record high during the past three months, pushing the domestic cereal costs in poor countries beyond the reach of many locals, the United Nations Food Agency reported Saturday.
Wheat prices have risen sharply since June because of tightening of global supplies, historically low levels of stocks and sustained demand, according to the latest issue of the FAO crop prospects and food situation report, released at the agency's headquarters in Rome.
Maize prices have also jumped, despite this year's bumper crop in North, Central and South America, because of continuing strong demand from the biofuels industry.
Paul Racionzer of the FAOs Global Information and Early Warning System said that cereal stocks, especially of wheat, are likely to remain at low levels for the foreseeable future.
Wheat stocks are close to their lowest level in 25 years.
"On current indications, this year's cereal harvest would only just meet expected utilisation levels in the coming year, which means that stocks will not be replenished," he said.
The higher export prices for wheat and other cereal crops besides surging freight rates have forced the price of bread and other by-products beyond the means of many people in the states classified as low-income food-deficit countries (LIFDCs), leading to social unrest in some areas.
The total cereal import bill for LIFDCs is forecast to hit an all-time high of USD 28 billion in 2007-08, a rise of 14 per cent in last year's figures, the report said.
In total, developing countries are likely to spend USD 52 billion on cereal imports, it added.
Weekly Technical Analysis
Last week, Nifty Futures maintained the 5k mark and did not go below the same. In the recent past, we had Nifty Futures giving the longest phase of recording higher closing for 12 consecutive days. From a low of 4479 on Sep 18 to an all time high of 5267.80 on Oct 3, this dynamic rise has been a outcome of an unfilled gap at 4557.50 to 4640 level.
On the daily chart, 20DSMA stood at 4761.73 indicating bullishness. The Directional Indicator is bullish and showing great strength. The Oscillator is in the overbought zone indicating that we are in a euphoria stage. During the week, we had three days of higher closings out of four trading sessions.
On the Weekly Chart, 20WEMA stood at 4476.65 indicating strength. The Directional Indicator has started depicting strength whereas the Oscillators too, are Bullish, even though they have just entered over bought zone. We had a continuous bull run for the past 7 weeks and a higher weekly closing for 7 weeks in a row. This brings to a Fibonacci number of 8 which happens to be the next week. Hence, the movement in the next week will be viewed with lot of interest as it could result in a possible change of direction for the market.
It has support at 5120 and 5065 levels and faces Resistance at 5260, 5325 and 5400 levels. Presently, all the time frame (Short, Medium and Long) trends are upwards. The Short term trend will turn downwards if 4880 level is broken whereas the Medium term trend turns downwards if 4560 is violated.
For the very short term trader, 5120 level would be the stop loss for long positions. In case, this level breaks, then one can book profits on long positions and sell Nifty 5450 Calls and go for Bear Spread of buying 5100 Put and selling 4950 Put. In case, this level holds for the next couple of trading sessions, the trader can go for Bull Spread by buying 5100 Call and Selling 5300 Call and also selling 4200 Puts to reduce the cost.
Nifty Futures Open Interest stood at 3.25 cr contracts up by 0.41 % on the last trading session of the week. The Annualised Volatility stood at 29 %. Sectorwise, on a medium term horizon, Textiles and IT stocks could be picked on every declines.
Oil India IPO
Oil India (OIL) will come out with an Initial Public Offering (IPO) in Jan-Mar next year to raise upto Rs 2,000 crore by off-loading 10 per cent of its stake.
"We will come out with an IPO by the last quarter of the financial year and raise up to Rs 2,000 crore by diluting 10 per cent stake," OIL's Chairman and Managing Diector M R Pasrija told reporters here on Satarday.
OIL is engaged in the business of exploration, production and transportation of crude oil and natural gas. It currently produces 25 million barrels of crude oil per annum and 6.6 million cubic metre of gas a day.
Pasrija said that the Government would also dilute additional 10 per cent stake in the company through disinvestment. The Government has 98.13 per cent sake in the company now.
He said one per cent stake in the company would be offered to the employees.
Banks dip on fund selling
Bank stocks have been witnessing some selling pressure in the last couple of days. According to market sources, a few big institutions have been selling banking sector stocks (and also reduced their open interest positions in F&O segment), on expectation that Reserve Bank of India might increase cash reserve ratio further to suck out excess liquidity in the banking system. According to them, banks are already grappling with high deposit and lending rates with flush liq uidity and stagnant credit growth.
The RBI will undertake second quarterly review of the monetary policy on October 30.
The RBI has been raising CRR since December 2006 and currently the rates rule at seven per cent, as its interventions in the foreign exchange market resulted in infusion of rupee liquidity.
Burden
According to banking analysts, if RBI hikes CRR, banks may not be in a position to pass on the opportunity cost of funds thus mobilised on to customers and may have to bear the burden themselves. The domestic credit growth already remains subdued.
The BSE Bankex fell 2.58 per cent in a week’s time (with selling happening on Thursday and Friday), as against the BSE Sensex, which gained 2.79 per cent.
Don't bet on IT this quarter
Higher wage bills (on account salary hikes and new employee additions) and lower employee utilisation rate are expected to pull down the average net profit growth of frontline IT companies in the second quarter (July-September).
According to estimates by key brokerage houses, average quarterly net profit of the top five IT companies is expected to be 1.7% lower compared with the previous quarter (April-June). This, despite the fact that quarterly revenues have risen at an average 3% during the period under consideration.
While the growing strength of the rupee has been scaring away prospective investors in IT companies, analysts point out that the rupee has little to do with the sluggish performance of these companies during the latest quarter. While the rupee breached the psychological 40-mark to the dollar last month, it did not rise much in second quarter compared with the previous quarter. Consequently, companies that had entered into forward transactions as a hedge against the rising rupee did not gain much from these transactions. That has also contributed to the slackness in their bottomlines.
Moving forward, the strength of the rupee and the slowing down of the US economy will remain the two major challenges for the sector. “Indian IT companies have a huge exposure to the banking, financial services, insurance (BFSI) vertical. The subprime crisis may affect the discretionary spending which accounts for 20% of the total IT spend by clients,” says Sushil Finance analyst Parikshit Kandpal.
However, he sees this as a temporary shock as a slowdown in the US could prompt more companies there to increase outsourcing to India in a bid to cut costs. IT shares have underperformed during the recent rally as investors expect margins to be under pressure because of strengthening rupee. These shares have been on a downtrend since March this year as the dollar began to weaken against the rupee.
The rupee gained 7.5% to the dollar during April-June and another 1.9% in the following quarter. “Expect September 2007 to be a quarter with strong sequential revenue growth, but unexciting profit growth,” says Merrill Lynch in its preview note on the sector.
At the operating level, brokerage firms expect a mixed scenario across companies. Companies like TCS and Infosys, which declared a wage hike in the previous quarter, are likely to show higher sequential growth in operating profit for the September quarter. This is on account of absorption of salary hikes.
On the other hand, Satyam, Wipro and HCL Technologies are expected to report subdued operating profit since these companies have undertaken salary hikes in the second quarter. For instance, Wipro has given an offshore salary hike between 12% and 14%. “This will impact our operating margin by 160 basis points. Despite this, our broad call is that we will keep our margins flat,” said Wipro IT business CFO KR Lakshminarayana while talking to ET in August.
Analysts are not too hopeful about companies raising their earnings guidance for the current financial year, especially since a recession appears to be looming over the US economy. “Given the economic uncertainty, we believe it is unrealistic to expect Infosys and Satyam to tweak their annual dollar revenue guidance by more than 3%,” says Merrill Lynch.
Citigroup Global Markets too shares the similar view. “Upgrades in earnings per share (EPS) guidance will not be significant in our view due to further rupee appreciation of 2% since the previous guidance.”
Rakesh Jhunjhunwala - Question and Answers
Q: From morning we have heard a variety of views on subprime and what impact it could have on India and emerging markets. What’s your take on it?
A: I think the impact of the subprime crisis is going to be far worse than markets are expecting today. I do not think Fed rate cut can solve the subprime crisis.
I do not think that the US housing market is going to bottom for the next 24-30 months. I think the US economy will further slow; anyway at the moment the markets are quite elated with the Fed rate cut. Let’s see what happens.
Q: You've been bearish on US saying that the bull-run over there has ended. We saw how this bubble has burst, the whole housing market has gone into a slump, and US stocks are down. What is your take on it?
A: The US market has not slumped; the Dow is nearly at a new high. The markets are perceiving that this problem will be surmounted, just like all other problems.
Q: You expect more Fed cuts to keep fueling the markets going forward?
A: I do not know what kind of Fed cuts will happen, because inflation also has to be looked at. But I do not think the Fed rate cuts can solve this problem.
Q: Our Indian markets, or almost all emerging markets are clued on to what is happening over there (US). Because of that, we are seeing heavy volatility coming into the markets. If you take a look at the past three days also, there has been heavy volatility?
A: I would disagree. About two-two and half years ago, the Sensex first crossed the Dow and today the Sensex is at least 20% higher than the Dow, in numerical terms. So you may have day-to-day reactions, but over a period of time you will decouple.
Q: From a longish point of view, what is your take on the bull run in India?
A: I think the longer-term bull market in India is very much alive.
The factors driving the bull market are alive and kicking and will be present in India for a very long time to come. Having risen from 3,000 to 18,000, we can always be prepared for corrections or some fall. Markets may not even go up for maybe another year. But I do not think the bull market is dead. We had a rise from 3,000 to 18,000 and if we consolidate and do not go up for a year or two, I do not think it’s going to make any difference to the long-term bull market.
Q: Do you think we are going to consolidate from now on and then only progress further?
A: I do not know whether we will consolidate. But even if we were to consolidate and not go up much or go down a little, the longer-term bull market will still be alive.
Q: We heard Chris Wood say in the morning that the Sensex target, the long-term CLSA target, is 40,000. What is your take on that?
A: I can only have some idea of the directions; I have no targets.
Q: You been bearish on Indian IT for quite sometime now. What could happen to the US economy? When we talked to the tech companies, they say fundamentals have not changed, rupee is the only problem. What is your take on that?
A: Fundamentals today might not have changed. But if there is a big slowdown in the US economy, which I personally anticipate, then I think software will also come under pressure.
Earlier, we had all tailwinds for the software industry and in my opinion we have headwinds now. I do not say that software companies are going to go down. Although volume may or may not get affected, margins will be affected and therefore price earnings ratios can be affected.
Q: Midcaps have been very tepid over the past one-month. Is it just like in the middle of the storm? How do you see them bounce back?
A: I disagree. Midcaps are doing exceedingly well. I think 50% of all listed stocks have made new highs. So I do not agree that they have been tepid.
Maintain caution at higher levels
Profit booking at higher levels snapped the ongoing rally, with the BSE Sensex closing at 17,773, off its days’ high of 17,979 and the S&P Nifty closing at 5,185.85 compared with the intra-day high of 5,248.55. Of the 30 Sensex stocks, 7 advanced and 23 declined. In the case of Nifty, 16 advanced and 33 declined.
According to market sources, Friday’s profit booking was triggered by an article in New York Times on burgeoning valuations of Reliance Industries, DLF and Bharti Airtel.
However, Reliance Industries made handsome gains and closed at Rs 2484, up 2.53 per cent. Bharti Airtel too closed 3.32 per cent higher at 993.05. DLF, however, closed at Rs 851.70, down 1.24 per cent.
The Nifty October futures traded at a premium of eight points for a while, before closing at 5172, a discount of 12 points.
The open interest in Nifty October futures has increased by 20.8 lakh shares to 344.5 lakh shares. The increase in OI and Nifty futures discount suggests short positions at higher levels.
The Putall ratio of open interest in Nifty options moved up further to 1.44 from the previous day’s level of 1.35. The Nifty Put Options added OI of 16.04 lakh shares, while Nifty Call Options added 2.25 lakh shares in open interest.
The out-of-the-money Call writers squared off their transactions at a profit. The Nifty 5200 call options open interest declined by 45,000 shares as its premium declined from the day’s high of Rs 194 to close at 141.
The 5,100 call options too witnessed a decline in OI by 84,550 shares as its premium declined from a high of Rs 263 to Rs 195.25
305 applications
The Department of Telecommunications (DoT) has received a total of 305 applications from 21 companies during the last week of submission for approval. In the previous week, DoT received around 100 applications, taking the total number of requests for telecom licences to 401.
The DoT had fixed October 1 as the last date for accepting applications.
Among the companies that have applied for pan-India licences include Bycell Communications, Next Generation, Avnija Properties, AT&T, Sterlite Infrastructure (Sterlite Group), Videocon Group, Silicon Infosys, Satvik High-Tech Builders and Cellebrum Communications among others.
These companies were seeking to commence operations from all the 22 circles in the country, sources in the telecom ministry said.
While companies such as ECME Telepower applied for 12 circles, Meta Telecom (7 circles) and Spurt Industry (6 circles), some players opted for single circle operations.
The companies opting for single circle operations include Electro Therm India (Gujarat) and RSK Enterprise (Jammu & Kashmir).
The major companies such as BPL Mobile (22 circles), HFCL (21), Datacomp (22), Spice Communications (20) and the Anil Ambani group companies Swan Telecom (14) and Cheetah (2), and Parsvnath (22) had applied for licences during the prior week.
The telecom ministry is expected to begin scrutiny of the applications in the next couple of weeks. Sources also said the ministry has received assurances from the Ministry of Defence for vacation of spectrum by the end of this year.
The DoT, which is also the licensor of telecom services in the country, had sought release of 45 MHz spectrum from defence establishments. Even though, this is unlikely, some spectrum would be released during the next two-three month period.
Your new mobile network - DLF-AT&T
Real estate major DLF Ltd is talking to US telecom giant AT&T as a strategic partner to roll out pan-India mobile services.
AT&T has also applied for a universal access service licence (UASL), which allows operators to offer services in both GSM and CDMA technology, with the Mahindra & Mahindra group, for 22 circles. The US company, however, has stipulated that it wants a majority equity stake in the mobile venture.
This will be AT&T’s second coming in India after it exited Idea Cellular a few years ago.
DLF had also applied for a pan-India licence on its own and without a foreign partner. A senior DLF executive said: “We are in talks with various international telecom operators; all the big operators will approach us.”
Sources close to the development, however, confirmed that DLF has been approached by AT&T. An AT&T India spokesperson said: “We do not comment on market rumours or speculation.”
Insiders also said DLF is talking to other international telecom majors apart from AT&T.
With over 300 Indian companies applying for pan-India UASLs, the race is on to get international partners with experience in the telecom sector as strategic partners. This is because the industry expects the government to offer only two or three licences in each circle.
Most of the world’s telecom majors, however, already have a presence in India — Vodafone, Singtel, Maxis and Malaysia Telekom among others.
Russian telecom giant Sistema has also entered the fray, indirectly applying for a pan-India licence through the acquisition of Rajasthan-based Shyam Telecom.
Sources close to the development said Japanese giant NTT DoCoMO and Deutsche Telecom had also shown interest in launching operations in India.
Gold shines back after faltering
But prices witnesses first weekly drop after six weeks of rally
Gold prices rose for the second consecutive day today after dollar weakened paring earlier gains in the day. Silver prices also rose today. After initially strengthening, dollar lost steam today after September employment report showed in line gains for the month and big upward revisions of previous months.
Gold prices fell by 0.4% for the week. It was the first weekly drop after a six-week rally.
In recent times, the weakening of dollar have continued to affect the price of the metal. Investor sentiments are boosted by the fact that gold and silver are alternate sources of good investment in the face of declining dollar and rising energy prices.
Earlier during the middle of this week, drop in crude oil and a continuation of the strengthening of the dollar against other currencies continued to hurt gold's appeal as an inflation hedge. Gold prices slipped on Tuesday and Wednesday, earlier this week.
Comex Gold for December delivery climbed $3.4 (0.5%) to close at $747.2 an ounce on the New York Mercantile Exchange today, Thursday, 5 October, 2007. It recovered from a low price of $732 an ounce. On Monday, 1 October, gold had climbed to an intraday high of $755.7. That was the highest intra day price seen since the last 28 years.
Comex Silver futures for December delivery rose 1 cents (0.01%) to $13.49 an ounce. The metal has climbed 4.3% this year.
The dollar rose as much as 0.7% after a report showed payrolls grew by 110,000 in September after an 89,000 increase in August. But then, the currency slipped. The currency has been witnessing a free fall since Federal Reserve cut interest rates by half percentage point.
Gold prices have jumped 15% during the third quarter and it is the most since 1999. The yellow metal has climbed 17% this year.
As per Nymex data on Wednesday, Gold warehouse inventories rose by 83,102 troy ounces to stand at 7.2 million troy ounces and silver supplies rose to 133.1 million troy ounces, up 294,757 troy ounces.
At the MCX, gold prices for December delivery closed at Rs 9522 per 10 grams. The closing price is Rs 47 (0.5%) higher as against previous closing price. Prices rose to a high of Rs 9538 per 10 grams during the day’s trading.
At the MCX, silver prices for December delivery closed Rs 27 (0.15%) higher at Rs 17,998/Kg. Prices opened at Rs 17,980/kg and went to a high of Rs 18,105/Kg during the day’s trading.
Grey Market - Reliance Power IPO, Saamya, Kouton, Consolidated Constructions
Reliance Power GREY MARKET PREMIUM OF 32 to 34
Dhanus Tech. 280 to 295 60 to 70
Koutons Retail 370 to 415 75 to 80
Consolidated Construction 510 170 to 180
Supreme Infra 95 to 108 55 to 58
Saamya Biotech 10 5 to 6
MAYTAS Infra 320 to 370 130 to 135
Circuit Systems (India) Ltd. 35 5 to 6
Stocks you can pick
Grasim Industries
CMP: Rs 3,543.95
Target price: Rs 4,450
Merrill Lynch has upgraded its rating on Grasim Industries to ‘buy’ with a price target of Rs 4,450. “We continue to believe that the cement industry will witness large capacity additions by March 2009(estimated). However, we think the market is not focused on FY09E risks yet and greater focus seems likely only by March-June 2008 when some of the large capacity expansions will commission (seeing is believing),” the Merrill Lynch note to clients said.
Bajaj Auto
CMP: Rs 2,612
Target price: Rs 3,065
Motilal Oswal Securities has initiated coverage on Bajaj Auto with a ‘buy’ rating and a price target of Rs 3,065, citing increased focus on premium segment motorcycles as a key trigger. “While we expect core business profitability to improve, its insurance business is a potential value driver. We believe that Bajaj Auto’s earnings before interest, taxes, depreciation and amortisation (EBITDA) margin will improve 2QFY08 (July-October) onwards,” the Motilal Oswal note to clients said. “Our view is based on the company’s improving product mix, its reluctance to re-engage in price wars, completion of dealer inventory rationalisation, and accrual of higher duty entitlement pass book (DEPB) benefit,” the note added.
Tata Power
CMP: Rs 944.10
Target price: Rs 1,198
HSBC Securities has maintained its ‘overweight’ rating on Tata Power, while raising its price target to Rs 1,198 from Rs 843 earlier. “We believe in Tata Power’s ability to expand its generation capacity over next five years. We now expect it to implement 10.3GW by FY2013 against our earlier estimate of 9.4GW,” the HSBC note to clients said. “The coal ministry has allocated coal mines in India to the company, which should reduce its fuel costs substantially.” the note added. “We expect the coal mines to be operational by the end of FY11 and hence we reduce our fuel cost estimates by 14% and 13% for FY12 and FY13, respectively,”
PFC
CMP: Rs 207.90
Target price: Rs 242.70
ABN Amro Securities has initiated coverage on Power Finance Corporation (PFC) with a ‘buy’ rating and a target price of Rs 242.70, saying the company’s high business growth visibility, largely stable margins and status as the government’s infrastructure-financing firm make for a compelling proposition.
“PFC is treated as a government-financing firm and is therefore exempt from a number of Reserve Bank of India regulations applicable to non-banking finance companies. The status allows PFC much flexibility in lending to power sector projects and in managing its capital structure,” the ABN note to clients said. “We believe this flexibility will be of even more value over the next few years as loan growth should surge ahead,” the note said, adding that while valuations looked rich at current levels, they reflected strong growth prospects.
Mega tower company in the making
This could be one of the biggest mergers in the telecom sector. After entering into an agreement to share their infrastructure, GSM mobile companies including Bharti Airtel, Vodafone and Idea Cellular are now exploring the possibility of merging their passive infrastructure to form a mega tower company.
Apart from leveraging on operational efficiency, the merger is aimed at getting a higher valuation for their country-wide mobile infrastructure. The three companies together own more than 70,000 towers across the country.
“The talks have been going on for some time, though no finality has been given to it. The companies are yet to agree on the modalities of being joint venture partners in terms of the equity share that they would hold and other operational issues,” said a source close to the negotiations.
One of the options being discussed is to give equity proportionate to the number of towers that the three companies own. According to industry estimates as of August, Bharti had 40,000 towers, Vodafone had 20,000 and Idea owned almost 10,000 towers. Going by this formula, Bharti could own 57 per cent in the merged entity while Vodafone and Idea cellular could get 28.5 per cent and 14.5 per cent stake respectively.
Confirming that initial discussions have begun, sources within the GSM industry said, “It is only a natural progression of the earlier decision to voluntarily share infrastructure. If the merger goes through, it would enable the operators to commercially tap the potential of their infrastructure.”
Bharti and Idea had earlier announced their decision to demerge their infrastructure into separate companies in a bid to unlock the value by offloading minor equity. “Merging their tower business would naturally push up the valuation higher. It will also bring down the cost of operation drastically for the operators,” said a market analyst. It could result in additional revenues for the three companies as the infrastructure can be offered to new entrants who have recently applied for licence. If the talks conclude successfully, then the merged entity could give tough competition to the likes of American Tower Corporation and Reliance Communications, that also have jumped into the tower business. More than 3 lakh towers are required by 2010, when the user base is expected to touch 500 million.
Power Grid up 100%
The much-awaited debut of Power Grid Corporation (PGCIL) coincided with the high volatility on the bourses, but the stock ended the day at a little over Rs 100, a premium of 93.46% to its issue price of Rs 52. The stock surged more than 100% during intra-day trades, and managed to hold on to most of its gains through the day. On NSE, the stock touched a high of Rs 109.50, after opening at Rs 89.80.
More than 48 crore shares changed hands on NSE. On BSE, the stock opened at Rs 85 and did not fall below that level. Later in the day, it touched a high of Rs 109.40, before closing at Rs 100.65. Nearly 10 crore shares of PGCIL changed hands on BSE, with a little over 35% resulting in delivery.
However, most of the power stocks ended the day on a weak note as the overall market fell in the last one hour of the trading session.
NTPC lost maximum ground among the heavyweights, shedding 5.28% to close at Rs 214.45. Similarly, Tata Power (down 4.92% at Rs 944.10) and Reliance Energy (down 2.08% at Rs 1,447.16) also ended the day lower after an impressive run in the recent past. CESC also ended the day in the red at Rs 566. However, Torrent Power managed to buck the trend, gaining 5.21% to close at Rs 128.15.
Nevertheless, the frenzy in the power sector is showing no signs of abating. The stock of the soon-to-be-listed Reliance Power is already said to be commanding a premium of Rs 32-35 in the grey market. The company has not yet announced the price band, but analysts expect the pricing to be in the Rs 60-80 band. This is based on estimates that the company would be looking to raise anywhere between $2 billion and $3 billion. At Rs 70, the company is valued at Rs 91,000 crore (around $22.75 billion).
“The grey market premium for Reliance Power would keep changing in line with the overall bearish or bullish sentiment in the market,” says an Ahmedabad-based broker.
According to brokers operating in the grey market, dummy retail applicants for the IPO are being paid as much as Rs 4,000 per Rs 1-lakh application.
These are retail investors who have subscribed to the IPO in their own names, but have entered into agreements with grey market operators to grab the shares immediately on listing. Reliance Power has proposed an IPO of 130-crore equity shares that constitute 10.1% of the post-issue paid-up equity capital of the company.
Currently, the promoter company Reliance-Anil Dhirubhai Ambani Group (R-ADAG) and Reliance Energy (REL) hold 50% stake each in Reliance Power. In REL, the promoters hold a 34.58% stake.
US economy: a tale of two parallel markets
More and more buyers are being found for the “emerging markets bubble” theory, thanks to the huge amounts of money pouring into them, sending their stock markets to record highs. The reasons for the move are entirely rational. As the Bank Credit Analyst, a well-known global independent research firm, puts it: “Global portfolio investment flows continue to move towards equities, commodities and currencies that are farthest from the US housing market, i.e. away from the epicentre of economic weakness.”
With the Damocles’ sword of a recession hanging over the US, why would an investor want to be exposed to that market? It’s a strong argument, made even stronger by the falling dollar. Since all other currencies are appreciating against the dollar, non-dollar assets and currencies deliver easy returns. While the Bombay Stock Exchange Sensex went up 25.3% this year to 2 October, the Dollex (the BSE index that tracks the performance of Sensex scrips in dollar terms) has gained 36.5% over the same period.
But if investors are fleeing US assets, how do we explain the Dow rising to new highs? Surely, if the US is facing a recession or, at least, an economic slowdown and if its banks continue to be exposed to the aftermath of the subprime meltdown, there’s little reason for investors to buy US equities. For an answer, it’s necessary to look a little more closely at the behaviour of the US market. Closer inspection shows that the stocks that are performing well in the US market are those which have an exposure to the global economy. While consumer discretionary and financials, the sectors that are a play on the domestic economy, are laggards, materials, industrials, energy and technology, all of which are dependent on global demand, are doing well. As a matter of fact, with a depreciating dollar, exports should do very well indeed, as will those companies with large overseas operations. US market experts are drawing attention to the fact that there are two markets in the US, with very divergent performances.
Given the increasing decoupling between the US and the global economy, it may be possible for a section of the US market to reach new highs while the economy slows down.
The mirror image of that trend is the turning away from tech stocks in the Indian market. These stocks are at least partially a play on the US economy and the strength of the dollar and investors in India are applying the same logic that’s causing US investors to flee US-centric stocks. Nor is this view limited to savvy investment banks and other institutional investors. A recent study by US fund tracker Lipper found that inflows into US domestic stock funds had fallen to levels not seen since 1994. On the other hand, Morgan Stanley recently raised a $1.5 billion (Rs5,925 crore) buyout fund for Asia, nearly treble the bank’s previous Asia fund raised two years ago. Inflows into emerging market funds, as EPFR Global points out, were at an 85-week high during the fourth week of September. As EPFR observed, “it was US, Japan and Europe equity funds that provided the cash which flowed back into emerging markets funds. Combined redemptions from these three fund groups totalled $13.04 billion for the week as dollar weakness and fears about the fallout from the turmoil in the US subprime loan market continued to weigh on sentiment.”
That’s not all. Some equity strategists that are long on Asian stocks are advising their clients to short US and European financial stocks as a hedge. The outperformance of one asset class would mean the underperformance of the other.
CLSA strategist Christopher Wood writes in a recent issue of his newsletter Greed & Fear that “it makes sense to remain structurally overweight Asia and global emerging markets— most particularly for genuine long-term investors such as pension funds. For a new round of Fed easing is akin to lighting a match to the Asian asset-reflation story”. All the signs also point to several rounds of Fed rate cuts, thanks to the deep-seated problems in the US housing sector. Wood points out that the strengthening of currencies such as the euro could persuade the European central bank too to start cutting rates, using continued weakness in the credit markets as an excuse. That would open the floodgates into Asia even further. At the same time, Wood is also concerned about the impact of a US slowdown on commodities. He doesn’t think that Chinese and Indian demand is enough to drive oil prices higher, for example. The current spike in commodity prices has more to do with a weaker dollar than with resurgent global demand. That’s the reason Wood would “rather continue to own interest-rate sensitives in Asia ex-Japan geared to domestic demand rather than commodity cyclicals”.
In the Indian market, it is sectors such as capital goods and banks geared to domestic investment demand that have been the leaders in this rally. Interest-rate sensitive stocks, which have lagged the market after rates started rising, have already moved up substantially from their lows. The bet that investors are making is that dollar inflows will be so strong that RBI will be forced to intervene in the forex markets to defend the rupee. That will unleash so much liquidity that, even if RBI does its best to mop up the liquidity, it may not be able to prevent interest rates from drifting down.
Globalization has led to dual markets everywhere—a set of stocks in every market tied to the domestic economy and another connected to the rest of the world. In the current rally, while those stocks that are connected to emerging markets will do well in the US market, stocks dependent on the domestic economy will outperform in the Indian market.
Mint’s
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